Asian Financial Crisis

The Asian Financial Crisis erupted on 2 July 1997 when the Bank of Thailand, having exhausted its foreign reserves defending a dollar peg against speculative attack, floated the baht, which promptly lost over half its value. The contagion swept through the "Asian Tiger" and "Tiger Cub" economies — South Korea, Indonesia, Malaysia, the Philippines and Hong Kong — within months. The underlying vulnerabilities were structural: fixed or quasi-fixed exchange-rate pegs to the US dollar, large short-term foreign-currency debts held by domestic banks and corporations, current-account deficits, asset-price bubbles in property and equities, and crony-capitalist lending under weak prudential supervision. When confidence broke, the sudden reversal of hot capital flows — the "sudden stop" later analysed by Guillermo Calvo — forced sequential devaluations and corporate bankruptcies.

The crisis mechanism combined the Krugman first-generation model of unsustainable pegs with self-fulfilling speculative dynamics. As reserves drained, investors anticipated devaluation and fled, making collapse inevitable; this is the classic balance-of-payments crisis logic. The International Monetary Fund intervened with conditional rescue packages — roughly USD 17 billion for Thailand, USD 40 billion for Indonesia, and USD 58 billion for South Korea — demanding fiscal austerity, high interest rates, bank closures and structural reform. These conditionalities proved highly controversial: critics including Joseph Stiglitz argued that contractionary austerity deepened the recessions, while Malaysia under Mahathir Mohamad defied the IMF orthodoxy by imposing capital controls in September 1998 and pegging the ringgit, recovering without a Fund programme.

The political consequences were profound. In Indonesia the economic collapse, with the rupiah losing some 80 per cent of its value and prices soaring, fuelled mass protests that ended President Suharto's 31-year New Order regime in May 1998. South Korea entered an IMF programme that restructured its chaebol conglomerates. The crisis reverberated globally, contributing to the 1998 Russian default and the collapse of the hedge fund Long-Term Capital Management. In response, Asian states accumulated vast foreign-exchange reserves as self-insurance, established the Chiang Mai Initiative (2000) of bilateral currency swaps under ASEAN+3, and the G-20 forum was created in 1999 to broaden crisis governance. By 2026, this reserve-hoarding legacy and East Asian scepticism of IMF conditionality continue to shape the international monetary order and debates over a global financial safety net.

For the exam, the Asian Financial Crisis is core to World History and International Relations / Economy papers. UPSC and FSOT candidates should connect it to globalisation, the Washington Consensus debate, and the architecture of the IMF; CSS and BCS papers frequently ask about contagion mechanisms and the comparative recovery of Malaysia versus IMF-programme countries. Typical question angles include: the causes of currency crises and the role of speculative capital; an evaluation of IMF conditionality and the Stiglitz critique; the political fall of Suharto; and the long-run lessons — reserve accumulation, the Chiang Mai Initiative and the birth of the G-20. Distinguish it sharply from the 2008 Global Financial Crisis, which originated in US subprime markets, not in emerging-market exchange-rate pegs.