INTRODUCTION:
The forces of international financial crisis can inflict real damage on societies, contributing to uncertainty, instability, and disruption. One need look no further than the current global economic crisis for a reminder of how quickly the deep fear and anxiety associated with volatile financial markets can sap a society’s sense of well-being. In such situations, the power of unilateral policy is limited. Financial crises require a highly coordinated and well-designed international economic response. Accordingly, an analysis of Washington’s response to such an international emergency, the 1997-1998 Asian financial crisis, offers an illuminating test case for the efficacy of U.S. interagency processes and valuable insights for the Project on National Security Reform (PNSR).

STRATEGY:
The lead U.S. agency during the Asian financial crisis was the Treasury Department. In August 1997, during the initial weeks of the crisis, Treasury appears to have viewed the emergency as limited—a garden-variety balance of payments (BOP) crisis with an Asian twist. Blame was laid at the feet of the Thai government and Washington refused to contribute to the August International Monetary Fund (IMF) support package for Thailand. The continued U.S. push for financial market liberalization in subsequent months suggests Treasury did not fully appreciate the financial linkages among Asian economies, the potential for a systemic banking crisis, and the role played by short-term capital flows. Further, because the bulk of foreign lending in the region involved European and Japanese banks, Treasury was relatively unconcerned about the direct effects of the crisis on U.S. financial firms.

Washington entered a new phase of policy formulation when the crisis enveloped South Korea and Hong Kong in mid-fall 1997. At this stage, Treasury’s public arguments supported the use of multilateral loans (through the IMF) conditional on local country policies that raised interest rates, reduced government spending, and reformed the financial sector. As the systemic nature of the crisis emerged, the IMF took the lead in responding to the crisis, although the U.S. Treasury remained highly influential through its voting power on the IMF Executive Board.

INTEGRATED ELEMENTS OF NATIONAL POWER:
With Treasury clearly in charge, other U.S. agencies played largely supporting roles during the crisis. The perspective of the national security community does not seem to have influenced the Treasury’s initial set of responses to the crisis. The State Department’s overseas offices provided an immediate platform for policy discussions with country officials as well as for monitoring reports on regional political developments. The Department of Defense tracked the implications for regional security, reported on availability of U.S. naval resources in the Pacific, and conducted visits with key Asian partners. However, broader discussions taking place at the Departments of State and Defense were largely divorced from the economic prescriptions being developed by Treasury and the IMF. Though the New York branch of the U.S. Federal Reserve disbursed U.S. bilateral aid as Treasury’s fiduciary agent, the Fed as a whole assumed only an advisory role. Congressional engagement was also limited; however, legislators’ reluctance to finance the IMF conflicted with the Treasury approach and contributed to mixed messages being sent by the U.S. government to the Asian nations and international financial markets.

EVALUATION:
Though U.S. influence was inherently constricted by the nature of the crisis, to the extent which American policy was capable of affecting outcomes, Washington’s management of the Asian financial crisis was a mixed success. The ad hoc nature of interagency relations weakened the potential for whole-of-government policy that might have better supported the promotion of U.S. strategic interests regionally and globally. Treasury’s ideological bias toward financial market liberalization and its close relationship with the White House, an advantage in some ways, tended to mute other agency perspectives. State and Defense entered discussions relatively late in the process and critics of the IMF’s austerity measures were largely ignored. For its part, Congress demonstrated little to no capacity to work with international financial agencies and allies in forging a coordinated economic response.

However, in the clear emergence of the Treasury as the lead agency and in the skill and dedication of its leadership, Washington performed fairly well. Treasury, in cooperation with the IMF and other foreign governments, restored stability and largely protected the U.S. economy and American commercial interests. Treasury’s internal organization, with a well-staffed and managed International Affairs Office, in addition to its oversight of the IMF and its good working relationship with the Federal Reserve and the White House, ensured a level of success.

RESULTS:
Economic losses from the crisis were large and irrefutable across Asia and growing economic insecurity made the governments of nearly every country in the region untenable in the short-term. Nevertheless, the economic ills of the crisis swept through the region within about two years, after which economies slowly recovered. The United States and the developed world felt few long-term financial effects. At the same time, IMF/U.S. conditions placed on governments seeking assistance likely imposed unnecessary hardship and poverty on millions. Resulting resentment and distrust lingers. Furthermore, clashes between the Clinton administration and Congress over IMF funding and other issues, in addition to the financial focus of the response, began to raise doubts regarding the credibility of U.S. security commitments to its Asian allies. Overall, the narrow U.S. focus on the financial aspects of the crisis overshadowed national security concerns to the detriment of long-term American interests in the region.

CONCLUSION:
The economies of developed states depend on diffuse market forces for generating dynamic growth and national wealth––forces which are difficult to harness for the sake of meeting a national foreign policy goal. Yet, such aims have important long-term effects on U.S. national and economic security. With limited recognition of these realities and absent robust collaboration in Washington during the Asian crisis, the U.S. government found it difficult to achieve more skilled and effective leadership in the international financial crisis.