Crisis or Signal? AsiaÕs Economic Problems
A Literature Review by Helen Hughes
Click here for PDF version Ê

The Riddle of Malaysian Capitalism: rent seekers or real capitalists
by Peter Searle
Asian Studies Association of Australia, Southeast Asia Publications Series, Allen & Unwin and University of HawaiÕi Press, Honolulu, 1999 $29.95, 336 pp., ISBN 1 86448 628 7

Asia: responding to crisis
edited by Ramon Moreno and Gloria Pasadilla,
Asian Development Institute, Tokyo, 1998

East Asia in Crisis: from being a miracle to needing one?
edited by R. McLeod and R. Garnaut,
Routledge, London and New York, 1998 US$100, 388 pp., ISBN 0 415 19831 3 (hbk)

Southeast AsiaÕs Economic Crisis: origins, lessons, and the way forward
edited by H.W. Arndt and Hal Hill,
Institute of Southeast Asian Studies, Singapore, 1999 US$44.90, 192 pp., ISBN 981 230 055 4 (hbk)

Steven Radelet and Jeffrey D. Sachs 1998, ÔThe East Asian financial crisis: diagnosis, remedies, prospects
in William C. Brainard and George L. Perry, eds.,
Brookings Papers on Economic Activity, Brookings Institution, Washington D.C.:1-90

Asian Crisis Turns Global
edited by Manuel F. Montes and Vladimir V. Popov,
Institute of Southeast Asian Studies, Singapore, 1999 US$17.90, 129 pp., ISBN 981 230 050 3 (sbk)

The Asian Crisis: is there a way out?
by Max Corden,
Institute of Southeast Asian Studies, Singapore, 1999 US$12.90, 90 pp., ISBN 981 230 043 0 (sbk)

Reconstructing Asia: the economic miracle that never was, the future that is
by M.T. Daly and M.I. Logan,
RMIT University Press, Melbourne, 1998Ê 206 pp., ISBN 0 86444 748 5

The commentators who failed to see currency and financial sector collapses coming in Thailand, South Korea, Indonesia and Malaysia lost no time in putting pen to paper to describe the ÔEast Asian crisisÕ.Ê Readers, particularly if they lost substantial sums as a result of devaluations, may be excused for looking at the morning after wisdom with a jaundiced eye.Ê A mere two-and-a-half years after Thailand sharply devalued the baht in 1997, it is clear that there has not been a ÔcrisisÕ in East Asia.Ê Four countries fell into recessions of their own making and other East Asian economies with problems, notably the Philippines, China and Vietnam, continue to be in trouble.Ê But the export-oriented sectors of South Korea, Malaysia, Thailand and Indonesia, quickly led recovery, so that their ÔcrisesÕ have turned into short, ÔVÕ shaped recessions.Ê What do the analysts who failed to predict these recessions have to say about likely future trends?

Peter SearleÕs book on Malaysian entrepreneurship is the pick of the batch of current analyses of East Asian economies.Ê Searle does not deal with the exchange and financial collapses of 1997 directly, but makes a very considerable contribution to explaining why they occurred.Ê He begins by showing that Thai and Indonesian dirigiste economic policies led to the encouragement of similar crony entrepreneurs to those of Malaysia (Hewison 1989; McIntyre 1994).Ê He discusses the political factors that led to dirigiste economic policies in Malaysia.

Fear of Chinese economic domination was the rationale for the adoption of the ÔNew Economic PolicyÕ in the 1970s.Ê Aimed to replace ethnic Chinese domination of the Malaysian economy, the unintended result was to weaken the liberal policies and institutions that had made Malaysia one of the fastest growing countries in the world.Ê Crony capitalism was established instead.Ê The ethnic Chinese community accepted egregious discrimination as the price of political accommodation.Ê ÔPicking winnersÕ, associated protection and credit subsidies favoured new Malay entrepreneurs.Ê The financial sector was weakened as crony cross ownership with manufacturing, real estate and other enterprises led to non-performing loans.Ê New Malay entrepreneurs were given preference in public sector tendering.Ê The privatisation of government enterprises created a new bonanza for crony interests.Ê Foreign investment provided the Malay elite with low cost participation in ventures exploiting domestic markets.Ê The government used petroleum rents for large-scale transfers of funds to its entrepreneurial associates to intertwine political with economic power. Moving away from the liberal policies associated with Anwar Ibrahim to the overvaluation of the Malaysian currency to protect the assets of the new elite made a recession inevitable.Ê

Fortunately, multinational firms, often wholly foreign owned, were at the same time building up competitive exports of manufactures, providing room for those producing for the domestic market to be inefficient, but profitable monopolists.Ê The exporting multinationals retained their profitability through 1997-99.Ê They were not tied into real estate and construction ÔbubblesÕ.Ê They enabled the Malaysian economy to recover by the end of 1998 as external demand for electronic components boomed.Ê

Searle challenges his readers.Ê He sees Malaysian crony capitalism as a new ÔAsianÕ style of entrepreneurship that could be transformed into more productive and competitive capitalism as the Malaysian economy grows.Ê But crony lobbies now manipulate the dirigiste policies that created crony capitalism.Ê If their influence persists, they could undermine the economy so that macroeconomic crises could become as endemic in Malaysia as they are in Latin America.Ê

The other ÔEast Asian crisisÕ books would have been greatly improved by the absorption of SearleÕs and othersÕ insights into East Asian institutional structures. Lingle (1997), the principal chronicler of East Asian crony capitalism, was one of the few analysts who has chronicled East Asian economiesÕ severe weaknesses.Ê He has not been quoted in any of the post-ÔcrisisÕ studies.Ê The books reviewed below discuss the very important economic developments of recent years without any reference to howÊ institutional and economic policies are determined.Ê

Moreno and PasadillaÕs essay in Ramon and PasadillaÕs East Asia: responding to crisis, was not only the first to be published, but remains the best summary of the events of 1997.Ê Though only concerned with the foreign exchange and banking symptoms of economic difficulties in the four ÔcrisisÕ countries, it draws attention to the underlying causes which lay in dirigiste policies and resulting crony structures.Ê The other essays in the book have little to add.Ê C.H.KwanÕs plea for the use of the yen as reserve currency fails to impress as Japan enters a second decade of economic recession without signs of serious economic reform.Ê Would any country be foolish enough to tie itself to an economy as crippled as Japan Inc?

Radelet and Sachs were also quick off the mark, but speed came at the cost of depth.Ê With very limited knowledge of the dual nature of the East Asian economies (competitive exports and inefficient production for domestic markets), they did not understand what happened in 1997.Ê They claimed that the causes of the ÔcrisisÕ were not in domestic policies, but the result of such external macroeconomic ÔshocksÕ as ChinaÕs mid-1990s devaluation that disadvantaged other East Asian exports.Ê Radelet and Sachs run counter to economic theory and a formidable body of empirical research, including analyses of East Asian economies by local scholars, in ascribing the main cause of the devaluations and financial problems to inappropriate behaviour by international lenders.Ê Short-term borrowing is claimed to be the responsibility of lendersønot of borrowers running out of long term borrowing capacity!Ê SachsÕ quick grasp of economic trends in a wide range of countries enables him to tell seemingly logical ÔstoriesÕ about a broad range of situations.Ê Unfortunately, he follows them up with from-the hip-economic advice.Ê Radelet and Sachs suggest that the four East Asian countries should lower interest rates.Ê Their central banks saw a need for higher, market interest rates so that the financial institutions staggering under overloads of non-performing loans could rebuild their assets by encouraging saving and limiting borrowing to productive purposes.Ê This was also the policy recommended by the International Monetary Fund.Ê Interest rates were raised.Ê It is widely thought that these measures contributed to the rapid climb out of recession. With recovery, interest rates have again fallen.

The Australian National UniversityÕs concentration on East Asia has made it an international leader in this area of research.Ê Early in 1998, McLeod and Garnaut brought together Australian and East Asian scholars who should have, but failed to, anticipate the 1997 recesssions.Ê The exchange rate and financial collapse stories of Thailand, Republic of Korea, Indonesia and Malaysia were examined in detail, and key East Asian economies that did not have crisesønotably Singapore, Hong Kong and Taiwanøwere also discussed.Ê China, Vietnam, India, and the Philippines were covered, as were Japan and Australia.Ê Compl-ementary issues, such as global capital mobility and the role of the IMF, particularly in Indonesia, were surveyed.Ê

The four ÔcrisesÕ accounts are straightforward.Ê In all four countries, overvaluation of the currency led to weakening exports even as non-performing loans resulted in increased demand for long-term and ultimately short-term foreign funds.Ê Liquid international capital markets, with IMF and World Bank encouragement, had been supporting borrowing regardless of project and sovereign risk.Ê When international capital markets found out the weak banking and corporate structures in the four at risk countries, foreign lenders ceased to lend and withdrew their funds and local capital fled.Ê None of the papers indicate the range of trade, industry, public sector and financial policies that subsidised the crony domestic production sectors, enabling real estate bubbles to form.Ê Nor are the political pressures discussed that, in marked contrast to previous exchange rate policies, allowed exchange rates to become overvalued.Ê

The Taiwan paper by Shirley Kuo and Christina Liu documented why Taiwan was unaffected by the ÔcrisisÕ.Ê Shirley Kuo played a key role from the 1960s in the liberalisation of the Taiwan economy, notably as Governor of the Central Bank and in various Ministerial roles.Ê She was thus able to give an insight into the intellectual and political effort that it took to maintain a liberal reform thrust over some 30 years.Ê As a result of the steady withdrawal of government from regulation and subsidies, TaiwanÕs entrepreneurs were scarcely touched by their neighboursÕ turmoils.Ê Indeed, they were well positioned to buy up assets in the region at fire-sale prices.Ê

In marked contrast, Akiyoshi Horiuchi told a depressing tale of economic stagnation and unwillingness to reform sclerotic institutions.Ê So much for the Japan Inc. model of economic development!Ê Alan Walters brought years of experience to the persuasive thesis that exchange rate regimes should be either fixed or floating, but not a muddle of the two.Ê Hadi Soesastro, perceptive as always, provided a timely reminder of the difficulties of achieving in a mere 30 years the social and political changes that have accompanied the evolution of competitive market capitalism over several hundred years in the ÔoldÕ industrial countries.Ê

Arndt and Hill also drew on the Australian National University networks, covering similar ground to McLeod and Garnaut.Ê Mohammad Sadli, a very active ÔBerkeley MafiaÕ insider, was finally free to touch on the cronyism that undermined the Indonesian economy.Ê Gerardo Sicat, welcome back at the University of the Philippines from the exile imposed on him by Imelda Marcos, added insights to the Philippines story.Ê The most regulation oriented paper is by David Cole on banking sectors.Ê Cole successfully supported those opposed to the denationalisation of banks in the Republic of Korea and Indonesia in the 1960s.Ê He has not paused to consider whether liberal financial reforms at that time might have some 30 years later resulted in mature, competitive commercial banks and other financial institutions that might have avoided the intense financial cronyism that led to the 1997 recessions.Ê He has retained his faith in regulatory intervention.

Montes and Popov linked the problems of the four ÔcrisisÕ East Asian economies to those of Brazil and Russia in a singularly unconvincing, albeit fashionable, ÔcontagionÕ thesis.Ê Undoubtedly, when lending in one segment of the international capital market is found to have been irresponsible, lenders question the prudence of their lending elsewhere.Ê A merchant bank that loses $500 million in a provincial Guangzhou finance company is likely to examine its loans to state finance companies in other countries.Ê In 1997-8, however, it was not ÔcontagionÕ that led to a need for sharp devaluation in Brazil and Russia, but the weakness of their respective economies.Ê Brazil (like several other Latin American countries) has had chronic fiscal and monetary policy, and hence inflation, budget, balance of payments and financial sector problems since the 1960s.Ê It has been a steady and major recipient of IMF credits and World Bank loans since that time, although it has never followed the advice of the Fund or the Bank, or, more importantly, of its own liberal economists.Ê Russia, together with several of its former communist neighbours, is such an egregiously badly managed ÔtransitionalÕ economy that there is little mystery about the internal sources of its crises.Ê The leading industrial countries, notably the European ones, are nevertheless prepared to support lending to Russia for political reasons to avoid its total collapse.

CordenÕs essay argues that the East Asian economies should use Keynesian pump priming policies to soften the recession early in 1998.Ê When the Republic of Korea, Thailand and Indonesia received substantial Ôrescue packagesÕ amounting to some US$1.4 billion, this was an option.Ê But the funds were used to prop up crony firms and the banking system instead.

Daly and LoganÕs Reconstructing Asia: the economic miracle that never was, the future that is, asserts that the East Asian economies have not grown rapidly since the 1960s.Ê No data is produced to support this assertion.Ê The authors conclude that liberal global market trends were responsible for the East Asian ÔcrisesÕ, but again, for this proposition that is presumably of very great importance to the authors, they do not provide any supporting evidence.Ê They go on to argue that market oriented ÔwesternÕ solutions will not lead to economic recovery.Ê ÊFaced with the remarkable export led recovery that has already taken place, the ÔmessageÕ that Daly and Logan seek to deliver is only convincing if scholarship standards that require evidence to support hypotheses are suspended.

What can we learn from these studies that will make us better prepared to anticipate future developments in East Asia?Ê Unfortunately, it would seem, very little.Ê International and national public funds to the tune of some US$1.4 billion, under IMF leadership, have been poured into South Korea, Thailand and Indonesia alone to rescue crony capitalists and irresponsible international lenders.Ê Reforms that introduced and implemented bankruptcy laws and prudential regulations that would have qualified the power of the cronies were stalled.Ê Bankruptcy proceedings are hung in the courts.Ê The rescue packages have transformed private debt into public debt without changing the unproductive structure of production that led to the 1997 recession.Ê The low and middle income taxpayers of East Asia not only paid for the immediate effects of the recession through job and business losses.Ê They will have to pay off medium-and long-term debt to the IMF, the World Bank, the Asian Development Bank and other foreign lenders.Ê The dual nature of the East Asian economies continues to dominate economic prospects.Ê The export sectors, often owned by foreign investors, have led the way out of the recession.Ê But the crony capitalists are surviving well, industry policies are in full swing, and a new bonanza has opened up in the award of major privatisation tenders to crony firms.Ê The next crisis is in the making.

References

Hewison, K. 1989,Ê Bankers and Bureaucrats: capital and the role of the state in Thailand, Monograph 34, Yale University Southeast Asian Studies, New Haven.

Lingle, C. 1997,Ê The rise and decline of the Asian century, Sirocco, Barcelona.

MacIntyre, A. (ed.) 1994,Ê Business and Government in Industrialising Asia, Allen and Unwin, Sydney.

Author

Helen Hughes is Emeritus Professor at the Australian National University and Senior Fellow at The Centre for Independent Studies.

Policy is the quarterly review of The Centre for Independent Studies. For more information on subscribing to Policy, click HERE

If you are interested in the Centre's activities and publications, why not subscribe to e-PreCIS, our regular email update on the latest news and events.

(e-PreCIS requires html capable email facilities, such as Microsoft Outlook Express or Netscape Messenger)