What the Asian Financial Crisis Can Still Teach Us

By Paul Brothwood

In 2004, I submitted a dissertation that defended market-friendly reform and treated poor implementation as the main cause of the Asian financial crisis. I believed the state had interfered too much, the market had not been allowed to work and the IMF offered the best route back to stability. It was a clear verdict. It was also too certain.

I returned to that work after a career that took me into banking, local government, the European Parliament, the House of Commons and operational leadership. Each role changed how I read the same evidence. Rules matter, yet the people who interpret them matter as much. Markets test decisions, yet they also copy fear. Institutions correct mistakes, yet they also defend old assumptions.

The enduring lesson from 1997 is not that states failed or markets failed. A financial system broke because public policy, private lending and international advice reinforced one another's weaknesses. Prevention therefore depends on regulation, liquidity, transparency and political judgement working together before confidence disappears.

Paul Brothwood links the Asian financial crisis to regulation, liquidity, political judgement and leadership.

Certainty was the first thing I had to lose

My dissertation used neo-liberalism and rational choice theory to reach three confident findings. Market reform was inherently positive. International institutions were able to resolve tension between state and market. South Korea's main error lay in implementation rather than design. The research contained valuable evidence, though the theory pushed me towards a verdict before every fact received equal weight.

The state-versus-market argument made the crisis look like a choice between rival systems. The evidence points to a different failure. Governments opened channels for short-term foreign borrowing. Banks and companies used them. Foreign lenders supplied the money and withdrew it together. Supervisors missed risks crossing legal and national boundaries. The IMF misread the scale and speed of the danger.

A strong argument does not become weaker when its author changes his mind. It becomes more honest. The final article in this series is therefore less about defending my old conclusion than identifying the lessons that survived a second reading, followed by two decades of work inside institutions.

Liquidity breaks before solvency is settled

South Korea entered late 1997 with usable foreign exchange reserves near $11 billion and short-term external debt of about $86 billion. Roughly $62 billion was owed by banks. Those figures did not prove that every borrower was insolvent. They proved that the country lacked enough dollars if creditors demanded repayment at the same time.

That is what happened. Short-term external bank debt fell from $49 billion at the end of November to $33 billion at the end of December. A $16 billion withdrawal in one month turned doubts about companies and banks into a national shortage of foreign currency. A long-term loss had become an immediate demand for cash.

Solvency ratios remain important, but maturity and currency decide whether an institution survives long enough for solvency to be judged. Leaders need to know what falls due, in which currency, under which guarantees and from which funding source. A healthy-looking balance sheet offers little protection when its funding disappears overnight.

Regulation must follow the risk

Korea expanded merchant banking rapidly during the mid-1990s. Twenty-four finance companies became merchant banks between 1994 and 1996, many with chaebol ownership. They borrowed abroad and financed domestic companies under weaker oversight than commercial banks. The business label changed. The economic risk did not.

Supervision was divided. The Bank of Korea's supervisory office covered commercial banks and the finance ministry covered merchant banks. Institutions carrying similar currency, maturity and credit risks faced different standards. The gaps mattered because money moved towards the route with fewer restraints.

Modern regulators face the same principle whenever finance moves outside an established bank, company or reporting line. Oversight has to follow the activity, connected exposures and total group position. Legal categories help divide responsibility. They should never conceal the same risk appearing in several places.

Transparency is an operating control

Korea's published reserve and debt figures gave an incomplete picture. Overseas branches had borrowed abroad. Some reserves were committed or unavailable. Cross-guarantees linked companies inside the same chaebol. When fuller figures emerged, confidence fell because investors realised that the position was worse than the official totals suggested.

Transparency is often presented as a reporting duty. My work in operational leadership has taught me to see it as a control. Good information changes a decision before harm occurs. It shows a board where exposure is concentrated, tells a regulator where authority ends and alerts managers when an assumption has stopped matching reality.

More data alone does not solve the problem. Information must reach the person with authority to act, in time, in a form that exposes the decision required. A long report that hides a dangerous maturity gap is less useful than one clear measure linked to an agreed response.

Open markets need the right sequence

My younger self treated liberalisation as directionally right and implementation as the fault. Korea shows why sequence is part of design. Short-term flows opened before safer long-term channels. Foreign currency borrowing expanded before consolidated supervision, reliable group accounts and firm insolvency rules were ready.

The IMF's independent evaluation later found that surveillance focused too much on the degree of capital market opening and too little on its order. The Fund underestimated a policy mix that encouraged short-term flows, restricted longer finance and left some external borrowers poorly supervised.

Opening a market is not a single act. It transfers decisions, incentives and losses across institutions. Capacity must exist before exposure expands. Supervisors need authority, companies need credible accounts, banks need independent credit judgement and failure needs an orderly legal route. Freedom without those conditions shifts risk rather than removing it.

Confidence is collective behaviour

Foreign lenders did not leave Korea one at a time after a calm review of every borrower. Once some banks refused to renew loans, others feared being last in the queue. Their individual decisions were rational from the viewpoint of each lender and destructive when taken together.

The eventual answer included coordinated creditor rollovers and maturity extensions. That matters because emergency public money alone did not end the liquidity run. Private creditors had helped create the short-term exposure. They also had to take part in stopping the rush for repayment.

Confidence therefore deserves more than a line in a communications plan. Leaders must understand who relies on whom, which signals trigger withdrawal and where individual self-protection produces a shared failure. Credibility comes from accurate information and believable action, not reassurance detached from the numbers.

Crisis policy has a human cost

I remain more supportive of the IMF than many critics, though less deferential than I was in 2004. Emergency finance prevented disorderly default and reform addressed real weaknesses. The first programmes also imposed tight fiscal and monetary conditions before the depth of recession was clear. That early judgement intensified pressure on companies, workers and public services.

The World Bank recorded rising unemployment, poverty and household distress across the affected economies. Those costs were not separate from financial policy. They influenced political consent, the ability of firms to recover and the legitimacy of reform. A rescue programme that stabilises creditors and neglects households leaves part of the crisis untreated.

Social protection belongs in crisis design from the start. So does willingness to revise policy when forecasts fail. Institutional authority should make correction faster, not make admission harder. The IMF eventually adjusted its approach. The lesson is to build that ability to learn into the first response.

Political experience changed my reading

Serving four years as a Dudley Metropolitan councillor taught me that a central policy and a local result are rarely the same thing. From 2014 to 2019 I worked as a chief of staff in the European Parliament, followed by the same role in the House of Commons from 2019 to 2021. I saw how competing institutions, public pressure and limited information shape what reaches the ground.

Politics rewards clear positions. Government or market. Rescue or moral hazard. Austerity or stimulus. Such choices help organise debate, yet policy does not operate in clean pairs. A ministerial decision passes through officials, regulators, companies, lenders and local services. Each participant has different information, incentives and power. The final result often sits in the gaps between them.

If I wrote the dissertation now, my verdict would be direct. Markets need capable states. States need market discipline. International institutions need evidence, humility and permission to correct course. Private creditors must share the cost of risks they chose. Leaders must test reassuring figures and listen for facts that disturb the preferred answer. That is what the Asian financial crisis still teaches me.

Asian Financial Crisis series

1.    What I argued about the Asian financial crisis in 2004, and whatI think now. 

2.    Why the Asian financial crisis happened. 

3.    State versus market after the Asian financial crisis.

4.    The IMF's controversial response to the Asian financial crisis.

5.    South Korea, chaebols and banking failure.

6.    What the Asian financial crisis can still teach us.

About the author

Paul Brothwood is an operations manager, Chartered Environmentalist and sustainability professional based in the West Midlands. His career has included banking, four years as a Dudley Metropolitan councillor, service as a chief of staff in the European Parliament and House of Commons, construction and electricity distribution. He writes about leadership, sustainability, motorcycles, travel and lessons from earlier academic work.

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