The document summarizes the social impacts of the Asian financial crisis of the late 1990s. It discusses how the crisis led to rising unemployment and inflation, a decline in real incomes and household assets, and increases in poverty levels. Vulnerable groups like women, children, the elderly and migrant workers were disproportionately affected. Governments, communities, and households implemented various responses and coping mechanisms to deal with the economic hardship caused by the crisis.

1. •The views expressed in this presentation are the views of the author/s and do not necessarily reflect the views or policies of the Asian
Development Bank, or its Board of Governors, or the governments they represent. ADB does not guarantee the accuracy of the data included
in this presentation and accepts no responsibility for any consequence of their use. The countries listed in this presentation do not imply any
view on ADB's part as to sovereignty or independent status or necessarily conform to ADB's terminology.
The Social Impact
of the Asian Crisis
Olivier Serrat
2000

2. Section Overview
Introduction
The Course of the Asian Crisis

3. Introduction
The financial crisis in Asia was one of the most significant events of the 1990s.
It began modestly enough in May 1997 with speculative attacks on the Thai
baht, whose value plummeted on 2 July 1997 following the country's forced
abandonment of its pegged exchange system.
The crisis spilled over and engulfed Indonesia, the Republic of Korea,
Malaysia, and the Philippines by the end of 1997. The currencies of these
countries depreciated sharply, exerting downward pressures on other
currencies perceived to be vulnerable, not just in Asia.
The crisis also impacted asset markets, namely stock and real estate markets,
and affected the health of banks and nonbank financial institutions.

4. Introduction
The outcome was that many Asian economies experienced drastic slowdowns
in economic growth and a loss of confidence by foreign investors.
The speed and the severity of the crisis took everyone by surprise: Asia's once
vibrant economies, used to decades of rapid economic growth, were plunged
into recession; for many countries, the economic hardship has been similar to
that suffered during the great depression of the 1930s.
The crisis has forced a reappraisal of policies ranging from corporate
governance to exchange rate management. It has spawned wide-ranging
discussion about the basic design of today's international financial system,
and suggestions for reform abound: there is debate on whether the policies of
the International Monetary Fund helped or hindered the situation.
The social impact of the crisis has received far less attention.

5. The Course of the Asian Crisis
The Asian Crisis began in July 1997 following the year's second speculative
attack on the Thai baht.
After defending the currency as it had done in May 1997 and losing reserves,
the Bank of Thailand let it float on 2 July 1997.
The baht immediately depreciated by about 15 percent and, the following
week, the Indonesian rupiah, the Malaysian ringgit, and the Philippine peso
also depreciated.
The depreciation of the peso and the rupiah gathered momentum after 11
July and 14 August 1997, respectively, when the central banks of these
countries adopted more flexible exchange rate policies.
The Korean won remained stable until mid-October 1997, after which it
depreciated rapidly: the Korean authorities widened the exchange rate band
for the won to 10 percent in November 1997, and let it float freely on 16
December 1997.

6. The Course of the Asian Crisis
In December 1997, the Republic of Korea almost defaulted.
Between end-June 1997 and end-January 1998, the nominal exchange rate
(the dollar price of the local currency) depreciated significantly in all affected
countries: the rupiah depreciated by about 80 percent; the baht by about 53
percent; the won and the ringgit by 42 percent; and the peso by about 36
percent.
After markets bounced back in February 1998, Indonesia's economic crisis
worsened: mixed policy signals, galloping inflation, and a vast debt overhang
scared investors and sent the rupiah plummeting.
The Suharto Government proposed establishing a currency board but
abandoned the idea under strong pressure from various quarters,
compounded by political uncertainties and civil unrest.
The Suharto Government resigned on 27 May 1998.

7. The Course of the Asian Crisis
Japan's woes compounded the region's troubles: in early February 1998, its
government declared the economy stagnant and Moody's rating agency
revised Japan's sovereign debt rating downward: the Japanese yen declined to
an eight-year low of ¥145 to the US dollar; the tumbling yen triggered
declines in other Asian currencies.
Japan and the United States turned to official intervention and, on 17 June
1998, the United States spent about $2 billion to bolster the yen. By mid-
August 1998, however, the yen had reached a new low of ¥147 to the dollar.
On 17 August 1998, the Russian central bank devalued the ruble and the
Russian Government effectively defaulted on its internal debt: investors fled
all types of risks, from emerging market bonds to noninvestment-grade
corporate bonds in developed markets.

8. The Course of the Asian Crisis
By September 1998, financial markets were clamoring for a coordinated G7
interest rate cut to calm the panic.
Although no coordinated move took place, the US Federal Reserve cut interest
rates three times, by a total of 0.75 percent, between September and
December 1998; European central banks cut their benchmark rates.
From September 1998, conditions in Asia improved.

9. Section Overview
The Social
Impact of
the Asian
Crisis
Prices and Assets
Employment and Income
Income Distribution
Human Development
Social Capital
Environment
Vulnerable Groups

10. The Social Impact of the Asian
Crisis
There are signs that the worst of the crisis is over but the social impact of the
crisis continues to unfold: it is likely to be deep and persist long after the
countries affected return to solid growth.
The social consequences of the crisis vary across countries according to the
extent of the downturn and dislocation; but the effects are pervasive, hurting
all social classes, particularly the middle- and lower-middle-income classes.
However, the poor and vulnerable groups (such as women, children, and
migrant workers) are invariably most at risk.
But, data is often anecdotal or only just becoming available.
Analytically, the social impact of the crisis can be gauged in terms of changes
in prices and assets, employment and income, income distribution, human
development (including education, health, and family planning), social capital,
and the environment.

11. Prices and Assets
The currency devaluations that signaled the onset of the crisis exerted an
immediate upward pressure on the prices of imported goods and services or
goods with a high import content.
Inflation was moderated in some cases by government subsidies, price
controls, and by additional imports of necessities, but consumer price indexes
generally increased: in Indonesia, for example, the CPI jumped to nearly 58
percent in 1998 from 6.6 percent in 1997; since food prices generally
increased more rapidly than nonfood prices, the impact of inflation was
harsher on the poor.
Inflation not only clipped purchasing power but, along with the collapse of
stock markets and banks, also drastically reduced the real value of household
savings.
Inflation and reduction in real incomes effectively spread the cost of labor
market adjustment beyond the unemployed workers.

12. Prices and Assets
INO KOR MAL PHI THA
GDP growth rate (%)
1998 -13.7 -5.5 -6.2 -0.5 -8.0
1997 4.9 5.5 7.7 5.2 -0.4
CPI (% Change Per Annum)
1998 57.9 7.5 5.3 9.7 8.1
1997 6.6 4.5 2.7 5.9 5.6
Population, 1998 (mn) 204 46 22 75 61

13. Employment and Income
Unemployment rates increased in all the countries affected by the crisis, with
the largest increase in the Republic of Korea, where it shot from 2.0 percent in
1996 to 6.8 percent in 1998; in the Philippines, unemployment rose from 7.4
to 9.6 percent; in Malaysia, it grew from 2.5 to 4.9 percent.
However, the unemployment rate can be misleading, particularly during a
crisis, because it does not reflect dropouts from the labor force (discouraged
workers), underemployment, early retirement, or downsizing and subsequent
rehire with cuts in real wages and benefits.
Incomes in the informal sector fell with weaker domestic demand an higher
input prices.
Moreover, the informal labor force expanded with the entry of the
unemployed from the formal sector, resulting in lower earnings per worker.

14. Employment and Income
UNEMPLOYMENT RATE, %
1993 1996 1998
China, People's Rep. of 2.6 3.0 3.1
Hong Kong, China 2.0 2.8 4.7
Indonesia 2.8 4.9 5.5
Korea, Rep. of 2.8 2.0 6.8
Malaysia 3.0 2.5 4.9
Philippines 8.9 7.4 9.6
Singapore 1.9 2.0 3.2
Thailand 1.5 1.1 5.3

15. Income Distribution
Not all income groups were affected proportionately.
The share of wage and salary incomes in total income declined, thereby
altering functional income distribution.
Rural families who grew their own food and had a surplus for sale benefited
from price increases; urban households that relied on the market for food
products were affected.
Increases in poverty were greater in urban areas than in rural areas.

16. Human Development
The crisis had a negative impact on household investments in human
development, particularly in education, health and nutrition, and family
planning and reproductive health.
• Education
• The crisis induced a shift of children's time from school to work, an
effect that was strongest at levels of schooling that are less subsidized,
such as the secondary level. (In Indonesia, about 6 million students
dropped out of education).
• Health and Nutrition
• The crisis influenced household demand for health care: many shifted
from modern medical care to traditional healers and self-treatment. (In
Malaysia, private hospitals and clinics reported a drop of 15 to 50
percent in the number of patients seeking treatment).
• Cuts in government budgets affected immunization programs.

17. Human Development
Cont'd
• Family Planning and Reproductive Health
• The cost of contraceptives increased and many women dropped out of
family planning programs. (In Indonesia, the national family program
required participants to pay the full cost of services.)
• There was in all likelihood an increase in the number of illegal
abortions, perhaps even infanticides.

18. Social Capital
Social capital consists of informal norms and established relationships that
enable people to pursue objectives and act in concert for common benefit.
An erosion of social capital is reflected in rising crime and domestic violence
and weakening community cooperation and participation.
• Crime and Domestic Violence
• The crisis led to increased criminality in communities, as well as stress
and conflict within households. (In Jakarta, the number of divorce
applications almost doubled between October 1997 and February
1998; in Mindanao, curfews were imposed in response to increased
crime; in Bangkok, attacks against debtors by loan sharks who had not
been repaid were recorded).
• The crisis also led to a rise in prostitution of women and children, drug
peddling, and the number of street children.

19. Social Capital
Cont'd
• Community Cooperation and Participation
• The crisis diminished cooperation and trust, replacing it with intense
competition. (In Thailand, hostility grew against neighbors; in
Indonesia, religious gatherings became infrequent.)
• But, community-based initiatives appear to have flourished in the
Republic of Korea, as farmers and women's groups organized to
improve their situations.

20. Environment
While economic recession may provide some respite to the environment,
household attempts to obtain additional income, along with efforts of
unemployed urban workers to find rural jobs, led to environmental
destruction. (In Thailand, the devaluation of the baht provided a strong
stimulus to agricultural exports, resulting in expansion and intensification of
shrimp farming; increases in illegal logging in Cambodia, Myanmar, and
Thailand were also noted.)
Government budgets for protection of the environment declined. (Reductions
in budget allocations for environmental protection were recorded in the
Republic of Korea and Malaysia, and probably also took place in the other
crisis countries.)
Improper management of natural resources and the environment reduces
further what stock is available to society.

21. Vulnerable Groups
The crisis affected vulnerable groups in particular.
Especially disadvantaged groups included women, children, youth, older
persons, ethnic minorities, and migrant workers.
• Women
• Being largely secondary earners and not belonging to labor unions,
female workers were more likely to lose their jobs than their male
counterparts. (In Thailand, women accounted for slightly more than
half of reported layoffs between January 1997 and February 1998; in
the Philippines, women accounted for a high proportion of returning
overseas migrants in 1998 and 1999.)
• It is also likely that women received a smaller share of limited
household food supplies.

22. Vulnerable Groups
Cont'd
• Children
• Children fared poorly in the competition for diminishing household
resources. (In Indonesia and the Philippines, teachers reported that
children were eating less before coming to school.)
• Children were also neglected by busy parents trying to make ends
meet.
• Youth
• Youth unemployment rates rose faster than those of adults. (In the
Republic of Korea, youth unemployment rates rose to 7.4 percent and
11.8 percent in the 20–24 and 15–19 age groups during the last quarter
of 1997 from 5.9 percent and 7.5 percent, respectively, in 1996; the
corresponding increase in the national average unemployment rate
was 2.0 to 2.6 percent.)

23. Vulnerable Groups
Cont'd
• Older Persons
• With incomes that tend to be fixed, older persons were especially
vulnerable to the effects of inflation.
• The additional demands placed on younger members of households
probably also deprived older persons of needed care.
• Ethnic Minorities
• Latent and deep animosities toward certain ethnic groups resurfaced as
a consequence of the crisis. (In Indonesia, the misfortune that befell
the ethnic Chinese exemplifies this impact.)
• Migrant Workers
• Overseas migrants working in other Asian countries were seriously
affected by reductions in employment opportunities and by currency
devaluation. (They included Indonesians in Malaysia, Burmese in
Thailand, and Filipinos in the Republic of Korea and Malaysia.)

24. Vulnerable Groups
Cont'd
• Migrant Workers
• Some migrant workers were forced to return to their home countries;
others were subjected to attempts by corrupt officials to extort
payments at border crossings. (This was the case for Burmese workers
returning from Thailand.)

25. Section Overview
Responses to the Asian Crisis
Conclusions
Annex—ADB's Response to the Asian Crisis
Further Reading

26. Responses to the Asian Crisis
Responses to the crisis included household responses, community responses,
labor-management responses, government responses, and international
responses.
• Household Responses
• Responses at the household level typically included adjustments in
consumption, saving, and adjustments in labor supply behavior,
besides utilization of social services.
• Community Responses
• Responses at the community level included cooperative solutions. (In
Davao, Mindanao, a community savings scheme was set up so that
everyone could contribute to a common fund to cover the cost of
festivals; a community policing scheme was introduced in response to
increased crime; and teachers formed a cooperative to borrow money
from the Government at lower rates.)

27. Responses to the Asian Crisis
Cont'd
• Labor-Management Responses
• Many businesses responded to falling market demand by laying off
workers.
• But, responses at the corporate level included instances of labor and
management working together to minimize the social impact of the
crisis. (In the Republic of Korea, a survey of 400 enterprises found that
45 percent of the firms imposed a freeze on new recruitment, that 17
percent used early retirement, and that 14 percent resorted to a
reduced number of work hours; but, the same survey revealed that 45
percent of unions were willing to accept a wage freeze if employers
guaranteed job security.)

28. Responses to the Asian Crisis
Cont'd
• Government
• The main government responses concerned budget reallocations,
which entailed shifting funds away from infrastructure investments and
national defense to meet immediate needs, such as the salaries of
government personnel, basic social services and social safety nets,
recapitalization of financial institutions, and repayment of foreign debt.
• The social safety nets deployed included a varying mix of severance pay
and restrictions on layoffs; unemployment insurance and other forms
of assistance to the unemployed; job retraining and job creation;
pensions and provident funds; income maintenance programs,
including public works; price controls and subsidies on foods and other
essential goods and services; and measures designed to ensure
continued access to social services for the poor and the unemployed.

29. Responses to the Asian Crisis
Cont'd
• International Responses
• The principal responsibility for dealing with the crisis at an
international level was assumed by the IMF.
• The IMF 's goal was to quickly restore confidence in the three hardest
hit economies, e.g., Indonesia, the Republic of Korea, and Thailand,
through a combination of tough economic conditionalities and
substantial financial support. In 1997, the IMF approved $35 billion of
loans for these countries and, in 1998, further loans worth $6.3 billion
for Indonesia.
• The strategy of the IMF had two key components:
• The first component of the strategy concentrated on macroeconomic
policy, the main aspect of which was to be tighter monetary policy,
e.g., higher interest rates.

30. Responses to the Asian Crisis
Cont'd
• International Responses
• The second component of the strategy concentrated on substantial
structural reform; this involved deep reform of the region's banking
systems, the breakup of monopolies, the removal of barriers to trade,
and substantial improvements in corporate transparency.
• Both components of the IMF's strategy have come under heavy fire, but
evaluation is plagued by the problem of the counterfactual , viz., knowing
what would have happened if the IMF had adopted a different approach
is impossible, and the fact that the IMF's targets and tactics changed over
time.

31. Conclusions
It seems clear that the social impact of the crisis is both massive and
potentially long-lasting. There are good reasons to expect that it has not yet
peaked because negative social effects have long gestation periods.
The crisis revealed that considerable effort needs to be directed to setting up
or further developing social safety nets in Asia and the Pacific, including crisis
monitoring mechanisms and statistical systems; this is important because
traditional family systems of support are likely to weaken with economic
progress.
Fortunately, because of the crisis, governments are now more conscious of
shortcomings and constraints.

32. Annex—ADB's Response to the
Asian Crisis
The worldwide repercussions of the crisis required a coordinated approach:
ADB acted in concert with other organizations and institutions.
In 1997 and 1998, ADB's assistance to the countries worst hit by the crisis,
e.g., Indonesia, the Republic of Korea, and Thailand, focused on governance.
In Indonesia, the centerpiece of ADB's assistance is the Financial Governance
Reforms: Sector Development Program loan of $1.5 billion, which supports a
major streamlining of the regulatory framework and provides for transparency
in the banking subsector and other reforms; fiscal decentralization is being
further encouraged through a Community and Local Government Support
Sector Development Program loan of $300 million.

33. Annex—ADB's Response to the
Asian Crisis
In the Republic of Korea, ADB provided a $4 billion Financial Sector Program
loan to the IMF-led multilateral assistance package, which supports the
restructuring of financial institutions, combined with strengthening regulation
and supervision, and with measures to liberalize the capital market and
develop it further.
In Thailand, two sizeable loans have major governance components: the
Financial Markets Reform Program loan of $300 million underpins
fundamental reforms for transparency and accountability in the financial
sector; and the Social Sector Program loan of $500 million supports, among
other things, the administrative decentralization of health and education
services.

34. Annex—ADB's Response to the
Asian Crisis
From 1998, ADB's assistance began to focus on the social infrastructure sector
to alleviate the social impact of the crisis and strengthen the policy and
institutional frameworks.
In Indonesia, for instance, ADB provided a Social Protection Sector
Development Program loan worth $300 million in 1998, and a Health and
Nutrition Sector Development Program loan of $300 million in 1999.
In Indonesia still, a School-Based Basic Education project worth $150 million
and a Reproductive Health Care project of $50 million are in the pipeline for
2000.
In Thailand, ADB approved a Social Sector Program loan worth $500 million in
1998 and an Agriculture Sector Program loan of $300 million in 1999.

35. Further Reading
• ADB. 1998. Assessing the Social Impact of the Financial Crisis in
Asia. Manila. aric.adb.org/pdf/edrcbn/edrcbn06.pdf
• ——. 1999. Social Consequences of the Financial Crisis in Asia:
The Deeper Crisis. Manila. www.adb.org/publications/social-
consequences-financial-crisis-asia-deeper-crisis
• ——. 1999. Social Consequences of the Financial Crisis in Asia.
Manila. www.adb.org/publications/social-consequences-
financial-crisis-asia

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