How the Sick Man Avoided Pneumonia: The Philippines in the Asian Financial Crisis

For most of the last three decades, economic growth in the Philippines lagged its Asian neighbors, earning it such sobriquets as "the Sick Man of Asia" and "the Latin American of Asia." During the Asian financial crisis however, the sick man proved more resilient than his neighbors. This was not simply a matter of being unable to fall out of the basement. On the eve of the crisis in mid-1997, the Philippines economy was forecasted by the International Monetary Fund (IMF) and private sector analysts to grow at more than six percent in 1998—a rate faster than most other low income countries worldwide, and a rate faster than the Philippines' own performance in recent history. When the crisis hit in the second half of 1997, those same forecasts exhibited less downward revision for the Philippines than for the other Asian countries, and in fact, the Philippines' contraction was considerably less severe than the others. The question naturally arises as to why the Philippines, with its reputation for weakness, fared better in the crisis than other countries in the region. To answer that question one has to have a theory or explanation of the crisis, and then show how the Philippines differed from its comparators in the relevant dimensions. This paper examines two non-mutually exclusive explanations for the crisis, weak domestic fundamentals and international contagion, and concludes that the Philippines endured the crisis relatively more successfully than its neighbors both because its financial system was in better shape than others around the region, and because it had a uniquely low vulnerability to contagion. In particular, the Philippines had already had its financial crises, and as a consequence, had undertaken measures to strengthen its domestic financial system. This observation is at once both trite and profound: it suggests that backsliding on the part of the Philippines could lead to renewed problems, and, that with respect to the benefits of financial market reform, the other countries around the world might have something to learn from the sick man.