Ten Years After: The Lasting Impact of the Asian Financial Crisis

This article was published in the Asia Program, Woodrow Wilson International Center for Scholars, publication entitled Ten Years After: Revisiting the Asian Financial Crisis, October 2007. The e-book is available free online (PDF). The article argues that the most important long-term impact of the East Asian financial crisis, a decade later, has been that it began a process that led to the collapse of the International Monetary Fund's (IMF's) influence over middle-income countries. This was partly a result of the Fund's role in the crisis, detailed in the article, which was widely seen as a major failure. Partly as a result of this experience, the middle-income Asian countries have accumulated large reserve holdings and largely removed themselves from IMF influence. The IMF's authority and credibility was further undermined in the Argentine crisis of 1998-2003. In recent years the availability of alternative sources of credit, especially in Latin America, have led to the collapse of the IMF's "creditors' cartel" in that region and among middle-income countries generally. The author argues that this is the most important change in the international financial system since the breakdown of the Bretton Woods system in 1973. For the foreseeable future, any positive financial reforms will be made at the national and regional level -- e.g., with the extension of such arrangements of the Chiang Mai Initiative. This is because the high-income countries are not significantly closer to supporting reforms at the level of the international financial system or institutions than they were a decade ago. It will also be important for low-income countries, where the IMF still retains its role as "gatekeeper" for official credit, to become independent from the Fund so they can pursue more effective macroeconomic and development policies.