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.


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  • Yiping Huang


    Congratulations on a very insightful piece!

    I am quite concerned by the latest call by some for Asian economies to rebalance their economies, ie, reducing dependence on export markets and developing domestic demand. Imbalance might be a serious issue in China, but I can’t think of an effective way of most East Asian economies becoming more inward-looking, while maintaining very strong growth. Asia as a whole benefited greatly from its openness. The negative impacts we are seeing now come naturally with the openness. But it would wrong to conclude that Asia should change its course of development.

    Having said that, most ASEAN economies do have room to lift domestic investment. On average, investment shares of GDP in key ASEAN economies are still 6-8 percentage points below their pre-crisis levels. While they probably should not return to the pre-crisis levels, there is increasing evidence that investment lagged in Southeast Asia during the past 10 years.

    I am particularly interested in your comments on ASEAN as an institution and its future. Some speculated that ASEAN’s lack of active participation in international economic decision-making is attributable to its generally consensus-building style. But the Euro Area has been extremely active in the G20 process. Or perhaps it’s because ASEAN no longer has a statesman , after Singapore’s elder Li and Thailand’s Thaksin?

    As you pointed out at the end, China is to be more important in the world economy. But China is not yet ready to play an active role unilaterally. So perhaps ASEAN can work with China, Japan and Korea to jointly formulate ideas for interantional economic policy reform. This would fit ASEAN’s medium power. But if ASEAN can rope in China and Japan, then it will make a significant contribution to the world economic affair, directly or indirectly.

    Thanks again.


  • Dr.Thanawat Pimoljinda

    I have some ideas to share in regard to this essay:

    The rise of China and Japan as Asian economic centers may be recognized as the opening up of national and regional economies to the global dimension. Even though in the past, Japan and China were understood as the major challenge to ASEAN regional security and economic stability, in the context of economic globalization, these countries could enhance the economic status of ASEAN and its member states in the global arena. This is simply because ASEAN is not in a position to pursue hegemony in the region. Rather it can serve as a buffer zone for the competition between China and Japan. What is noteworthy is that all of the East Asian countries are positive toward regional cooperation. Thus, ASEAN plus three can be developed into an institutional device for bona fide regional cooperation while serving as a forum for policy dialogue among member states. In addition, ASEAN plus three is expected to produce specific outcomes by institutionalizing government-level cooperation, whereas regional cooperation based on economics alone has failed to yield any results. Nevertheless, even if the intra-ASEAN trade volume is much greater than that with Japan and China, but when comparing country to country, each of ASEAN member states is more obviously linked with external economic powers than that of its ASEAN partners. For example in the case of Thailand, even though Singapore and Malaysia are the largest ASEAN trading partners of Thailand, the trade volume is less than half that of China and Japan, for instance. This situation might thus affect the possibility in creating ASEAN’s solidarity as a singular entity.

    Thanawat Pimoljinda