Reflections on 1997 Economic Crisis: Ten Years Later

President's Speech

Speech to the Asia Society of Southern California
Los Angeles, California
By Janet L. Yellen, President and CEO, Federal Reserve Bank of
San Francisco
For delivery February 6, 2007, 12:30 PM Pacific time, 3:30 PM Eastern

The Asian Financial Crisis Ten Years Later: Assessing the Past and Looking to the Future

Good afternoon. On behalf of the Federal Reserve Bank of San Francisco, the Asia Society of Southern California and the Pacific Council on International Policy, I’m delighted to welcome you all here. This is the first in a series of presentations, seminars, and conferences the San Francisco Fed will be involved with over this year as we explore various facets of the Asian financial crisis, focusing on the stability and resiliency of financial sectors today and remaining challenges in the future.

At the time of the crisis, I was the Chair of President Clinton’s Council of Economic Advisers, and, as you may imagine, it was definitely a “front-burner” issue for us. As the crisis spread from country to country, there was deep concern about how big the impact would be on the U.S. economy, and the markets certainly were jittery: that October, the Dow Jones Industrial Average plunged over 500 points. For the five Asian nations most associated with the crisis—Thailand, Korea, Indonesia, the Philippines, and Malaysia—the toll in both human and economic terms was enormous: in 1998, these countries saw their economies shrink by an average of 7.7 percent and many millions of their people lost their jobs. More broadly, there was concern that the crisis had revealed new sources of risk in the international financial architecture. Now that I am a Reserve Bank President with responsibilities for overseeing financial institutions, I have an even greater awareness of how these issues remain vital for maintaining financial stability today.

In my remarks this afternoon, I would like to provide some background for the discussions that will take place in the follow-up events marking the tenth anniversary of the crisis. Let me note that, as usual, these comments are my own and do not necessarily represent the views of my colleagues in the Federal Reserve System. I will first review the major strands of thought in the literature on the causes of the crisis, highlighting some of the vulnerabilities that were contributing factors. Then I will turn to conditions in the affected countries today and examine how their policy responses to the crisis have shaped the current Asian financial environment. I will round out my remarks with some thoughts on lessons learned, particularly for international financial institutions, and observations on China in the current environment.

Before I begin, I should note that the subject is not really a single Asian crisis, but rather several crises. The afflicted countries obviously differ very much from one another, both in terms of their levels of economic development and their institutional features. Therefore, the causes of the crises and, likewise, the policy reforms that have been adopted in the last 10 years are not uniform for the region as a whole. Nonetheless, there are some important overarching themes in these developments, and I will try to draw them out.