Aftermath of the Asian Crisis
The Asian Crisis of 1997/98 demonstrated to Asian governments that unfettered financial flows can create profound destabilization. The problem is that financial markets are subject to certain market failures like financial panic and unregulated and undercapitalized banks that are made worse by globalization.
The Asian Crisis compelled regional governments (and many academics) to question the benefits of globalization. A globally integrated economy increased the risk of contagion amongst countries as one after another Asian economy collapsed from the crisis. Political chaos came hand in hand with economic chaos as several Asian leaders were toppled. Indonesians suffered even more as a result of the escalating violence that followed the economic crisis.
The Asian crisis highlights how fragile the world economy is and how unpredictable the foreign investment environment can be. One of the factors that led to the Crisis was the over-optimism of investors over regional prospects after three decades of rapid economic growth, which led to panic as over-pessimism then became the predominant sentiment. Perceptions thus play a very important role in the investment decisions of many businesses. Capital flows surge and dip based on investor perceptions of a particular economy, rational or not. Hence perceptions of decision-makers in business and financial institutions are a major deciding factor in how a country’s economy performs. After all, the IMF’s actions during the crisis were often designed to help investors regain “confidence” in the economy, and confidence is in turn based on perceptions.
Globalization, and Asian Governments' Response
One of the most important factors affecting globalization trends in Asia is the strong role of government. Governments influence the flow of FDI and other aspects of globalization through trade and investment policies, legal systems and other administrative and political roles. Uncertainties about government policies impinge on the flow of FDI and create political risk for investors that will in turn influence the extent of globalization.
Political risk increases because
some less-developed Asian economies have insecure governments and unstable sociopolitical environments. For these
polities, the balance of economic interdependence is a delicate issue. Even as
the world becomes more like a global village, different national cultures,
ideologies and aspirations continue to create potential conflicts. Governments
are increasingly screening foreign investments. There are attempts to increase
local participation. Most host governments accept the need for foreign
investment but they increasingly want foreign investments on terms that maximize
the contribution to national goals and minimize the threat to national
sovereignty. Less-developed countries are special in that their
macroeconomic goals are more likely to emphasize a catch-up rate of growth,
industrialization, increase in employment and repayment of heavy foreign debts.
Asian political systems may also be less developed and the central
government still in need of legitimizing itself in face of ethnic, religious or
other competing pressures. Asia's historical and cultural legacies are very diverse.
These factors can affect both the quality and stability of political
institutions and the attitudes of multinational firms based in the industrial
and ex-colonial West.
Recent literature and forum discussions on the merits of globalization reflect increasingly the negative implications. International conferences like those held by UNCTAD and WTO have been dominated by expressions of concern from developing nations and other critics of the negative aspects of globalization. For example, the Declaration issued at the Non-Aligned Movement Summit XIII in Kuala Lumpur on February 25th 2003 stated the following:
“Globalisation presents many challenges and opportunities to the future and viability of all states. In its present form, it perpetuates or even increases the marginalisation of developing countries. We must ensure that globalisation will be a positive force for change for all peoples and will benefit the largest number of countries and not just a few. Globalisation should lead to the prospering and empowering of the developing countries, not their continued impoverishment and dependence on the wealthy and developed world.”
Foreign investors in a world becoming more cautious about globalization perceive political risks of a sudden reversal in government policies from longstanding hospitality to more cautious constraint.
What makes today’s globalization so different from 19th century globalization can be seen in terms of the scope and pace of the process. Concerning only trade and investment, today more economies than ever before have opened their borders significantly more than earlier eras. Globalization has become broader in terms of the number of national markets involved, deeper in terms of density, interaction, and velocity of flows of factors of production. Modern globalization is driven more by plunging communication costs than transport costs, giving firms new ways to organize at a global level. Gross international financial flows are also much bigger than before. The great increase in flows of goods and money can be traced to two forces – technology and liberalization.
The pace of change, and the increasing ease with which people, ideas and money move about, unfortunately provides the opportunity for human beings to behave in an economically destructive way. This makes the world a much more uncertain and volatile place than it was. While the world today has the resources and capabilities to generate wealth, its institutional machinery to organize the economic restructuring demanded by technological changes is often inappropriate or outdated. The financial crises in recent years have already hinted at the fragility of the financial system and almost monthly new currency or banking or debt crises appear. Hence, even as we prosper from globalization over time, one might be excused for being pessimistic about its impact at any particular moment in time.
Globalization is generally defined as the growing economic interdependencies of countries worldwide through the increasing volume and variety of cross-border transactions in goods and services and of international capital flows and also through the rapid and widespread diffusion of technology (IMF 1997 p.45). Being a complex and contested concept having varying connotations, it is useful to differentiate globalization along three dimensions - cultural-ideational, politico-institutional, and economic globalization (Prakash and Hart 1998).
The first-mentioned dimension raises the issue of whether certain 'universal' values and norms will sublimate 'old lifeways'. This is a matter of some nationalistic concern in Asia: Malaysia's Prime Minister Mahathir once observed, "Western values are western values, Asian values are universal values."
Politico-institutional globalization refers to the moves towards common political, policy and legal practices across countries through: the creation of supranational, regional or global institutions that replace national institutions; policy convergence across countries; and conscious policy harmonization through recognition of principles such as national treatments and nondiscrimination. Economic globalization can be achieved through global infrastructure, institutional harmonization, and borderlessness. Because of this movement towards commonality and harmonization in all areas, governments feel the pressure to be politically correct when implementing policies related to trade, human rights, environmentalism and even ideologies. It is imperative for governments in this globalized setting to have a “free and open market” economy modeled on the American free-market system in order to receive worldwide acceptance and ultimately the flow of FDI that they need.
Recent definitions of globalization have tended to reflect the growing concern at the highest levels over the negative effects of globalization while at the same time conceding that globalization as a phenomenon cannot be stopped. In his opening remarks at the UNCTAD 10th Conference in Bangkok in February 2000, United Nations Secretary-General Kofi Annan referred to globalization as a “web of commerce, communication and co-operation” that provides opportunities for some and marginalization for others. Mike Moore, Director-General of the World Trade Organization (WTO), emphasized that globalization is not a political option but rather an irreversible economic evolution, even if the pace of its advance raises fears of vulnerability. Free trade is not a panacea; rather, countries have to rely on good governance, transparency, “decent” tax systems and the development of sound infrastructures as a basis for development and growth. Rubens Ricupero, Secretary-General of UNCTAD, emphasized that the challenge of globalization is to achieve the quality, and not the quantity, of integration into the world economy. These high-level pronouncements about globalization suggest very important concerns.
In recent decades, globalization seemed to offer mankind a promise of truly historical magnitude. The promise was for a broadening of opportunities to improve living standards and to secure a brighter future for millions of people. Asian governments saw these clear benefits as they positioned their countries to participate increasingly in the dynamic growth of the world economy. This growth, in turn, was believed to be the inevitable outcome of globalization, liberalization and rapid technological change (UNCTAD X, Bangkok, Feb 2000). Theories and empirical evidence have supported the idea that both sides of the great income divide stand to benefit from globalization with the developed nations reaching a larger market for new innovations and the developing nations enjoying the fruits of those innovations while sharing in global production via multinational enterprises. (Sachs 1998)
Yet the sharing of the fruits of growth and development matters. Evidence mounts that prevailing patterns of globalization and growth can widen income disparities. Brazil needs growth rates three times higher than Indonesia to gain the same level of poverty reduction. (Economist June 10th 2000 p4) Higher growth in China and India increase inequalities between rich and poor regions and social groups. Besides issues of distribution, other negative aspects include loss of community, continuity, security and autonomy.
Even
granting that economic growth from globalization can help reduce
poverty (a debatable argument), the progress that globalization provides is
fragile. Global financial instability has worked to undo the advances recorded in the late
1980s and early 1990s, posed mounting
difficulties to development and thrown many developing countries into disarray.
Most affected have been precisely those developing countries that had seemingly
integrated most successfully into the globalizing world economy, notably those
in East Asia. While domestic management weaknesses have played a role in all
cases, openness to the globalizing world economy and the difficulties
experienced in managing that openness have also been important factors. The
global financial crisis of 1997-98 which started in Thailand
indicated that simultaneous trade and financial liberalization can have severe
and unexpected consequences. Furthermore, liberalization and globalization have
been accompanied almost everywhere by a deterioration in the distribution of
income. (UNCTAD X, Bangkok, Feb 2000)
It
would seem that the difficulties of harnessing liberalization and globalization
for the benefit of all have been seriously underestimated. Liberalization and
globalization have sharply accentuated the extent to which economic success
depends on the rapid acquisition of skills and on the creation and effective
utilization of technology and information and their exploitation through
markets. These processes have actually widened the gap between the feasible
options available to skill-rich developed countries to accelerate growth and
those available to most developing countries. As a result, many countries are
experiencing growing public disaffection with current economic strategies, a
disaffection that threatens to erode the ability of Governments to maintain the
open and liberal regimes which are ostensibly the basis of current growth. (UNCTAD X,
Bangkok, Feb 2000)
At the extreme, globalization is seen as a ruse to undermine the power of an activist state. Globalization poses new challenges to governments as costs and benefits of globalization remain unevenly distributed, raising the risk of a political backlash. New technology and new types of financial instruments make it hard for governments to impose effective capital controls. Technology has rendered even the largest national markets too small to be meaningful economic units on their own. National markets are fused transnationally rather than linked across borders (Kobrin 1997). Globalization also seems to compromise the basic symmetry of political and economic organization of nation states and national markets. Economic units will expand in space well beyond the limits of political units constraining the autonomy and effectiveness of states and raising serious questions about the meaning of internal and external sovereignty (Kobrin 1997).
States will also face greater difficulties controlling new forms of traffic carried by global infrastructures such as the Internet. Governments are especially sensitive regarding erosion of their abilities to influence and tax commerce supported by such infrastructures. Nationality of firms is important and governments try to retain key roles in safeguarding the commercial interests of domestic firms in international markets. Furthermore, for cross-border integration to proceed, politics needs to keep pace with economics and this is sought to be achieved by a conscious harmonization of policies and institutions across jurisdictions. However, this also marks a dilution or undermining of political and economic power of states in influencing cross-border economic activity (Prakash and Hart 1998).
In this global environment, governments are acceding to a loss of control in return for the immense benefits brought in by foreign investors and other merchants of globalization and will not reject these benefits for the sake of national sovereignty. Whatever the attitude towards globalization and ultimately FDI adopted by governments, there is no doubt that host and home government policies are important, according to Dunning (1979), as determinants of the relative attractiveness of some host countries over other host countries and the home country. Foreign investors dislike uncertainties; although, where the long-term prospects are perceived sufficiently favorable they will embrace them. But as shown by the shifting geographical balance of investment in the past twenty years, foreign investors have generally increased their investments in the fastest growing markets; and ones in which they believe the political and economic risks are the lowest. They have eschewed countries that impose too stringent entry demands or performance requirements, and have focused their attention on countries or regions liberalizing their markets. Governments, in this view, impose extra costs that need to be considered in the analysis of foreign market entry strategy decisions (Root 1982).
Globalization can help to fuel economic growth but at the end of the day, it is the governments who will determine progress of globalization in Asia. In the words of Dunning (1993):
“The world is truly a tinder box of ideological uncertainties and economic unrest… It is governments – both individually and collectively – which provide the signals which in the last resort, will determine the extent, speed, direction and quality of ... growth.”
Foreign direct investment (FDI) has been the central driver and indicator of globalization in the modern era. Increased inward and outward FDI activity basically translates into increased globalization. In fact, FDI is often used as a measurement of the degree of globalization in the world economy. Hence, the factors that affect FDI also implicitly affect globalization.
Foreign
direct investment (defined as international corporate operations in which the
parent firm exercises control or supervision over the activities of affiliates
in multiple countries (Moran 1998)) is “patient capital”. It generally
cannot be withdrawn quickly and is tied to longer term strategies. It thus has
staying power. While economic uncertainties and economic mismanagement may
indeed lead to a pause in new commitments (and prolonged deterioration could
result in the abandonment of some facilities), the economic restructuring that
follows a period of financial crisis might even enhance the international
competitiveness of the local subsidiaries of foreign parents and stimulate a new
round of investments as in the case with ASEAN.
FDI flows to ASEAN in 1997, the year in which the financial crisis started, increased by 7% compared to the level achieved a year before. The crisis did not affect FDI flows as much as short-term capital flows and bank lending. The crisis thus put to the test the stability of FDI over other types of capital flows, and FDI did not leave the ASEAN host countries in a manner that initially many thought would be the case. Even if it did, the scale was small compared to the case of portfolio investment and other types of capital flows. Only two ASEAN countries experienced net dis-investment in 1998 (ASEAN Secretariat 2000).
FDI to developing countries was stable in the face of a sharp fall in global FDI flows from $1.3 trillion in 2000 to $0.8 trillion in 2001. This reflects improved conditions in many emerging markets after the crises of the late 1990s (and also recession in industrial countries coupled with collapse of industrial country stock markets which had fed the boom in mergers and acquisitions). Receptiveness to foreign investment by governments in emerging economies seems only to continue toward more liberalization –China, which forbade foreign investors under Mao Zedong, today has one of the most liberal legal regimes for foreign direct investment (FDI) in the developing world.
Foreign Direct
Investment Environment
The dynamics of the
foreign direct investment (FDI) environment of a host country spring from changes in that environment,
especially change that is influenced by host government policies. (The FDI environment
can be defined as
the aggregate of the factors that motivate FDI, that influence the interactions
of FDI firms and the host government, and that determine the absolute levels and
the distribution of the net gains from FDI (Erdilek 1985).) The FDI
environment must be analyzed in terms of interrelated economic, political and
social factors. The optimal environment for FDI is often
perceived as one in which the host country is efficiently integrated with the
international capitalist economy on terms favourable to private enterprise-
mainly by offering stable economic, social and political conditions for growth
of private investment and “free” markets (Lall and Streeten 1977).
Perceptions of political instability are likely to continue to affect investors’ inclinations about undertaking FDI projects in particular countries or regions. The findings of survey-based studies indicate that MNCs consider the sociopolitical stability of the host country as one of the most important considerations in allocating funds to foreign projects. Thus, political risk is the restraining force in the foreign investment decision-making process while return on investment is the driving force.
The effects of political instability on FDI are apparent in two ways. First, in potential host countries whose histories have been marked by chronic political instability, many investors have been deterred from undertaking projects. Second, even brief periods of governmental instability can cause interruptions in FDI flows as investors wait for a return to normalcy in the political system (Brewer 1993).
FDI in ASEAN
Despite the series of occurrences of global financial turbulence in 1997-1998, world outward FDI flows grew by 36.6% from US $475.1 billion in 1997 to US $648.9 billion in 1998, surpassing significantly the growth rate of international trade of 3.5% in the same period (ASEAN Secretariat 2000). Part of the explanation might be that during 1997, 151 changes in FDI regulatory regimes were made by 76 countries, 89 percent of them in the direction of creating a more favourable environment for FDI (1998 World Investment Report). The principal determinants of the location of FDI were policy framework, business facilitation measures and economic factors (1998 World Investment Report).
Outward FDI flows from Japan and the Asian Newly lndustrializing Economies (ANIES) were affected by the Asian financial crisis, and the economic situation in the region limited the contributions of these countries to the global FDI flows in the last two years. Out of US $760 billion FDI inflows to developing countries between 1993-1998, developing Asia collected 54%. The distributions of FDI flows to ASEAN were concentrated in six countries which accounted for 98% of the $132.5 billion FDI flows to the region in the same period (ASEAN Secretariat 2000).
Direct investment originating from within ASEAN constituted a very significant share of the total FDI flows to the newer member countries, especially in the second half of the 1990s. An average of 30% of FDI flows into the four ASEAN newer member countries came from within the ASEAN region between 1995 and 1999. The geo-cultural proximity and affinity and the "experience effect" of ASEAN firms operating in other ASEAN countries can be credited for pushing ASEAN firms in one country to invest further in other ASEAN countries (ASEAN Secretariat 2000).
Available data on ASEAN FDI in the newer member countries seems to suggest a strong manufacturing investment relationship between Singapore and Vietnam, Malaysia and Cambodia, and Thailand with Myanmar and Laos. Singapore is the largest overall investor in Myanmar. Among regional sources, FDI originating from Singapore accounted for more than 50% of the total intra-ASEAN investment in all sectors between 1995 and 1999 and in terms of approved intra-ASEAN manufacturing investment projects between 1990-1998. The financial crisis however limited the ability of ASEAN MNEs to continue to expand their operations and invest in regional countries leading to a marked decline in FDI flows in the newer ASEAN member countries in 1997 and 1998 (ASEAN Secretariat 2000).
The financial crisis of 1997-98 has affected FDI flows in ASEAN, but the depth of the impact on ASEAN's ability to attract FDI has not been as profound as initially expected. Available data indicates that FDI levels in the crisis period, although down, remains at a healthy level. FDI into ASEAN and outward ASEAN FDI flows declined in 1998 in both relative and absolute terms. The crisis that affected the economic situation in the region has been the main driving force for the decline. In addition, the difficult financial and economic conditions in some of the major FDI source countries or economies, such as Japan, Taiwan, Korea and Hong Kong, further contributed to this development. Overall FDI flows to ASEAN in 1998 declined by 23% from US $27.8 billion recorded a year before. However the magnitude of the decline was considerably smaller than initially expected underscoring the point that direct investments behave differently from short-term capital flows (ASEAN Secretariat 2000).
Globalization
and the Asia Pacific
East Asians and their governments have embraced globalization and have generally accepted the discipline imposed by exposure to international capitalism and the need to conform to global best practice. This book will examine the globalization of the Asian region. Specifically, we look at economic, social, cultural and political legacies of Asia; its trade, investment and financial patterns, and the changing structure of its business enterprise. We hope to ascertain both the direction of change and what also might withstand the Darwinian struggle and remain among those Asian virtues or institutions that will help them prevail in the test of competition to not only survive but prosper in the new millennium.
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