GROWTH AFTER THE ASIAN CRISIS: WHAT REMAINS OF THE EAST ASIAN MODEL?

Abstract

This paper focuses on the prospects for sustained development in the four East Asian economies most adversely affected by the crises of 1997/98. These include all three second-tier South-East Asian newly industrializing countries (NICs) – Indonesia, Malaysia and Thailand – as well as the Republic of Korea, the most adversely affected of the first-generation newly industrialized economies (NIEs). The first section critically examines the East Asian model presented by the World Bank’s “East Asian Miracle” (1993). The study emphasizes the variety of East Asian experiences. The three second-tier South-East Asian experiences are shown to be quite distinct from, and inferior to, those of the first-generation NIEs, especially the Republic of Korea and Taiwan Province of China. The circumstances leading to the onset of the East Asian crises of 1997/98 are then reviewed to assess whether and how the East Asian “models” may have contributed to the crises. Macroeconomic indicators in Malaysia and the three most crisis-affected economies – i.e. Indonesia, the Republic of Korea and Thailand – are reviewed to establish that, despite some misdemeanours, the crises cannot be attributed to macroeconomic profligacy. After reviewing the causes of these crises, the role of international financial liberalization and the reversal of capital inflows are emphasized. Nevertheless, the trend towards further financial liberalization continues. Malaysia is shown to have been less exposed as a result of restrictions on foreign borrowings as well as stricter bank regulations, but more vulnerable owing to the greater role of capital markets compared to the other three economies in the region. The role of the IMF and financial market expectations in exacerbating the crises is also considered. The emerging discussion begins by asserting that economic recovery in East Asia since 1999 – especially in Malaysia and the Republic of Korea – has been principally due to successful reflationary measures, both fiscal and monetary. The main institutional reforms currently claimed as urgent to protect the four affected economies from future crises and to return them to their previous high growth paths are critically assessed. It is argued that the emphasis by the IMF and the financial media on corporate governance reforms has been misguided and that such reforms are not really necessary for recovery. Instead of the Anglo-American-inspired reforms currently proposed, reforms should create new conditions for further “catching-up” throughout the region. Although the prospects for reform of the international financial system remain dim, a reform agenda in the interests of the South is outlined. Globalization, including international financial liberalization, has reduced the scope for selective interventions so crucial to the catching-up achieved during the East Asian miracle years. However, the process has been uneven and far from smooth, leaving considerable room for similar initiatives more appropriate to new circumstances. In any case, it is unlikely that globalization will ever succeed in fully transforming all other national economic systems along Anglo-American lines. The emerging hybrid systems have not really advanced late development efforts. There is an urgent need to understand better the full implications of globalization and liberalization in different circumstances so as to identify the remaining scope for national developmental initiatives.