The countries worst affected by the 1997-98 Asian financial crisis. Photo: Bamse/CC
The countries worst affected by the 1997-98 Asian financial crisis. Photo: Bamse/CC

Steve Score, Socialist Party national committee

Economic crisis and political instability are built into the system of capitalism. The banking collapse and recession of 2007-08 was a turning point in modern history, from which capitalism has not fully recovered, and new crises are now developing. But the Asian financial crisis of ten years earlier was a harbinger of things to come.

Politicians and advocates of the capitalist system attempt to portray its regular crises as temporary ‘blips’ before returning to ‘normality’. They put forward policy tweaks and new models to ‘prove’ things have changed. But again and again these come up against reality.

The South Asian economies, such as South Korea, Thailand, Indonesia and Malaysia, had been lauded as economic miracles, so called ‘tigers’. Proof that poorer, less developed countries could grow rapidly and become ‘emerging markets’. Some had seen average growth rates of around 7-8% a year from the 1970s.

Capitalist triumphalism

The political background in the 1990s had been the collapse of Stalinism and the return to capitalism in the former Soviet Union and Eastern Europe. While these had not been genuine models of socialism, with no working-class democracy, nevertheless their demise enabled capitalism to portray itself as being the only game in town. Former workers’ parties had shifted to the right, and socialist ideas were receding.

The imperialist victory in the first Gulf war of 1990-91 reinforced capitalist triumphalism. US president George Bush senior declared there was a ‘new world order’.

 ‘Globalisation’ of the world economy – really an expansion of the ability of huge transnational corporations to exploit the world – along with neoliberal deregulated ‘free markets’, were to result in a new era of capitalist growth and stability.

The Socialist Party, and the Committee for a Workers’ International of which we are part, argued that the underlying problems of capitalism had not been solved, that further economic crises would develop at some point and that ultimately they would have political effects. Globalisation meant that when economic crisis hit in one country or region, it could more easily spread internationally.

Mid-1997 saw crisis break out in Asia, beginning with the devaluation of the Thai baht. The Thai government ran out of the foreign currency, which it was using to try to stabilise the baht and went into freefall. This led to a chain reaction through a series of south Asian countries, including, South Korea, Indonesia, Hong Kong, Laos, Malaysia, and the Philippines. Currencies crashed along with stock markets.

The financial crisis was accompanied with a huge collapse in the real economies. Millions lost their jobs. 10,400 people in Hong Kong, Japan and South Korea committed suicide because of the crisis. Social turmoil and political instability grew.

Social unrest

General strikes swept South Korea, popular mass movements led to the downfall of governments in a number of countries. In Indonesia, for example, where national income (GDP) fell by 13.7% during 1998, a mass movement of millions of working people and the poor confronted the army, leading to the downfall of the dictator Suharto. But none of the movements had drawn the necessary political conclusion that it was the capitalist system that needed to go, and that it was the working class, with the support of the urban and rural poor, that had the power to bring about such a change.

Economic growth in the region had been fuelled by huge inflows of capital from the advanced capitalist countries. Investors searched for super-profits by exploiting cheap labour, cheap materials, and growing markets. In part, this ‘foreign direct investment’ created factories and assembly plants, but increasingly resulted in short-term investment into shares and bonds. This so called ‘hot money’ could notoriously flow in and out again rapidly.

Speculative bubble

Stock markets grew, with local investors borrowing huge amounts from abroad. Property prices rose, and speculation abounded. A classic bubble developed.

However, by 1996 increased production of goods such as cars and microchips were reaching the limits of the market. The beginnings of overcapacity and dropping export sales resulted in growing trade deficits.

Countries such as Thailand had ‘pegged’ their currencies to the US dollar. This was to reassure foreign investors that their assets would maintain their value. But the trade deficits, exacerbated when the dollar began rising after 1995, effectively made the region’s exports more expensive. A devaluation of the Chinese yuan meant China could undercut south Asian goods.

These factors made it increasingly hard for governments to maintain their currencies at such a level. When the Thai government ran out of reserves and ‘floated’ its currency, it sank! This triggered the financial crisis across the region, ultimately also impacting the world’s stock markets.

The debt to GDP ratio of those countries, already high, rocketed further during the crisis – in some cases to 180%.

IMF assault

The International Monetary Fund (IMF) stepped in, aiming to get western money repaid with a $40 billion bailout. But it was at the cost of ‘structural adjustment programmes’: cutting welfare and government spending, such as subsidies on food and fuel, privatisation, further deregulation, as well as raising interest rates and measures to stop banks from collapsing. In other words, making the working class and poorest suffer to serve the interests of international capitalism. No wonder placards appeared on demonstrations reading “IMF = I’M Fired” such as in South Korea.

The crisis at that stage did not develop into a worldwide recession. But the underlying weaknesses in capitalism had been exposed. Further bubbles over the following years allowed the illusion that capitalism had moved on from the crisis. But, as we pointed out at the time, the economic recovery was weak and fuelled by record levels of debt on a world scale.

Ten years after the south-east Asian crisis, another crisis developed, triggered by the banking collapses of 2007. This time it was a worldwide recession. Twelve years later we saw the huge economic collapse triggered by Covid, but reflecting the underlying problems of capitalism. Now, amid soaring inflation, a new recession threatens.

Like 25 years ago, this will lead to explosions of mass struggle as we have already seen in Sri Lanka (see pages 8-9), and Ecuador recently. In the inevitable unrest during this new period of economic crisis, in south-east Asia and across the world, the lessons must be drawn of past struggles: that capitalism has no solutions and only its overthrow and replacement with genuine socialism can find them.