Malaysian Journal of Economic Studies 61(1): 177–197, 2024 ISSN 1511-4554

Comparing the Causes and Consequences of the

Asian and Global Financial Crises on Southeast Asia
Kee-Cheok Cheonga
Universiti Malaya

Rajah Rasiahb
Universiti Malaya

R. Thillainathanc
IDEAS Policy Research Berhad

Abstract: The arrival of the global financial crisis (GFC) just a decade after the Asian
financial crisis (AFC) may have settled for now the argument about whether the world
had learned enough so that economic crises are no longer possible. But it has not
settled the argument of whether lessons were learned. This paper deals with this
question by focusing on the experience of Southeast Asia, which has borne the full
impact of both crises. For this region, these crises emerged through a combination
of factors that were as different as they were similar between one crisis and another.
The lessons that were learned or not learned in interpreting those factors with respect
to each crisis determined each country’s response to that crisis, with politics being
an important part of the calculus. Indicators just before the onset of the GFC and of
its impact showed that some, but not all, lessons from the AFC were indeed learned.
Whatever the lessons learned, however, Southeast Asian stock markets were decimated
but which quickly rebounded. Nor would learning lessons guarantee insulation from
future crises because the external environment facing Southeast Asia has changed and
will continue to change.

Keywords: Asian financial crisis, global financial crisis, regulation, Southeast Asia
JEL classification: G01, G15

1. Introduction
Some eminent economists like Lucas (2003) had argued that the world had learnt
so much that the main problem of economic depressions has been solved. In now
famous books that looked at the history of economic crises over the years, Krugman
(2009) and Reinhart and Rogoff (2009) posited that lessons were never learned.1 With

a
Faculty of Business and Economics, Universiti Malaya, 50603 Kuala Lumpur, Malaysia.
b
Asia-Europe Institute, Universiti Malaya, 50603 Kuala Lumpur, Malaysia. Email: rajah@um.edu.my
c
IDEAS Policy Research Berhad, Wisma Hang Sam, 1 Jalan Hang Lekir, 50000 Kuala Lumpur, Malaysia. Email:
rthilli@gmail.com (Corresponding author)
1
Rajan (2011) was similarly skeptical. However, Heng and Lim (2009, p. 2) thought otherwise, noting “no
two financial crises are the same”.

Article Info: Received 16 October 2023; Revised 16 January 2024; Accepted 29 March 2024
https://doi.org/10.22452/MJES.vol61no1.10

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 Kee-Cheok Cheong, Rajah Rasiah and R. Thillainathan

Southeast Asia having experienced two economic crises over the period 1997–2009, it
is a question that should now be posed for this region. The starting point for such an
enquiry is to compare similarities and differences between the crises.
Notwithstanding the arguments of Keynesian exponents on the need to reform
the financial architecture of the world, and especially flows of capital to the developing
world (see Akyuz, 2002; Akyuz & Cornford, 1999; Pringle, 2012; Stiglitz, 2004) most
mainstream work seem to assume that these crises are unlikely to occur if markets are
left to coordinate the allocation of financial resources and instruments. Although there
has been discussions of the state of the world and region after the Asian financial crisis
(AFC), most accounts came around the time of the onset of the global financial crisis
(GFC) (for instance, Eichengreen, 2007; Heidrick & Struggles, 2007; Stiglitz, 2007; Yuen
& Wee, 2006) or just after that (Akyuz, 2010; Lim & Lim, 2010), with no clear indication
at the time of the magnitude and duration of the GFC’s impact. Whatever the dates of
these papers, their focus on Asia, where clues were sought for the next crisis, suggests
that there was a widespread perception that the next crisis after the AFC would likewise
originate in the developing world.2 History has proven otherwise. An analysis on the
impact of the GFC on Southeast Asian economies, and its comparison with that of the
AFC, is certainly appropriate.
Although these impacts, particularly relating to the AFC, are well documented,
comparing impact across the different crises is important because it tells us about the
lessons learned after the AFC. It is also important to determine if, even were the lessons
learned, considerations relating to the nature of the sources of the crises, as well as
the external environment, could nevertheless have offset the benefits of these learned
lessons. In other words, would learning lessons necessarily mean that “this time is
different”? Further, looking at the evolution of the GFC, are there lessons that can be
learned so that the severity of the next crisis, when it does arrive, can be reduced?
The focus of our discussion is Southeast Asia. Unlike America and Europe, South-
east Asia has borne the full force of both the AFC and the GFC. It is also one of the most
globally integrated regions in the world with extensive flows of trade and investment,
so that the external environment plays a vital role. Finally, it has been a test bed for
both neoliberalism and a significant state role, allowing discussion of the role of each in
the crises.
A paper by four economists (Park et al., 2017) of the Asian Development Bank
(ADB), written twenty years after the AFC, attempts to draw lessons learned and
anticipate future challenges, based not on “the political, corporate, or economic
policy conditions that may or may not have set the stage for the AFC” but on “three
common factors that directly triggered the crisis, namely currency mismatches, maturity
mismatches and inefficient allocation of foreign capital flows.” The ADB economists
also examined the new challenges presented by global financial trends to the region’s
policymakers – particularly, (i) more pronounced financial cycles, and (ii) financial
globalisation and deeper interconnectedness.

2
The notable exceptions include Akyuz (2010), Krugman (2009), Lim and Lim (2010), Stiglitz (2007) and Woo
(2007), who focused on the international financial architecture.

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 Comparing the Causes and Consequences of the Asian and Global Financial Crises on Southeast Asia

The focus of this paper, in addition, is on the nature and origin of the GFC and the
AFC, whether the crises in SEA were generated by internal or external factors, whether
the crises were regional or global on their impact, on what was the state of underlying
economic and financial conditions of the individual Southeast Asian economies, as
well as on the state of domestic and external demand these economies faced during
the two crises, the mechanisms through which each of the crisis was transmitted, how
good or bad was economic and financial management of these economies before and
during the crises, what were the nature of the reforms carried out during and after the
AFC, and to what extent were lessons learned by the Southeast Asia economies policy
makers. Given the openness of these economies, the paper also explores the extent to
which they can be insulated from major external shocks, and on how best they can be
prepared for the inevitable next time.
This paper is organised as follows. The next section examines the origins of the
two crises to set the context for analysing their impact. We have avoided referring to
“causes” because in both crises, this word remains contentious. Section 3 looks at the
external environment facing Southeast Asia at the onset of each crisis. The impact of
the crises is examined in Section 4. Section 5 concludes with observations regarding
whether lessons were learned and the extent to which they helped mitigate the
next crisis.

2. The Crises in Context

To compare the impact of the AFC and GLC, we need to examine the contexts. When
we look at both crises, the striking commonality between both is the lack of agree-ment
among scholars between the causes of each. There is, however, not much debate on the
triggers for each outbreak (see also Krugman, 2009).3 With the AFC, it was a speculative
attack on the Thai baht in July 1997 based on the assumption that the currency was
overvalued but more importantly because the emerging bubble in these countries left
them vulnerable for such attacks (UNCTAD, 1996).4 First the fear of and then actual
devaluation led to a flight of portfolio capital, as well as the withdrawal of foreign-
owned bank deposits,5 which had rushed to East and Southeast Asia, the newly labelled
“emerging markets”6 with the end of the Cold War, in pursuit of higher yields than could
be obtained in the West and Japan around the time its “lost decade” began. This attack
triggered the massive sell-off of other Asian currencies having similar characteristics as

3
There is of course no dispute that these crises began with the financial sector before moving on to the real
sector. This was recognised by Keynes (1936) himself in his seminal work.
4
UNCTAD (1996) had already warned the East Asian economies over the possible crisis following short-term
debt service and current account deficits exceeding the respective international reserves of the individual
countries. However, Dunn (2001, p. 33), citing the fact that Southeast Asian countries' exchange rates
might have risen, thanks to the inflow of capital, if left unpegged, came to the conclusion that “the success
or failure of an economy as a supplier of products that are saleable in the world market depends less on
the exchange rate regime than is commonly supposed.”
5
Some of these deposits were carry trades to take advantage of the higher interest rates in emerging
economies.
6
This term was attributed to Antoine Van Agtmael of the World Bank’s International Finance Corporation in
1981.

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 Kee-Cheok Cheong, Rajah Rasiah and R. Thillainathan

the Thai baht, so that by August, Indonesia, Malaysia and the Philippines, faced with
economic conditions similar to Thailand’s and all of whose currencies were similarly
pegged to float within a narrow band against the US dollar, experienced severe
devaluations (Whitt, 1999, p. 19).7 Even the so-called “strong economies” – Hong Kong,
Singapore and Taiwan – were affected, although not to the same extent.8
Some scholars, attempting to find common ground with the GFC, argue that it was
asset inflation, primarily real estate, which brought the Asian economies down (see, for
instance, Collyns & Senhadji, 2002; Quigley, 2001). Thus, Quigley (2001, p. 129) argued
that the proximate cause of the AFC “was unchecked activity in the property market.”
However, given that the housing boom predated the onset of crisis for months, and
was itself brought on by the large inflows of hot money with the end of the Cold War,
we conclude that real estate bubbles were a part of the causative chain of events that
led to crisis but not the trigger. Nevertheless, as with the build-up in current account
deficits arising from the appreciation in currencies, and growing short-term debt
commitments, non-performing loans arising from the housing bubble provided the
explosives for the eruption (Rasiah, 1998, 2000a, 2000b).
If the proximate cause of the AFC is in dispute that of the GFC is not. It was
the subprime crisis in the US in 2006, so called because subprime loans, loans to
borrowers who did not meet prudential requirements for lending,9 defaulted on a
large scale when the housing bubble in the US burst. Widespread default rendered
the large pool of financial derivatives into which subprime mortgages were bundled
worthless.10 Billions were wiped off the books of investors, from hedge funds to financial
institutions to individuals with 401K investment plans. As financial institutions on both
sides of the Atlantic were imperiled, lending froze (see, for instance, Blackburn, 2008).
Stock markets declined sharply, this contraction transmitted quickly to Asia, including
Southeast Asia. However, thanks to reforms instituted after the AFC, as well as the
fact that not much time had passed for a fresh build-up of vulnerabilities, Southeast
Asian financial sectors held. Also, apart from Singapore, the remaining Southeast Asian
countries did not attract financial derivatives from the West, and hence, were not
exposed to the fallen stocks.
Although events leading up to both crises were clear, the origins of each remain
hotly debated. For the AFC, Montes (1998, p. 19) refers to “menageries of explana-
tions”. Broadly, they divide into factors external and factors internal to Southeast
Asian countries. Those who argue that the AFC was of external origin noted the
risks associated with the volatility of portfolio capital flows (Bhagwati, 1998), and

7
A detailed chronology of the events from the start of the AFC to mid-1998 is found in Wong (1998).
8
Singapore and Taiwan had also to allow their currencies to devalue, albeit more modestly, while Hong
Kong, with its fixed exchange rate peg, saw its stock market savaged and interest rates soared.
9
Subprime refers to a credit rating below what lenders consider creditworthy (usually a FICO score of 680
and above). “FICO” is a registered trade mark of the Fair Isaac Corporation. FICO scores are calculated
using a risk assessment model proprietary to that corporation. The score ranges from about 300 for poor
credit risk to about 850 for the best credit risk.
10
The widespread incidence of default meant that the instruments into which subprime mortgages were
bundled could no longer be sold. The “mark-to-market” accounting rule adopted after the Enron scandal
of 2001 required that financial assets that could not be sold be valued as worthless.

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 Comparing the Causes and Consequences of the Asian and Global Financial Crises on Southeast Asia

with foreign-owned deposits and currency mismatches that were greatly enhanced
by premature liberalisation of financial markets that lacked depth (Goldstein, 1998;
Radelet & Sachs, 1998; Rasiah, 1998, 2000b; Singh, 1998; Stiglitz, 2007). Subsumed
under this category is the set of developments outside Southeast Asia that brought
huge portfolio capital inflows into Southeast Asia – the end of the Cold War, the
bursting of the Japanese housing bubble, among others (Whitt, 1999). Others blamed
weaknesses in the countries afflicted by the AFC – external deficits, pegged exchange
rates, crony capitalism, weak regulatory mechanisms and corporate governance
(Fischer, 1998; Greenspan, 1998; Huang & Xu, 1999; Johnson et al., 2000).11
The debate over the causes of the GFC has a familiar ring. Asians, including
Southeast Asians, blame the US, while Americans, politicians as well as academic
economists, blame Asia. Those who blame America argued in terms of the refusal to
regulate its financial sector, the growth of a shadow financial sector, state capture,
executive compensation, even fair-value or “mark-to-market” accounting (Anderson
et al., 2010; Blackburn, 2008; Johnson, 2009; Kaufmann, 2009; Whalen, 2008). To
others, however, the ultimate fault lay in East Asia’s (especially China’s) current account
surpluses and build-up of reserves, made possible by keeping currencies undervalued,
and hence to export capital to the US that kept American interest rates low (Bernanke,
2011; CEA, 2009; Dunaway et al., 2009).
The point of the above is not to argue what the causes of the AFC and GFC are but
to demonstrate that these crises arrived through a combination of factors that were as
different as they were similar between one crisis and another. In terms of similarities,
both crises began with the financial sector, were brought on by panic, with the
government exacerbating if not precipitating the crisis, and with exchange rates playing
a role. But these commonalities also embodied important differences. For instance,
whereas Southeast Asian governments were accused of extensive arbitrary intervention
in the AFC, the US Federal Reserve simply refused to regulate, believing that the market
was self-regulating, ultimately bringing on the GFC. Further, while overvalued Southeast
Asian exchange rates triggered the AFC, the region, led by China, was accused of
keeping exchange rates deliberately undervalued, thus contributing to what Bernanke
(2005) called a “savings glut”. The contexts for the two crises, i.e. circumstances just
prior to the onset of crises, also differed. But the biggest difference lies in the fact that
while the AFC began in Southeast Asia, brought about by factors both internal and
external to the region, the factors that brought on the GFC were entirely external to
Southeast Asia, if the much disputed global imbalances were excluded.

3. Lessons from the AFC

The impact of each crisis depended on the above factors, but also on the responses of
governments to address its arrival. For the GFC, the impact depends also on the lessons
learned or not learned from the AFC, a central theme of this paper. What are these
lessons and what, if any, was learnt?

11
Reflecting the IMF position, Fischer (1998), while acknowledging external factors, was of the view that the
problems “were largely homegrown”.

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Drawing Lessons. Although for each researcher the lessons to be drawn would
be expected to vary with what he/she considers to be the causes of the AFC, some
agreement on what needs to be done did emerge (see Rasiah, 2000b, pp. 382–387;
Stiglitz, 1999, pp. 321–328; Woo, 2007, p. 2). Thus, to counteract the negative impact
of the crisis and address weaknesses in Southeast Asian countries’ financial sectors, the
following recommendations were made:

1. To instill confidence in the financial sector, the flow of credit during crisis
should be maintained at low interest rates and with stronger direction from
the central bank;
2. Their regulatory framework and governance needed to be strengthened;
3. Non-performing loans must be reduced;
4. Short-term debt must be contained as well as foreign borrowing by the
corporate sector monitored closely;
5. Maturity and currency mismatches must be managed prudently.

Beyond national policies, states should be “acting in concert to restructure the

international environment that created the shocks and exacerbated their effects”
(Akyuz, 2002, 2010; Woo, 2007, p. 18).12 Even if this did not occur, regional agreements
to which these states belong should be able to orchestrate at the minimum a
coordinated response by member states. The delayed, haphazard response of Southeast
Asian leaders to the AFC clearly illustrated this latter need. Indonesia’s Suharto, a
reluctant participant of the IMF program, made erratic policy announcements (Sharma,
2003, p. 40). Malaysia’s Mahathir, in denial mode, blamed speculators, currency traders
and even saw a Jewish conspiracy (Jomo, 2006, pp. 491–492; Krugman, 2009; Tan, 2000,
pp. 17–18). Thailand’s fragile democracy had to contend with too many vested interests
to be able to mount an effective response. Instead of inspiring investor confidence,
these actions had the opposite effect.
But was a regional response possible? The helplessness of ASEAN, with all its
founding members afflicted by the AFC, coupled with the unreliability of assistance
from advanced countries, was also a lesson Southeast Asian leaders took to heart.
ASEAN simply did not have the resources to respond to a crisis of this scale, nor did
it have the requisite institutional mechanisms for economic cooperation to make it
happen (Harris, 2000, pp. 504–505). The increase in membership has also brought
within the ASEAN fold political and economic systems of considerable diversity, making
consensus, an ASEAN hallmark, difficult. As for the advanced West, the only financial
assistance to the governments of Indonesia and Thailand came in the form of IMF
loans, with all the conditions attached that caused early pain. Western governments,
triumphant at what they believed to be the end of the “Asian model”, saw fit to lecture

12
Greater economic cooperation did materialise in northeast Asia when the GFC arrived, suggesting this
recommendation was indeed taken seriously (Heng & Lim, 2009, p. 138). The People’s Bank of China
established a bilateral currency swap arrangement with the Bank of Korea amounting to 180 billion yuan in
December 2008, with Korea itself having completed another swap arrangement with Japan to the tune of
US$30 billion.

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 Comparing the Causes and Consequences of the Asian and Global Financial Crises on Southeast Asia

crisis-hit countries on the superiority of their model.13 And when Japan proposed an
Asian rescue fund, the proposal was opposed by the US fearing that it would undermine
the IMF.14
More contentious is the issue of capital controls that Malaysia alone instituted
and which was roundly criticised by neo-liberalist commentators (see Kaplan & Rodrik,
2002, p. 400). This anti-control rhetoric continues to this day. An opinion piece in the
Wall Street Journal of June 17, 2010 titled “Capital controls comeback” even ascribes
to capital controls Malaysia’s inability after the AFC “to attract money back, even after
lifting many of the restrictions” (online.wsj.com/article/SB100014240527487042895045
75312080651475312080651478488.html). However, prominent economists have come
to its defence (see, for instance, Athukorala, 2008; Kaplan & Rodrik, 2002). Indeed,
Kaplan and Rodrik (2002, p. 402) went so far as to challenge the capital controls as
being benign (Cheong, 2007) on the grounds that “pressure on the Malaysian currency
remained high in Malaysia months after the Korean and Thai currencies had begun to
appreciate.” For these latter scholars, then, the need for capital controls in the face of
financial flow instability is an important lesson to learn.
Our view lies between these extremes. Clearly history has proved the naysayers
wrong. But neither did it prove capital control backers right. Kaplan and Rodrik’s
argument (2002, p. 402) hinged upon their assertion that Malaysian financial markets
faced a crisis situation in September 1998 so that capital controls had to be imposed.
In fact, the Malaysian ringgit faced none of the pressures on the Thai baht and the
Indonesian rupiah at that time, in the latter case on account of race riots and the down-
fall of President Suharto. By the second half of the year, financial market conditions
were improving all over Asia, including in Malaysia, with onshore interest rates falling.
This was because Malaysia was embarking on real financial and corporate restructuring,
and agencies like Danaharta and Danamodal (see below) had been established by
August 1998. The spike in offshore rates was not necessarily reflective of a crisis but
rather of restrictions on the supply of ringgit to the offshore market (Thillainathan,
2003, 2011). The onshore market was also many times larger than the offshore market
and should have been the better measure of the country’s financial health (Annex
A). Indeed, there is credibility to arguments by some scholars that the rationale for
capital control lay in the political and/or political economic realm (Haggard & Low,
2000; Johnson & Mitton, 2001; Jomo, 2006; Rasiah, 2000b).15 Indeed, while the AFC
hastened the collapse of governments in Indonesia (Suharto) and Thailand (Chatichai
Choonhavan), it also led to the sacking of the Deputy Prime Minister in Malaysia, which
also shows that economic experiments cannot be isolated from political interventions.
Government Responses. Southeast Asian governments did undertake short-term
damage control while instituting financial reforms that strengthened regulatory over-
sight and corporate governance. Thus, Malaysia set up three bodies, Danaharta (the
National Asset Management Company) to take over non-performing loans, Danamodal
to recapitalise ailing banks, and the Corporate Debt Restructuring Committee to

15
Rasiah (2000b: 381) provided evidence to show that the debt rehabilitation programme was already
underway before the sacking of Anwar Ibrahim on 3 September 1998, and that the focus then was on
resuscitating ailing GLCs by first carrying out proper due diligence rather than simply bailing them out.

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 Kee-Cheok Cheong, Rajah Rasiah and R. Thillainathan

restructure corporate debt (Ito & Hashimoto, 2007, Rasiah, 2001; Thillainathan, 2003,
2011). Governance reforms to ensure strict prudential regulation and supervision of
borrowing from abroad had already been put in place (Jomo, 2006, p. 495) with the
result that Malaysia had a lower burden of external debt compared to its neighbours.
Indonesia agreed to and implemented an IMF program of bank resolution that initially
made things worse (Sharma, 2003, pp. 150–151) before taking steps to guarantee all
debt, setting up a bank restructuring agency, and a framework for corporate restruc-
turing put in place. Bank recapitalisation and steps to strengthen the prudential
and regulatory framework of the banking system followed (Sharma, 2003, p. 162).
Thailand likewise took short-term measures to stabilise the financial sector, including
guaranteeing deposits, closure or merger of bankrupt financial institutions, and
encouragement of foreign financial institutions’ participation (Menkhoff & Suwanaporn,
2007, pp. 4–5). Further reforms consisted of capital market diversification through
developing bond markets, promotion of specialised financial institutions and broadening
access to financial services.
Both Indonesia and Thailand saw IMF supervised reforms in corporate governance
that brought national practice more in line with Anglo-American norms under the
presumption that any departure from these norms was undesirable (Jomo, 2001,
p. 30). Malaysia, which shunned IMF assistance, nevertheless took similar steps,
including tightening listing rules on the Kuala Lumpur Stock Exchange, introducing a
code of corporate governance and an accreditation program for company directors.
Jomo (2001, p. 32) correctly observed that while corporate governance in Southeast
Asian countries did leave much to be desired, corporate failures prior to the AFC did
not necessarily signal a collapsing corporate sector and a high priority for AFC reform.
Additionally, as Malaysia has shown since, even with new rules in place, the power of
state and state-linked enterprises has been such that the playing field remains not at
all level.
In terms of fiscal and monetary policy response, many now agree with Stiglitz
(1999, pp. 321–323) that countercyclical policy was needed, the opposite of what
the IMF initially prescribed to combat the AFC. The plight of the population made
vulnerable by the crisis also called for the erection of strong social safety nets, which
either did not exist or had been progressively whittled away by market liberalisation
(Stiglitz, 1999, p. 328). After an initial spell of belt-tightening, the IMF reversed
course, advocating fiscal spending and lowering interest rates. Malaysia rejected IMF
involvement following the introduction of capital controls on 2 September 1998 after
initially undertaking measures that mirrored the IMF programs. Unlike Indonesia,
Philippines and Thailand whose short-term debt commitments and current account
deficits had far exceeded their international reserves when confidence crashed,
Malaysia still enjoyed a positive surplus (Rasiah, 2000b). Hence, while Indonesia,
Philippines and Thailand had to approach the IMF “with cap in hand”, Malaysia enjoyed
the autonomy to experiment with capital controls. Also, Malaysia was lucky as most of
its debt were denominated in ringgit while that of Indonesia, Philippines and Thailand
were mainly in foreign currencies.
One of the most important lessons of the AFC to Southeast Asian governments
is the need to be self-reliant. ASEAN had limited capability to respond to member

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 Comparing the Causes and Consequences of the Asian and Global Financial Crises on Southeast Asia

countries’ needs during crisis,16 the West would not intervene directly, preferring to
channel assistance through the IMF with conditions attached. Their response was to
build up their external reserves. This build-up was helped by the buoyant exports to a
booming West that only came to an end when the Tech Bubble burst in 2001.

4. Measuring Reform Impact

How well were these lessons learned? One, albeit indirect, way of answering this
question is to look at the robustness of Southeast Asian economies just prior to and in
coping with the onset of the GFC. A decade would have been sufficient for the impact
of the above reforms to be felt. Table 1 shows financial and other indicators for four
AFC-affected countries in the region in 2007 compared to 1996. Clearly there have
been improvements in the financial sector. Monetary supply and private sector credit
growth have been restrained, while short-term external debt has been sharply curtailed,
especially in Indonesia and Thailand. Overall, then, the financial institutions in the region
have become risk-averse and less debt-prone, especially with respect to short-term
foreign debt, the last a major factor in bringing on the AFC in Indonesia and Thailand.
Thanks also to more favourable exchange rates, current accounts in the balance
of payments have also gone from deficit to surplus. Governance is another matter

Table 1. Selected indicators just before each crisis, 1997 and 2007

Indonesia Malaysia Philippines Thailand

1996 2007 1996 2007 1996 2007 1996 2007

M2 growth rate (%) 29.3 19.3 21.2 9.5 15.6 10.7 12.6 6.3
Private sector credit 45.6 3.5 30.2 7.9 51.0 8.5 14.6 4.8
growth rate (%)
Corruption control -0.56 -0.78 0.51 0.28 -0.18 -0.8 -0.21 -0.33
index
Regulatory quality 0.15 -0.32 0.64 0.56 0.23 -0.15 0.18 0.26
index
Voice & accountability -0.81 -0.14 0.00 -0.50 0.19 -0.11 0.39 -0.68
index
Short-term external 167 27 41 22 68 21 123 25
debt (% of reserves)
Current account -3.4 2.4 -4.4 16.9 -4.8 4.8 -7.9 6.3
balance (% of GDP)
International reserves 4.5 8.0 3.4 8.8 2.9 7.0 6.0 7.6
(months of imports)

Sources: World Bank database; ADB key economic indicators, various years.

16
Nevertheless, a modest bilateral currency swap arrangement was signed by a number of ASEAN and the
Plus Three countries in Chiang Mai. This became known as the Chiang Mai Initiative (Heng and Lim, 2009,
p. 174).

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 Kee-Cheok Cheong, Rajah Rasiah and R. Thillainathan

altogether. In the decade since the AFC began indicators for corruption, regulatory
quality and voice and accountability have, with few exceptions, deteriorated, in some
cases, significantly. However, the bitter experience of AFC on NPLs led the governments
of Indonesia, Malaysia, Philippines and Thailand to better regulate the banks.
At the same time, recognition of the importance of self-reliance saw these
countries redoubling their efforts to drive exports that contributed to the countries’
rapid exit from the AFC but also the build-up of international reserves. Thus, the “global
imbalances” that have occupied centre stage in the discussions of the GFC have roots
in Asian (including Southeast Asian) governments’ response to the AFC. The need for
coordination also saw the birth of a number of bilateral currency swap arrangements
that involved ASEAN together with China, Japan and Korea and became known as the
Chiang Mai Initiative (see, for example, Henning, 2009: 2). These swap arrangements
would provide $120 billion of foreign exchange reserves that Southeast Asian countries
in distress could draw upon.17
Greater economic robustness led to more resilience against the impact of the GFC.
Table 2 confirms this for both the real and financial sectors. The GFC did bring about
negative GDP growth in Malaysia and Thailand, but not in the Philippines and Indonesia.
Indeed, Indonesia, the worst hit in the AFC, recorded the highest growth among the
four countries in 2009, a respectable 4.6%. Fairly decoupled from multinational value
chains that originated from the West, the collapse in export demand faced by Malaysia
and Thailand did not affect much Indonesian exports. Rapid action by way of fiscal
stimulus also helped, although the size of stimulus varied across countries depending
on perceived vulnerability and fiscal space (Doraisami, 2011). Thus, Malaysia, the most
open and therefore the most vulnerable among the crisis affected countries, announced
the largest stimulus package in relation to GDP that also resulted in the largest fiscal
deficit (Doraisami, 2011, p. 6).
Lower export growth first from the freezing of trade credit (Mora & Powers, 2009)
and eventually reduced demand from the US and Europe was the main transmission
channel, as seen by the sharp drop in exports in 2009 (Table 2). But imports also shrank,
leaving the current account balance in positive territory in all four countries between
2008 and 2011. The downward adjustment in imports can be partially explained by
these countries’ participation in global supply chains, reflected in a high import content
of exports. That exports rebounded strongly in 2010 for all four countries was in no
small measure the result of continued strong demand from China, which had become a
leading destination for these countries’ exports (Table 4).
Also, unlike in the AFC, the financial sector held up very well. Non-performing loans
remained very modest throughout the period, while money supply growth had been
held relatively in check. Private sector credit as a share of GDP has also been reduced
from AFC levels, although it remained much higher in Malaysia and Thailand compared
to Indonesia and the Philippines. Financial reforms after the AFC have undoubtedly
built stronger financial sectors; that with the exception of Singapore, Southeast Asian
financial institutions did not hold any toxic assets that sank American and European
banks helped.

17
The Initiative was launched at a meeting of ASEAN+3 finance ministers in Chiang Mai in May 2000.

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 Comparing the Causes and Consequences of the Asian and Global Financial Crises on Southeast Asia

Table 2. Selected indicators during and immediately after the AFC and GFC

AFC GFC
Country and indicator 1997 1998 1999 2000 2008 2009 2010 2011

Indonesia
GDP growth rate 4.7 -13.1 0.8 4.9 6.0 4.6 6.2 6.5
NPL as % of total loans 34.4 3.2 3.3 2.6 2.9
Money supply (M2) growth (%) 23.2 62.3 11.9 14.3 14.9 13.0 15.4 16.4
Private sector credit (% GDP) 59.6 59.9 62.1 60.7 36.8 37.0 36.5 38.5
Budgetary balance (% GDP) 0.5 -1.7 -2.5 -1.1 -0.1 -1.6 -0.7 -1.2
Export growth rate 7.3 -8.6 -0.4 27.7 20.1 -15.0 35.4 29.0
Current account balance (% GDP) -2.3 4.3 4.1 4.8 0.0 1.9 0.9 0.2
Malaysia
GDP growth rate 7.3 -7.4 6.1 8.9 4.8 -1.6 7.2 5.1
NPL as % of total loans 15.4 4.8 3.6 3.4 2.9
Money supply (M3) growth (%) 18.5 2.7 8.6 5.1 11.9 9.2 7.0 14.4
Private sector credit (% GDP) 163.4 162.1 150.1 138.4 115.0 137.4 132.2 132.1
Budgetary balance (% GDP) 2.4 -1.8 -3.2 -5.5 -4.6 -6.7 -5.4 -4.8
Export growth rate 12.1 29.7 12.2 16.1 9.7 -16.7 21.6 8.6
Current account balance (% GDP) -5.9 13.2 15.9 9.0 17.1 15.8 11.1 11.1
Philippines
GDP growth rate 5.2 -0.6 3.1 4.4 4.2 1.1 7.6 3.7
NPL as % of total loans 24.0 4.5 4.1 3.8 –
Money supply (M2) growth (%) 20.5 8.0 19.3 4.8 15.4 7.7 10.7 6.5
Private sector credit (% of GDP) 78.5 63.3 58.9 58.3 47.4 48.7 49.2 51.8
Budgetary balance (% GDP) 0.1 -1.7 -3.4 -3.7 -0.9 -3.7 -3.5 -2.0
Export growth rate 22.8 16.9 18.8 8.7 -2.8 -21.7 34.0 -6.7
Current account balance (% GDP) -5.3 2.4 -3.5 -2.7 2.1 5.6 4.5 3.1
Thailand
GDP growth rate -1.4 -10.5 4.4 4.8 2.5 -2.3 7.8 0.1
NPL as % of total loans 17.7 5.7 5.3 3.9 3.5
Money supply (M2) growth (%) 16.4 9.5 2.1 3.7 9.2 6.8 10.9 15.2
Private sector credit (% GDP) 177.6 176.7 155.8 138.3 130.5 137.0 135.5 150.8
Budgetary balance (% GDP) -2.2 -7.0 -9.6 -2.8 -0.6 -3.9 -2.4 -1.8
Export growth rate 29.8 21.9 -1.4 27.0 10.4 -11.2 18.9 11.7
Current account balance (% GDP) -2.1 12.6 9.9 7.4 0.7 7.8 3.9 3.2

Sources: World Bank database; ADB key economic indicators, various years.

The area where the impact of the GFC was most severe (in terms of relative
decline), and almost immediately felt, was in the Southeast Asian stock markets.
Table 3 shows this impact to be as severe in 2008 as it was in 1997, but the rebound
was also much stronger and more rapid. Yoshida (2010, p. 2) argued that this more
rapid rebound was on account of the same factors underlying the better real sector
performance – the expanded role of China and a rapid and coordinated countercyclical
response. These factors, combined with the fact that there really was nowhere else

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 Kee-Cheok Cheong, Rajah Rasiah and R. Thillainathan

Table 3. Equity indices during the AFC and GFC (% change)

Indonesia Malaysia Philippines Thailand

1996 16.4 24.1 13.1 -41.1

1997 -73.6 -72.9 -61.6 -78.8
1998 -28.1 -2.9 9.2 34.3
1999 95.1 44.5 0.9 43.3

2007 49.3 44.6 36.0 39.4

2008 -61.1 -43.7 -53.7 -50.5
2009 130.1 46.7 41.9 72.8
2010 37.9 36.1 11.3 62.1
Source: World Bank database.

equity capital could flee safely (to) helped to engineer this rebound. The fact that
financial collapse did not lead to economic collapse in 2008 should be a reminder that
there is no inevitability of one leading to the other.
This divergence between the stock markets and the rest of the economy has also
fueled the on-and-off debate about decoupling (see, for instance, Economist, 2008;
Willett et al., 2011).18 It is not our purpose here to contribute to this debate. For
Southeast Asia, what is evident is that reforms since the AFC have helped insulate the
real and financial sectors from the stock markets. This insulation has remained, even
after the outbreak of the pandemic crisis.

5. GFC’s Impact: Did Lessons Matter?

The above discussion suggests that implementing reforms, better developed finan-
cial markets, and less asset liability mismatches had strengthened Southeast Asian
economies, rendering them more robust before and during the GFC. While prudential
regulation has strengthened financial institutions, current account surpluses have
permitted the build-up of international reserves as defences against crisis.19 Exchange
rates have also been managed with a bias towards undervaluation rather than
reliance on a peg against a basket of major foreign currencies. The build-up of external
reserves coupled with reduced external borrowing has bought Southeast Asian
government considerable policy space, permitting the use of significant economic
stimulus packages.20 ASEAN has also pragmatically sought help from China, Japan and

18
Kim et al. (2009), in arguing in favour of “recoupling”, noted that its nature has changed – from a relation-
ship that was uni-directional (the West affecting Asia) to bi-directional (Asia also affecting the West).
19
Some of these reserves have been invested in foreign equity and bonds denominated in the issuing
countries’ currencies. This meant Southeast Asian countries were no longer exposed to foreign exchange
risks, leaving them free to cut interest rates to combat recession (Economist, 2012). This was in contrast
to the AFC when heavy foreign borrowing rendered both devaluation and defending exchange rates costly.
20
For instance, they no longer had the Hobson’s choice of defending their exchange rates at the cost of
hiking domestic interest rates (as Hong Kong did), or permitting exchange rates to depreciate, at the cost
of more expensive imports.

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 Comparing the Causes and Consequences of the Asian and Global Financial Crises on Southeast Asia

Korea to help fund the Chiang Mai Initiative of bilateral swap arrangements. Thus, at
least domestically, Southeast Asian countries have seen changes for the better in the
form of stronger “fundamentals” that helped mitigate the impact of the GFC. And
regionally, ASEAN has taken steps to give it more space, and hence, a greater role in
crisis management. That the GFC arrived around a decade after the AFC also meant that
lessons learned were fresh in the minds of policy-makers while, as already mentioned,
not enough time had elapsed for vulnerabilities to build up.
However, given its openness, how well Southeast Asia performed in the GFC
depended on the external as much as the domestic and regional environment, which
has also undergone major change. First, unlike in the AFC, the US and Europe no longer
experienced an economic boom but were where the GFC began (the US) and spread
and continued to rumble (Europe). As a result, the transmission mechanism was not
only through the financial markets but also through reduced exports. Southeast Asia
at the heart of global supply chains could no longer export its way (to the West) out
of trouble. Unlike the AFC in which it was argued that global supply chains cushioned
its negative impact (Lee & Tham, 2007; Obashi, 2009; Rasiah, 1998, 2000b), the GFC
impacted these networks (Weitzman, 2010). In any case, the US’ growing trade deficit
with Asia has led to calls by its politicians to retaliate against Asian exporters.21 At the
same time, the US deficits were financed largely by Asia, principally China and Japan.
Second, the pattern of trade has also been shifting, with greater intra-Asian trade
for all Asian countries, including those in Southeast Asia. At the centre of this trade is
China, which has, by 2008, overtaken the US in trade with ASEAN (Table 4),22 which has
become a major destination for Southeast Asian supply chains. Exports to China have
also been driven by China’s demand for machinery and equipment as well as energy
products and raw materials to fuel its growth. However, China exports more and more
to destinations outside Asia, overtaking Germany to be the world’s top exporter in 2009
(WTO, 2010: Appendix Table 1). The country continues to be the top destination for
foreign direct investment.
Table 4. Exports to China and level of international reserves, four Southeast Asian countries,
2008 and 2011

Country Share of exports to China (%) International reserves (months of imports)

2008 2011 2008 2011

Indonesia 8.5 (4)a 11.3 (2) 4 6

Malaysia 9.5 (4) 17.9 (1) 6 7
Philippines 11.1 (2) 21.2 (1) 6 11
Thailand 9.1 (3) 12.0 (1) 6 9 (2010)
Note: a Rank based on the value of exports according to export destination.
Sources: World Bank database; ADB key economic indicators, various years.

21
This rhetoric, directed particularly at China, became particularly shrill during the US Presidential election
campaign of 2008.
22
Between 2000 and 2008, ASEAN’s trade with China grew six times, compared with just under two times
with Japan, and one and a half times with the USA (ASEAN, 2009: Table V.12)

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 Kee-Cheok Cheong, Rajah Rasiah and R. Thillainathan

These developments effectively means that a significant shift took place in the
economic centre of gravity from West to East in the space of a decade.23 For Southeast
Asia, the economic wellbeing of China was fast becoming as crucial as the US and the
EU. This well-being has been helped by the fact that China was relatively unscathed by
the AFC, and although it was adversely affected by the GFC because of its heightened
exposure to trade with the West, it had built up robust international reserves it could
and did deploy to cushion its economy from the shocks generated (see for instance,
Tanaka, 2011). Within Southeast Asia, the early movers, Malaysia and Thailand, have
begun to lose momentum, while Indonesia, long the underachiever, and Vietnam,
which started liberalising its economy since 1986, are beginning to set the economic
pace, although the latter’s reliance on credit expansion to drive growth has dented its
long-term growth prospects.24 Cambodia, recovering from its traumatic experience of
the Pol Pot regime and isolation for a decade after that, has recorded robust growth
since the beginning of the new millennium. These changed circumstances have meant
a reordering in the structure of growth within the region. The GFC merely exposed the
greater vulnerability of highly open economies to such shocks.25
A final point to note, although no longer centrally related to whether Southeast
Asia learned lessons from the AFC, is the question of capital controls. As earlier
indicated, these controls were implemented by only Malaysia, and only in response to
the AFC. When the GFC arrived, no Southeast Asian country, not even Malaysia, saw a
need to impose capital controls even when the stock markets faced a huge collapse.26
Beyond Southeast Asia, however, this instrument has moved from economic heresy to
mainstream. Even the IMF, which opposed its use in 1997, has, through a policy paper
(Ostry et al., 2010), conceded that capital controls could, in particular situations, be
appropriate. These situations could include currency attacks, large inflows of short-
term capital, loss of monetary autonomy, and asset bubbles, which ironically, together
affected Indonesia, Malaysia, Philippines and Thailand during the AFC. This change of
heart has been brought about by positive results in economies like Brazil and Taiwan
(Gallagher, 2011) coupled with increasingly pessimistic views of the benefits of capital
account liberalisation (e.g. Bhagwati, 1998; Ocampo et al., 2008). That China and India,
both still having in place capital control instruments, rode out both the AFC and GFC
extremely well must have also been a lesson learnt. However, cheerleaders for the
Malaysian capital control (e.g. Tourres, 2003) should not rush to celebrate; the capital
controls that have been encouraged since the ringgit has fallen sharply from July 2023
till March 2024, should refer to capital inflows rather than capital outflows as the latter
affects investor confidence.27

23
This is recognised in the US, as seen from the National Intelligence Council’s Global Trends 2025 (2008).
24
The Global Manufacturing Competitiveness Index 2013 (Deloitte Touche Tomatsu & Council on
Competitiveness, 2012) shows Indonesia and Vietnam rising 6 and 8 spots to rank 11 and 10 respectively,
above Malaysia, whose rank fell from 13 to 14.
25
World Bank data showed Indonesian exports to be 30% of its GDP in 2008, compared to 103% for Malaysia
and 76% for Thailand.
26
Indonesia did place quantitative limits or minimum stay requirements to limit short-term external
borrowing to 30% of capital and also introduced a one-month minimum holding period for central bank
money market certificates in 2010 (Massa, 2011, p. 1).
27
This was introduced by the government of Chile in the early 1990s (Agosin & Ffrench-Davis, 1998).

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6. Conclusion
A comparison between the AFC and GFC reveals both similarities and contrasts. Some
of these similarities result from circumstances, for instance, both crises began in
the financial sector, while others were structural, for example, the openness of the
economy and natural resource endowment for each country which did not change
between crises. Indonesia, Malaysia, Philippines and Thailand responded initially to
the AFC in the same way by raising interest rates and collateral requirements for loans.
Malaysia took a different path when it introduced capital controls in September 1998. In
the end interest rates in all the crisis-affected countries in East and Southeast Asia had
already started to fall in 1998. The modest role played by ASEAN was another common
circumstance, although in the GFC, ASEAN did play a coordinative role. The sharp fall
in output followed by rapid recovery is also the product of circumstance – continued
economic boom in the West that allowed Southeast Asia to export its way out of crisis
and strong demand from a fiscally stimulated China doing the same. And for all the talk
about the need for revamping the international financial architecture, nothing really
had changed between the two crises.
But circumstances also played a major role in differentiating the two crises. The
most obvious contrast is the different locations where these crises began, as well as
their coverage – the AFC did not spread beyond East and Southeast Asia while the GFC
generated a global crisis. This meant, for instance, that global production networks
that helped cushion the impact of the AFC on Southeast Asia were themselves severely
impacted by the GFC. No less important is the shift in economic power to Asia that was
accelerated by the GFC. Indeed, a major reflection of this shift has been the growing
intra-Asian trade among Southeast Asian countries. Also different was the way each
crisis was transmitted, the AFC from the financial sector to the real, and the GFC
primarily through the real sector via exports. These differential circumstances meant
that the less globalised and more resource-rich Indonesia held up much better than its
neighbours during the GFC.
Although the fact that the GFC occurred barely a decade after the AFC meant that
vulnerabilities had not built up to pose new risks, some credit for the differentiated
impact of the AFC and GFC must go to the reforms undertaken by governments badly
afflicted by the AFC. These reforms – greater prudential regulation combined with
financial deepening – have produced much more robust financial sectors, while more
cautious management of exchange rates have preempted the kind of speculative
attacks that launched the AFC. Greater leeway in crisis management has also been
given Southeast Asian governments the change of heart over capital controls. Thus, the
question as to whether lessons have been learned in Southeast Asia must be answered
in the affirmative. Also, any attempt to revisit past crises or to construct viable
mechanisms to prevent future crises from happening will require, inter alia, a political
economic assessment.
Does it follow that this time is different? It is possible to conclude that this time
is indeed different, but not different enough. In fact, Krugman (2009) argued that the
causes were identical. Given the openness of the Southeast Asian economies, there is
simply no way for them to insulate themselves from major external shocks, no matter
how well past lessons are learned. As the GFC shows, the best that they can hope for is
preparedness, in the form of sound fundamentals, for the inevitable next time.

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 Kee-Cheok Cheong, Rajah Rasiah and R. Thillainathan

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Annex 1
Estimating the Malaysian Onshore and Offshore Currency (Ringgit) Market Size
No direct estimate of the size of the onshore and offshore Malaysian ringgit market
is available. However, Bank Negara Malaysia (the country’s central bank), in its 1996
annual report provided the following data on the size of the non-traded related (NTR)
forward exchange transactions (FET) (Table A48) and the size of the deposit base
(demand together with other deposits) (Table A37). The ratio of the NTR FET to the
deposit base is an estimate of the size of the offshore ringgit market relative to the
domestic ringgit market. For the period 1992–1996, the ratios are:
1992 11%
1993 16%
1994 7%
1995 12%
1996 9%
The rationale for this estimate is as follows. The offshore market has no use for
ringgit denominated funds over and above what is given out as ringgit-denominated
loans in the offshore market; the surplus funds would be relent to the onshore market.
These loans are done through the forward or swap market. The sum of transactions in
these two markets is shown as NTR FET.
In using the above ratio as an estimate of the size of the offshore market, the
assumption has been made that all NTR FET of the onshore banks have been contracted
with offshore banks in Singapore as the counter parties. In fact, a counter party
could have been non-bank institutions such as foreign fund managers with portfolio
investments in Malaysia or banks based in other financial centres. To the extent that
these transactions existed, the above ratios actually overstate the size of the ringgit
market in Singapore.
Annual reports subsequent to 1996 did not give data on onshore banks’ NTR FET.
Hence no estimate of their share in Singapore in relation to the onshore ringgit market
in 1997 and 1998 was possible. These were years of heavy speculation against local
currencies. To prevent this, Bank Negara prohibited onshore banks from entering into
forward or swap transactions with non-residents in August 1997. This was done to
deny offshore speculators access to ringgit funds to prevent them from borrowing and
shorting the ringgit. With this restriction, the onshore and offshore ringgit markets were
decoupled. Whatever happened on the offshore market would have had no impact on
the onshore market.

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