Asian Financial Crisis: An Analysis of U.S. Foreign Policy Interests and Options

Publication Date: April 1998

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Economics

Type:

Abstract:

The sharp fall in the currencies and stock markets of a number of East Asian economies since July 1997 has the potential to damage U.S. regional and other foreign policy interests, in addition to the expected detrimental effects on the U.S. economy, including slower growth, falling exports, and a rising trade deficit. As of mid-April 1998, the currencies of the most affected Asian countries appeared to have stabilized at about 60%-70% of their mid-1997 values against the U.S. dollar, with the exception of the Indonesian rupiah, which continues to hover at about 25%-35% of its pre-crisis value. Although some observers also see the crisis bringing potential
benefits in the form of economic reforms and pressures for more democratization, even the most optimistic analysts agree that the process will a long term one, at best.

One of the most important non-economic impacts on U.S. interests could be a rise of political instability in countries whose leaders have largely based their legitimacy on promoting rapid economic growth and an expanding economic “pie.” If growth continues to decelerate, existing social class, regional, ethnic, and religious fissures may widen in a number of countries. These developments may be exacerbated by austerity and economic reforms required by the International Monetary Fund (IMF) in return for financial rescue packages, leading to a nationalist backlash against economic globalization as well as a rise in anti-American feeling. Alternatively, some analysts express hope that the crisis may provide an opportunity for “creative destruction,” i.e., the adoption of much needed structural reforms, including greater accountability and transparency in banking systems, and more open markets. Most, however, agree that economic distress in a number of countries will cause at least temporary setbacks for regional trade liberalization.

While the crisis does not appear to pose direct risks to U.S. regional security interests, a prolonged economic decline could fuel nationalism, undermine regional cooperation, and foster confrontation over long-standing territorial and other disputes. More than half of Persian Gulf oil shipments pass through key Southeast Asian straits and the disputed Spratly Islands, and the region is also a major oil and gas exporter in its own right. South Korea’s economic problems could significantly complicate U.S. efforts to resolve Korean Peninsula issues. Some also see the crisis working in the longer term to enhance China’s status and influence.

Congress has addressed the issue primarily through hearings and a pending FY1998 supplemental appropriations request for new IMF borrowing authority and a quota increase, totaling $17.9 billion. Members tend to be divided between those who emphasize the importance of containing the crisis and using the IMF’s leverage to promote economic reforms and market opening, and those seek to make the availability of U.S. funds contingent on the adoption of specific reforms, on the part of both the borrowing countries and the IMF itself. As of early April 1998, the most restrictive of two supplemental appropriations bills — that reported to the House — contains limitations on the release of funds for the IMF that the Administration views as unworkable. The IMF funding measure may also become burdened by an antiabortion amendment that the Administration says will lead to a veto.