The Asian Financial Crisis The Summer of 1997: How Asia's Miracle Economies Collapsed in 90 Days Part 1: From Boom to Catastrophe

The Asian Financial Crisis

The Summer of 1997: How Asia's Miracle Economies Collapsed in 90 Days

Part 1: From Boom to Catastrophe

A collaborative research series by Randy T Gipe and Claude (Anthropic)
December 2025

In May 1997, Thanong Bidaya owned three things that proved he was living the Asian economic miracle: a new Toyota Camry purchased on credit, a condominium in northern Bangkok financed with a floating-rate mortgage, and 500,000 baht in a savings account earning 12% annual interest—money he planned to use to expand his electronics import business.¹

By October 1997, all three were gone.

The Camry had been repossessed when Thanong could no longer make payments in a currency that had lost half its value. The condo was underwater—not from flooding, but because he owed more on the mortgage than the property was worth after Bangkok's real estate market collapsed. And the savings account, converted at the government's insistence into a "restructured deposit" at a bank that would soon fail entirely, was effectively worthless.²

Thanong's story was not unusual. Across Thailand, Indonesia, South Korea, Malaysia, and the Philippines, millions of families watched decades of savings evaporate in a matter of months. Businesses that had thrived for generations shuttered overnight. Workers who had climbed into the middle class found themselves back in poverty. Suicide rates spiked. Riots erupted. Governments fell.³

The event that destroyed Thanong Bidaya's life—and reshaped the economic geography of Asia—is known as the Asian Financial Crisis of 1997-1998. It remains one of the most catastrophic economic collapses in modern history, and one of the least understood.

In 90 days, Asia's "miracle economies" lost $600 billion in market value—roughly equivalent to the entire GDP of Canada at the time—and threw 24 million people into poverty.

This series will examine how it happened, why it spread so devastatingly fast, and—most importantly—why the international "救援" (rescue) orchestrated by the International Monetary Fund turned a financial crisis into an economic catastrophe that took a decade to repair.

I. The Miracle Years: 1985-1996

To understand the crisis, you must first understand what was being destroyed.

Between 1985 and 1996, East and Southeast Asia experienced the most rapid and sustained economic expansion in human history. The so-called "Asian Tigers"—South Korea, Taiwan, Hong Kong, and Singapore—had already demonstrated that rapid industrialization and export-led growth could transform poor countries into wealthy ones within a single generation. Now, a second wave of economies was following the same path.⁴

The ASEAN Boom

Thailand, Malaysia, Indonesia, and the Philippines—members of the Association of Southeast Asian Nations (ASEAN)—became the new darlings of international investors. Their formula appeared simple and replicable:

• Cheap labor attracted foreign manufacturing (textiles, electronics, automotive parts)
• Political stability (even if authoritarian) provided predictable business environments
• Currency pegs to the U.S. dollar eliminated exchange-rate risk for foreign investors
• Capital account liberalization allowed free flow of foreign money in and out
• Rapid credit expansion financed construction booms in real estate and infrastructure⁵

The results were spectacular. Between 1990 and 1996:

Annual GDP Growth Rates (1990-1996 average):
• Thailand: 8.6%
• Malaysia: 9.2%
• Indonesia: 7.8%
• South Korea: 7.5%
• Philippines: 4.2%⁶

For context, the United States averaged 3.3% growth during the same period. Western Europe averaged 2.1%. The Asian economies were growing two to three times faster than the developed world, year after year, seemingly without limit.⁷

International capital poured in. Between 1990 and 1996, net private capital flows to the five crisis-hit economies (Thailand, Indonesia, South Korea, Malaysia, Philippines) increased from $20 billion to $93 billion annually—a 365% increase in just six years.⁸

The New Wealthy Class

The boom created a new middle class across Southeast Asia. In Bangkok, Jakarta, and Kuala Lumpur, families that had lived in rural poverty a generation earlier now owned cars, sent their children to universities, and vacationed abroad. Shopping malls proliferated. Luxury brands opened flagship stores. The skylines of Asian capitals transformed as glass-and-steel towers replaced low-rise shophouses.⁹

Western economists and policymakers celebrated the "Asian economic miracle" as proof that globalization and free-market reforms worked. The World Bank published a landmark 1993 study, The East Asian Miracle, which analyzed the region's success and recommended that other developing countries follow the same model.¹⁰

In 1996—just one year before the crisis—the IMF published its annual World Economic Outlook with a section titled "Emerging Market Economies: Sustaining Strong Growth." The report praised Asia's "sound macroeconomic fundamentals" and projected continued rapid growth for the foreseeable future.¹¹

Within 12 months, those "sound fundamentals" would collapse spectacularly.

II. The Hidden Vulnerabilities: What the Optimists Missed

In retrospect—and there is always clarity in retrospect—the warning signs were everywhere. But in the euphoria of sustained boom, few paid attention.

1. The Currency Peg Trap

Most Southeast Asian currencies were pegged (fixed) or semi-pegged to the U.S. dollar. Thailand's baht, for instance, traded at approximately 25 baht per dollar throughout the early 1990s, maintained by the Bank of Thailand's willingness to buy or sell baht at that rate using its foreign exchange reserves.¹²

This arrangement had two major benefits:

• It eliminated exchange-rate risk for foreign investors (you could invest in Thailand knowing your returns wouldn't be wiped out by currency depreciation)
• It provided a nominal anchor for monetary policy, theoretically preventing inflation

But it created a catastrophic vulnerability: it required the central bank to hold sufficient foreign currency reserves to defend the peg against speculative attacks.

If investors lost confidence and tried to convert large amounts of local currency into dollars, the central bank would have to sell dollars from its reserves to maintain the exchange rate. Once reserves ran low, speculators would intensify their attacks, knowing the peg could not hold. This created a self-fulfilling prophecy: fear of devaluation caused the very capital flight that forced devaluation.¹³

2. The Current Account Deficit Problem

A current account deficit means a country is importing more goods and services than it exports—the difference must be financed by borrowing from abroad or selling assets to foreigners.

By 1996, Thailand's current account deficit had reached 8.1% of GDP. Malaysia's was 4.4%. The Philippines was at 4.8%.¹⁴ These were not sustainable levels—they required continuous inflows of foreign capital to finance.

As long as investors remained confident, capital flowed in to cover the deficits. But confidence, once lost, can evaporate overnight. And when foreign capital suddenly reversed—flowing out instead of in—countries with large current account deficits faced an immediate crisis.

3. Short-Term Debt and Maturity Mismatch

Perhaps the most dangerous vulnerability was the structure of the debt itself.

Asian banks and corporations had borrowed heavily in foreign currencies (primarily U.S. dollars and Japanese yen) at short maturities—often 90 days to one year. They used this borrowed money to finance long-term investments: real estate development, infrastructure projects, industrial expansion.¹⁵

This created a double vulnerability:

• Currency mismatch: Borrowers owed dollars but earned revenue in local currency. If the local currency depreciated, their debt burden in local-currency terms would explode.
• Maturity mismatch: Short-term debts had to be "rolled over" (refinanced) every few months. If lenders refused to roll over loans—which they would do at the first sign of trouble—borrowers would face immediate liquidity crises even if their long-term projects were fundamentally sound.¹⁶

By mid-1997, Thailand's short-term external debt exceeded its foreign exchange reserves. South Korea's short-term debt was $67 billion—against reserves of just $30 billion. Indonesia's position was similarly precarious.¹⁷

⚠ The Combustible Mix

By early 1997, Southeast Asian economies had assembled all the ingredients for a catastrophic crisis:

• Currency pegs that required massive reserves to defend
• Large current account deficits requiring continuous capital inflows
• Short-term foreign-currency debt exceeding available reserves
• Overheated real estate markets built on speculative credit
• Financial sectors with weak regulation and connected lending¹⁸

All that was needed was a spark.

4. The Real Estate Bubble

Across Southeast Asia, but especially in Thailand and Malaysia, real estate had become the engine of growth—and the focus of increasingly reckless speculation.

Thai banks lent aggressively to property developers, often with minimal due diligence. By 1996, property-related lending accounted for 30-40% of total bank credit in Thailand.¹⁹ Office vacancy rates in Bangkok were climbing, but construction continued at a frantic pace—financed by foreign capital that saw only double-digit returns, not mounting oversupply.

When the crisis hit, Thailand had 365,000 unsold residential units—enough to house nearly 2 million people in a city whose total population was 6 million.²⁰ The prices at which these units had been valued, and against which banks had lent, were fictional. The correction, when it came, would be brutal.

III. The Breaking Point: Thailand, July 1997

The crisis began, as most financial crises do, quietly and in a place few were watching.

The Attack on the Baht

In early 1997, currency speculators—led by prominent hedge funds—began betting that the Thai baht was overvalued and that its peg to the dollar could not hold. The mechanics of the attack were straightforward:

1. Borrow baht from Thai banks
2. Immediately convert baht to dollars at the official exchange rate (~25 baht per dollar)
3. Wait for Thailand to run out of reserves and abandon the peg
4. Buy back baht at the new, depreciated rate (e.g., 40 baht per dollar)
5. Repay the original baht loan and pocket the difference²¹

The Bank of Thailand initially fought back, selling dollars from its reserves to buy baht and prop up the exchange rate. Between January and June 1997, Thailand spent over $30 billion defending the peg—nearly all of its usable foreign exchange reserves.²²

It was not enough.

July 2, 1997: The Day the Baht Broke

On July 2, 1997, the Bank of Thailand announced it could no longer maintain the baht's peg to the dollar. The currency would henceforth float freely, determined by market forces.

The baht immediately plunged from 25 per dollar to 28 per dollar—a 12% devaluation in a single day. By the end of July, it had fallen to 32 per dollar. By October, 38. By January 1998, 56 baht per dollar—a collapse of 56% from its pre-crisis level.²³

The Baht's Collapse (July 1997 - January 1998):
• June 30, 1997: 25 baht/dollar
• July 2, 1997: 28 baht/dollar (-12%)
• October 1997: 38 baht/dollar (-52%)
• January 1998: 56 baht/dollar (-56%)²⁴

For Thanong Bidaya and millions like him, this meant catastrophe. Every baht of dollar-denominated debt now required more than twice as many baht to service. Import costs doubled. Any business that relied on foreign inputs—which was most of them—saw profit margins evaporate or turn negative overnight.

Banks holding dollar-denominated loans watched their balance sheets implode as borrowers defaulted en masse. The real estate bubble, built on credit that assumed stable exchange rates, burst spectacularly.

But Thailand's collapse was only the beginning.

IV. Contagion: The Crisis Spreads

Financial crises are contagious. Once investors see one "miracle economy" collapse, they begin asking: Which country is next?

The Domino Effect: July-August 1997

Within weeks of Thailand's devaluation, the crisis spread across Southeast Asia:

Crisis Timeline: Summer 1997

July 2: Thailand abandons baht peg; currency falls 12%

July 11: Philippines abandons peso peg; currency falls 11% immediately

July 14: Malaysia's ringgit comes under attack; falls 5% despite intervention

July 24: Indonesian rupiah begins sliding; Bank Indonesia spends $1 billion defending it

August 14: Indonesia abandons rupiah defense; currency falls 30% in two weeks

October 17: Taiwan devalues 3.5%; contagion spreads beyond Southeast Asia

October 23: Hong Kong stock market crashes 10.4% in a single day—largest one-day fall in history

November 17: South Korea requests IMF bailout²⁵

The pattern repeated in each country: speculators attacked the currency, central banks spent billions defending pegs, reserves ran out, currencies collapsed, banks failed, economies contracted.

But the worst was yet to come.

South Korea: When a "Tiger" Falls

South Korea was not supposed to be vulnerable. It was a member of the OECD—the club of wealthy, developed nations. It was the world's 11th-largest economy. Its chaebols (family-controlled conglomerates like Samsung, Hyundai, and LG) were globally competitive industrial powerhouses.²⁶

But South Korea had the same underlying vulnerabilities: massive short-term foreign-currency debt ($67 billion due within one year), maturity mismatch, and over-leveraged corporations. When foreign lenders refused to roll over loans in late 1997, South Korea faced an immediate liquidity crisis. Its foreign exchange reserves, once over $30 billion, fell to just $5 billion by December.²⁷

On November 21, 1997, South Korea formally requested an IMF bailout. The amount required—$58 billion—was the largest in IMF history at that time, dwarfing even the 1995 Mexican bailout.²⁸

The psychological impact was profound. If South Korea—wealthy, industrialized, OECD member South Korea—could collapse, then no emerging market was safe.

V. The Human Toll: From Statistics to Suffering

Economic crises are often discussed in terms of GDP growth, currency depreciation, and stock market indexes. These numbers are real—but they obscure the human catastrophe.

Unemployment and Poverty

In Thailand, unemployment tripled from 2.2% in 1996 to 6.9% in 1998. In Indonesia, it doubled. In South Korea, it nearly tripled from 2.6% to 6.8%—the highest level since the Korean War.²⁹

But official unemployment figures vastly understated the problem. In countries where unemployment benefits barely existed, people did not register as unemployed—they returned to subsistence farming, took informal-sector jobs at a fraction of their former wages, or simply stopped looking for work.

The poverty impact was staggering:

People Pushed Below Poverty Line (1997-1998):
• Indonesia: 14 million additional people
• Thailand: 3.5 million
• South Korea: 3.0 million
• Philippines: 2.0 million
• Malaysia: 1.5 million
Total: ~24 million³⁰

These were not abstract statistics. They represented families evicted from homes, children withdrawn from school, meals skipped, medical care foregone, futures foreclosed.

Suicide and Social Collapse

In South Korea, suicide rates increased by 45% between 1997 and 1998. The rise was particularly acute among middle-aged men who had lost jobs and saw no path back to employment.³¹ The Korean term "IMF suicide" (IMF 자살) entered the national vocabulary—a bitter acknowledgment that the economic crisis and the IMF's response were driving people to take their own lives.

In Thailand and Indonesia, the crisis triggered political upheaval. In May 1998, riots in Jakarta over fuel price increases (mandated by the IMF) left over 1,000 people dead and forced President Suharto to resign after 32 years in power.³²

VI. Conclusion: How Did This Happen?

By the end of 1997, the destruction was immense:

• Five economies in recession, with GDP contracting between 5-15%
• Stock markets down 40-80% from pre-crisis peaks
• Currencies depreciated 40-80% against the dollar
• 24 million people pushed into poverty
• Tens of thousands of businesses bankrupt
• Unemployment at levels not seen in decades
• Political regimes in Thailand and Indonesia toppled³³

The proximate cause—currency pegs defended with insufficient reserves, short-term debt exceeding available liquidity—is clear. But deeper questions remain:

Why did international investors lend so recklessly to countries with obvious vulnerabilities?

Why did governments maintain obviously unsustainable currency pegs rather than allowing gradual adjustment?

And most critically: Why did the International Monetary Fund's "救援" (rescue) turn a financial crisis into an economic catastrophe?

That last question is the subject of Part 2.

The Asian Financial Crisis destroyed $600 billion in wealth and threw 24 million people into poverty. The IMF's response made it worse.

Next in This Series

Part 2: The IMF Arrives—How the "Rescue" Became a Catastrophe

When Thailand, Indonesia, and South Korea faced financial collapse, they turned to the International Monetary Fund for emergency assistance. The IMF provided loans—but with conditions. Interest rates were to be raised dramatically to "defend currencies and restore confidence." Government spending was to be slashed to "reduce fiscal deficits." Banks were to be closed to "eliminate weak institutions." These policies, the IMF insisted, were necessary to restore market confidence and stabilize economies.

Instead, they turned a financial crisis into a depression. We'll examine exactly what the IMF demanded, why those policies failed catastrophically, and how countries that rejected IMF advice (Malaysia, China) recovered faster than those that followed it. The IMF's role in the Asian Financial Crisis remains one of the most damning episodes in the history of international economic policy—and the lessons remain urgently relevant today.

Footnotes

1. Composite narrative based on documented patterns from: Pasuk Phongpaichit & Chris Baker, Thailand's Crisis (Institute of Southeast Asian Studies, 2000), pp. 89-112; and interviews compiled in Boom, Bust and Beyond (Bangkok Post, 1999).
2. Bank failures and deposit restructuring documented in: Nukul Commission, Analysis and Evaluation of Facts Behind Thailand's Economic Crisis (Bangkok: March 1998), pp. 67-89. Of Thailand's 91 finance companies, 56 were suspended in June 1997 and eventually liquidated.
3. Regional suicide rate increases: South Korea +45% (1997-1998); Thailand +27%; Indonesia data incomplete due to Suharto regime collapse but anecdotal reports widespread. Sources: Korean National Statistical Office; WHO mortality database; Human Rights Watch Indonesia reports (1998-1999).
4. "Asian Tigers" growth model analyzed in: World Bank, The East Asian Miracle: Economic Growth and Public Policy (1993). The report identified eight high-performing Asian economies (HPAEs): Japan, South Korea, Taiwan, Hong Kong, Singapore, Thailand, Malaysia, Indonesia.
5. ASEAN growth strategy documented in: IMF, World Economic Outlook: Interim Assessment (December 1997), pp. 1-9, which ironically praised these exact policies in 1996 before reversing course after the crisis.
6. GDP growth data: World Bank, World Development Indicators database (accessed 2024). Averages calculated for 1990-1996 period.
7. Comparative growth rates: IMF, World Economic Outlook (October 1997), statistical appendix. U.S. growth averaged 3.3%; Euro area 2.1%; Japan 1.4% (1990-1996).
8. Capital flow data: Institute of International Finance, Capital Flows to Emerging Market Economies (April 1998). Net private capital inflows to crisis-5 economies: $20.5B (1990) → $93.0B (1996) → -$12.1B (1998)—a swing of $105 billion in two years.
9. Urban transformation documented in: Douglass, M., "A Regional Network Strategy for Reciprocal Rural-Urban Linkages," Third World Planning Review 20(1): 1-33 (1998); and Pasuk & Baker, supra note 1, pp. 34-56.
10. World Bank (1993), supra note 4. The study was influential in promoting the "Washington Consensus" policy framework that emphasized liberalization, privatization, and deregulation.
11. IMF, World Economic Outlook (May 1996), Chapter 3: "Emerging Market Economies: Sustaining Strong Growth." The report stated: "The impressive performance of many emerging market economies has been underpinned by sound macroeconomic policies and far-reaching structural reforms" (p. 47).
12. Currency peg mechanics: Bank of Thailand maintained baht at 25±0.3 per dollar through daily interventions in foreign exchange markets. See: Nukul Commission, supra note 2, pp. 12-34.
13. Speculative attack dynamics formalized in: Krugman, P., "A Model of Balance-of-Payments Crises," Journal of Money, Credit and Banking 11(3): 311-325 (1979); and Obstfeld, M., "The Logic of Currency Crises," Cahiers Economiques et Monetaires 43: 189-213 (1994). Both models predicted that fixed exchange rates become unsustainable when reserves fall below a critical threshold.
14. Current account deficit data: IMF, International Financial Statistics (1997). Thailand: -8.1% of GDP (1996); Malaysia: -4.4%; Philippines: -4.8%; Indonesia: -3.3%; South Korea: -4.7%. For comparison, the U.S. current account deficit in 1996 was -1.6%.
15. Maturity and currency mismatch documented in: Radelet, S. & Sachs, J., "The East Asian Financial Crisis: Diagnosis, Remedies, Prospects," Brookings Papers on Economic Activity 1998(1): 1-90. The authors note that "most of the debt was denominated in foreign currency, typically with maturities of one year or less" (p. 8).
16. Ibid., pp. 10-14. The "double mismatch" (currency + maturity) created what economists call a "sudden stop" vulnerability—a rapid reversal of capital flows that freezes credit markets and forces fire-sale liquidations.
17. Short-term debt vs. reserves data: Bank for International Settlements, The Maturity, Sectoral and Nationality Distribution of International Bank Lending (January 1998). Thailand: $45.7B short-term debt vs. $38.7B reserves (June 1997); South Korea: $67.5B vs. $30.4B; Indonesia: $34.7B vs. $20.3B.
18. Financial sector weaknesses analyzed in: Corsetti, G., Pesenti, P., & Roubini, N., "What Caused the Asian Currency and Financial Crisis?" (NBER Working Paper 6833, 1998). The study identified: connected lending to politically-favored firms, inadequate capital requirements, poor loan-loss provisioning, and implicit government guarantees that encouraged moral hazard.
19. Thai property lending concentration: Bank of Thailand data cited in Nukul Commission, supra note 2, p. 76. Property-related lending peaked at 39% of total bank credit in 1996.
20. Bangkok housing oversupply: National Housing Authority of Thailand, Housing Market Survey (1998). The 365,000 unsold units figure includes both completed and under-construction units. At average household size of 4.8 persons, this represents housing for ~1.75 million people.
21. Speculative attack mechanics explained in: Blustein, P., The Chastening: Inside the Crisis That Rocked the Global Financial System (PublicAffairs, 2001), pp. 73-89. Blustein interviewed hedge fund traders who participated in the attacks.
22. Reserve depletion: Nukul Commission, supra note 2, pp. 45-67. Thailand spent $33.3 billion defending the baht (January-June 1997), reducing usable reserves from $38.7B to $2.8B. An additional $23.4B was committed to forward contracts (essentially hidden reserve commitments).
23. Exchange rate data: Bank of Thailand, Economic and Financial Statistics (monthly, 1997-1998). Baht/dollar rate: 25.00 (June 30, 1997) → 28.00 (July 2) → 32.63 (July 31) → 38.00 (October 31) → 56.13 (January 12, 1998).
24. Summary compiled from note 23.
25. Contagion timeline compiled from: IMF, International Capital Markets: Developments, Prospects, and Key Policy Issues (November 1997), chronology appendix; and contemporaneous reports in Financial Times, Asian Wall Street Journal, and The Economist (July-November 1997).
26. South Korean economic profile: OECD, OECD Economic Outlook (June 1997). South Korea joined OECD in December 1996, becoming the organization's 29th member and second Asian member after Japan.
27. South Korean reserve crisis: Bank of Korea data cited in Blustein, supra note 21, pp. 134-158. Usable reserves (excluding gold and SDRs) fell from $30.4B (October 1997) to $6.0B (November 30) to $3.9B (December 15)—dangerously close to zero.
28. IMF bailout package: IMF Press Release No. 97/55, "IMF Approves SDR 15.5 Billion Stand-By Credit for Korea" (December 4, 1997). Total package: $58.2 billion, including $21B from IMF, $14B from World Bank and Asian Development Bank, $23.3B from bilateral sources (primarily Japan and U.S.).
29. Unemployment data: ILO, World Employment Report 1998-99; national labor force surveys. Thailand: 2.2% (1996) → 4.4% (1997) → 6.9% (1998). Indonesia: 4.9% → 5.5% → 9.7%. South Korea: 2.6% → 3.1% → 6.8%.
30. Poverty impact estimates: Asian Development Bank, Asian Development Outlook 1999, pp. 41-67. Poverty defined as living below $2/day (1985 PPP). The 24 million figure is conservative; some estimates range as high as 30 million when including Malaysia's ethnic-Chinese population who were not officially classified as impoverished despite income drops.
31. South Korean suicide data: Korean National Statistical Office, Annual Report on the Cause of Death Statistics (1997, 1998, 1999). Age-standardized suicide rate increased from 13.1 per 100,000 (1996) to 18.4 (1997) to 19.0 (1998)—a 45% increase. The term "IMF 자살" documented in Korean media coverage (Chosun Ilbo, Dong-A Ilbo, multiple articles 1998-1999).
32. Indonesian riots and Suharto resignation: Human Rights Watch, Indonesia: The Damaging Debate on Rapes of Ethnic Chinese Women (1998); Time Magazine, "Indonesia Burns" (May 25, 1998). Death toll estimates range from 500 (official) to 1,200+ (independent estimates). Suharto resigned May 21, 1998, after 32 years in power.
33. Crisis summary statistics compiled from: IMF, World Economic Outlook (May 1998); World Bank, East Asia: The Road to Recovery (1998); and national statistical offices. GDP contractions (1998): Indonesia -13.1%; Thailand -10.5%; Malaysia -7.4%; South Korea -5.7%; Philippines -0.6%.