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Four years after theAsian crisis beganHeribert DieterPublished online: 26 Nov 2010.
To cite this article: Heribert Dieter (2001) Four years afterthe Asian crisis began, The Pacific Review, 14:3, 467-477, DOI:10.1080/09512740110064866
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Review articleFour years after the Asian crisisbegan
Heribert Dieter
Four years ago the Asian crisis began with the �oating of Thailand’scurrency on 2 July 1997. After a deep crisis in the second half of 1997and in 1998, some economies recovered quite impressively. South Koreamanaged to grow at a spectacular rate of 10.7 per cent in 1999 and stillsubstantial 7.5 per cent in 2000. Less dazzling is Malaysia’s recovery with5.4 per cent growth in 1999 and 6.0 per cent in 2000. And Thailand’srespective growth rates of 4.1 and 4.5 per cent are low compared to thepre-crisis levels. Indonesia is worst affected: a growth rate of 0.2 per centin 1999 and 4.0 per cent in 2000 is a reminder that Southeast and EastAsia were affected by the most dramatic economic crisis the region hadseen for more than �fty years.
After East Asia’s rapid and somewhat miraculous rise from the ashes,it is quite rewarding to look at some books that were published after thecrisis broke, but before the return of the economies of East Asia to healthygrowth rates became evident.
One of the least valuable books in this sample is Bernhard Arogya-swamy’s monograph on The Asian Miracle, Myth, and Mirage. TheEconomic Slowdown is Here to Stay (Westport, CT: Quorum 1998).
Arogyaswamy concentrates on the microeconomic aspects of economicdevelopment in East Asia. He stresses that Asian countries are confrontedwith technological, managerial and institutional de�ciencies which needto be addressed before growth rates of the past can be restored.Arogyaswamy argues that technology and science are the foundations ofmodern economic civilization, and in these central areas Asian economiesare falling behind the West. The organization of companies, namely thehigh proportion of family-owned businesses in some Asian economies,limits their ability to become global operations. Institutional weaknesses
The Paci�c Review, Vol. 14 No. 3 2001: 467–477
The Paci�c ReviewISSN 0951–2748 print/ISSN 1470–1332 online © 2001 Taylor & Francis Ltd
http://www.tandf.co.uk/journalsDOI: 10.1080/0951274011006486 6
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and the absence of institutions that bridge the gap between familism andthe government further contribute to Asia’s failure to remain players ofgrowing importance in the global economy.
Arogyaswamy includes India in his analysis of Asian economies.Although this may be justi�ed from a strict geographical point of view,according to my knowledge India is not a country that was regarded tobe part of the Asian miracle, and it certainly was not involved in the Asiancrisis. A reader expecting to learn about causes and consequences of theAsian crisis might be disappointed to learn a lot about India, not muchabout the crisis.
The main assessment of Arogyaswamy is that Asian countries havelagged behind the West when it comes to inventing modern technologies.This might be an appropriate description of the current situation. However,it is hard to see that the success of East Asian economies since 1945 hasat any stage been built on inventing technology. Rather, technology wassuccessfully applied. Does East Asia need to invent for instance Internetapplications or can it, like in the past, just apply them?
Arogyaswamy suggests that
The Asian miracle . . . has all too earthly, even socialist, origins. Bornof the desire to be the equal of the West and orchestrated by a forcethat created and moulded markets, provided advice and made sugges-tions and even made know-how and capital available where neces-sary, the phenomenon had much that was remarkable, though littlesupernatural about it [p. 8].
He continues to argue that the past success will not be repeated in thefuture unless dramatic measures are taken: ‘Asian de�ciencies, it is argued,are systemic and deep. Much more than cosmetic surgery is needed toaddress the structural problems confronting the region’ (p. 22).
Here the reader wonders, knowing how quickly in particular SouthKorea recovered, whether the ‘surgery’ suggested by Arogyaswamy hasalready been implemented. Hardly could the radical and comprehensiverestructuring of economic systems have been successfully concluded within1998, which would have laid the foundation for a return to growth in 1999.Instead, foreign capital, which had been withdrawn from Southeast and East Asia in 1997 and 1998, returned after bankers and fund mana-gers realized in what a panic they had been. The economies of the regionwere slightly modernized in the meantime, but there was no radical over-haul.
Arogyaswamy manages to devote entire chapters to developments thatmake no contribution to the understanding of the Asian crisis. In partic-ular the second chapter, on ‘States Strong and Helpless’, is trying tocontribute to the understanding of speci�c ‘Asian’ patterns of governmentguidance for economic development, but the reader is left with little
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empirical evidence and a lot of narrative analysis. The comparisons madehave no convincing methodology behind them.
When Arogyaswamy turns to regional integration and Europe, whichhe brie�y does in his third chapter, the analysis becomes quite turbulent.Power and hierarchy in international relations play no role. Still referringto the EC, the author misses quite a few points that characterized Europe’sintegration process. He argues:
The EC, undoubtedly, is the articulation of that most human of all drives: self-preservation. The threats posed by the rest of apredatory world, initially the United States, the communist world,and Japan, but of late encompassing much of Asia, to defenceless‘loners’, not the desire to rise above petty national interests andsquabbles, underlie the birth and subsequent evolution of the EC [p. 55].
Undoubtedly Arogyaswamy has studied European integration in detail.Perhaps, however, he lacks an understanding of history and politics.
The best part of Arogyaswamy’s book is Chapter 5, in which he analysesthe different types of capitalist development and contrasting managementstyles in East Asian economies. His conclusion, however, is again lessconvincing. He argues:
. . . the highly nationalistic countries of Asia must increasingly adoptWestern management ideas but, in so doing, become less indigenousin their approach to issues and decisions. The more they cling totheir traditional ways of running businesses, the longer they remainincapable of competing with Western �rms . . . [p. 109].
Does the West really have the only answer to management challenges?Furthermore, is the West synonymous with the USA?
At the end of a pretty unrewarding book, Arogyaswamy draws a rela-tively convincing conclusion:
Until Asian countries can develop their own philosophical and ideo-logical bases for capitalism, until they can rise above sheer material-istic and familistic preoccupations, they will be condemned foreverto toil in the long, ubiquitous shadows of their European andAmerican mentors [p. 138].
It is plausible to expect Asian countries to develop their own approaches.This, however, may not be con�ned to the microeconomic �eld. In partic-ular, East Asia may, after the severe crisis has been digested, strengthenintra-regional cooperation as well as develop a more uni�ed position ofthe region vis-à-vis the rest of the world.
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A much more rewarding book is François Godement’s The Downsizingof Asia (London and New York: Routledge 1999). Godement �rst takesthe reader on a brief journey through the region and suggests an explan-ation of the crisis. In the third chapter, Godement has a critical look atthe ‘rescue party’. Chapter 4 contains a sober analysis of the debate onAsian values. The following chapters are devoted to Asian identity, poli-tics in Asia and an attempt to develop scenarios for the further develop-ment of the region.
Godement points out the more relevant events that made the crisis asdeep as it was. Panic, psychological contagion and herd behaviour arementioned as important factors in the development of the crisis (p. 2). Ina similar vein, he criticizes the arti�cial separation of economics and poli-tics and underlines the importance of collective psychology for economicdevelopment (p. 4).
However, Godement at times draws rather risky conclusions. In his view,the East Asian crisis is not merely an economic crisis, but rather a colli-sion of civilizations: ‘It is a clash of systems, between formerly mercan-tilist Japan and triumphant neo-liberal America’ (p. 8). Drawing a linebetween the West, in particular the USA, on one side, and Japan and EastAsia on the other, misinterprets the crisis. For a whole range of reasons,Japan has been responsible for the emergence and deepening of the crisis.The inability to mop up its own �nancial crisis of the early 1990s, whichled to a continuous �ow of capital out of Japan and into the region –resulting in an in�ow of what the Economist called ‘hot money’ intoemerging markets – is just one of the factors that underline Japan’s respon-sibility for the Asian crisis.
Godement suggests, correctly so, that the informal cooperation that EastAsia and the Asia-Paci�c so proudly announced as superior concepts ofregional integration, will have to give way to legally and institutionallymore formal approaches. ‘The Crash has taught a harsh lesson to allbelievers in weak, voluntary and informal cooperation. The logic ofregional integration and institution-building is even more compelling todaythan yesterday’ (p. 18).
If Godement’s analysis is correct, which I believe is the case, a numberof consequences follow from this. Foremost, it means that APEC does nothave too bright a future, if any, unless it radically changes its approachto supranational regional integration. Old-fashioned integration based onpeer pressure is a feature of the past, not of the future. Similarly, ASEANwill also be forced to develop a more formal approach to regionalism.Furthermore, any new integration process in East Asia will also have torely on institution-building and a more formal approach.
Godement’s explanation of the Asian crisis (he continues to use theterm crash, which is perhaps too strong an expression considering the rela-tively quick recovery) is still more convincing than most interpretationsthat were given at the time or that are given today. The author is proposing
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an analysis which is pretty similar to that of Joseph Stiglitz when he stillwas chief economist of the World Bank. Godement takes the success ofthe past into account: The same model that may have contributed to thecrisis was producing high growth rates for a few decades (p. 21). He singlesout deregulation, economic liberalization and the opening up to globalforces as the areas of most rapid change in East Asia and concludes: ‘Onbalance, most causes for the Crash are to be found in the recent mone-tary and �nancial history of Asia faced with globalization’ (p. 21). A usefuladdition is that he also discusses factors that did not contribute to thecrisis:
Culture, communities, bureaucracies and even authoritarian statesdo not engineer �nancial meltdowns, markets do. The basic cause ofthe Crash must be identi�ed in the confrontation between globalmarket forces and local institutions which have not adapted wellenough to new realities [p. 29].
This appears to be a convincing assessment which acknowledges theprimary responsibility of the international �nancial system and thoseplayers that have promoted its rapid liberalization in the past. However,national economic policy contributed to the emergence of the crisis bynot seeing the risks and by not preparing the domestic �nancial systemsfor increased capital �ows.
Occasionally, however, Godement has a very speci�c understanding ofeconomics. He suggests that, although Japan is an industrial power and isa big capital exporter, it does not have control of the value of its currency(p. 42). Although it may be argued that economies with �oating exchangerates have lost most in�uence on their exchange rates, in particular in thecase of Japan some of the pressure on the yen’s exchange rate is entirelyhome made. Owners of capital in Japan do not have much choice whatto do with their money: They can either leave it in risk- and interest-freegovernment bonds, can invest in a still wobbly corporate sector or exportit and invest in more dynamic economies. Precisely the export of capital,due to a lack of investment opportunities in Japan, has frequently drivendown the yen. If policy-makers in Japan were unhappy with the low yen,they could have addressed the remaining problems in Japan’s domestic�nancial sector with much greater vigour. But they probably are signi�-cantly less unhappy with a weak yen than Godement thinks: a cheapcurrency has served Japan very well over many years, and policy-makersmay continue to think they can export their way out of trouble again.
By the same token, Godement draws a too dramatic picture of thechoices the Chinese government was confronted with: China, he argues,could choose between devaluation or a deep and dangerous recession (p. 170). Macroeconomic stability was not easily achieved in China, anddevaluation not merely improves the competitive position of exporters,
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but at the same time could bring back in�ation. This would not be a brightprospect for the Chinese economy either.
Godement’s best chapter is the third, which is an analysis of the workof the IMF and other global �nancial institutions. The author argues thatthese institutions have failed to prevent an escalation of the crisis andmay even have contributed to its deepening (p. 61). Godement gives somedetails of the IMF packages imposed on Thailand, Indonesia and SouthKorea, but could have perhaps discussed the individual elements of thepackages. For instance, the consequences of the �scal and monetary poli-cies dictated by the IMF are not considered in detail. On the other hand,the political dimension of the rescue attempts is provided in depth and isa very useful piece of analysis.
Godement sums up the IMF’s mistakes in East Asia: the IMF assumedthe crisis to be a set of unrelated national breakdowns; blindly forcedsevere austerity policies on the real economy; and high-handedly dealtwith governments, which further deepened the crisis and eventuallyresulted in their downfall (p. 95).
Towards the end of an interesting book, Godement draws some remark-able and also exaggerated conclusions. His call for debt forgiveness ispretty bizarre:
Cancelling increasing amounts of emerging Asia’s debt, and lettingthe �ow of goods produced at devalued prices enter the hugeconsumer markets of America and Europe, are the only globalanswer possible if the free and open international system that wecall the global economy is to be maintained [p. 178].
Godement even calls for the establishment of an International ResolutionTrust Co. to solve the crisis (p. 212).
This is the least convincing part of the book. It was and is hard to followthe logic of debt forgiveness, especially if �nanced with public money, inthe context of East Asia, at least not as a general approach. Re-sched-uling of debt and partial reduction of the debt due by granting morefavourable terms can be considered to be logical consequences of thecollective mistakes made by both debtors and creditors. But beyond that,compulsory and uniform consequences for the creditors are not entirelyplausible. It is unreasonable to have either debtors or creditors pay theentire bill. Furthermore, it was and is hard to envisage Western banksaccepting such a broad cancellation of debt. And it is not plausible tohave Western taxpayers contributing massively to the bail-out, if only toavoid moral hazard in the future.
There is also the offering of a further three edited volumes on EastAsia and the Asian crisis. The �rst, edited by F. Gerard Adams andShinaichi Ichimura and entitled, East Asian Development. Will the EastAsian Growth Miracle Survive? (Westport, CT, and London: Praeger 1998),
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is the result of a longer running research project at the InternationalCentre for the Study of East Asian Development (ICSEAD) in Japan.Consequently, the �ndings of the book are primarily concentrated on thehistory of economic development in East Asia and put less emphasis onthe Asian crisis. In �ve chapters the various articles in the book look atdifferent aspects of economic development. The �rst articles analyseprocesses of growth in East Asia. The second chapter is devoted to theanalysis of the sources of growth. Third, the high savings rates in theregion are considered. Fourth, foreign in�uences, speci�cally foreign directinvestment, are taken into consideration. The �nal chapter looks at EastAsia’s future and the possibility to restore growth to its pre-crisis levels.
The advantage of Adams’ and Ichimura’s book is that it looks at EastAsian development from a long-term perspective. Rather than justanalysing the few years before the crisis, the authors in the edited volumeconsider a broader picture. In the �rst chapter, F. Gerard Adams looksat the East Asian development ladder. He considers macroeconomicstability, export orientation and high levels of investment as the keyfeatures of growth in the past, but concludes that strengthened linkagesbetween the economies of the region are the key to the future (p. 16).
The articles of Ezaki, Lau, Saito, Abe and Plummer, Wescott andHarrigan, dealing with very speci�c aspects of East Asian development,may appeal to a narrower audience, but they are not improving the under-standing of the build-up to the Asian crisis. Harrigan, for instance,addresses the issue of saving in East Asia. But the article was out of dateeven when the book went to press. Harrigan suggests:
Despite the recent upsurge in international capital �ows into develop-ing Asia and the promise of further �ows seeking a better balance ofglobal risks and rewards, domestic resources seem likely to account forthe majority of Asia’s capital needs for the foreseeable future [p. 150].
Rather than taking this view, which re�ects the situation prior to the crisis,it would have been far more interesting to learn about the reasons forhigh domestic savings and high capital in�ows at the same time.
Again, Ishida’s and Ramstetter’s pieces on foreign direct investmentmight be helpful for readers interested in these speci�c issues, but no con-tribution toward the better understanding of the crisis is made. The �nalchapter, by Adams and Vernon, looks at the perspectives for a renewal ofEast Asian growth. Although the article is quite short and does not gobeyond scratching the surface, it offers a sober and quite convincing assess-ment. After having listed seven elements that may contribute to the rapidreturn of growth in East Asia, the authors argue: ‘These positive factors sug-gest that one can be optimistic about the longer-term prospects for the EastAsian area as a whole. Once adjustments have taken place, and con�dencereturns, the East Asian development process is likely to resume’ (p. 208).
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The majority of articles in this edited volume may be of interest to afew readers, but the book is not a must for people interested in East Asiaor the Asian crisis.
The second offering is East Asia in Crisis. From Being a Miracle toBeing a Needing One, edited by Ross McLeod and Ross Garnaut (Londonand New York: Routledge 1998). This is an impressive collection of twenty-one essays on the crisis. The book was completed in July 1998 and repre-sents one of the �rst major books on the crisis.
The book has a convincing structure. Ross Garnaut provides the intro-ductory chapter. The following twelve chapters look at countries directlyand indirectly affected by the crisis. The �rst four chapters look at themost severely affected countries: Indonesia, Thailand, South Korea andMalaysia. The third part of the book, Chapters 6 to 8, looks at economieswith more or less comprehensive capital controls. Vietnam, China andIndia weathered the crisis better than those economies affected by rever-sals of capital �ows. In Part 4, the countries of the Asia-Paci�c that havebeen least affected are analysed: The Philippines, Singapore and HongKong, Taiwan, Japan and Australia. The �nal three parts of the book are on global perspectives, policy implications and re�ections on the crisis. The last part contains two separate articles by the two editors ofthe book.
In his opening chapter, Ross Garnaut gives a forecast of the conse-quences of the crisis for longer-term economic growth and structuralchange. He argues:
The crisis has disrupted the use of resources, but it has not negatedthe years of human and physical capital accumulation and institu-tional development. Although it is impossible to make con�dentpredictions in relation to Indonesia … in the other countries manyof the conditions that supported sustained rapid growth are likelyto remain in place: high savings and investment; a strong emphasison education; acceptance of a major role of markets in resource allo-cation; deep integration into the international economy; and, aftera while, the self-reinforcing character of internationally-orientedgrowth across neighbouring economies [p. 20f].
Compared to the widespread doom and gloom that swept both acad-emic and media circles at the time, Garnaut’s assessment is both soberand, judged with the bene�t of hindsight, quite accurate. However, hegives no convincing explanation of the crisis and its emergence, apart froma brief paragraph on contagion (p. 14). The crisis comes, the crisis goes,but the reader is left guessing as to what contributed to the crisis. It seemsthat Garnaut simply continues to have an optimistic position on the futureof East Asia, the very position he has held ever since he publishedAustralia and the Northeast Asian Ascendancy in 1989.
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McLeod’s contribution on Indonesia is stimulating for everybody inter-ested in the drama that emerged in Southeast Asia in 1997 and 1998.McLeod gives a very critical assessment of IMF policies in Indonesia anddoes not forget to mention that, despite cronyism, the country had enjoyedhigh growth for many years prior to the crisis. He suggests that corrup-tion and anti-competitive policies played no role in the emergence of thecrisis (p. 46) and consequently he regards the IMF’s comprehensive wishlist as a failure (‘Nirwana could well have waited’, p. 47).
The book bene�ts from substantial inputs regarding economic data and(narrow) economic analysis, but the reader would have expected substan-tially more on the political economy of the crisis. For instance, Peter G.Warr gives an otherwise interesting recollection of the economic devel-opment in Thailand. One of the crucial points that led to the crisis wasthe radical change of the regime of capital controls in the 1990s. Warronly devotes half a page to this matter and argues:
To attract this capital it had been necessary to demonstrate not onlythat entry was open, but also that exit was unobstructed as well, sothe government had removed most of the capital controls that hadmade maintenance of its �xed exchange rate policy consistent witha degree of monetary independence [p. 60].
He says nothing about the in�uence of the IMF on the dismantling of thecapital controls (keeping them would have enabled Thailand to maintaina �xed exchange rate), and there is no discussion of a very importantquestion: why did Thailand open its capital account in the presence ofsubstantial domestic savings that would easily have �nanced domesticinvestment?
Equally sanitized is Heather Smith’s article on South Korea. We do notlearn that OECD membership effectively forced South Korea to dismantlecapital controls. And, although the odd structure of capital controls inSouth Korea is mentioned (p. 76), there is no analysis of the causes andconsequences of this point: South Korea dismantled capital controls onshort-term in�ows, but maintained restrictions for long-term foreign port-folio and direct investment. In the event, this made Korea more vulner-able to sudden changes of sentiment in the �nancial community and tothe out�ow of ‘hot money’.
Ligang Song’s paper on China gives an impressive account of the weak-nesses of the Chinese economy. He gives six reasons why China avoidedbeing too badly affected by the crisis, but gives only limited credit to theexisting capital controls. These, however, were setting China apart fromthe countries affected by the crisis. Like China, the macroeconomic recordof, say, Thailand was relatively good. There is very little that would havesaved China, given the weaknesses that Song points out, if capital controlshad not existed. Consequently, when Song wraps up the reasons for
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economic growth, he misses a few more important points. The experienceof East Asia teaches us:
First, trade liberalization leads to rapid economic growth and pros-perity, as demonstrated by the remarkable performances of theseeconomies in the past decades or so. Second, profound structuralreform and adjustment in industrializing economies cannot bedelayed inde�nitely, as shown by the �nancial crises some of theEast Asian countries have been experiencing since mid-1997 [p. 118].
Such analysis ignores quite a few factors that contributed both to growthprior to the crisis and to the crisis itself. Also, some authors based inAustralia continue to draw too rosy a picture when it comes to trade poli-cies in East Asia.
Having been confronted with a mixed blessing in the previous chapters,the reader eagerly waits for the comments on the policies of the IMF. Theeditors’ wisdom was limited: the IMF’s assistant director in the Asia-Paci�chas been given this assignment, and, as you would expect, the IMF’s poli-cies enjoy the author’s full support. Even the recommendations on �scalpolicy, one of the greatest failures of the IMF in East Asia, are vigorouslydefended (p. 253). The basic argument against the IMF’s critics is, similarto Michel Camdessus’ and Stanley Fischer’s standard argument: withoutthe IMF things would have been worse (p. 261). Hard to prove the oppo-site, but still not convincing. David C. L. Nellor’s conclusions sound liketales from a distant past. ‘With the onset of the Asian crisis, the IMFstood ready to help these countries in whatever way possible. At theirrequest, their reform programs were presented to the IMF executive boardfor endorsement and �nancial support’ (p. 263f.). Leonid Brezhniev’sspokesperson might have given a similar comment on the invasion ofAfghanistan.
Much more bene�cial are Ross McLeod’s re�ections on the crisis. Inconcluding, McLeod points out the need for a new set of policies in thewake of change in the international �nancial system, in particular thegrowing mobility of capital (p. 349). His suggestion to do nothing in theevent of a crisis, rather than unnecessarily tighten �scal and monetarypolicy, is a rather radical departure from approaches of the past.
Although the edited volume offers some interesting views on the crisis,in the end its case study approach turns out to be not a very satisfyingchoice. Similar to the IMF, which has treated the Asian crisis as a set ofseemingly unrelated crises, the book by McLeod and Garnaut is lackinga coherent analysis of the Asian crisis and, consequently, is unable to focuson the political and economic consequences of the crisis for East Asia.
Perhaps unfairly, the third edited book included in this review is twoyears younger than the other four. Politics and Markets in the Wake ofthe Asian Crisis, edited by Richard Robison, Mark Besson, Kanishka
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Jayasuriya and Hyuk-Rae Kim (London and New York: Routledge 2000),bene�ts from a longer period of re�ection. The book is a valuable contri-bution to the understanding of the causes and consequences of the crisis.In seventeen articles the authors look at different elements of the crisis.Among the contributors are well-known opponents of the IMF’s policies,like Walden Bello and Richard Leaver. As you would expect, the levelof analysis of these more recent papers is more complex than in the 1998edited volume of McLeod and Garnaut.
Of particular importance are those articles of the edited volume whichaddress the future of regionalism in the Asia-Paci�c. Higgott points outthat the Asian crisis has discredited the concept of a community in theAsia-Paci�c and consequently he expects a stronger emphasis on EastAsian cooperation in the twenty-�rst century (p. 281). In a similar tune,Leaver argues that East Asian economies are able to develop their ownregional fund:
Given, however, that the total currency reserves of East Asian statesare three times larger than those of Europe and the United Statescombined, there is considerable scope in principle for collectiveaction by Asian states on a regional or international scale [p. 296].
As we have seen in 2000 and early 2001, the ASEAN+3 countries haveat least started to explore the possibilities of monetary regionalism in EastAsia. The �rst steps toward the development of a regional liquidity fundhave been taken with the declaration of Chiang Mai in May 2000 and thesubsequent creation of a network of swap agreements between the partic-ipating central banks.
Four years after the crisis, and despite a wave of literature on the issue,no consensus has yet emerged, either with regard to the causes or withregard to the consequences of the crisis. The study of the consequencesof the crisis for East and Southeast Asia continues to be a fascinating�eld. An imminent Westernization of East Asia, an argument frequentlyfound in the books reviewed here, has not happened yet and may wellnever happen. Those arguing in favour of an adoption of the blueprintfor further �nancial market liberalization provided mainly by the US mayhave underestimated both the political will in the region for autonomyand its collective ability to shape its own future.
Heribert DieterSWP, Research Institute of International Affairs
Berlin, Germany
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