OUTLOOK FOR ASIAN PROSPERITY: VIEW FROM THE TOP OF THE WORLD
When our distinguished moderator, Sang Joo Kim, proposed this topic to me I was momentarily puzzled about what he meant by "view from the top of the world". And then I remembered those items, such as T shirts, to be seen in Australian airport souvenir shops which feature a map of the world with north and south reversed so that Australia is in the middle of the top part of the map. I think Sang Joo must have seen those on his visit to Australia.
I'm not an assertive nationalist, and have no exaggerated ideas about the importance of Australia, so I disassociate myself from any claim to come from the top of the world. But the idea has its uses. It is arbitrary that our cartography depicts the north as up and the south as down; yet that depiction has influenced at least Western perceptions of the world order for a very long time, perceptions reinforced during the second half of this century by the notional division of the world into the advanced and prosperous north and the poor and under-developed south. More broadly, the trick of doing a map with Australia at the top is a reminder of the manifold ways in which our perceptions are shaped by our place, our background, and our interests, by the set of habits and assumptions through which we construct our world.
Given the influence of critical theory and especially post-modernist theory and analysis in recent times such a reminder might be thought less necessary than it once was. But in fact in the West, and especially in the United States, the belief or assumption that the world is undergoing a process of homogenisation has been very influential. That assumption is that the rest of the world is converging on the Western and particularly the American model of democracy and neo-liberal economics. The extreme example of that was the assertion, in the aftermath of the ending of the Cold War, that the dialectical processes of history had in effect run their course and the rest of time belonged to democracy and
Policy and practice of the United States and the International Monetary Fund in the context of the East Asian financial crisis has seemed to be committed to seeking to accelerate such a convergence outcome in a part of the world which, with a couple of exceptions, had risen very fast for the most part following policies not conforming to the Washington model. Much public commentary in the United States on what has happened in East Asia since the middle of 1997 has interpreted it as showing that the "Japanese model" or the "East Asian development model" was fundamentally flawed. On this account the American liberal open market model has been proved superior and the claims made for the superiority of the "developmental state" have been confounded. It is not surprising that there has been a resurgence of confidence in the US model given the long boom and the continuing flourishing economy.
This adversarial view of the recent history of the attempts to globalise the neo-liberal approach is not all the fault of those who have had the most influential roles in Washington during the last few years. There was a triumphalism abroad in East Asia in the years up to 1997 which was most openly displayed in the writings of the 'Singapore School'. It is remarkable how quickly perceptions of this kind can change. Less than ten years ago the bookshops in this country were full of works proclaiming that Japan was overtaking the United States as number one and that the United States was a declining imperial power, overstretched and ill-adapted to the global competition of the rising East Asian powers led by Japan. Now there is a celebration of the burgeoning prosperity of the United States and of the way in which the US economy has reinvented itself to stretch its lead over all others. At the same time, with the revolution in military affairs, the margins by which United States power exceeds that of all others have increased.
The prevalent view in this country of the East Asian financial crisis now seems to be changing. Instead of satisfaction at the apparent confounding of the claims of the East Asians to have found a better way than free market neo-liberal formulae there is more objective and analytical attention to the causes and course of the crisis and a more critical consideration and rethinking of the Washington consensus which seized the opportunity a year or so ago to impose a range of tough and radically reformist conditions on the
The contested issues involve the causes of the crisis, the role of the United States in those causes, the effects of the conditions imposed directly by the IMF, reflecting the Washington consensus, on Thailand, Korea and Indonesia, and the extent to which those countries will indeed abandon the distinctive characteristics of their political and business cultures as a result of the crisis and the consequent IMF interventions.
These issues are complicated by the differences between the crisis countries themselves. Although there are significant shared features such as dangerous exposure to unhedged foreign short-term borrowing and inadequate prudential supervision of the financial institutions, there are also great differences. Thus there is, for example, a world of difference between Korea and Indonesia in terms of institutions, in terms of productive capacities and priorities and in terms of government capacity. But in terms of the way these developments have affected attitudes and assessments there are important common themes. Thus from the Washington perspective all were seen, and all were treated by the IMF, as requiring more openness and tighter domestic fiscal and monetary policies. In the case of Korea it had for years been Washington policy to reduce the extent of bureaucratic influence on the economy and already, partly in connection with the OECD membership, a range of steps had been taken to achieve that and to make the economy much more open to foreign entry including notably in the financial services sector. It has been argued by a
number of scholarsiii.
that the dismantling or removal of bureaucratic guidance and regulation was instrumental in causing excessive competition and investment by the chaebol , the rapid build-up of foreign debt and reducing the capacity of the government to manage the problem when the currency came under severe pressure.
The disagreement between those who say that the East Asian crisis underlines the need for greater liberalisation and those who emphasize the need for effective government direction and regulation of these developing economies refers back to a long-running argument about the causes of the striking success of the East Asian developing economies during the years of the so-called "miracle" phase. The orthodox Western economists argued that that success was due to the free market policies of the East Asian countries exposing their economies and especially their export sectors to a high degree of open competition. On the other side there has been a growing group of scholars who have shown the extent of government or bureaucratic direction and guidance which existed in Japan, Korea and Taiwan especially shaping their economies and securing very high levels of growth driven by favoured export industries. The latter now tend to argue that the end of the "miracle" phase and the onset of the Crisis was brought about at least partly because of shifts away from the earlier governed or directed policies to much more hands-off open policies under the influence of the United States and other G7 economies and of the
Bretton Woods Institutions .iv.
These arguments have a significance which goes beyond their importance in the scholarly debate about the nature and dynamics of the East Asian economies. They concern the future as well as the past of the most populous segment of the world and they concern the way in which the United States and the great capitalist organisations, the International Financial Institutions, which it hosts will relate to East Asia in the future.
One of the assumptions which has been very influential on Washington perspectives, as well as in other places is that the advantages of international capital flows greatly outweigh any problems they might cause. So Washington pressed hard for the East Asians to integrate their financial markets with international markets. It was recognised before the crash that this could cause problems. Earlier in 1997 the World Bank explained : "The world's financial markets are rapidly integrating into a single global marketplace, and ready or not, developing countries, starting from different points and moving at various speeds, are being drawn into this process. If they have adequate institutions and sound policies, developing countries may proceed smoothly along the road to financial integration and gain the considerable benefits that integration can bring. Most of them, however, lack the prerequisites for a smooth journey, and some may be so ill-prepared that they lose more than they gain from
financial integration." v.
What constitute "adequate institutions and sound policies"? No-one could argue that Indonesia had such things. It had weak institutions and quite inadequate and distorted policies. Even though the Bank and the Fund had for years praised Indonesia for its early opening of its capital market it is very clear now that that left the economy very vulnerable. The Fund's reaction (and the general Washington reaction) when the crisis struck Indonesia included demands for quite extensive reforms. Indonesia was seen not so much as a victim but as having brought the problems on itself because of such failings as "cronyism". Of course cronyism - nepotism and cronyism and corruption - were endemic in Indonesia and created extensive distortions. But despite them Indonesia had done well and had for years been held out as a success story by the Fund and the Bank.
Here I come to a point where the view from Australia was different from the view from Washington. In June 1997 when the crisis struck with the devaluation of the baht over 60% of Australia's exports were going to East Asia and the proportion was increasing. Australia's foreign and trade policy had for years been directed to strengthening its relations with those countries with special emphasis on Indonesia, our immediate neighbour, the fourth largest country in the world in terms of population, and the largest Moslem nation. Despite difficulties over the fifty years since Indonesia had become independent the two countries had developed a fairly robust relationship especially during the later years of the Soeharto presidency. Japan was still by far Australia's largest export market but Korea had become its second largest and there were rapidly growing links with that country including substantial numbers of Korean students in our universities. So obviously East Asia loomed far larger on the horizon for Australia than it did for Washington. Among the many ties which had developed between Australia and its East Asian neighbours were those between our Reserve Bank and the other regional central banks. When Mr Sakakibara floated the proposal for an East Asian Fund the initial reaction in some influential Australian quarters was favourable but the Washington reaction was strongly negative, ostensibly at least partly on the grounds that such a fund would be likely to undermine the conditionality of IMF assistance arrangements.
But it was when Indonesia was struck by the crisis that the difference of approach became clearer. The view in the Reserve Bank and some other quarters was that it was essential for the Fund to move quickly and decisively to deal with the immediate problem of the collapsing rupiah. There was concern that the US Administration and the IMF seemed to have a less urgent sense of the matter in that they were insisting that Indonesia agree to extensive reforms before implementing assistance arrangements. The IMF was called in in October, in January the Managing Director flew in to try to overcome the outstanding issues which were preventing agreement. On 15th January a new agreement was signed but the rupiah failed to recover and the economy continued to run down. Soeharto distanced himself from the economists who had been one of the pillars of his success since 1996, removed the Governor of Bank Indonesia and sought advice elsewhere. Mr Clinton sent Walter Mondale to urge Soeharto to carry out the reforms in the 15th January agreement in order to regain international confidence. The same message was conveyed by telephone by the Chancellor of Germany, and the Prime Minister of the UK as President of the European Union sent a Minister to urge the President to fall into line. But Soeharto believed that he would not survive if he did what was demanded in the 15January agreement and so
he stalled vi.
Australian concern at the standoff between Soeharto and the IMF became acute and the Governor and Deputy Governor of the Reserve Bank visited Washington as, subsequently did the Foreign Minister. The US Treasury and the Fund put their respective positions strongly to the Australian Treasury. The Reserve Bank representations probably had some effect because the IMF was at pains to emphasise that it was making every effort to reach enough agreement with Indonesia to release the second tranche of the support funding. But at some point it was decided in Washington that Soeharto stood in the way of a solution to Indonesia's problems, and that he should step down.
In Indonesia it had become clear that there was enormous repressed antipathy towards the Soeharto regime. Indeed it is still not clear how popular rerormist pressures can or will be organised in productive ways. The failure of the IMF intervention in the first few months to prevent the collapse of the Indonesian economy and then the ouster of Soeharto left a nation in deep crisis. On the positive side there is the possibility of a new and sounder political and economic basis being established. It will be surprising if the successor political arrangements, that is to say after the elections of a new parliament and then a new president, are not much more democratic and it will be surprising if there is not a better institutional and regulatory framework. If there had been a really determined, Washington-led rescue operation in the closing months of 1997 it is possible that Soeharto would still be President and still maintaining much of the previous order of things. There are obvious negative considerations to that, and they were all apparent and well known before the Crisis. But if the rupiah could have been stabilised at somewhere around 5,000 to the US$1 it is likely that considerable loss of life and property could have been avoided and that the present impoverishment of the country would have been much less severe.
Hopefully the election processes for this year, which have now been agreed by the Parliament, will produce a sensible and steady outcome. If that should be the outcome it will be hard to question the approach which has been taken by the Fund and by the United States. But there will still be a question as to how far the IMF should go in procuring large political and institutional changes in countries who call on it for help.
Even if all goes well in Indonesia in the coming year and more it is unlikely that there will be an early return to the standards of living of 1997. There are parts of Indonesia where people are better off now than they were before the Crisis. That is because they are producing export crops or products which, because of the collapse of the rupiah, return income far higher in rupiah terms than formerly. But those are the exceptions. For the great majority of Indonesians, and especially for the Javanese, the outlook is continuing bleak. Indonesia was a great success story in development terms for much of the Soeharto term but the setback since late 1997 has been massive and it is difficult to see how the manufacturing industries which were becoming so important for exports and for employment generation will be able to re-establish themselves and then grow in competition with other low wage exporters like China, Viet Nam etc. At some point Indonesia will again develop strongly, but in the meantime the educational infrastructure has suffered and the participation level in schooling has fallen sharply. Domestic capital has not yet been repatriated and there is no sign of foreign investment on a large scale.
Given the known candidates or alternatives to take over the government of Indonesia following the parliamentary elections in June, and then the presidential elections in October/November, it is quite possible that there will be rather different economic policy approaches from those favoured by the Fund. The emphasis could be nationalistic and disposed to modify the open internationalist policy approach. They might be attracted to the Mahathir sort of approach. We do not know, and indeed the candidates themselves probably do not yet know. All we can say is that there seems a very small prospect of Indonesia returning in the near future to the prosperity levels of 1997. Thailand is clearly less threatened by political uncertainties but also faces difficult development issues. In the case of Korea the outlook is more favourable. There are major problems but there is also no shortage of highly trained and effective people. For the time being East Asia seems unlikely to return to very high growth and the fulfilment of their desire for prosperity will be deferred. Japan has the potential to provide a powerful stimulus to the others but that is not going to happen. The Japanese economy does not seem at all likely to enter into a dynamic phase in the foreseeable future.
But the experience of doing very well for years on end to the point of predictions that East Asia would be the powerhouse of the world economy by the end of the first quarter of the 21st Century has made a permanent difference. There will be much reflection on the lessons of the period since mid -1997 and on how to avoid the need to bring the IMF in again.
It is clear that both the IMF and the US government have been thinking a lot about next steps in East Asia and the rhetoric has been changed. For the futureof the region, and of the world, it is important that there be a willingness to accept that East Asian countries may want and need to preserve distinctive features of their economies even though those may not be part of the preferred Washington model. In time they may again begin to search for new forms of forms of East Asian cooperation.
Famously, in The End of History and the Last Man, Francis Fukuyama 1992,
Avon Press which rapidly became a best-seller and prize-winner, stimulating
controversy and debate which continue even though Fukuyama's specific
formulations now have little support.
See for example "How the U.S. Wooed Asia to Let Cash Flow In" by Nicholas D.
Kristoff with David E.Sanger in the New York Times of February 16.
This long analytical article is in contrast to the earlier reporting and
analysis of the crisis in the same newspaper.
Carefully and notably by H-J Chang, H-J Park and C.G. Yoo in The Cambridge
Journal of Economics vol 22, no 6 "Interpreting the Korean crisis:
financial liberalisation, industrial policy and corporate governance". See
bibliography at the end of that article for others such as Robert Wade.
See Chalmers Johnson, "Economic Crisis in East Asia: the clash of
capitalisms" in Cambridge Journal of Economics, vol 22, no 6.
World Bank (1997), "Private Capital Flows to Developing Countries: The Road
to Financial Integration" World Bank Policy Research Report, OUP for the
World Bank. Quoted in S.A. Grenville Capital Flows and Crises, Reserve
Bank of Australia, 1998.
I have discussed this and related issues in an article written at the time
and published in the Australian Journal of International Affairs,
vol 52, No. 3, 1998, "Indonesia and the IMF: the Evolving Consequences of a
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