Asian Financial Crisis

A Crisis of Governance

The significance of the Asian financial crisis is multifaceted. Though the crisis is generally characterized as a financial crisis or economic crisis, what happened in 1997 and 1998 can also be seen as a crisis of governance at all major levels of politics: national, global, and regional. In particular, the Asian financial crisis revealed the state to be most inadequate at performing its historical regulatory functions and unable to regulate the forces of globalization or the pressures from international actors. Although Malaysia's controls on short-term capital were relatively effective at stemming the crisis in Malaysia and attracted much attention for Prime Minister Mahathir bin Mohamed's ability to resist International Monetary Fund (IMF)–style reforms, most states' inability to resist IMF pressures and reforms drew attention to the loss of government control and general erosion of state authority. Most illustrative was the case of Indonesia, where the failures of the state helped to transform an economic crisis into a political one, resulting in the downfall of Haji Mohammad Suharto, who had dominated Indonesian politics for more than thirty years.

Debates about the causes of the financial crisis involved competing and often polarized interpretations between those who saw the roots of the crisis as domestic and those who saw the crisis as an international affair. The economic crisis focused much attention on the role of the developmental state in East Asian development. Proponents of neoliberalism, who saw the crisis as homegrown, were quick to blame interventionist state practices, national governance arrangements, and crony capitalism for the crisis. Assistance from the IMF all came with conditions aimed at eliminating the close government-business relationships that had defined East Asian development and replacing Asian capitalism with what neoliberalists saw to be an apolitical and, thus, more efficient neoliberal model of development.

The early neoliberal triumphalist rhetoric, however, also gave way to a more profound reflection about neoliberal models of development. Perhaps most of all, the 1997–1998 financial crisis revealed the dangers of premature financial liberalization in the absence of established regulatory regimes, the inadequacy of exchange rate regimes, the problems with IMF prescriptions, and the general absence of social safety nets in East Asia.

Echoing these concerns were those who saw the crisis as a function of systemic factors. In contrast with neoliberal theorists who focused on technical questions, however, critics of neoliberalism focused on political and power structures underlying the international political economy. Mahathir's characterization of the financial crisis as a global conspiracy designed to bring down Asian economies represented the far extreme of these views, though his views did have some popular appeal in East Asia.

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