Lessons from a reflection on the Asian Contagion

ANTHONY KILA

Anthony Kila is a Jean Monnet professor of Strategy and Development. He is currently Institute Director at the Commonwealth Institute of Advanced and Professional Studies, CIAPS, Lagos, Nigeria. He is a regular commentator on the BBC and he works with various organisations on International Development projects across Europe, Africa and the USA. He tweets @anthonykila, and can be reached at anthonykila@ciaps.org 

What we refer to as the “Asian Contagion” pertains to the 1997 Asian Financial Crisis, a severe economic crisis that began in Thailand and spread like a contagious disease across various Asian economies, including Indonesia, South Korea, Malaysia, and the Philippines.

I regret to inform you that I am unable to provide the name and profile of the specific individual who coined the expression today; however, the phrase was certainly popularised by economists, financial analysts, and media outlets such as The Economist, The Financial Times, and The Wall Street Journal during the Asian economic crisis. Readers who can fill my lacuna are welcome to suggest the name of the expression’s originator. Here is a good time to remind ourselves that “contagion” in economic and financial contexts refers to how financial instability in one market or economy can swiftly spread to others, often due to investor panic, capital flight, and interconnected financial systems.

Overall, the Asian Contagion was triggered by the collapse of the Thai baht. Due to fund depletion and speculative attacks, the government was compelled to float the national currency and cease defending it. The Thai baht plummeted from 26 to the US dollar in July 1997 to approximately 53 US dollars in December of the same year. This led to a series of financial turmoil, capital flight, currency devaluations, and economic recessions in the affected countries.

The immediate and most visible effect of the crisis was a series of bankruptcy and business failures in the countries affected by the contagion. In Thailand, the closure of about 56 finance companies resulted in 15,600 job losses and the economy shrank by 8.0 percent in 1998. In South Korea, the number of small and medium-sized enterprises (SMEs) filing for bankruptcy nearly doubled, from 11,600 in 1996 to 22,800 in 1998 and the GDP decreased by 5.8 percent in 1998. In Indonesia, the GDP contracted by 13.7 percent in 1998, and the average living standards declined by 24.4 percent between 1997 and 1998. In Thailand, unemployment was projected to rise from 0.5 million in 1996 to around 1.8 million in 1998; the projection for Indonesia was from 4.4 million in 1996 to between 7.9 and 9.7 million in 1998. In South Korea, the unemployment rate escalated from 2.6 percent in 1997 to 7.0 percent in 1998, with approximately 1.8 million workers losing their jobs.

Expectedly, the poverty rate also surged. In Indonesia, it grew from 11 percent to 19.9 percent between 1997 and 1998, pushing approximately 20 million more people into poverty. In South Korea, urban poverty increased from 8.6 percent to 19.2 percent, and in Thailand, it increased from 11.4 percent to 12.9 percent. 

As one can easily imagine, social and political unrest erupted in the affected countries. 

In Indonesia, violent protests broke out in Jakarta and other cities, targeting businesses, especially those owned by ethnic Chinese Indonesians. Universities became centres of resistance, calling for political reforms. After 32 years in power, President Suharto resigned on 21 May 1998 amid mass protests and a loss of military support.

In South Korea, the crisis led to the ruling party’s downfall and Kim Jung’s election in 1998. Once in power, Kim Jung introduced economic reforms and increased transparency.

In Thailand, thousands protested against his handling of the economy, forcing Prime Minister Chavalit Yongchaiyudh to resign in November 1997. 

In Malaysia, Deputy Prime Minister Anwar Ibrahim voiced his dissent and was subsequently dismissed. He later faced imprisonment after criticising Prime Minister Mahathir Mohamad’s crisis handling. Anwar Ibrahim’s arrest ignited the Reformasi Movement, with thousands protesting for democracy and against corruption. For further details, see “The Making of the Reformasi Movement” by Anthony Kila.  

A closer look at the Asian Contagion will readily reveal that the factors that triggered the crisis were both internal and external, political and financial. Additionally, as some of us like to point out, the Asian countries also experienced their successes turning sour. It is worth noting that these factors were common among the Asian countries affected by the contagion. 

In the early 1990s, many Asian economies experienced rapid growth, allowing them to undertake risky investments and excessive borrowing, primarily foreign debts that became too burdensome to service. 

Many Asian countries pegged their national currencies to the US dollar, which exposed them to speculation when the currencies were strong and made their economies vulnerable whenever investors lost confidence. 

Another significant contributing factor to the Asian financial crisis was the weak regulations that permitted unregulated lending, which led to asset bubbles, particularly in real estate.

Once investors sensed the party was over in Asia, many withdrew, resulting in massive capital flight from Asian markets.

To overcome the crisis, the IMF offered its assistance; however, for many in Asia, it resembled a person pretending to scratch one’s back while wearing a glove made of sandpaper. The IMF provided billions of US dollars in aid; nevertheless, the austerity measures were excessively rigid and sparked controversy. Undoubtedly, the IMF’s help exacerbated the situation in numerous countries, yet it must still be considered among the factors that contributed to alleviating the Asian contagion. 

Other factors that contributed to resolving the Asian financial crisis included sweeping banking and financial reforms that led to bank recapitalisation, the closure of insolvent institutions, and strengthened financial regulations that helped restore confidence in the banking sector.


These countries also diversified their economies, moving away from dependence on short-term foreign capital and speculative investments and shifting towards general production, with a particular emphasis on manufacturing. Their governments actively encouraged and facilitated industrialisation, technology, and infrastructure development to sustain long-term growth.

What they produced became exportable due to their weak currencies, rendering them competitors in the global market. The link between a weak currency and an export-led economy is a nexus that policymakers and economics students should examine closely.

The regional cooperation that has been developed should not be underestimated, as it has played a crucial role in strengthening regional financial collaboration and in preventing future crises. For instance, the ASEAN+3, comprising China, Japan, and South Korea, established the Chiang Mai Initiative, a regional currency swap agreement designed to avert potential crises.

Overall, it is safe to say that the Asian contagion, which did not kill those affected, ultimately made them stronger. That is their story: what can we learn from it? 

Join me if you can @anthonykila to continue these conversations.

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