October 1, 1999.
Institute for Corean-American Studies, Inc.
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[Editor's note: This paper is, with a written permission from the
author, a special contribution to The ICAS Lectures series. Dalrymple
presented this paper at the "The Sixth International Conference on
Japanese Studies: Japan-Southeast Asia Relations", October 1-2, 1999,
sponsored by the Department of Japanese Studies, National University of
Singapore, Singapore. sjk].|
Japan and Southeast Asia in the Financial Crisis
What does Japan's role in Southeast Asia's financial crisis tell us about Japan's role in the development of the Southeast Asian economies over recent decades and what is the outlook for that role in the aftermath of the crisis?
These seem to me the interesting and important questions to address because Japan has played the most important single external role in that part of the "East Asian Economic Miracle" which has occurred in Southeast Asia and, as I shall argue, the outlook for the future of those economies is significantly dependent on Japan's role in them.
When I was asked to propose a title for this paper I thought I should try to encapsulate the way I want to address the topic. So I have taken the metaphor of the flying geese formation which, for quite a few years had wide currency as a description of the crucial role which Japan could play in the development of the East Asian region. It was based on the idea that when geese fly in those V-shaped formations the wake or slipstream of the leading goose helps those behind to follow on. As Japan moved into new phases of industrial and post-industrial activity it would cease to be competitive in more labour-intensive and earlier technology production which would be relocated in newly industrialising countries via Japanese foreign direct investment. Japan would support that process with infrastructure and other development aid and technical assistance and training. The process would be emulated serially by the followers in a developmental chain reaction.
As a metaphorical illustration the flying geese notion had attractions for both Japan and the Southeast Asian countries.
For Japan there was the idea of leadership on a very benign basis. Japan would be doing good by doing well; a leadership in no way imposed but arising from a very visible superiority in development level. And it would be done not by pressure of commercial exploitation but by example, supported by generous aid and technical assistance. For the Southeast Asian countries there was the suggestion of being able to take off and soar into development by hitching to Japan's visible and tangible success with the additional attraction of the cornucopia of Japanese funding based on Japan's booming exports and massive balance of payments surpluses.
The idea of Japanese leadership and of a larger and more influential Japanese role in the world has been under discussion for more than ten years now. Its most thoughtful and developed public expression was in an aritcle in the Gaiko Forum1by then Foreign Affairs Vice-Minister Kuriyama in 1990 which based Japan's claims to such a role largely on its economic size and importance. The project was unfortunately set back seriously by the difficulties which Japan encountered the following year in formulating policy and taking decisions on practical measures during the Gulf War. In the end the joint allied effort in the Gulf war probably cost Japan more in money terms than it cost the United States. But for various reasons Japan's big financial contributions did nothing to enhance Japan's standing, and indeed as an issue between the two countries it left a sour taste on both the Japanese and American sides. Then the bursting of the bubble economy and Japan's long struggle to come to grips effectively with the problems of its banking and financial sector have caused uncertainties and discontents which did not fit the leadership image and ambition. Most recently the 1997 East Asian financial crisis has been seen by many, especially in the United States, as a demonstration that the "Japanese model" of economic development could not survive in the age of globalisation. But as we shall see this Western triumphalism is itself problematic.
In any case the idea of Japanese leadership for the region and beyond lives on in Japanese policy thinking. The Minister for Foreign Affairs gave an address2 recently on "Japan's Leadership for the Future of Asia" in which he spoke about security issues and then moved on to Japan's efforts towards prosperity in Asia, emphasizing the magnitude of Japan's recent assistance measures and the prospects for the internationalisation of the yen. And despite the burst bubble and its consequences Japan remains so much larger than all the other East Asian economies, and still so much more advanced in nearly all sectors, that its influence continues to be very great. Even without any encouragement from Japan, and even despite some wariness on the Japanese side, the issue of Japan's leadership of an eventual East Asian regional grouping is still there, just off stage.
Despite scepticism about the flying geese image of Japan's role there has been a recognition in Southeast Asia that Japan has been the most important source of concessional finance and usually also the principal source of FDI. Indeed this has come to be seen as the normal way of things and no one in Southeast Asia seems to have been surprised, or even particularly impressed, by the truly massive scale of Japan's recent assembling of measures to provide emergency and recovery assistance to the region. Altogether, and including the Republic of Korea, the total in Japanese announcements is around $85 billion3. That dwarfs commitments by others. And yet Japan has so far seemed to have had less influence on policy towards the crisis than has the so-called Washington consensus. To some extent as we shall see that impression is likely to need qualification as the Washington consensus itself has been, and continues to be, in the process of modification as a result of the experiences of the East Asian crisis and of the Fund's interventions. But in any case Southeast Asia does seem to have come to regard large Japanese contributions as the norm and something to be expected even if at the same time the main policy pressures come from Washington and show little evidence of Japanese input.
However this cannot continue indefinitely, if only for the obvious fact that even Japan, especially in view of its own problems, will not be able to continue indefinitely providing public sector support on that sort of scale4. The impact of these recent very large scale measures will be felt for some time and they should reinforce Japan's position in Southeast Asia. But can Japan be expected to be able, or perhaps willing, to come forward with massive resources year after year? It is likely to be necessary for the weaker Southeast Asian countries, and Indonesia especially, to make do with less foreign support. This is also an argument in favour of those (including the Fund) who put emphasis on governance reforms in Indonesia and other places.
We noted earlier that the flying geese image of Japan's position in relation to Southeast Asia is a very benign and favourable one for both sides. But it has not always been accepted in those terms. There has always been a more critical view which has seen Japanese policy and practice in less generous terms. In that account the Japanese purpose has been to create a relationship of dependency in which the level of technology transferred, the management and financial control, and other key aspects of the transplanted or implanted manufacturing would remain as far as possible under the Japanese head offices. This involves a high degree of vertical integration between the Japanese main companies and the dependent implants in Southeast Asia as well as in some cases the extension of keiretsu or keiretsu-like relationships to the offshore production arrangements where Japanese component suppliers also set up in association with the main transplant. It has been argued that Japanese aid arrangements have supported such extensions of Japanese controlled production facilities in various ways and that the whole pattern reflects MITI planning which sees Japanese companies as the drivers of industrialisation in individual economies in the region and on a regional basis.
This account has recently been developed in detail in the work of Kozo Yamamura and Walter Hatch5 who called the process "embraced development". Rather than the flying geese analogy they use that of the cormorant fisherman who uses his birds to catch the fish (which of course the cormorants do not get to eat themselves). Yamamura and Hatch contest the flying geese version of the story in which the economies following the Japanese leader gradually develop ever higher levels of capacity and skills and become less dependent. Their claim is that the nature of the arrangements which Japan sets up result in Japan "flying further and further ahead of the regional flock"6. Another US-based writer, Edith Terry7, has carried the Hatch and Yamamura analysis further and sought to show how the Japanese response to the financial crisis in Southeast Asia has been used to consolidate and advance the Japan-centred production networks in the region. She has an interesting account of how "the IMF and liberal Western economists" saw the crisis and how "Japanese bureaucrats" saw it. The former looked at it "as an opportunity to restructure Asian economies along Western lines" while the latter saw it "as a chance to accelerate "embraced development" by a raft of programs which "either had a strong bias towards Japanese companies and their affiliates in Asia, or else developed it early on". She draws attention especially to the export-focussed purpose of these measures which she argues reinforces the continuing rationale of the "embraced development" strategy of creating and advancing Japan-led vertically integrated networks which generate export surpluses for Japan with the subsidiary countries in the network and then generate offsetting surpluses for those countries with the United States and other markets.
Theories of East Asian Development and the Implications for Policy
The issue of Japan's role in Southeast Asia and how that should be interpreted involves also the role and influence of the United States as a vital market for the exports generated by the Japanese investment and general developmental activity in the region. It also involves the United States in other ways. In particular there has always been an ambivalence in Washington about the issue of Japanese leadership in the region. Japan has been encouraged and at times publicly applauded but there have always been reservations about the nature and perceived purposes of a Japanese leading role. There has often been a sense that in Washington's eyes the increasing influence of Japan in the region challenged the access and influence of the United States itself and its desire to see the expansion of liberal market policies and practices.
From an Australian point of view, and probably from the viewpoint of many in Southeast Asia, it has been seen as very important that Japan and the United States work along broadly consistent lines on the economic development of Southeast Asia. Differences between them cause discomfort and concern certainly in Australia where successive governments have sought to do what they could to ease such differences. Of course there have been those in Southeast Asia, particularly in Kuala Lumpur, who have applauded and endorsed even the more strident sort of "Japan can say no" thinking in Japan. But generally in the region the more widely held view is that both Japan and the United States are needed.
One factor in the background to the somewhat ambivalent Japan-United States dialogue in the region has been a long-running disagreement about the nature of the economic success of the developing states of East Asia and about the appropriate model and policies for them to follow to ensure continued rapid growth and prosperity. A fruit of this disagreement was the landmark World Bank report "The East Asian Miracle - Economic Growth and Public Policy" in 1993. That report represented a major step in the evolution of the Bank's policy and it was the result of sustained pressure from the Japanese representatives at the Bank over several years. Of course it was a compromise, but a sensible compromise, and it is probably unfortunate that its implications were not more prominent in the articulation of what has been called the Washington consensus during the crisis which started with the Thai baht in June 1997. This disagreement about economic analysis and policy developed against a rather overheated background of public discussion. It is hardly remembered now that in the late eighties and early nineties the bookshops in the United States were full of books, the press full of articles and the talk shows on TV full of earnest talk to the effect that Japan was a threat to the United States, that Japan would become the dominant economic power and that it would exert that power in ways inimical to the perceived interests of the United States. It was a time when there was a belief that the United States was experiencing "imperial overstretch" and was in the early stages of decline as a great power. Those expectations about Japan and the United States and about shifts in their relative positions proved to be very wide of the mark. Japan ran into major trouble with the bursting of the bubble at the beginning of the nineties and has been unable to regain momentum. The United States entered on one of its periodic great surges of "reinventing" the economy, with massive shifts out of the ailing traditional industries into a range of largely information-based very high growth industries which have made it again the unchallenged global economic superpower as well as the unchallenged superpower in security terms.
It is not surprising that the expectations and mood of the late eighties have dropped out of sight. But we need to recall them to understand the background against which there was conducted an important argument: that is the argument whether the so-called "Japanese model of development" was as valid as the neo-classical or neo-liberal model which the Bretton Woods institutions and the Department of the Treasury in Washington espoused. The contemporary background gave that argument a resonance which went beyond dispassionate analysis. That might have contributed to the length of the struggle to have the World Bank issue a report which acknowledged the effectiveness of some features of the development model which the Japanese had been defending in the Bank.
The idea that the Japanese economy itself had achieved its remarkable growth record by adherence to free market principles and minimal government intervention had already been challenged in the western scholarly context by Chalmers Johnson's work on the role of MITI. Subsequently others found in detailed studies of Taiwan, Korea, and Hong Kong that there had been extensive, persistent and effective government guidance and influence in the remarkable development of those economies too. Robert Wade in his influential 1990 work "Governing the Market"8 refined the analysis: rather than claiming that government intervention was the "principal factor behind East Asian economic success" he argued that "A more tenable formulation is a synergistic connection between a public system and a mostly private market system, the outputs of each becoming inputs for the other, with the government setting rules and influencing decision-making in the private sector in line with its view of an appropriate industrial and trade profile for the economy". This concept of the "synergistic connection" has since been explored and developed by others. Linda Weiss and John Hobson described as "governed interdependence" what they called the "institutionalized collaboration between policy-makers and industrialists (which) lies at the root of state capacity, and thus national competitiveness, in the modern world."9
By June 1997 scholarly opinion was divided on the issue. Certainly the "guided development" school had made considerable inroads but there was still a substantial body of neo-classical economists who believed the success of the East Asian economies was to be accounted for by the operation of the market with minimal government intervention. In the latter part of 1997 and into 1998 they saw the weaknesses exposed in the East Asian crisis economies as due largely to government attempts to fix exchange rates at unrealistic levels, and to malign government and bureaucratic involvement which in the Southeast Asian cases resulted often in rent-taking protection, cronyism in the creation of monopoly positions and licences, corruption and so on. In all three of the cases where it was called in the IMF, following the Washington consensus, imposed various conditions designed to improve governance especially in the financial sector. This was most controversially the case in Indonesia where the demands for very extensive reform in the end led to the downfall of the government of President Soeharto which had been in power for 32 years and, for all its faults, had overseen an enormous increase in national income and welfare10.
Whatever views Japan might have put forward inside the International Monetary Fund it did not, as far as I am aware, engage in any public disagreement with the steps the Fund took in the crisis economies. However at the Joint Annual Meeting of the Governors of the IMF and the World Bank on 6 October 1998 in the address in which he announced the Miyazawa initiative for Japan's assistance to the crisis economies, the Minister of Finance of Japan made some remarks which indicate the line of Japanese official thinking11. Mr Miyazawa said that he believed "that economic management and development strategy that makes the most use of the market mechanism, which has long been promoted by the Fund, is still essentially valid. Ensuring greater exposure to a market mechanism, thus increasing economic efficiency, will continue to be a major policy for many of the developing and transition economies." That is a somewhat hedged endorsement of the Fund's essentially free market, deregulatory approach which had strongly influenced its crisis interventions especially in the early months. But in the next sentence Mr Miyazawa said "As the basis of a market system, they must improve regulatory and accounting systems, maintain sound financial systems, and strengthen supervision of financial institutions for appropriate risk control". He then went on to outline steps which should be taken by the IMF and the emerging economies to reduce risks arising from capital account liberalizing and its consequences with regard to short-term or speculative movements of capital, which were the immediate causes of the crises. At around the same time academic critics were saying something which seems very consistent with the Finance Minister's observations: namely that a major factor in creating the vulnerability which the East Asian emerging economies exhibited in the crisis was the extensive liberalization and deregulation which they had all been undergoing in the preceding period under pressure from the IMF and the other elements of the Washington consensus.
In June 1998 Wade published an article entitled "The Asian Crisis and Western Triumphalism"12 in which he noted that "(t)wo main interpretations have emerged of the Asian meltdown. One says it is part of the end-game of Asian state-directed capitalism. The other says it is due to a panic-driven investor pullout that has triggered debt deflation". He said that the "most prominent, if not the most eloquent, exponent of the first is Alan Greenspan, chairman of the Federal Reserve" and he quoted a statement by Mr Greenspan as follows: "What we have here is a very dramatic event towards a consensus of the type of market system which we have in this country. The current crisis is likely to accelerate the dismantling in many Asian countries of the remnants of a system with large elements of government-directed investment, in which finance has played a key role in carrying out the state's objectives. Such a system inevitably has led to the investment excesses and errors to which all similar endeavors seem prone. In a system of government-directed production gluts and shortages are inevitable". Wade and many others have pointed out that up until just before the crisis struck the Washington consensus had been lavish in praise of the East Asian economies which were hardest hit by the financial meltdown. They were praised on the ground that their commitment to free markets was producing remarkable growth. But when they were struck down by the capital markets' attacks on them they were told that their problems were due to a lack of liberalization. There is some justification for this criticism but it rather overlooks the fact that public statements by the IMF and the World Bank praising these countries before the crisis would undoubtedly have been made partly to encourage the governments and authorities concerned to continue on the deregulation, open market course and to enhance their attraction in the market place. What the Fund and the Bank were saying privately to the Thais, the Koreans and the Indonesians in particular was no doubt less rosy.
The issue which Wade identifies and which he and others have pursued is that the "triumphalism" of the West and of the Washington consensus in particular was misplaced. It is argued that the vulnerability of the economies which were struck down by the East Asian crisis was not due to their having failed to shift sufficiently to the government hands-off free market policies advocated by Chairman Greenspan for example. There was therefore no reason to claim that the crisis was the final proof of the fallibility and unsoundness of the governed markets and governed development school of thought. Nor was it a triumphant proof of the validity of the views of the neo-conservative free market advocates.
In their discussion of this Wade and others argue that part of the reason for the vulnerability of the crisis economies was precisely that they had, under pressure from the Washington consensus, given up much of their capacity to direct and control investment and capital inflows. With their own currencies pegged to the dollar and foreign funds being offered short term at much lower rates of interest than in their domestic markets Southeast Asian banks and corporations set off unhindered on a wave of borrowing and over-investment, much of it in speculative real estate.
Thus the crisis is taken by the advocates of governed markets and governed development as showing that it is the free market which produces "gluts and shortages". In their account an institutionalised and solidly based framing and implementation of policy by skilful government in close consultation with industry provides a much steadier and more successful platform for growth.
In defending their account of the basis of the success of the East Asian growth economies the governed or guided development school have limited the scope of their claims. Wade, Weiss and others have drawn attention to important distinctions they see between, on the one hand, the Northeast Asian growth economies and in particular Korea and Taiwan, and on the other hand the Southeast Asian states like Thailand, Malaysia and Indonesia. Wade sees the Southeast Asian states as caught in "a medium technology trap" without the education levels necessary to break out as did Korea and Taiwan. Weiss sees a basic difference between state involvement and a state's transformative capacity. In the Southeast Asian examples state involvement has frequently followed different priorities from those which prevailed in Northeast Asia. Not only were the public priorities different but the bureaucrats were not of the same quality or sense of commitment as those in Northeast Asia. As a result a lot of investment went into non-productive and speculative projects 13.
The guided market school are right to argue that it is misleading to represent East Asia as an undifferentiated whole in these discussions. It should also be said that it is misleading to suggest that all of East Asia did or could follow Japan's example or the "Japanese model". Japan has had a substantial industrial base for a hundred years, a strong educational system, a commitment to catch up to and overtake the West, a committed and skilful bureaucracy, and so on. Nevertheless Japan has shared some of the vulnerabilities and weaknesses of the Southeast Asians. For example, in Japan too there was a great deal of misdirection of borrowed funds into speculative investment in real estate and massive investment of public funds in politically generated and determined infrastructure projects which had little economic justification. Hence the bubble economy and the difficulty of overcoming it. But it is certainly true that at this stage Thailand or Indonesia appear to lack the capacities to follow in Japan's footsteps on the road to industrial development. The creation of those capacities is a complex process which could well be protracted.
The distinction Weiss makes between state involvement and transformative capacity is suggestive. In Indonesia for about two decades there was massive state involvement and investment in industrial development under the then Minister for Technology and Research, the present President Dr BJ Habibie. Huge amounts of funding were appropriated off budget for the development of an aircraft industry, a shipping industry and other projects. Dr Habibie believed, and persuaded President Soeharto, that it would be possible for Indonesia to leap over stages of development by training cadres of engineers and other specialists to a high international standard so that they could design, develop and build aircraft and other advanced equipment. It is not possible to make a quantitative assessment of the results because the balance sheets have never been revealed. But it is clear that the costs were massive and the results relatively meagre. Here was a notable case of state intervention attempting very deliberately to exercise transformation, but not succeeding. It could be argued that the Habibie schemes did not adequately meet the criteria of "governed interdependence" because for example they were not driven by a sufficient consensus between government and industry. Free market proponents would no doubt add that it illustrates also one of the basic problems with all state governed or state guided development - the risks involved in trying to pick winners, and more generally the risks involved in trying to override the market. On the other hand the Indonesian authors of the plans to leap over intermediate stages directly into aircraft design and construction for example claimed that the risks and large investments were justified by the impetus that would be given to the modernisation of the economy and the society. They accepted that this sort of policy was going to involve higher costs than simply importing the end products.
Clearly it is necessary to be selective in identifying states which can be presented as examples of the application of "governed interdependence" and there is now a rather demanding set of criteria such as a highly motivated and very capable bureaucracy and disciplined and organised industrial associations. It is unlikely that the necessary conditions could be created any time soon in a country like Indonesia, or for that matter in China. If the conditions have so far occurred sufficiently only in Korea and Taiwan the model may have fairly limited direct application. There is then a question whether a flying geese pattern would be possible at all in East Asia including Southeast Asia if it required the sort of conditions postulated by Weiss, for example. But for twenty years and perhaps longer the development of the region did show some of the features of the flying geese pattern at least in the sense that Japan exported some of its more labour intensive and thus less competitive manufacturing and Korea and Taiwan in due course did the same as they moved up. As a result China, Thailand, Malaysia and Indonesia developed growing manufacturing sectors and all reduced their dependence on the export of minerals, agricultural products and other traditional products. It may be, as Professor Krugman and, in a different context, Professor Wade, have argued the Southeast Asians have grown not because of improvements in productivity but through the massive application of capital and relatively unskilled labour at low levels of technology. But there seems no inherent reason why that should not change over time, albeit a long time in some cases, and meanwhile, if they can resume reasonable economic growth, there will be increasing demand in their own markets for what they can and do produce.
The division between the guided market, guided development school and the Washington consensus position is not just an academic debate. It goes to the roots of policy in all these countries and affects not only the role of the IMF, the World Bank, the Asian Development Bank and other international institutions, but also international trade policy and the expectations and policy influence of the world's most important economies. The relevance of the guided market, guided development school would be limited if its applicability were to be restricted to two or three successful economies in Northeast Asia. But part of the importance of the present emphasis on governance in the conditionalities imposed by the IMF and in the development assistance programmes of the OECD countries is that the Southeast Asian countries should achieve the capacity to run regulatory and policy systems which are relatively transparent, efficient, fair and uncorrupt. It is clear that such emphases recognise that the state must have an important role in these countries. The concomitant emphasis on the open market is needed to ensure that their investments are competitive
. The Crisis and the Search for Answers
In the aftermath of the financial crisis and the massive effort in many quarters to analyse its causes there has been a shift in the Washington consensus position as regards the capital market and financial flows. There is certainly a recognition that market activities outside the control of the countries concerned were at least the proximate causes of the devastating impact on Thailand, Korea and Indonesia. There is much current attention to possible reforms or modifications to the international financial architecture as a result. There is also considerable attention being given to the regulatory and control mechanisms of the developing economies themselves, as well as to appropriate exchange rate regimes. Now it is important to make a distinction between regulation and control of foreign investment flows, and of the country's currency arrangements and the different area of industry policy. To say that the Southeast Asian countries need stronger control over the inflow of foreign short term funds and matters of that sort does not imply any particular position as to industry policy or any view that the state should guide investment into particular industries. It is not inconsistent with a relatively open market, small government policy on industry and development generally. It does not need to represent any shift towards the guided market position.
Indeed it is not clear at all what light if any the financial crisis has shed on the issue of guided as against open market development policy for the Southeast Asian states. It is also still an issue for debate how much of the severe conditionality which the Fund imposed on Indonesia in particular was relevant to the rescue requirements or to what extent it was rather a matter of the Fund taking advantage of the situation to secure a range of changes which were anyway desirable and strongly favoured by the Washington consensus. It was argued that those conditions relating to governance were necessary to bring back the investment funds which had fled the country, and also draw in additional investment. It is true that the spotlight which was directed on the gross distortions of the Indonesian economy and the abuses, privileges etc (the so-called KKN) were not likely to reassure potential investors. But that was not the most urgent task and yet it overshadowed all the other activity. It was I believe the view of the Japanese authorities at the time, as it was the view of the Australian authorities, that the Fund's conditionality regime imposed on Indonesia constituted a distraction from the main task of preventing the collapse of the currency.
In circumstances where the crisis took everyone by surprise it strains credibility to claim that the crisis countries failed to maintain their fixed exchange rates and then had to call in the IMF to prevent collapse because they had not opened their financial markets fast enough. Indonesia, which was worst affected, had extensively decontrolled its financial sector over the preceding period. The distortions in the system were well known and had not stopped foreigners from investing and lending. It has been argued that a lesson to be learned in this area from both the Southeast Asian experience and the Russian and other recent episodes is that controls can be removed too rapidly and before there is an adequate capacity to supervise and regulate.
There have been many conferences about the East Asian financial crisis and much research and analysis. A great deal is known about the factors and circumstances and there are diverse views about which of these was critical. But there seems as yet to be no fully satisfactory explanation which both accounts for what happened and has predictive value for the future. There are of course some illuminating interpretations which to some extent supplement each other. Thus Dr Eisuke Sakakibara has insisted that what happened in 1997 to Thailand, Korea, Indonesia and to a degree to some of their neighbours was not an "Asian" crisis but a "crisis of global capitalism" and he argues that looking at the details of these crises "one is led to believe that they are testaments to the inherent instability of liberalized international capital markets where sudden reversals of market confidence cause periodic panics of different mangitude and duration" 14. Dr Sakakibara argues that the IMF must continue to have the central role in the supervision and safeguarding of the financial system but that the Fund requires reform and strengthening in various ways. If I have understood him correctly, Mr Paul Volcker does not believe that the key to ameliorating future crises lies where the official consensus has sought to locate it, in reforms to national banking regulations, auditing standards, accounting practices, greater transparency etc. He cites the examples of the savings and loan crisis in the United States, the collapse of banking systems in Scandinavia and the collective failure of the large Texas banks in the mid-80s all in circumstances where there were supervision and regulation regimes in place. Banking supervision lags behind institutions and markets and the market will find a way around confining banking regulations by finding other ways to do business, which is what has happened with investment banks and hedge funds.
While recognising the role of supervision and regulation and also in some cases restraints on short-term capital inflows, Mr Volcker sees great difficulties for emerging economies in circumstances where the size of their financial sectors is so small in relation to the volume of funds disposed of by institutions in the market. He points out that the aggregate size of banks in Argentina or Thailand or Indonesia fall in the range of a single regional bank in the United States 15. It is hard to maintain pegged exchange rates in such circumstances but in the light of experience floating rates leave these economies exposed to massive volatilities which provide tempting profit opportunities for professional speculators.
The globalized financial market holds great difficulties for the emerging economies of Southeast Asia and the present system manifestly has not found the answers to those difficulties. The Malaysian response has been in effect to reject the IMF and Washington Consensus advice and try to erect its own protective arrangements of capital controls and other restrictive devices. So far this has helped Malaysia to avoid the worst consequences of the crisis and it may be that Malaysia will be able, with skilful management and a return to economic growth, to move gradually to a less restrictive investment regime. If it succeeds in this way in again becoming an attractive place for international investors Malaysia is likely to suggest that it has successfully defied the West and set an example for the region. A closer look suggests that Malaysia is doing a number of the things which the Fund would have urged it to do and the controls are perhaps of limited relevance at the present (post crisis) phase. It is not clear to what extent the Malaysian measures could represent a long-term solution. There is no shortage of sceptics.
Japan's Leading Contributions and the Role of the Yen
The Japanese policy of promoting the internationalistion of the yen is aimed in part at broadening the base for the Southeast Asian economies which have had such problems with their attempts to peg to the dollar. If Mr Volcker is right there may be no real future for separate currencies for the emerging economies. Hence discussion of "dollarisation" in the Latin American context. But for Southeast Asia a problem is that their trade is diversified between the US dollar, the Yen and the European bloc. Recourse to the yen also raises the problem of yen/dollar volatility. With the rate swinging between 80 and 140 there is instability in being stuck with either if you are involved with both in trade and investment transactions. With Japan providing such a large share of the funding for the Southeast Asian crisis countries in the next future the aim of internationalisation of the yen will proceed in the region; but hopefully against a background of a more stable yen/dollar rate.
The Japanese role in Southeast Asia in the context of the crisis and its aftermath has been influenced by Japanese efforts to assert a leadership role in terms of financial institutions. At about the same time as the crisis struck there was a proposal, floated by Mr Sakakibara who was then Vice-Minister for Finance, to set up an East Asian monetary fund. The proposal was strongly opposed by the United States and also not at the time favoured by Australia. There was a concern that such a fund would offer less onerous conditions than the IMF in order to attract regional countries to use the new facility. That could undermine the disciplines which the IMF represented and subvert the authority of the Fund and the consensus which governed it. Japan did not proceed with the proposal.
Following the launching of the New Miyazawa initiative in October 1998 Japan and the United States announced that they would cooperate in an Asian Growth and Recovery Initiative (AGRI). President Clinton and Prime Minister Obuchi issued a joint statement at the APEC leaders meeting in Kuala Lumpur on 16 November 1998 explaining this initiative which was to have four main components including efforts to:
The first stage of the New Miyazawa Initiative had two components: $15 billion in short-term support , including trade financing measures, and $15 billion in medium- to long-term yen loans through Exim bank and the OECF to Thailand, Indonesia, Malaysia, the Philippines and Korea16 some of which was extended to Japanese affiliates. The short-term facility is designed to produce an on-going support in that money lent should circulate through the fund on a three month cycle. The second stage of the Miyazawa Initiative is designed to raise up to $17 billion in sovereign debt and private capital with the broad objective of promoting the resumption of a fully functioning capital market in the region. Mr Miyazawa said that the new instruments created and the associated funding should encourage Japanese capital back to the region. The core of the scheme is the setting up of a $3 billion bond guarantee scheme through the Asian Development Bank's Asian Currency Crisis support facility. Japan also put up $230 million to subsidise interest payments on bonds issued by regional governments under the scheme. Such bonds could be issued in US$, Euro or Yen or combinations of those. Exim Bank assistance will be directed to "financing schemes such as equity and debt funds that invest in Asian private-sector enterprises" which will include "assistance in working capital to facilitate the restructuring of private-sector enterprises" 17
A potentially important element in the New Miyazawa Initiative is its concern with the "construction of a stable financial system resistant to currency crises" looking to promote "the influx of good quality funding (long-term funding denominated in Asian currencies) form outside the region and to build up a stable financial system". With a view to upgrading and fostering Asian bond markets the government of Japan is to promote the issuance of the Samurai bonds and upgrading the government bond markets and settlement systems and also conduct "joint examinations" with regional governments in the region to improve the individual supervision and governance capacities relating to the bond markets and enhance regional primary markets of international bonds as well as upgrading secondary markets. This agenda suggests a clear intention on the part of Japan to use its expertise and its institutional and financial strength to exercise leadership in this key area. The New Miyazawa Initiative has already placed Japan at the centre of the recovery plans of the Southeast Asian governments. The intensity of consultation between the Japanese authorities and the Southeast Asians has been remarkable.
Partly this is connected with the securing of particular funding under the first stage of the initiative but there is also a wider consultative agenda illustrated for example by the "Mission for Revitalization of the Asian Economy" which was charged with the objectives of examining and analysing the current economic situation in East Asia, evaluating the implementation and effects of Japan's $80 billion assistance measures and then making recommendations "on challenges that Asian economies need to address and the contribution that Japan should make, in order for Asian economies to revive and develop steadily thereafter". This mission comprises seven of the most senior and experienced persons from Japanese business and finance, a Professor of Economics at the University of Tokyo, a most eminent and internationally respected former Vice-Minister of Finance and a former ambassador to Indonesia. It is an immensely well-qualified team and its recommendations will carry much weight. The Mission is visiting Thailand, Indonesia, the Philippines, Malaysia, Vietnam and South Korea.
Japan of course continues active and very much involved in all those activities of the IMF and the World Bank affecting the recovery of Southeast Asia. There is also continuing consultation with Washington. But the failure of the AGRI scheme or rather the abandonment of it as a joint Japan/US scheme and what has been in effect its relaunching as a Japanese scheme as the second part of the New Miyazawa Initiative has shifted the Japanese leadership role to a new level. The Japanese role has always been distinctive but it now becomes more separate from and greater than the joint international role represented by the IMF and the World Bank and the World Bank's consultative arrangements involving donors and developing countries in the region. There is now the potential for Japan to be even more at the centre of Southeast Asia's development than it was before the crisis, and certainly more than it was during the height of the IMF rescue efforts of the Washington Consensus influence. Japan is now the principal source of concessional funding with much of that being disbursed from Tokyo. Much of the thrust of the Miyazawa second stage is to encourage Japanese capital back to Asia 18 and to support Japanese affiliates in East Asia (which are important in the export performance of Southeast Asian economies). Japanese affiliates in the region were set back by the crisis with many having to seek assistance from parent companies and through the Miyazawa initiative.
The Miyazawa Initiative also serves to promote the long-standing Japanese objective of the internationalisation of the yen. We noted earlier Mr Miyazawa's advocacy of less regional reliance on the dollar and more use of the yen, perhaps in basket with the dollar and the Euro. But there are important benefits to Japan itself in the greater use of the yen in the region. Greater use of the yen in trade settlements could be expected to encourage regional economies to borrow more in the Japanese market because of the greater ease of repayments in yen. Japanese companies which can deal in yen face a more stable calculation than where US$ quotations face them with unpredictable fluctuations. And the value of overseas assets of Japanese companies denominated in yen would avoid the risk (which happened last year) of foreign currency based values falling substantially in consequence of a rising yen. As is the case with other elements of the more active and prominent Japanese role the extent to which the New Miyazawa Initiative and other measures will succeed in increasing regional use of the yen will depend largely on whether the Japanese economy revives and becomes again a driver of the region's economic growth.
Some Conclusions and Pointers to the Future
Japan has long held a different perspective on national economic development from that which has for some decades dominated much (but not by any means all) Western and especially American thinking and policy-making. Japan is changing but one of the reasons why it has taken so long for the country to get its house in order after the bursting of the bubble is that it is changing fairly slowly. The distinctive features of Japanese capitalism were not duplicated in the other East Asian dynamic economies which followed on, although they developed structures which served the same broad purposes of driving the development of the economy through coordinated bureaucratic and business planning. The Japanese model could not have been duplicated at their present stages of development by the Southeast Asian countries. Nevertheless Japan has been in a less specific sense a model of what could be achieved in a non-western cultural and historical setting and at least in that exemplary sense has had an influence on development policy and economic planning in the region. The Japanese idea of the flying geese pattern suggested a closer set of causal and imitative factors than was the case. But it also reflected part of the reality in terms of transfer of industry and technology and also in exemplary terms, that is to say by demonstrating that an Asian country could catch up to and surpass the industrialised West and draw strength in doing so from its own Asian cultural and societal roots.
The East Asian economic crisis was seen at first as the death knell of the "Japanese model" or the governed market model and as a trumpet call to announce that there was no viable alterative to the liberal market thinking which was supreme in the corridors of power in Washington. But it is hard to find in those events strong proofs for any such sweeping conclusions. The only thing they surely demonstrate is that relatively small economies have become very vulnerable to the great tides of speculative funds washing around the world. Since the crisis the proponents of the governed or guided market models have been at pains to recall that they did not regard the Southeast Asian states which looked up to Japan as meeting the criteria which would qualify them to be regarded as test cases of the robustness or effectiveness of the model. In terms of the East Asian economic crisis their focus is thus a narrow one in effect confined to Korea and Taiwan. That leaves open the issue whether the Southeast Asians will or should continue to see Japan and more recently Korea and Taiwan as showing the best path for their own development. To the extent that they have done so in the past one could speak of a stricter flying geese model. To the extent that they have only seen Japan and then Korea and Taiwan as economies which were shifting out of industries which were no longer suitable for them and relocating those industries to Southeast Asia one could speak of a looser flying geese model.
The looser flying geese model will continue to operate although globalisation is bringing more and more diversification. European and American investment is growing faster than investment from East Asia (see Attachment B). Moreover an effect of the crisis and the drying up of Japanese investment has been that European and American investors are now more active than Japanese in buying Southeast Asian assets at greatly reduced prices. (See Attachment B). It may be that the measures contained in the second part of the New Miyazawa Initiative and possible other measures which could arise from the current high level mission mentioned above will result in a resurgence of Japanese investment. But there is another factor which is likely to play a role in the longer run. For Japan Southeast Asia is an area of permanent and close interest. For the Europeans and the United States on the other hand it is of much less direct and close interest. Investments at this time in Southeast Asia for them may be to a large extent a matter of taking targets of opportunity when there are distress sales and the like, and at a time when their currencies are very strong against the Southeast Asians. There might be more of a speculative element in that investment, with investors having in mind selling later at a profit when markets and prices in Southeast Asia recover. Japanese investments in Southeast Asia are more likely to be the product of planning and long term intentions.
Will Japan be the locomotive for a new surge of growth in Southeast Asia and will the Southeast Asians look to Japan as their leader both in terms of policy cooperation and as a model to follow in development strategy and policy? Or will the geese go their own way while the erstwhile leader struggles to regain altitude? Despite all Japan's massive efforts in Southeast Asia in the last two years and the continuing intensity of involvement and attention, the answer to these questions will depend on whether Japan can overcome its own problems and open up its own market and its own internal institutional and informal arrangements. Southeast Asian spokespersons at meetings such as the major Nikkei conference recently recognised and expressed gratitude for Japan's massive contribution to the region's recovery. But Southeast Asians are also saying that it is important that Japan boost its demand for their exports. They want Japan to help them in this very direct way to trade their way out of their problems. Since the crisis struck Japan has been taking less of their exports while the United States has been taking more 19. Even Japan's most respectful friends have been making that point. The Australian Prime Minister, Mr Howard, in an address to Japanese business organisations in Tokyo in July, did so in diplomatic but unmistakable terms. After emphasizing the importance for the region and the world of Japan's returning as soon as possible to sustainable growth he said :
" Japan has been very generous in its financial assistance to those economies that have suffered from the Asian crisis. Through the Miyazawa plan, and in other ways, you have made a very great contribution that has not always received the credit it deserves. But generous though this assistance has been, it is the recovery of Japan's economy that is a key to a sustainable recovery in the region as a whole. Also important is the confidence and credibility that Japan will gain from restoring its economic health. Japan is a central element in the strategic and political as well as the economic structure of the region. Your capacity to exercise leadership in policy directions and regional institutions is important for the future stability and prosperity of Asia."
That seems to me to express very well what is probably a regional consensus. Great hopes are being placed on Japan making the changes necessary to become dynamic again in ways which will help lift the growth of the whole region. There are changes afoot in Japan, but personally I doubt whether Japan will rapidly increase its imports from the region. I know of no reason to expect that Japanese consumer demand and behaviour will become much more dynamic in the foreseeable future, and there are good reasons to anticipate that the Japanese propensity to save will remain very high.
What we have then is major effort by Japanese government and industry associations to take the lead in helping Southeast Asia climb out of the aftermath of the crisis, in helping Southeast Asia become less vulnerable to such crises in the future, and in generating a new era of growth in Southeast Asia. But there are reservations on the part of others engaged in the principal international vehicles for serving those ends, and especially on the part of the United States. Although it must be clear to everyone that the American nightmare of domination by Japan was quite unrealistic and derived from quite mistaken premises, the United States still has difficulty accommodating Japanese initiatives and commitments to Southeast Asia. There is the concern discussed earlier that Japan may be seeking to pursue "embraced development" policies which would result in Japan having very privileged access and control over trade and investment in Southeast Asia. Other doctrinal differences apart, the United States is more committed to and welcoming of globalisation than Japan.
I do not know to what extent Japan might at this time be attracted by Mahathir- type prognoses about East Asian solidarity and so on. But Southeast Asians have a supporter and ally in Japan which is more globally experienced and aware than any of them, and which has shown that it is prepared to put major resources at the disposal of the region.
A possible conclusion would be that the flying geese will continue to be assisted and influenced by Japan, but the whole formation needs the United States also, if only because that has been and remains their crucial market.
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Nationality of companies in Asian Mergers & Acquisitions
Source: adapted from JETRO, 1999: White Paper on Foreign Direct Investment.
"The overwhelming majority of M&As, 4,563, were initiated by U.S companies and 2,326 were initiated by German firms, the latter being more than double the 1,110 M&As by Japanese firms" (Jetro,1999:7)
US and Japanese FDI in ASEAN4
Japan External Trade Organization
Note here that while Japanese FDI in the ASEAN4 grew by 87.1% from 1996 to 1997, US direct investment fell by 52.6%. Comparing the figures on M&As and FDI, it appears that while the US has led the way in portfolio investment in East Asia since the crisis, Japan leads the US in terms of direct investment. This may suggest that US and European investment may be more speculative (looking to make a profit on the market upswing) while Japan is in for the long haul but a closer analysis would be needed to support such a conclusion.
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US and Japanese exports to ASEAN
US and Japanese imports from ASEAN
The United States appears to have responded to the crisis by importing more from ASEAN and exporting less, while Japan has cut down on both exports to and imports from ASEAN. This lends weight to the idea that Japan is not helping ASEAN by absorbing more imports, and that this task is falling to the US.
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