«Comprehensive Security: Challenge For Pacific Asia♠ James C. Hsiung New York University Abstract This study identifies the origin, components, and ...»
Criticisms of the IMF bail-out behavior during the crisis were widespread. See Feldstein 1998, Calomiris 1998, and Vasquez 1998. Even the World Bank came out criticizing the IMF response, which, among other things, made bank interest hikes a condition for IMF bailout to countries in trouble. The high-interest requirement caused many small and medium-sized companies to go bankrupt, making the economic meltdown worse. See discussion in Hsiung 2001 (p. 79 and n. 3).
Asian Development Bank, sian Recovery Report 2000,” a semi-annual review of Asia
recovery from the crisis that began in July 1997. Available at:
Tzong-shian Yu and Dianqing Xu, eds., From Crisis to Recovery: East Asia Rising Again?
(Singapore: World Scientific, 2001), p. 25.
The timing of recovery as such is not of itself important. What is important is the implicit but potent message that the recovery carries, or, in other words, the lessons we can learn from the reasons for the early onset of the reversal, which falsified the forecasts of IMF and many other Western analysts trained in laissez faire economics.
Although many lessons can be learned,43 I shall focus on only a few that will not only explain the relative smooth turnaround but, more importantly, shed light on the future of economic security for the region, which is the real concern for this discussion.
First, from the experience of the financial crisis, it is safe to conclude that what had done the region in was a combination of three perverse factors: (a) heavy foreign debt burden, (b) attacks by international currency speculators, and (c) loss of control by governments, due to either laxity of laws and discipline or premature liberalization without due safeguard. Parenthetically, the Japanese case was slightly different, but even Japan had its ample share of the problem named in (c), as we will see below.
Thailand, with a short-term, private-sector, foreign debt burden equivalent to 50 percent of its GDP, was the first domino to fall.44 Devaluation of the Thai baht on 2 July 1997 sent rippling effects through the Pacific Asian region, affecting all its members, especially Korea, which was similarly ridden with huge short-term foreign debts. The rest was a story of chain reactions, known as “contagion” in the technical parlance.45 In the search for an answer to the causes of their own weakness, especially their financial vulnerability, despite their robust growth, the region governments were forced to face the reality that, although they all had strong manufacturing sectors, which had accounted for their growth, the countries’ financial sectors were weak. The nadequacy of financial regulation”46 result of weak financial sectors was a general across the region. This weakness explains why the Asian governments hit by the financial crisis were ill-equipped to forestall the problems named as factors (1) through (3) above. The logical deduction from this flaw pointed to the C word (control) as a critical, relevant remedy.
Hence, these governments resorted to capital control in response to the economic For a broader discussion of these lessons, see Hsiung, Twenty-First Century World Order, pp. 86-96.
Takatoshi Ito term, in Stigliz and Yusuf, eds., Rethinking the East Asian Miracle, p. 64.
challenge.47 Malaysia, which had been among the most open economies on the capital account, went furthest in reintroducing capital controls. Beginning in August 1998, the exchange controls removed the Malay ringgit from international currency trading. The new system, patterned after China preexisting model, made the ringgit convertible on the current account as before, but not on the capital account, thus preventing buying of foreign exchange for speculative purposes. Holders of offshore ringgit accounts had, in one month time eptember 1 to October 1 o repatriate their ringgits, after which repatriation would be illegal. Thus, contrary to fears of capital flight, imposition of exchange controls as such yielded a short-term, debt-free capital inflow.48 In similar fashion, governments elsewhere in the region (Hong Kong and Taiwan, for example) also intervened to protect stability in (read: maintain control over) the local stock and foreign-exchange markets and to fend off attacks by international speculators. In South Korea, where some capital account restrictions had been in place on the convertibility of the won, the government became more interventionist. In the financial sector, it moved fast to buy up bad loans from the banks and forced small banks to merge with larger ones.49 The government adopted tighter monetary and fiscal policies and accepted slower growth to keep inflation below five percent and the current account deficit below one percent of GDP. 50 As elsewhere, these measures were taken to enhance governmental controls and not the structural reforms that Western critics had demanded.51 Thailand was the only exception in the region in that its government did not institute similar capital controls because after having used nearly all of its foreign reserves in its futile 1997 defense of the baht, the country had no reserves left to Hsiung, Twenty-First Century World Order, pp. 84-85.
Robert Wade, he Asian Crisis and the Global Economy: Causes, Consequences, and Cure,”
Current History, Vol. 97, No. 622 (November, 1998), pp. 361-373, at p. 367; World Bank, East Asia:
Recovery and Beyond (Washington, D.C.: IBRD, 2000), pp. 32-33.
Robert Wade, he Asian Crisis,” pp. 368-369.
Douglas Sikorski, he Financial Crisis in Southeast Asia and South Korea: Issues of Political Economy,” Global Economic Review (Seoul), Vol. 28, No.1 (January, 1999), pp. 117-129, at p. 120.
In a change of heart, the Korean government did allow more access to domestic markets by foreign banks and insurance companies, but at the same time required improvement in corporate and state Unknown disclosure to increase the transparency of the financial system, so as to upgrade the government Deleted:. But ability to control such matters as overborrowing, a crucial cause for Korea succumbing to financial Unknown contagion. See Sikorski, ibid., p. 120. Deleted: it defend. It was entirely dependent on the IMF standby facility. 52 These financial controls went against the teachings of laissez faire economics and, equally, the counsels of globalization advocates. Undeniably, however, the controls proved instrumental in reversing the tides and re-steering the Asian economies to a path of steady recovery. The controls worked, precisely because they fulfilled a dual need of most nations in the region by (1) protecting against excessive inflows of foreign capital, especially short-term loans (i.e., the casino effects of hot money in and out) and, more importantly, (2) making the fairly open economies ess vulnerable to the whims and stampedes of portfolio and hedge fund managers” so as to reestablish stable growth following the whirlwind financial crisis.53 I should add from the Asian experience that, in addition to capital control, the government in each case must have the ability to maintain price stability and high savings despite hardship. Currency control, in other words, worked only because it had the attendant support of sound economic fundamentals. Hence, currency control may not work in another region without similar supportive conditions.54 The second lesson we can learn from the Asian experience, building on the first lesson just noted, is that exogenous factors unquestionably accounted for more of the genesis of the Asian financial crisis than did domestic causes, such as nepotism and structural infirmities, at which many external critics had waggled giant fingers. We have already seen that the institution (or tightening up) of financial controls, rather than more un-safeguarded liberalization or deregulation, served the region economies well in their recovery. Although Japan was a special case, it was different only because it did not have a full share of the first two of the three ills bedeviling the other Asian nations, marked (1) and (2) above. To wit, Japan did not have the same extent of the eavy foreign debt problem” (although it had a different sort of problem brought on by foreign borrowings, as we will see), nor the same problem of ttacks by international speculators.” Japan nevertheless shared part of the problem named as (3) above, to wit: oss of control by governments, due to either laxity of laws and discipline or premature liberalization without due safeguard.” Concededly, the government-zaikai nepotism problem is notorious. It underscored Japan one-and-a-half-decade-long economic downturn that predated the Asian crisis (as it began as early as 1989) and has continued long after other countries have resurged from the crisis of 1997–1999. Pessimism prevailing in almost all discussions of Japan prospects of recovery is reflected in book titles such as Wade, he Asian Crisis,” p. 369.
Ibid., pp. 369-370.
Hsiung, Twenty-First Century World Order, p. 87.
Can Japan Compete? and The Emptiness of Japanese Affluence.55 But, as has been shown by the record, even overborrowing and corrupt banking systems were linked to external factors that compounded their deleterious effects, in the Japanese, as in other Asian, cases. First, overborrowing from foreign capital sources, usually in the form of loans denominated in the U.S. dollar, creating a crushing debt burden (more especially in the cases of Thailand and Korea), was due to the casino effect (hot money in and out) that came with globalization. The Japanese government fault was that its control over borrowing by public and private end users was inadequate and hence, a monetary policy mismanagement. Second, although poorly-regulated sectors may be a true flaw in some cases, domestic banking reform alone may not solve the whole problem. Take the Japanese banking system for example. The Japanese banks’ trouble can be traced back to Tokyo unguarded deregulation in the 1980s, when they were under pressure from the G-7 and the 1985 Plaza Accord. Despite its supposed virtues, deregulation opened the Japanese capital market to global capital inflows nd removed the Japanese banks’ monitoring function on corporate performance of the borrowing enterprises, to boot. It also greatly enhanced equity financing by the so-called onbanks” (e.g., manufacturing firms) for Japan medium and small enterprises that could not borrow from the foreign capital markets. In the process, this change robbed the Japanese banks of their core loan market, shrinking it to a third of its previous level by the end of the 1980s.
As Sunday Owuala points out, the ensuing competition forced the banks to ngage in speculative lending in property and stocks for survival.” The collapse of both property and stock prices at the beginning of the 1990s, he adds, eft on the trail a huge volume of non-performing assets in many banks.”56 If indeed this was the case, Japan would need to moderate its unguarded banking deregulation as well as tighten control over borrowing from the international financial market. Both actions would go against the counsels usually heard from Western economists about Japan epotic” banking system!
The future of the Pacific Asian region economic security, therefore, depends on two closely related conditions. First, whether the measures that the Asian governments instituted in response to the crisis hat is, measures that have been responsible for bailing them out and bringing about their relatively smooth and, in some cases, even speedy recoveries ill remain in place, immunizing them from Michael Porter, et al., Can Japan Compete? (Cambridge, MS: Perseus Publishing, 2000; and Gavan McCormack, The Emptiness of Japanese Affluence, rev. ed. (Armonk, NY: M.E. Sharpe, 2001).
Sunday Owuala, anking Crisis Reforms, and the Availability of Credit to Japanese Small and Medium Enterprises,” Asian Survey, Vol. 39, No. 4 (1999), pp. 656-667, at p. 667.
similar attacks in the future. Second, of the three factors we identified above as being responsible for the onset of the crisis, only the first (overborrowing from the global monetary market)57 and the last (inadequate financial regulation) are within the grasp of governments. In fact, the capital control mechanisms instituted by the Asian governments, as noted before, should insulate them against the said problems, provided that the existing sound economic fundamentals continue in place. Attacks by international currency speculators r what Paul Krugman calls asters of the universe: hedge funds and other villains”58 cannot be coped with by any government acting alone. External speculators, such as the ones whose manipulations brought on the Asian financial crisis, operate in the dark and get away with predatory illings” because no international rules and mechanisms (regimes) exist to restrain them.59 The recent Asian experience provides a justification for the creation of international regimes for the control and restraint of international currency speculation. Although the Pacific Asian region, in the aftermath of the crisis, has established a modest early warning system,60 the task requires further collective efforts, eventually at the global level.61 is a healthy development for the future of the region economic security.
Human Security in Pacific Asia Unlike certain other parts of the world, the Pacific Asian region has only remote memories of Kosovo-type genocidal conflicts. No similar attacks on human security of the kind found in Bosnia, Burundi, and Rwanda (besides Kosovo), were heard of, at least in the final two decades of the twentieth century. It remains sadly true, however, that Cambodia (briefly known as Kampuchia) under the Pol Pot regime, 1975–1979 was the first state after the end of World War II to commit war crimes against its own population. In four years’ time, Pol Pot Khmer Rouge regime was credited with having slaughtered three million people, roughly one third of its population, approaching half of the six million victims of the Holocaust over 12 years When overborrowing from foreign monetary markets is controlled by heightened internal regulation, it obviates the problem known as casino effects of globalized capital (Hsiung 2001: 360–361). Unknown Paul Krugman, Return of Depression Economics, pp. 118ff. Deleted: For a brief discussion of how these international currency speculators operate, see Krugman, ibid., pp. 118-136.