41 SE Asia: Economic Geography I – Bubble Economics

The 1997 Southeast Asian Financial Crisis

In the 1980s and 1990s, four countries in Southeast Asia were enjoying some of the fastest economic growth rates in the world. The economies of Singapore, Indonesia, Malaysia, and Thailand were red hot, and many investors believed they were on the verge of replicating the economic miracles of Japan, South Korea, and Taiwan.

Southeast Asia’s investment bankers were flooded with money from eager investors from around the world. Hundreds of new firms were established, real estate booms transformed the region’s cities, millions of jobs were created, and a new middle class began to emerge. And then, disaster struck. In 1996, there had been a $96 billion inflow of investment capital to the region. In 1997, there was a $12 billion outflow, a stunning reversal. Over the course of just one year, Singapore’s gross national product (GNP) declined by 10%, Malaysia and Thailand’s GNPs declined by about 20% each, while Indonesia’s GNP plummeted by a staggering 40%. (By comparison, during the United States’ Great Recession of 2008, which seemed catastrophic to many Americans, GNP declined by less than 2%.) The crisis was so traumatic in Indonesia that General Suharto, the dictator who had ruled the country for thirty years, was forced from office.  Many Southeast Asians lost their jobs, poverty increased, and those who had invested in the region learned a painful lesson about bubble economics.

Bubble Economics

The global economy is a vast and complex machine, and any major economic event tends to defy simple explanation. Still, it is possible to get a grasp on the basics of bubble economics by examining two bubbles that have burst in the United States over the last few decades. One was the “Dot Com” bubble. In the 1990s, the internet was revolutionizing the way Americans communicated, consumed information and entertainment, and how they spent their money. Entrepreneurs seized on the new technology, attempting stake a claim in a vast new economic territory. Hundreds of new tech firms were established, and millions of investors poured money into them. Stock prices in these new firms soared throughout the decade. Many of those who bought stock early became instant millionaires. Flush with their investors’ cash, many tech firms built elaborate corporate campuses and spent lavishly on marketing. Unfortunately, one thing that many of these firms failed to do was discover how to turn a profit. By the late 1990s, poor earnings reports from these firms spooked investors, and they began to sell their stock. As more stock was sold, the value of the stock began to drop, which caused more investors to sell, which caused stock prices to fall even farther. So, more investors began to sell, and so on, right down to the bottom of the barrel. The Dot Com bubble had burst.

What is so vexing about bubble economics, and what makes it so hard to predict the next one, is that not all of these new tech firms failed. For every investor left with worthless stock in Pets.com, eToys.com, or GeoCities, was an investor who purchased stock in Amazon or Apple. Similarly, while an investor who poured money into the Indonesian economy of the 1990s was almost certainly disappointed, an investor who poured money into the Japanese economy of the 1960s almost certainly was not. Bubble economies are so unpredictable that another would burst in the United States just a decade after the Dot Com debacle, although this time it would involve the housing market.

Any commodity can be appraised for its value, but its true value can only be known when it is sold. Consider the collectibles market. A prized baseball card, comic book, or vintage toy might be said to be worth $5,000, but that is only an appraisal. It is not truly worth $5,000 until it actually sells for $5,000. The same thing is true in real estate. In the early 2000s, one of the wisest investments an American could make was in the housing market. Demand was housing was extremely high, and the supply of housing was relatively low. Home prices were increasing each year, as were profits. Many Americans rushed to buy homes, knowing that they were almost guaranteed to sell it later for significantly more money. Flipping houses – buying older homes to refurbish and sell – became a lucrative side business for many in the middle class. For developers and contractors, the construction of new housing was an economic bonanza, and banks could not give away home loans fast enough. The market grew so frenzied that many Americans acquired loans and bought second, third, and even fourth homes as an investment, and wound up with debt loads greater than what their jobs might pay them in a lifetime.

By 2007, many middle-class Americans were living in homes worth half a million dollars. Until they weren’t. The housing market in the United States was grossly overbuilt, and grossly overvalued. Savvy buyers stopped purchasing homes, waiting for prices to come down. Suddenly, houses were staying on the market for months. Then, as happened in Dot Com bust, nervous homeowners began to cut the prices of the houses they were trying to sell. That caused home prices to decline, which caused more homeowners to sell, which led to a further collapse in prices. Developers and homeowners were unable to get a return on their investments, and were unable pay off their loans. Soon, a crisis of epic proportions was reaching all the way up to major investment banks on Wall Street. Some of the largest and oldest banks in the country, along with the investment dollars of millions of ordinary Americans, were swallowed up by the housing crisis.

The Southeast Asian Bubble

Again, economics is complex. The 1997 Crisis in Southeast Asia was caused by a number of factors, and actually began with a currency devaluation in Thailand. Inadequate government regulation was another problem, as was a lack of corporate transparency. Crony capitalism was also a serious issue. Many investment bankers in Southeast Asia took foreign investments and funneled them toward economic enterprises that were associated with their family, friends, or political allies, even if they were not particularly prudent investments. When these firms failed to turn a profit, investment bankers continued to flood them with cash to keep the artificially viable.   Mainly, however, the economic crisis in Southeast Asia was caused by the same bubble economics that caused the Dot Com and housing crises in the United States. In retrospect, it is quite apparent that real estate and stock market values in Southeast Asia were grossly overinflated in 1996.

The economies of Singapore and Malaysia made quick recoveries, while recovery in Thailand and Indonesia took a bit longer. All four have experienced significant economic growth over the last two decades, although not nearly at the rates of the 1980s and 1990s. Their current growth rates are more grounded in reality, and are far more stable. But the region still serves as a cautionary tale for investors attempting to determine what bubble will be next to burst. In 2022, there are some signs that it may be China, a development that could have severe economic consequences for Southeast Asia, which is home to some of China’s largest trading partners.

Cited and additional bibliography:

. Ray in Manila. Marina Bay, Financial District and Singapore River. photo, 3 July 2017. Flickr, https://www.flickr.com/photos/rayinmanila/35622190292/. Attribution 2.0 Generic (CC BY 2.0).

Troutner, Allison. “Why Do Bubbles Pop?” HowStuffWorks, 22 June 2022, https://science.howstuffworks.com/why-do-bubbles-pop.htm.