3 - Global Economic Crisis and Social Security in Southeast Asia

Summary

The following summary of the origins of the 1997 crisis in Asia has eerie echoes of the start of the current crisis in the United States:

The lead up to the crisis involved growing private capital flows … encouraged in part by the prevailing low interest rates. … In many instances governments had recently liberalized financial institutions, although without building up a sufficiently strong financial supervisory and regulatory capacity. These poorly regulated financial institutions took on excessive external debt … stimulating a surge in domestic credit, investment and asset prices. Strong asset prices and growth in turn attracted more foreign capital inflows. Vibrant domestic demand growth also led to the emergence of significant deficits on the balance of payments current account. The crisis began when a sharp change in foreign investor sentiment in mid 1997 led to a sudden … severe liquidity squeeze, the emergence of massive bad debts, a collapse in investment and severe recession. (World Bank 2007)

In both instances what started as a financial crisis rapidly turned into an economic crisis and eventually a social crisis. Both were preceded by unprecedented optimism and financial excesses followed by widespread economic gloom and eventually social and political upheavals. The objective of this chapter is to provide a snapshot of the 1997 financial crisis in Asia, how it was tackled, how it compares with the current crisis, and the lessons they offer for the future.

The chapter will examine the economic crisis and its social effects in five Southeast Asian countries: Indonesia, Malaysia, the Philippines, Singapore, and Thailand. It will argue that the 1997–98 crisis put the population at risk of a social catastrophe due to the lack of a social protection system. The catastrophe was averted only after governments in the worst affected countries hurriedly expanded their social protection with substantial help from international organizations. The current crisis is yet again confirming the need for robust social protection mechanisms that will protect those affected by adverse economic circumstances.

Economic Crises

Asia has been struck by economic crises twice within just over a decade: 1997 and 2008. In many ways, the recent crisis is more pernicious than its predecessor, as it follows immediately after energy and food crises.