The financial crisis and what’s in store for Southeast Asia

Author: Hal Hill

Southeast Asia was at the epicenter of the last major Asian economic crisis in 1997-98, which originated in Thailand and spread quickly to its neighbours.

South East Asia is likely to feel the shock, with ASEAN at the centre of the storm

In Indonesia it resulted in the collapse of the seemingly impregnable Soeharto regime, followed by a rapid and largely successful transition to democracy. Indirectly, the crisis resulted in the rise to power of Thaksin, and with it an entirely new era in Thai politics. Malaysia too was shaken by these events following the infamous Anwar Ibrahim affair.

The crisis also led to apparently permanently lower growth trajectories in three of the region’s larger economies, Indonesia, Malaysia and Thailand. A decade earlier, a similar set of events – a crisis overturning a deeply entrenched authoritarian regime – occurred in the Philippines.

What’s in store this time round? Will the global financial crisis permanently alter the region’s political economy and development dynamics? Does it signal the end of the so-called ‘East Asian model’, or at least a substantial modification of it? And what about the Association of Southeast Asian Nations, ASEAN?

We are only just beginning to piece together an accurate story of the impact of the crisis thus far, owing to the absence of reliable, quick-release data for many countries, and to uncertainty as to whether more financial time bombs will emerge in the US and Europe.

In the short term, even though the crisis will inflict some economic distress and social hardship, its effects on the region are likely to be contained. It is not easy to envisage major ‘transformative’ effects, and the domestic political dynamics that are in train in several countries are likely to dominate local landscapes.

What of the challenges for the region in the medium term and beyond? At least four effects are likely.

First, more will be expected of governments in hard times. There will need to be better governance, a greater focus on targeted social support programs, and a perception that development delivers broad-based progress.

Second, will the crisis lead to a major shift in Southeast Asia’s development strategies? There have been frequent assertions that the crisis marks the ‘end of the East Asian model’, that these economies need to be ‘rebalanced’, or that the export-oriented model will have to be jettisoned. The criticisms of the so-called ‘Washington consensus’ – whatever that now means – are mounting, and attitudes towards globalization are turning sharply negative.

Nevertheless, trade and investment policies need to stay open, while thinking about new forms of financial regulation and prudential supervision at home alongside a new international regulatory order. Importantly, Southeast Asian countries have by and large not resorted to protectionism or beggar-thy-neighbour currency depreciations.

Third, where does ASEAN fit into this? A global crisis requires a coordinated global response. None of the Southeast Asian economies is in the big league, although collectively ASEAN is an influential regional association, and Indonesia is a member of the G20, which appears to be evolving as the key global decision-making group.

During the current crisis, ASEAN’s voice has by and large been notable for its silence.

And perhaps more importantly, the region’s leaders have not yet articulated a vision of the way forward. It remains to be seen whether ASEAN as a regional institution will be permanently damaged by this inaction. A charitable view is that it was never set up for these complex crisis-resolution tasks. A more negative assessment is that ASEAN will fade into insignificance, at least in so far as economic cooperation is concerned.

If, as seems likely, China is able to maintain moderately strong economic growth through the crisis, and to desist from major competitive exchange rate depreciations (as it did in 1997-98, earning the region’s gratitude), the effect will be to change the regional, and possibly global, strategic architecture irrevocably. Unlike in 1997-98, when there were still lingering reservations in the region towards China, both politically and as a commercial rival, it is now seen as the principal hope for recovery, and the major economic locomotive.

The prolonged Japanese recession from the early 1990s had a major effect on Southeast Asian thinking about the ‘Japanese model’, particularly the desirability of its industrial promotion and planning policies. The current crisis is leading to a similar re-evaluation of the ‘US model’, especially as it related to lightly regulated financial markets. In both cases, the rethink has broader commercial, diplomatic and geo-strategic implications. In the process, China’s ‘soft power’ will be greatly enhanced. Unless of course it misplays its hand, through for example, over-bearing strategic interventions abroad or a failure to keep up with the revolution of rising expectations at home.

This article first appeared as ‘Political realignment in Southeast Asia?’ in the Far Eastern Economic Review, April 2009, and may be found in its original form here.