The financial crisis that erupted in 1997 and engulfed Asia in gloom through the end of the millennium came as a shock to virtually all observers. The preceding decade had witnessed the end of the Cold War and the apparent triumph of liberal capitalism. Controversies over the benefits of trade and direct foreign investment had declined, as globalisation and liberalisation seemed to expand inexorably. In the developing world, periodic financial crises were hardly new, of course, but they had typically occurred in countries with weak export sectors and obvious macroeconomic imbalances such as uncontrolled inflation, inadequate domestic savings and gaping deficits in government budgets (IMF 1998a). The Asian financial crisis, in contrast, delivered an unprecedented blow to a region that had managed to bring its macroeconomic house into reasonably good order and had sustained decades of rapid growth driven by exports.

The effects of the crisis throughout East Asia were more severe than any since the great depression of the 1930s. In Indonesia, the fourth most populous country on earth, the impact was shattering. In 1998, the economy contracted by nearly 14 per cent. Korea's economic reversals surpassed anything since the Korean War of the early 1950s. Thailand and relatively affluent Malaysia experienced an abrupt reversal of longterm growth trends. Even Hong Kong and Singapore, the wealthiest and most sophisticated economies in Asia outside Japan, suffered deeply as their trading partners fell into crisis.