The Explainer: The 1997 Financial Crisis

That was Robert Vaughn in his award-winning one-man show, “FDR.” One of the greatest democratic leaders of all time, Franklin D. Roosevelt earned the gratitude and affection of Americans who had to live through the Great Depression.

In 1997, a mini Great Depression of sorts, struck our region. A decade later, much is being written to take stock of the effects of that crisis.

Tonight, we’ll focus on one such article. The 1997 Financial Crisis in retrospect, and the chilling question, could it happen again, is our task for tonight. I’m Manolo Quezon. The Explainer.




On October 29, 1929, the stock market crashed in America. Wall Street’s crash kicked off The Great Depression, an economic downturn that devastated American in the early 1930s and the world, too.




If you’d like to know more, I’d like to suggest “Rainbow’s End: The Crash of 1929” by Maury Klein, who weaves together a fascinating tale of out-of-control bankers, society figures, and  politicians.

But briefly, my point is this. An economic crash can spill over and traumatize not only a country, but the world.

Among the consequences of the Great Depression were: the rise of Hitler in a Germany. It was so economically devastated by the depression, that banknotes bore figures in the trillions, and the price of bread changed between the time you lined up for it, and bought it with a suitcase full of money. 

In last week’s recommended book, “The End of Poverty,” Jeffrey Sachs recounts that the first Prime Minister of independent India, Jawaharlal Nehru, focused economic activity inward, because he recalled the global dislocations of the Great Depression.

The defining song of the era was “Brother, Can You Spare a Dime?” Here it is, performed by the Chad Michael Trio.

And here’s the antidote to that song. It became the campaign song of Franklin Delano Roosevelt. His administration made such a mark, this song became the unofficial theme of the Democratic party in America for half a century. The song’s called, “Happy Days Are Here Again.” Performed by the New Christy Minstrels, let’s listen.

And here, by means of a song, we have, in a nutshell, the challenge and response people look for, in times of crisis: how do you restore hope, to a society facing an economic crisis?


Last June, the article you see here:


Appeared in The Asia Sentinel, an independent online newsmagazine covering the region. The article covered the breakdown in negotiations for a joint defense agreement between Singapore and Indonesia. A problem arose concerning an extradition treaty linked to the agreement.

The Indonesians were the ones who wanted the extradition treaty particularly badly. Explainee, could you read the relevant part for our viewers? It’s the start-off point for our discussion tonight.

Local analysts say Jakarta moved too fast to sign the [defense] treaty because the government wanted the extradition treaty…

[The] extradition agreement [was] eagerly awaited by Indonesian prosecutors who hope to hunt down white-collar fugitives hiding in Singapore. Jakarta also hopes to recover some of the billions of dollars of embezzled government funds believed to be in Singaporean banks after being carted away during the 1997-98 Asian financial crisis by wealthy Indonesians on the run.


Ah, the Asian financial crisis of 1997-98. Last month, the world commemorated the tenth anniversary of this event: for those of you watching tonight who are my age, it was the first crisis of our adulthood. For our more senior viewers, it was the second downturn in as many decades: the near-collapse of our economy in 1983 being the trauma for their generation.

Writing in Business World, Filomeno Santa Ana III penned an article titled “Ten Years After.” He’s unable to join us tonight, but with his permission, I’d like to present the points he raised.

First, let’s begin with Santa Ana’s recap of how the crisis began:

The conflagration, as it were, began in Thailand. Financial investors panicked and like a herd, rushed towards the exit. The capital flight led to the precipitous fall of the once stable but overvalued Thai baht. The wild fire immediately spread to the neighboring region – Korea, Indonesia. Malaysia, and the Philippines. Within the same year, the Asian contagion reached other parts of the world, especially Brazil and Russia. Not only did their currencies plunge; their economies crashed.


We know of course, that the state of the economy can make or break governments. The decline and fall of Ferdinand Marcos, for example, is usually tied to a specific, political event: the assassination of Ninoy Aquino. But it could also be tied to economic problems that the Aquino assassination magnified. Let’s put it this way: Marcos might have survived the political fallout from the Aquino assassination. He might have been able to survive the loss in public confidence his crony capitalism had brought upon the country. But put the two together, and his regime was doomed.

In 1997, Santa Ana says Southeast Asian governments and international institutions suffered politically from the economic fallout:


Ø      In Indonesia , the financial crisis ended the long reign of the dictator Suharto.

Ø      In Malaysia , Prime Minister Mahatir Mohamad was initially weakened but managed to survive. He instituted capital controls to stem the hemorrhage and provoked nationalist sentiments by blaming the IMF for the crisis.

Ø      In the Philippines , Fidel Ramos took a beating from popular opinion. His much ballyhooed vision, “Philippines 2000” was blown to smithereens.

Ø      The crisis marked the decline of the Washington Consensus (WC) agenda of liberalization and deeper economic integration.


You may remember that when the financial crisis began, our exchange rate was 26 pesos to the dollar. By the time the crisis ended, the exchange rate was 40 pesos to the dollar. At one point, our economy stopped growing at all, and as economists call it, actually “contracted” by .06%. And even after the crisis, the collapse of public confidence resulted in our exchange rate hitting 55 pesos to the dollar at one point, around the time President Estrada was impeached.

We had a major devaluation during the 1983 crisis, and then again in 1997 and the years that followed. Besides being a focus for national pride –a good exchange rate seems, to most people, a sign our country’s doing well- the peso-dollar rate affects businesses. In the 97 crisis, companies that had taken out loans in dollars suffered, when the exchange rate climbed. Banks were hit in turn, when businesses were unable to repay dollar-denominated loans.

This was the case in Thailand and Indonesia and other places, too. And Santa Ana says that one lingering effect of that regional trauma, is that countries have set aside huge foreign exchange reserves, as insurance in case their currencies again come under attack.

East Asian countries have 2.3 trillion dollars set aside. China alone has 1.33 trillion dollars. The Philippines has 26.3 billion dollars in foreign-exchange reserves. Santa Ana points out though, that these billions set aside for a rainy day are a lost opportunity: that’s 26 billion dollars, for example, our government can’t use to finance human development.

And this, Santa Ana says, is something the experts point out as a sign government’s haven’t learned the proper lessons from the 97 crisis.




That was another scene from Robert Vaughn’s stage portrayal of Franklin Delano Roosevelt. His stage performance tries to recapture the boldness with which FDR confronted the Great Depression.

In a 2006 Asia Sentinel article,


John Berthelsen and A. Lin Neumann wrote this summary of the point we’d reached in the 1960s, and from which we’ve fallen:

In the early 1960s the Philippines had a higher GDP than any country in Asia save Japan, and also had the best human development indicators – longest life expectancy, lowest infant mortality rate, highest primary school enrollment ratio, and lowest illiteracy rate – of any of its neighbors. That is far from the case now, of course.


According to them, this is what’s happened:

Beginning with a series of financial scandals under former President Ferdinand Marcos in 1981, the country went into a tailspin. Communist insurgency grew, political assassinations became commonplace, intrigue, chaos, and vigilantism rose. The birth rate soared as the Catholic Church maintained a high degree of political influence. The cities choked on garbage and shanty towns. Many Filipinos lost hope in the country.


Boom and bust has been a characteristic of our economy since time immemorial. But it’s something that happens to all economies.

In the first part of our program, we took a look at an article by Filomeno Santa Anna III in Business World. Let’s return to that article.

In it, Santa Anna looks back on what happened and says an expert says governments failed to learn two important lessons.

The expert he focuses on is the Nobel Laureate Joseph Stiglitz.



Joseph Stiglitz is an economist whose managed to become widely-read by the public. His book, “The Roaring Nineties,” explains why business booms and busts happen.

Santa Ana says countries have failed to learn two major lessons from the 97 crisis have not been absorbed.

Ø      1st lesson: “Capital market liberalization -opening up developing countries’ financial markets to surges in short term ‘hot money’- is dangerous.”

Ø      2nd lesson: “There is a need for a credible international financial institution to design the rules of the road in ways that enhance global stability and promote economic growth.”


To show what Stilgitz means, Santa Ana points to certain developments in the ten years  that have passed since the 1997 crisis:

Ø      Thailand is enjoying modest growth. The economic managers attempted to tax stock market transactions, but this was immediately withdrawn after a wild reaction from the financial markets.


Now the significance of this lies in how Mahathir was able to prevent the Malaysian economy tanking, by means of imposing controls on hot money. He could do that as a tough leader; in other countries where the leaders aren’t as authoritative, the markets complain and governments retreat.

Ø      While China ‘s high growth has been sustained through two decades, its dizzying pace has produced bubbles that can bust in the near future.

A leading pillar of the Philippine business community recently put it this way: “It’s not if the Chinese stock market bubble will burst, but when…” In 1997, the collapse of the economy in Thailand acted like a Tsunami: how prepared are countries for something similar? 

Ø      In the Philippines , short-term flows are again on the rise as the stock market booms. The peso has appreciated and is in fact already overvalued, according to IMF.

Recently, Deutsche Bank said the bull run in our stock market is over. Not because of anything our government did, but because money’s begun to be pulled out by foreign investors, in reaction to a slowdown in the US stock market.

There’s increasing talk of two possible developments, we should consider and prepare for. The first, as we’ve mentioned, is for the stock market bubble in China to burst. There’s a famous story about one big American businessmen in 1929.

He saved his fortune because one day, his shoeshine boy offered him stock tips. He decided that if shoeshine boys could claim expertise in the stock market, something was very, very wrong. So he pulled out of the market just before it crashed.

In his article, Santa Anna puts forward four ways our economy can strengthen its muscles:

Ø      Encourage productive long-term flows but discourage hot money.


Several tools are available -a tax on short-term flows, for one. It means if you bring in money, you’ll have to park it here for a while, not pull it out at a moment’s notice. Santa Anna says this wouldn’t upset the IMF.

Ø Rethink the exchange rate policy.  As Josef Yap of the Philippine Institute for Development Studies argues in his paper (“Ten Years After: Financial Crisis Redux or Constructive Regional Financial and Monetary Cooperation?,” 2007)

This is because, according to Santa Anna, an overvalued currency is a tell-tale sign of the likelihood of a financial crisis. The countries struck by the 1997 crisis, as well as countries in previous and later crises, had overvalued currencies.

Ø Reforms at the country level are undoubtedly crucial. But the problem is likewise global, requiring internationally coordinated solutions.

When we return, we’ll ask our guest for his views on Santa Anna’s articles, and look into how we might best prepare… just in case the bubbles burst.


My view


Our clips of Robert Vaughn as Franklin D. Roosevelt should remind us that the economy might have a life of its own, but in times of crisis, it’s government we look to, to sort out the mess. If a government lacks public confidence, if it’s incapable of inspiring not only sacrifice, but optimism, a sense of solidarity, among the people, then government will fail. And the public mood can turn very ugly.

In the boom years prior to 1929, US President Calvin Coolidge said “America’s business is business.” His anointed successor was the technocrat Herbert Hoover. When the US economy failed, and businesses were wiped out, Americans turned to Roosevelt who bluntly told his countrymen there’s more to civic and social life than making money. His combination of optimism and a strong desire to leave no person behind, however unfortunate, saved his country. 

When economics began as an academic discipline, it was originally known as political economy. Some say, we should divorce politics from the economy. These are the kind of people who have yachts waiting to evacuate them from the country, should there ever be an economic crisis.

Manuel L. Quezon III.

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