The economic crisis in South East Asia affected the whole region and the world economy. Market models of regional integration assume that institutional development was driven by a rational and functional response of governments. This remains problematic, because it undervalues the importance of different types of regional political project and the different national consequences that follow from pursuing certain types of regional integration strategy. The financial crisis had deep social, political and economic causes which influenced this region and its market structure.
The start of crisis
The financial crisis began in July 1997 in Thailand. In several months, it affected Indonesia, South Korea, Hong Kong, Malaysia, Laos, Philippines, China, Vietnam, Taiwan, Singapore and Taiwan. What is clearly evident with this process was linked to both national and international regulatory governance through the internationalization of various state agencies and actors. “The crisis that started in Thailand in July 1997 was originally a financial crisis, characterized by the sharp depreciation of currencies, plummeting real estate values, a drop in stock prices, and huge capital outflows” (Cai 2004, p.1). It became part of a regional system of surveillance and regulation that transmits the disciplines of a globalized economy (Pomerleano, 1998).
The reason of financial crisis
The main cause of the financial crisis was inability of the governments to recognize the problem and respond to economic changes. similar financial crisis occurred in Latin America in 1980s, In Asia, countries did not have fiscal deficits or public debt burdens but they were unable to respond to emerging problems and global market changes. “While the causes of the Asian financial crisis are multidimensional at both domestic and global levels, the lack of a regional mechanism for close economic policy coordination and cooperation among the region’s governments is widely cited as being responsible for the rapid and unchecked spread of the crisis across the region” (Cai 2004, p.1).
In general, this underlines the critical point that the reproduction of the global economy requires the increasing harmonization of standards and codes such as corporate governance, transparency standards, and broad macro- and micro-economic policies. The so-called ‘Asian way’ of regionalism – predicated on the development of informal, and often elite-led, channels of discussion within regional forums – is a product of the strong centralized, authoritarian regimes that prevailed at the height of the Asian crisis. The Asian crisis also affected one of the countries from the global north, Japan (Pomerleano, 1998).
Following from the formalization by two economists in the 1960s, the impossibility of maintaining currency stability and monetary policy autonomy under conditions of capital mobility is often referred to as the Mundell-Fleming thesis (Beeson, 1999). This incompatibility arises because when capital can move easily from one country to another, monetary policy that is tighter than that prevailing elsewhere will trigger capital inflows, which will exert upward pressure on the currency. Conversely, a comparatively loose monetary policy will tend to be associated with capital outflows, which exert downward pressure on the currency.
Even if in reality capital flows are considerably stickier and less predictable than the basic model assumes (because of market imperfections and risk perceptions), the record suggests that as the technical and regulatory barriers to capital mobility are reduced, it becomes harder to avoid a trade-off between currency stability and monetary policy autonomy (Hunter et al 1999).
A commitment to a fixed currency removes the option of using the exchange rate as a tool of monetary policy. Singapore, for example, has targeted the exchange rate as its primary monetary policy instrument since 1980. The relative stickiness of domestic prices means that many countries find it less painful, economically and politically, to bring about necessary price adjustments through the exchange rate rather than domestic deflation.
Overall, therefore, whether the advantages of currency stability outweigh the costs of having a relatively inflexible currency depends very much on specific national and international contexts: the volatility and dynamics of international financial markets; the intensity and structure of trade and investment flows among a group of countries; and domestic economic factors, including the flexibility of domestic wages and prices (Hunter et al 1999).
The history of the financial crisis
Before the financial crisis, monetary cooperation did not go beyond vague discussion of macroeconomic policy at meetings of regional central bankers. Before the crisis of 1997-98, interest and exchange rates in most Southeast Asian countries were influenced primarily by the US dollar and US interest rates, with a more moderate influence exercised by the yen (Claessens & Djankov 1999).
Although the Thai government encouraged the use of the baht in transactions in the Indochina area, the yen was the only regional currency with any potential to challenge the US dollar. Japan gave the idea more attention from the late 1980s and, in 1994 and 1995, the country’s Ministry of Finance, MITI and Economic Planning Agency all released reports mentioning the desirability of greater international and regional use of the yen). However, significant changes in Japanese financial markets would be needed to provide attractive yen-denominated assets (Claessens & Djankov 1999).
In order to overcome the crisis, leaders of the countries and international economists developed programs aimed to reduce influences and negative consequences of the crisis. Proposals for regional cooperation on money and finance took on a new level of prominence as a result of the Asian financial crisis that began in 1997 (Pomerleano, 1999). While national and global institutions for managing finance were also the subject of critical scrutiny, many ideas for reform were centered on the regional level. The crisis made it very clear that Asia lacked effective mechanisms for crisis prevention and management (Beeson, 1999).
Critics admit that cooperation on money and finance entails unveiling the general reasons why it might be desirable and the trade-offs associated with different types of cooperation. The most significant of these are for cooperation on an East Asian, not Southeast Asian, basis. There are incentives for cooperation on both monetary and financial issues, although some goals, particularly a region-wide common currency, are premature given the economic diversity of East Asia (Hunter et al 1999).
The benefits of monetary cooperation are mainly those that currency stability brings: a degree of predictability that reduces the costs and risks of international trade, investment and bank lending; the avoidance of competitive currency depreciation spirals; and the total elimination of the exchange rate costs of doing business across national boundaries (Hunter et al 1999). Because monetary cooperation is often supported by crisis management facilities – commitments to provide emergency financial support to defend currencies at their agreed values – it may help to avoid the costs of sudden and steep devaluations caused by shifts in investor sentiment.
Backed up by the pooled resources of a set of collaborating countries, each national currency may be more resilient to speculative attacks. This type of cooperation comes at a certain cost. This cost is the loss (or reduction) in monetary policy autonomy that is a direct consequence of fixing the external value of a currency in a world of capital mobility (Beeson, 1999).
Following Beeson (1999) regional governance needs to deal with new transnational issues such as a more active and assertive civil society and evolve strategies of governance that depart from the doctrines of non-interference. But, as he notes, this shift towards what he calls ‘participatory regionalism’ faces a number of challenges, one of which in my view is the fact that authoritarian state traditions still act as a powerful influence in otherwise democratic polities such as Thailand and the Philippines (Beeson, 1999).
The emergence of regulatory regionalism in the Asia-Pacific requires a move away from the informal and closed systems of regional governance that held sway at the height of the era of open regionalism. “The move toward a free trade zone in Northeast Asia will inevitably bring about significant implications for not only regional economics but also regional politics in the region, and perhaps even beyond. Of the possible major implications, the following five aspects seem to be of particular importance” (Cai 2004, p.2).
The idea that Asia might benefit from various forms of currency cooperation in the future, including a common currency, has been raised by the secretary-general of ASEAN, policy makers in Japan and Taiwan, the financial secretary of Hong Kong, the governor of the Hong Kong Monetary Authority, the governor of the Philippines central bank and then Philippines President Joseph Estrada. One incentive that has been raised frequently by policy makers in Asia since 1997 is a desire to improve the functioning of global institutions by presenting the region’s interests more forcefully at the global level (Claessens & Djankov 1999).
Coordination could secure a greater say in global negotiations and organizations where Asia still lacks influence proportionate to its economic weight While ASEAN countries have acted collectively to increase their international voice, greater influence is likely to be achieved if Southeast Asia joins forces with the larger players, particularly Japan and China. Some sense of common interest must underlie this and other types of regional cooperation.
While many differences in policy preferences are apparent across the region, some common attitudes regarding economic policy also exist (Cai, 2004). There is no consensus on whether they are technically correct or not – the judgment depends on which analytical model of international capital flows and crises is adopted. On this score, opinions among influential economists and policy makers in the western Pacific tend to place more emphasis on the inherent instability of international capital flows than is reflected in the current direction of attempts at the global level to develop international rules and crisis management systems (Cai, 2004).
The crisis in Asia shows that effective cooperative crisis management therefore requires more than the availability of a pool of funds: the precise mechanisms and rules under which support is made available are critical (Beeson, 1999).
These are likely to lead to a second type of financial cooperation in the form of measures to make crises less likely. Such measures include cooperative monitoring of financial markets, surveillance and information exchange, and the development and implementation of common prudential standards (Claessens & Djankov 1999).
At the global level, this kind of function is performed largely by the Bank for International Settlements (BIS), but the IMF and other bodies are increasingly playing a standard-setting role. Monetary cooperation was not considered seriously in the region until the 1990s. The idea of an Asian clearing house and Asian reserve bank did circulate in the late 1960s but for various reasons, including opposition by Japan, it never amounted to anything. Actual cooperation on monetary issues involving an Asian country was confined to periodic US-Japan efforts to manage the relative levels of their two currencies (Claessens & Djankov 1999).
Claessens & Djankov (1999) underline that even when monetary cooperation is not an objective, joint management of currency and financial crises can yield overall gains as access to international lending provides some of the benefits of a domestic lender of last resort: a source of funds that prevents illiquid but otherwise sound firms from failing. While such funds are sometimes made available on a bilateral government-to-government basis, the International Monetary Fund (IMF) is the organization tasked with providing cooperative liquidity support at the global level. The benefits of this kind of support are clear in theory, but the costs and risks are also fairly apparent.
In sum, financial crisis in Asia was a result of ineffective economic policies and inability of the regional governments respond affectively to global economic changes. Even if there are no distinct shared preferences on financial management in Asia, and even if regional countries are very dissimilar in terms of economic structure, there are nonetheless advantages to regional crisis management and prevention.
Proximity on its own can create shared risks from contagion and, in the case of East Asia, substantial interdependence reinforces this incentive to respond to crises in neighboring countries. On the issue of managing international financial flows and crises, many policy makers and commentators in the region share a perception that arrangements at the global level are inadequate. The state learnt that lack of cooperation and collaboration between the states led to financial crisis of the region. These countries are weak enough to resist and prevent financial crisis using their own resources only.
- Beeson, M. 1999, Politics and Markets in the Wake of the Asian Crisis (Asian Capitalisms). Routledge; 1 edition.
- Cai, K. G. 2004, Is a Free Trade Zone Emerging in Northeast Asia in the Wake of the Asian Financial Crisis?’ Pacific Affairs 74, p. 1.
- Claessens, S., S. Djankov, et al. 1999, Resolution of Corporate Distress: Evidence From East Asia’s Financial Crisis. World Bank Policy Research Working Paper. Washington DC: p. 29.
- Hunter, W. C., Kaufman, G. G., Krueger, Th. H. 1999, The Asian Financial Crisis: Origins, Implications and Solutions. Springer; 1st edition.
- Pomerleano, M. 1998, “Corporate Finance Lessons from the East Asian Crisis.” Public Policy for the Private Sector 155, p. 8.
- Pomerleano, M. 1999, The East Asian Crisis and Corporate Finances- the Untold Micro Story. World Bank Policy Research Working Paper Series. Washington DC: 2, p. 32.