Nineteen ninety-seven will be remembered as the year of Asia's economic bust. On a fateful first Wednesday in July Thailand unpegged its currency to the U.S. dollar, causing a massive withdrawal of foreign funds and sending the local currency into free fall. By year end the baht had lost around 40 per cent to the U.S. dollar, and the stock market had declined by about the same amount. A similar pattern quickly repeated itself in Indonesia, the Philippines, and Malaysia, and the ripples expanded to the rest of Southeast Asia and beyond. Called in to assist, the International Monetary Fund (IMF) arranged a bailout package of US$17.2 billion for Thailand, the second largest IMF package ever, followed by a much bigger package of US$43 billion for Indonesia (then a US$57 billion package for South Korea). After a decade of exceptionally high growth, dubbed the Asian Miracle by the World Bank and others, the economic crisis of the second half of 1997 was quite unexpected.

Debate over the origins of the crisis focused on whether it was caused by weaknesses in the fundamentals of the ASEAN economies, or risks associated with open capital and financial markets. Declining competitiveness, weak financial sectors, and a lack of good governance in both the public and private sectors all contributed to the crisis. Such factors were evident in Thailand, though not uniformly apparent, initially, in other Southeast Asian countries. But the massive inflow of foreign capital in preceding years and the volatility of international financial markets were also part of the problem. Distinguishing this crisis from others preceding it, the massive debts run up in the region were mainly private, not government.

With no agreement on the causes of the crisis, it is hardly surprising that experts differed over solutions. The IMF approach, which focused on stabilizing currencies by reforming financial institutions, maintaining high interest rates, and enforcing government austerity, was accepted by many in the region; but it was criticized by those who believe that such contractionary policies would aggravate liquidity problems for the private sector.