The implosion that became known as the Asian financial crisis had several chapters. Over the better part of two years in the late 1990s, the economies of Indonesia, Thailand and South Korea crumbled, while Malaysia suffered its deepest recession and rocked the world with capital controls. To appreciate the brew of forces driving this market collapse, one moment in Hong Kong during the early days of the rout is instructive.
At the combined annual meetings of the International Monetary Fund and World Bank in September 1997, a conflict raged over who was to blame for the nascent financial calamity, and what kind of economic model would emerge after it.
The main protagonists were Mahathir Mohamad, at the zenith of his power as prime minister of Malaysia, and George Soros, the billionaire who made bold bets against the currencies of Thailand and Malaysia in the run-up to the crisis.
A few years earlier, Soros had defeated the Bank of England's efforts to prop up the pound. Mahathir, for his part, had presided over high growth rates for much of his 16 years in office that were now at risk of being undone.
With Thailand already subject to the strictures of an IMF-led bailout and Indonesia hurtling down the path toward one, Mahathir feared Malaysia could be next. Soros was portrayed by Mahathir and other nationalists as representing global capital, in all its fickleness — and drew scrutiny (and sometimes praise) for his ability to spot countries and assets that were starting to go awry.
Mahathir became a proxy for an old state-directed way of doing business that often coupled turbocharged economic growth with political centralisation.
Eager to avoid blame for the coming hardship, Mahathir pointed his finger at outside forces seeking to undo Malaysia's progress. In Soros, who was sharply critical of him, the Malaysian leader found his foil. IMF meetings are typically buttoned-up affairs, but over a weekend of drama, the two men had at it.
Mahathir, who had called Soros "a moron," accused financial titans of seeking to reverse decades of economic development that propelled tens of millions into the middle class. Soros branded Mahathir "a menace" to his country.
Despite their exchange at times resembling schoolyard taunts, the underlying questions were profound. Would Asia resume torrid rates of growth that had lifted hundreds of millions from poverty in the space of a generation?
Could political frameworks built up over decades around strongman leaders survive the wrenching downturn? While Asian leaders embraced market liberalisation in the late 1980s and early 1990s as a way to attract foreign direct investment and portfolio capital, the loss of control that came with it made them leery. Prior to the crisis, and into its initial phases, they sought to delay that reckoning.
The Asian financial crisis began unfolding 25 years ago, on 2 July, when Thailand abandoned efforts to shore up its currency, the baht. The capitulation prompted sharp declines in Asian foreign exchange markets, setting Bangkok, Jakarta and Seoul on a path to bailouts from the IMF. It also lit the fuse on political upheavals that were a long time in the making.
In Indonesia, the tumult, alongside the harsh conditions sought by the IMF in a series of emergency loans that began in October 1997, hastened the end of the Suharto era, a three-decade run of impressive growth — and repression.
As long as the economic expansion rolled on, much could be swept under the carpet. It ended in May 1998 amid communal violence and the deaths of student demonstrators at the hands of police. Months later, a Korean opposition candidate won the presidency for the first time. Mahathir held on, but left a legacy of fragmentation in the Malay establishment that, ultimately, culminated in the ruling party's defeat in 2018.
The region's democratic transition has since had setbacks, though all three countries are far more open than before the bust.
This was also no local affair. The crisis migrated from Asia to Russia and then Latin America. Capital fled shaky emerging markets and piled into dollars. America was in the midst of a boom and the US propounded a "strong dollar" policy.
The architects of this happy state of affairs, Federal Reserve Chairman Alan Greenspan and Treasury Secretary Robert Rubin, were at the IMF and World Bank gatherings in Hong Kong, but avoided theatrics, as did a young assistant secretary at Treasury by the name of Tim Geithner. US prosperity was not at risk from market tumult — yet.
Geithner became a critical player in a financial drama that beset the US from 2007 to 2009, first as New York Fed president and then as Treasury secretary. Viewed from one perspective, the subprime bust was a sequel to the emerging market crackups a decade earlier.
There was the same complacency and certitude about things that would not happen: The US housing market would never implode and the government would never be forced to bail out systemically important firms, or so the thinking went. The waves of upheaval were not dissimilar from the ones that rocked Asia a decade earlier.
A year after Mahathir's provocative performance in Hong Kong, which included an exhortation that currency trading ought to be banned outright, the premier pegged the ringgit to the buck and imposed capital controls. He also vanquished Anwar Ibrahim, then finance minister, who was considered sympathetic to the IMF and Wall Street.
Mahathir also blamed Jews, including Soros, for the economic slump, remarks aimed at bolstering support in the Malay-Muslim heartlands. It will always be a stain on his career. (Ironically, Soros was at one point supporting the ringgit, Malaysia's currency.)
So was this just a standard emerging market drama spiced by the odd revolution and verbal grenades from cantankerous leaders? On a global scale, it looks like the first great bust of the post-Cold War era.
For Asia, it marked a dividing line: Growth recovered, but never really returned to the pre-1997 levels on a sustained basis. While power can change hands, monetary regimes are more orthodox. When long-held assumptions collapse, it is rarely limited to matters of money.
Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously, he was executive editor of Bloomberg News for economics.
Disclaimer: This article first appeared on Bloomberg, and is published by special syndication arrangement.