In 1997, while the Association of Southeast Asian Nations (ASEAN) proudly looked back at its past thirty years of accomplishment in forging regional peace and security, vibrant economic growth, and higher levels of social welfare, a new issue — economic security — confronted the grouping's economies. Rapid growth of over 7 per cent per annum achieved during the past decade, which made ASEAN one of the fastest-growing regions in the world, came to a crashing end because of the financial crisis that hit the region in the second half of the year. ASEAN's economic growth in 1998 is predicted to be the lowest in the last three decades.

However, the factors that contributed to rapid economic expansion in ASEAN countries remain strong, and have the potential to return the region's economies back to a sustainable growth path. ASEAN continues to enjoy, for example, high levels of saving, a strong work ethic, low underlying inflation rates, and a dynamic and entrepreneurial private sector.

In previous instances of economic slow-downs in the 1980s and 1990s, each ASEAN country was able to come out relatively unscathed after the restructuring of their industrial sectors. Since then, the region's rapid economic growth, particularly in the real sector, has resulted in strong demand for capital to finance economic development. This led to large inflows of both long and short-term capital into the region. The development of strong financial institutions both at the regional level and for each ASEAN member country is of crucial importance in order to cope with such large inflows. The adjustment to the present crisis will therefore be different from previous ones. The crisis is a region-wide phenomenon and calls for a regional solution. It also involves private debts for which the role of the private sector would be crucial.

ASEAN Economies Up to the 1990s: An Overview

To understand the financial turmoil it is necessary to begin by looking at macroeconomic developments in the region up to the middle of 1997. The sound macroeconomic fundamentals of ASEAN countries defied any suspicion of the dramatic collapse of exchange rates that began in July 1997.