The history of the Asian crisis sheds some light on one of the ways defenders of European austerity policies move the goalposts: by claiming that the pre-crisis peak isn’t relevant for comparison purposes, because it was inflated by a bubble.
In any case, Asia from 1997 on provides a useful comparison. Southeast Asia in the mid-90s was a bubble with huge current account deficits and wild speculation in real estate. Nonetheless, by contrast with Europe’s crisis economies, the Asians fairly quickly returned to and then passed the pre-crisis peak:
15 years ago it would never have occurred that we would be looking back at Asia’s crisis as a success story.
The rupiah is falling! The rupiah is the national currency of Indonesia. The thing is, the last big rupiah plunge was in 1997-98, when Indonesia was the epicenter of an Asian financial crisis. In retrospect, that crisis was a sort of dress rehearsal for the much bigger crisis that engulfed the advanced world a decade later. So should we be terrified about Asia all over again?
We don’t think so... Consider, for example, the worst-case nation during each crisis: Indonesia then, Greece now.
Indonesia’s slump, which saw the economy contract 13 percent in 1998, was a terrible thing. But a solid recovery was under way by 2000. By 2003, Indonesia’s economy had passed its precrisis peak; as of last year, it was 72 percent larger than it was in 1997.
Now compare this with Greece, where output is down more than 20 percent since 2007 and is still falling fast. Nobody knows when recovery will begin, and guess is that few observers expect to see the Greek economy recover to precrisis levels this decade.
Why are things so much worse this time? One answer is that Indonesia had its own currency, and the slide in the rupiah was, eventually, a very good thing. Meanwhile, Greece is trapped in the euro. In addition, however, policy makers were more flexible in the 1990's than they are today.
The International Monetary Fund initially demanded tough austerity policies in Asia, but it soon reversed course. This time, the demands placed on Greece and other debtors have been relentlessly harsh, and the more austerity fails, the more bloodletting is demanded.
So, is Asia next? Probably not. Indonesia has a much lower level of foreign debt ... than it did in the 1990s. India, which also has a sliding currency that worries many observers, has even lower debt. So a repetition of the 1990's crisis, let alone a Greek-style never-ending crisis, seems unlikely.
What about China? China just kept putting off the necessary changes, instead boosting the economy by keeping the currency undervalued and flooding it with cheap credit.
China’s economy is still only modestly bigger than Japan’s; it’s around half the size of either the U.S. or the European Union. So it’s big but not huge, and, in ordinary times, the world could probably take China’s troubles in stride.
But let’s be clear: Even if we are spared the spectacle of yet another region plunged into depression, the fact remains that the people who congratulated themselves for saving the world in 1999 were actually setting the world up for a far worse crisis, just a few years later.