# **3.2 The Asian Crisis of 1997**

The Asian Crisis originated in Thailand in 1997 and quickly spread to the rest of East Asia and its trading partners. It was a currency crisis. In July 1997, the Thai government had to abandon its fixed exchange rate against the US dollar that it had maintained for so long, citing a lack of foreign currency resources. Among others, Indonesia, Korea, and Thailand were affected the most. Relatively less impacted were countries, including Brunei, China, Singapore, Taiwan, China, and Vietnam, however, also suffered from a sharp decline in demand in the region.

Infrastructure PPP investments and the number of projects in transport and energy sectors declined substantially soon after the Asian Crisis in the East Asia and Pacific (Figure 4). Currency conversion risk in infrastructure financing projects translated into reduced government willingness to provide explicit guarantees for projects in the period following the crisis. The investments in the region were also affected during the Global Recession but the impact was relatively smaller.

**Figure 4: Greenfield Transport and Energy Investment (by US$ and number) in East Asia Pacific**

<!-- Start of picture text --> 1990 2000 2010 2020 1990 2000 2010 2020<br>125<br>40000<br>100<br>30000<br>75<br>20000<br>50<br>Number of Projects<br>Real Investment (USDm)<br>10000 25<br>0 0<br><!-- End of picture text --> _Source:_ Authors’ calculation based on private investment in infrastructure database (https://ppi.worldbank.org/en/ppi). Vertical lines represent 1997-98 Asian Crises and 2008-09 Great Recession. This figure shows the total number of greenfield projects in transport and energy sectors for the period 1990-2019 in the East Asia and Pacific countries. There is a sharp decrease in the number of projects and associated investment starting with the Asian crises in 1997, which continues till 2000. Countries included in the analysis: Cambodia, China, Indonesia, Lao PDR, Malaysia, Mongolia, Myanmar, Papua New Guinea, Philippines, Solomon Islands, Thailand, Timor-Leste, Tonga, Vanuatu, Vietnam.

The 1997 Asian financial crisis seriously hampered infrastructure investments. In the case of Indonesia, public infrastructure investment fell dramatically after the crisis, to about 1 percent of GDP in 2000. Even a decade after the crisis, total public infrastructure investment—public, state-owned enterprises and private sector combined—stood at 3.4 percent of GDP, which is still significantly below pre-crisis levels of around 5 to 6 percent of GDP, leading to a ‘lost decade’ in infrastructure investments since then. More broadly, the Indonesian government failed to invest sufficiently in its economy and the public investment rate became one of the lowest among middle-income countries. Total investment, both public and private, declined from 27 percent of GDP in 1996 to less than 20 percent in 1999. There was even sharper decline in the public development spending -- a proxy for public investment. It declined from 6.5 percent of GDP in 1996 to around 4 percent in 2000 (World Bank, 2007). In countries such as Indonesia and Korea where public austerity prevailed, public works programs were used in the attempt to provide targeted income support to the poor. However, many flaws were discovered during the implementation of such projects. For example, in Indonesia, nearly two-thirds of the poor did not participate in the projects (World Bank, 2000).

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