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National Observer Home > No. 48 - Autumn 2001 > Book Reviews

The Politics of the Asian Economic Crisis

edited by Professor T. J. Pemp

Ithaca, Cornell University Press, 1999, pp. 284 and index.

This volume, the genesis for which lies in a conference held at the University of Washington in late 1998, is an analysis, by a group of academics whose primary interest is East Asia, of how the intersection of economics and politics contributed to and influenced the outcome of events which occurred in that The first part of the book provides analyses of events from this global perspective.

The second part of the book examines the impact of events on each country and how each one responded. In doing so it includes not only observations about how political structures and dynamics contributed to these responses, but also how history had contributed to the economic structures which were in place in mid-1997.

Professor Pempel also reminds his readers of the impact of the influx of savings into U.S. mutual funds in the late 1980s and 1990s. Capital flows now total more than 70 times the volume of world trade, and increasingly it comprises private capital. By 1994, 19 U.S. closed-end funds, with assets totalling over U.S.$4 billion, specialized in East Asia. Open-ended East Asian funds held almost another U.S.$2 billion. Associate Professor Jeffrey Winter points out the investments in developing countries of mutual funds is channeled through just 100 emerging market fund managers, which increased volatility and susceptibility to a herd mentality.

By 1995 private capital constituted three-quarters of investment resources in the developing world, much of it made up of short-term loans and portfolio investments. Eighty per cent of net global foreign exchange transactions mature in less than seven days. Put another way, in 1983 the central banks of the United States, Japan, Germany, Switzerland and the United Kingdom held U.S.$139 billion in foreign-exchange reserves and the average daily turnover in the major foreign-exchange markets was U.S.$39 billion. By 1998 these reserves had increased to U.S.$426 billion, but daily trading activity had increased to U.S.$1.8 trillion.

At the same time as East Asia was becoming vulnerable to the vagaries of "hot money", the United States attitudes towards East Asian economic structures were changing. To quote Bruce Cumings, Professor of International History and East Asian Political Economy at the University of Chicago:"American indulgence for the neomercantilism of its East Asian allies, which was always a function of the Cold War struggle with their opposites [has disappeared]. If there has been a `Clinton doctrine' since 1993, it has been one of aggressive foreign economic policy designed to promote exports and to open targeted economies to American goods and investment . . . while maintaining the Cold war positions that give Washington a diffuse leverage over allies like Japan and Germany and pose a subtle but distinct threat to potential adversaries like China.

[T]he United States now prefers the virtues of a multilateral economism to the vices of direct coercion, and thus the I.M.F. and the World Bank have vastly enhanced their usefulness in Washington's eyes . . . [P]erhaps the breadth of American hegemony can be appreciated in China's beleaguered efforts to polish its application to the W.T.O . . . [T]he deep meaning and intent of the American and I.M.F. response to the Asian liquidity crisis is to close the historical chapter in which the sheltered `developmental states' have prospered."

Analyses like this explain why Malaysia's Prime Minister, Dr. Mahathir, receives more sympathy in parts of Asia than many in the West think he deserves and why some of his criticism of the West, and of the United States in particular, strikes a chord. His contention that the hedge funds were responsible for Malaysia's problems lacked substance, but these funds pounced on Thailand when the central bank attempted to defend the baht.

Dr. Mahathir's criticism of the I.M.F. gained much support. As Professor Pempel points out, "[p]olitical linkages were unmistakable in the conditions established for I.M.F. assistance." Jeffrey Sachs labelled its freezing of finance corporations in Thailand the equivalent of screaming "fire" in a theatre; uninsured depositors panicked when it closed domestic banks holding uninsured deposits in Indonesia; and its actions in South Korea "most of which had little direct relationship to the liquidity problems faced by private Korean borrowers, . . . involved a wide departure from the I.M.F.'s officially stated role and previous actions, and even from the advice of many economists".

Professor Cumings also reminds the reader that U.S. Treasury Secretary Robert Rubin's intervention in South Korea's crisis achieved three goals: "to stop a run on Korean and Japanese banks; to rewrite the rules of Korea's political economy as a prelude to the (still going) struggle to do the same in Japan, and to maintain American hegemony in the region." He writes that U.S. Reserve Board chairman Alan Greenspan described the result of the Asian crisis as a "worldwide move toward `the Western form of free market capitalism'".

Structures within Asian countries were also changing at this time. The editor quotes from an article written by Linda Yim, Associate Professor of International Business at the University of Michigan: "Whereas previous authoritarian regimes could impose high interest and taxation costs on local business communities almost at will, and had done so to maintain currency stability for decades prior, this became difficult with the increased political influence of businesses over elected legislatures whose members were either business persons themselves, or required business to get elected." Thus the "hot money" flooded in with minimal government control over it.

Then there were trade and currency issues. China's devaluation of the yuan in 1994 had serious implications for Thailand, South Korea and Malaysia. A consequence of Japan's economic malaise was that its share of imports from Asia fell from 20 per cent in 1980 to 13 per cent in 1995. The re-alignment of the U.S. dollar and the Japanese yen in the mid-1990s exacerbated the problems as many East Asian countries had aligned their currency to the U.S. dollar.

Associate Professor Jeffrey Winters contends:

"The key considerations in the Asian crisis were convertibility of currency; the existence, size, and international exposure of capital markets; the degree of private foreign borrowing by local corporations; the share of this borrowing that was short-term; and the ease with which currency traders could raised local credit to launch an attack on the local currency. These factors were more important than the economic fundamentals of the countries in question, their degree of crony capitalism, or whether governments were resolute and skilled in adopting policies to dampen the crisis once it began to spread throughout the region."

The second part of the book contains much of interest, such as Associate Professor Lim's focus on how domestic politics, the power of the property cartel in Hong Kong and electoral accountability in Singapore, determined the different responses by Hong Kong and Singapore, Associate Professor Meredith Woo-Cummings' assessment that South Korea has paid the price for being "hamstrung between a highly effective bureaucracy that sought to regulate the corporate sector and a political ruling group that, relying on the financial support of big business, ended up circumventing the best efforts of the bureaucrats", the factors which stood Taiwan in good stead, including the high level of domestic savings and consequently low foreign borrowings, the restrictions on local banks from offering local currency accounts to overseas customers, the restriction on the outbound movement of the Taiwanese dollar and the caps on foreign ownership of publicly-listed companies, and the ethnic Chinese domination of the middle class in the Philippines which emerged under the Aquino and Ramos administrations and controls up to 30 per cent of the top 500 Philippine corporations, a development which could well become an important factor in the current political machinations consuming that country.

It is still too early to say what the long-term implications of the Asian financial crisis will be. It is being promoted as a symbol of the United States' economic hegemony, but it has reinforced resistance, as has been seen in Seattle; it has been the catalyst for domestic upheaval, not necessarily for the better in the short-term, at least, in some cases; the political dynamics of East Asia have been shaken with the apparent impotence of A.S.E.A.N. and A.P.E.C. being exposed; and China has gained in stature and Japan declined in the short term. This collection of wide-ranging essays provides a basis for understanding the factors which will influence the final chapter of this story.

F.J. Brown


National Observer No. 48 - Autumn 2001