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By Prof. Art Boquiren

(the following are my personal notes on the crisis. Several materials deserve

citations but  I can no longer find them. In due time, I will do the proper citations)

June 1998

I.      PERSPECTIVES ON THE NATURE OF THE CRISIS

 

At least five explanations to the crisis are available.

1.    CRONY CAPITALISM AND MORAL HAZARDS.  One position, including that of the International Monetary Fund, blames the crisis on the highly interventionist governments of Asia. In their view, the crisis emerged from the "inefficiencies" and "distortions" caused by government intervention in the economy.  For them the crisis arose from excessive government intervention which encouraged the development of systems of crony capitalism and  mis-allocation of resources because of moral hazards.

2.    CONSPIRACY THEORY.   Another position explains the crisis in terms of a conspiracy of foreign traders led by fund manager George Soros to undermine economic development in Southeast Asia.  According to this view, the traders were not merely over-reacting to events but even deliberately manipulated markets to earn profits. This position is associated with Malaysia's Prime Minister Mahatir Mohammad (1997, 1998).

3.    FINANCIAL PANIC THEORY.  Another position is that of  Steven Radelet and Jeffrey Sachs <http://www.stern.nyu.edu/~nroubini/asia/AsiaHomepage.html> of the Harvard Institute for International Development  views the crisis in terms of a sudden shift in market expectations and confidence that resulted in a massive withdrawal of capital from the region. They further argue that the crisis did not arise from poor policies or weak fundamentals in the region. Panic, not rational consideration of fundamentals, was responsible for the crisis.

4.    POWER SHIFT THEORY.  This is the view of  scholars such as Richard Robison and Andrew Rosser (cf. Beeson and Rosser, June 1998).  For them, one power shift is that from the state to mobile capital that occurred as a result of globalization. This power shift resulted to the weakening of fundamentals of many East Asian economies. Another power shift is the emergence of in the 1980s and 1990s of business-government coalitions which exacerbated the moral hazard problem by creating a false sense of security among investors.  For the proponents of the power shift theory  the dominance of these coalitions prevented the adoption of measures that would have overcome foreign debt, non-performing loans, and other problems associated with the crisis.

5.    PART OF THE CRISIS OF CAPITALISM.  This is a Marxist view.  For them the crisis reflects the essential feature of world capitalism: crisis of overproduction. For proponents of the view, "crisis of overproduction" means that because production and economic activities are governed by profit  (and unguided by economic planning that supposedly characterize socialist societies), supply tends to exceed effective demand and economic dislocations or economic chaos result. 

 

II.     PERSPECTIVES ON MANAGING THE ASIAN CRISIS

 

1.    IMF strategy innitially involved its standard recipe for "reform" of countries experiencing rapid losses of investor confidence and capital flight:  loans are tied in to the adoption of reforms which at the core involve tight fiscal and monetary policies as well as government withdrawal from intervening in the economy and adoption of market mechanisms. In particular, IMF reforms advocated during the crisis includes the closure of insolvent financial institutions,  elimination of government and private monopolies, reduction in tariffs and export subsidies, and greater transparencies in government. Beesons and Rosser (1998) point out that many of the policies advocated by the IMF have been criticized as inappropriate as most of the East Asian economies were basically sound in terms of government spending, foreign reserves, trade surpluses, and inflation before the crisis. IMF's "advise" from hereon may respond to these criticisms especially now that its ability to bail out economies has been significantly reduced. For example, Krugman (September 1998) advocates a Plan B that basically involve currency controls for the IMF to adopt.

2.    Jeffrey Sachs ((1997) contends that drastic budget cutting and credit tightening are inappropriate for Asia and advocate instead stable or even slightly expansionary monetary and fiscal policies vis-a-vis the decline in foreign loans.

3.    David Hale (19998)  criticizes the IMF for failing to deal with the issue of foreign debts. Hale argues that the main cause of the crisis was not poor policies or "crony capitalism" but enormous flows of short-term unhedged US dollar loans. Further, Hale contends that the IMF approach would lead to social strife and that the solution to the crisis lies in negotiated debt rescheduling.

4.    Veneroso and Waade (1998) argue that the main reason for the East Asian miracle was the "cooperative relation" between business and government and that by following the IMF advise to close down banks, greater foreign investments, and capital account liberalization, the IMF has been effectively dismantling the source of the East Asian Miracle and making Asia at the same time more vulnerable to "financial panic" than they had been before the crisis.