The Myth of Recovery, Book

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THE MYTH OF

RECOVERY

THE MYTH OF

RECOVERY
The Asian Crisis More Than a Decade Later

Edsel L. Beja Jr.

INSTITUTE OF PHILIPPINE CULTURE

Ateneo de Manila University
Quezon City, Philippines 2009

Institute of Philippine Culture Ateneo de Manila University Loyola Heights, Quezon City P.O. Box 154, 1099 Manila, Philippines E-mail: [email protected] Website: www.ipc-ateneo.edu Copyright 2009 by Institute of Philippine Culture, Ateneo de Manila University Cover design by Reamur David All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the written permission of the Publisher.

The National Library of the Philippines CIP Data Recommended entry: Beja, Edsel L. The myth of recovery: The Asian Crisis more than a decade later/ Edsel L. Beja — Quezon City: Institute of Philippine Culture, Ateneo de Manila University, c2009. p.; cm. 1. Financial crises—Asia. 2. Asia—Economic conditions—1945-. 3. Indonesia—Economic conditions. 4. Malaysia—Economic conditions. 5. Philippines—Economic conditions. 6. South Korea— Economic conditions. 7. Thailand —Economic conditions. I. Title HB 3808 332.042095 ISBN 978-971-8610-56-5 2009 P092000199

De Omnibus Dubitandum

If you would be a real seeker after truth, it is necessary that at least once in your life you doubt, as far as possible, all things. René Descartes (1596–1650)

I am speaking of a ruthless criticism of everything existing, ruthless in two senses: the criticism must not be afraid of its own conclusions, nor of conflict with the powers that be. Karl Marx (1818–1883)

Table of Contents

List of Figures List of Acronyms Acknowledgments Executive Summary 1 2 3 Starting the Recollection How to Frame Crises Recalling the 1997 Asian Crisis Re-analyzing the 1997 Asian Crisis Comparative Analysis of the Costs Looking Back to Move Ahead Economic Growth Opportunism and Hesitation International Flows of Capital and Trade The Role of Governments International Cooperation Conclusion

ix x xi xiii 1 13 20 21 42 48 49 52 55 59 63 68

4

5

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viii

Postscript Parallels Between the Global and Asian Crises Affirming a Declaration of Independence Appendices References Cited About the Author

71 71 91 117 122 133

List of Figures

2.1 2.2 2.3 2.4 3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8 3.9 3.10 3.11 3.12 3.13 3.14 3.15

Short and transitory impact of crisis Extended but transitory impact of crisis Permanent (negative) impact of crisis Permanent (positive) impact of crisis GDP per capita, normalized to 1996 GDP per capita, rotated at 1996 GDP per capita and counterfactual, Indonesia Estimated costs per capita, Indonesia GDP per capita and counterfactual, Malaysia Estimated costs per capita, Malaysia GDP per capita and counterfactual, Philippines Estimated costs per capita, Philippines GDP per capita and counterfactual, South Korea Estimated costs per capita, South Korea GDP per capita and counterfactual, Thailand Estimated costs per capita, Thailand Share of foregone output to GDP per capita Share of opportunity cost to GDP per capita Share of accumulated cost to GDP per capita

14 15 17 18 22 24 27 28 30 31 33 34 37 38 39 41 43 44 45

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List of Acronyms

ADB BIS G20 G24 GDP IMF LTCM OECD WFO

Asian Development Bank Bank for International Settlements Group of Twenty Group of Twenty-Four gross domestic product International Monetary Fund Long-Term Capital Management Organization of Economic Cooperation and Development World Financial Organization

x

Acknowledgments

T

his book is based on a research project that was completed under the auspices of the Merit Research Awards of the Institute of Philippine Culture (IPC), Ateneo de Manila University, with funding support from the Ford Foundation. Wilfredo F. Arce was IPC director when the research grant was awarded in 2007, and he gave me full flexibility in pursuing my study. The research was thus completed without being concerned about ruffling feathers, so to speak. I am grateful to Czarina A. Saloma-Akpedonu, current IPC director, and Ma. Elizabeth J. Macapagal, IPC deputy director, for their constant interest in my study and for seeing through the publication of this book.

The Department of Economics of Ateneo de Manila University is a special place in the Philippines because it embraces and provides the sustenance to anyone interested in pursuing progressive thinking. Faculty members welcome alternative analyses, notwithstanding the predominance of the so-called “there-is-no-alternative” mode of thinking in Philippine economics, as it is elsewhere. My findings debuted, as in my earlier works, at Ateneo de Manila University, with my students as captured listeners. If I was able to convince them with my ideas, I am sure that you, too, would
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be convinced and find the book provocative to the soul. I also had opportunities to present my study elsewhere, namely: A Decade After: Economic Recovery and Adjustment Since the 1997 Asian Crisis (Bangkok, July 2007); Singapore Economic Review Conference (Singapore, August 2007); Annual Conference on Development and Change (Johannesburg, December 2007); ASEAN Inter-University Conference on Social Development (Manila, May 2008); and IPC-MRA Lecture Series (Quezon City, August 2008). I thank the seminar and conference participants for their inputs. I also wish to thank an anonymous referee and external readers for their constructive criticisms, suggestions on how to improve my analysis, and pointers on useful references. Of course, the usual disclaimer applies. Finally, Maria Donna Clemente-Aran did an excellent work on improving my written English and gave considerable effort into putting this book in its final shape for publication. Many thanks indeed to her for helping make the message of my book a lot easier to grasp and simpler to read.

Executive Summary

T

hree issues are raised in this book, issues that have been underplayed in the analyses of the 1997 Asian Crisis.

The first concerns the economic performance of Indonesia, Malaysia, the Philippines, South Korea, and Thailand in the post-crisis period, which has been inferior relative to their respective pre-crisis performance. In the two decades prior to 1997, the average gross domestic product (GDP) per capita growth rate of the group — excluding the Philippines because its performance was an outlier throughout the 1980s and 1990s — was 5.6 percent; in the decade prior to 1997, it was 6.9 percent. After the Asian Crisis, the average growth rate was about half (3.7 percent with and 3.9 percent without the Philippines). In short, the Asian Crisis played an important part in undermining the dynamic performance of the region. The second pertains to the fact that the crisis-affected economies have yet to recoup the losses they incurred during the Asian Crisis. The task of achieving full economic recovery remains daunting. A lot needs to be done to regain the lost economic momentum. Indonesia has to recoup a social cost of US$94.8 billion; Malaysia, US$39.1 billion; the Philippines, US$6.7 billion; South Korea, US$52.3 billion; and Thailand, US$95.1 billion. These figures have remained large partly
xiii

xiv

because of deficient economic growth. These economies have also not completed the needed reforms to regain their dynamism. Stronger but sustained economic growth is crucial to economic recovery. Excessive pragmatism that characterizes the actions of the crisis-affected economies has impeded their recovery. If economic performance slows down to less ambitious levels, recovery will simply be difficult. Downgrading growth targets in economic plans to conform to the projections announced by international institutions and rating agencies is unwise, given the sufficient capacities available for robust economic expansion. Such aversion to rapid growth betrays a wanton disregard for the unsatisfactory performance of the region in recent periods. Lastly, it is important to stress that, if the policies of the crisisaffected economies do not move in a positive direction, their economic progress will likely be limited and punctuated by crises. A positive direction is one where governments revive strategies that have proven effective in achieving dynamic performance and then strategically employ new ones to meet current challenges. Full economic recovery from the Asian Crisis remains difficult. Complacency with a seemingly stable economic environment will be misplaced as long as massive and volatile international flows continue to characterize the global financial system and most economies remain ill equipped to deal with the challenges produced by this highly mercurial global setup. If the international economic architecture is the origin of the crises, it is reasonable to demand changes in it so that more space is opened for governments to realize dynamic performance and for the world to achieve economic stability. Decisive action is needed from governments so that they can achieve such goals. Dynamic performance may require a robust private sector, but timely and appropriate government interventions are very important to succeed in an integrated and globalized environment. Environmental sustainability, income distribution, social safety nets, and international policy coordination have to be included as additi-

xv

onal goals. Of course, the efficacy of policies will largely depend on the capacity of the incumbent leadership and the political will of governments to implement unpopular measures. Ultimately, everything rests on the capacity of the leadership to orchestrate policies in pursuit of its goals. The study that became the basis of this book was completed in mid-2008, a few months before the Global Crisis began. The US housing bubble burst in 2007, but the bigger financial mess did not start until the second semester of 2008. As this book goes to press, the Global Crisis is unremitting, evolving and pulling many economies to much deeper contractions. The analysis presented in this book on the Asian Crisis remains valid, if not more relevant, given the Global Crisis. In view of the present crisis, however, it was deemed necessary to write a postscript to, first, present a preliminary analysis of the Global Crisis — perhaps a prelude to another study using the same approach as this book — and, second, pull out the policy guidelines outlined in this book and apply them to the present crisis. In other words, were the lessons from the Asian Crisis learned by the crisis-affected economies? At a general level, were the lessons from the Asian Crisis learned by other economies to forestall the Global Crisis? Or, in the case of advanced economies, were they basically going about their usual do-as-wetell-you-and-not-as-we-do approach to policy? Thus, the basic message of the postscript is that there has been little progress within Asia in institutionalizing the reforms that were found necessary because of the Asian Crisis. More importantly, the lessons of the Asian Crisis were not learned by many economies outside Asia. Once the Asian Crisis was contained and eventually disappeared as a menace to the region and the world, governments took a lighter approach to reforms, even in Asia. The Asian Crisis became a bad dream, so to speak, that could be forgotten when pursuing deregulation and financial liberalization. Indeed, the mainstream rhetoric vigorously accentuated the notion that the crisis-

xvi

affected economies were able to bounce back rather quickly despite the severity of the problem, thus shifting attention away from probing the underlying causes of the Asian Crisis to accumulating huge international reserves as buffer funds against future crises and the ensuing global imbalances owing to increasingly larger current account surpluses experienced by Asian economies as a result of their economic performance after the Asian Crisis. Even mainstream literature accentuated the recovery by 1999 or 2000, pointing out the V-shape pattern of economic growth rather than the actual L-shape pattern, as shown in this book. The result of such analysis extinguished progressive views inquiring about basic items for a sound economic management of present-day capitalist systems, namely, fundamental reforms in the international economic architecture, determination of the appropriate modes of cooperation and policy coordination, including the procedures for intervention during crises, and the introduction of structural changes that would enable domestic economies to pursue appropriate industrial policies and erect institutions that could withstand external shocks. There are, of course, historical and structural antecedents that explain why economies could not internalize the lessons of the Asian Crisis. Many explanations have been made elsewhere, among others, Minsky (1986), Wade and Veneroso (1997), Dumenil and Levy (2004), Harvey (2005), Bello (2006), Brenner (2006), and Klein (2007). Not surprisingly, the policy guidelines relevant to the Asian Crisis are found likewise relevant to the Global Crisis. A lot remains to be done to change the international economic architecture and make it conducive to balancing domestic and global goals so that economic welfare is enlarged without undermining national sovereignty.

1
Starting the Recollection

he 1997 Asian Crisis was unprecedented in its breadth and impact. There is large literature on its causes, and there is no need to rehearse them here.1 Analysts continue to study their implications, and policies move in a particular manner as a result. Before the Asian Crisis, the consensus shaped by the World Bank, the International Monetary Fund (IMF), and mainstream analysis in general was that the Asian miracle economies of Indonesia, Malaysia, South Korea, and Thailand would continue to have rapid economic growth even in the early 2000s, as gross domestic product (GDP) per capita growth rates averaged 6.9 percent in the preceding decade. In fact, Indonesia and Thailand had not experienced a negative growth rate prior to 1997. While Malaysia and South Korea went into economic
1 Important studies that appeared in 1998 are Bhagwati (1998), Chang and Velasco (1998), Corden (1998), Corsetti, Pesenti and Roubini (1998a, 1998b), Furman and Stiglitz (1998), Goldstein (1998), Jomo (1998), Krause (1998), Krugman (1998), Lee (1998), Montes (1998), Radelet and Sachs (1998a, 1998b), Wade (1998), and Wade and Veneroso (1998). This list expands if country studies and subsequent periods are included in the count.

T

2

Chapter One

recessions in the early 1980s, they recovered quickly to achieve rapid economic expansion beginning in the late 1980s. The inclusion of South Korea in the Organization of Economic Cooperation and Development (OECD) in 1995 raised prospects that other miracle economies would follow suit in due course. The Asian Crisis affected the Philippines, but not to a significant degree as it did the four miracle economies. Although the country faced minor damages, it needs to be stressed that its economic performance had not been impressive for some time, as its GDP per capita growth rate averaged only 1.4 percent between 1987 and 1996, and zero between 1980 and 1996. Studies have found that its boomand-bust performance contributed to a failure to reach growth acceleration, in turn, stalling the country from economic takeoff to higher growth trajectories similar to what the four miracle economies had accomplished by the 1980s. Of course, political troubles led to the doldrums that have characterized the Philippines since the late 1970s. It is now clear that the Asian Crisis uncovered the weaknesses of the miracle economies and that the debacle led to a change in sentiments toward the Asian model of economic growth. From being successful emerging economies — lauded in mainstream analysis as embodiments of virtuous economic expansion coexisting with rapid poverty reductions, stable prices, and provision of basic goods and services to all — they were quickly condemned as principals of crony capitalism, bastions of corruption, facilitators of wide-scale inefficiencies, and initiators of structural defects, not to mention their wayward external borrowings and unsound investments that altogether caused the collapse.2 Thailand, where the Asian Crisis erupted, experienced
2

The oil price shocks of the 1970s, the recession in the OECD in the late 1970s, the Latin American debt crisis in the early 1980s, the commodity prices slump and then the oil price crash in the mid-1980s, the European financial debacle of the early 1990s, and the reverse Plaza Accord in 1995, among others, brought economic problems to Asia. The dramatic economic contraction produced by the Asian Crisis is unprecedented to the region in the post-World War II period.

Starting the Recollection

3

a 2.4 percent contraction in GDP per capita growth in 1997 then went on to face the worst in 1998, as its growth contracted by 11.4 percent, or a total of 13.8 percent contraction over two years. Negative growth rates were reported in Indonesia, Malaysia, the Philippines, and South Korea by 1998, as the Asian Crisis worked itself out in the region. In fact, the growth rates in 1997 indicated that these economies were already shaken by the shock from Thailand. As the 1998 data show, Indonesia had the worst fate, with a contraction of -14.3 percent. Malaysia had -9.6 percent, and South Korea had -7.5 percent. The Philippines was injured the least, with a -2.5 percent contraction. The Asian Crisis bared the incompatibility of the Asian model of economic growth with the model advocated by the Washington Consensus, which was characterized by wide-scale privatization, deregulation, and financial liberalization, together with minimal government participation in giving finance and goods the freedom to move across borders. Of course, Hewison and Robison (2006) have pointed out that the Asian miracle economies were never completely drawn to the Washington Consensus model; rather, these economies were more strategic when introducing reforms while preserving the overall character of their respective approaches to growth. But Jomo (1998, 2003) has emphasized that aggressive financial liberalization in the region by the 1990s, coupled with no reforms in — or, in some cases, the weakening of — governance structures and regulatory capacities to manage international flows, eventually generated structural vulnerabilities that then aggravated the existing institutional weak points of the Asian approach. In time, the introduction of reforms created mismatches between the domestic and external sectors, widening opportunities to exploit the situation and circumventing existing regulations while finding ways to undermine regulations. Policymaking and implementation were eventually captured by elites; in other contexts, elite capture was allowed or tolerated by governments. The resulting inferior industrial policies discouraged further capital accumulation and industrial deepening as well as technological adaptation, thereby removing

4

Chapter One

some of the fundamentals for long-term economic expansion. In the end, the economies were vulnerable to speculation and crises. They were robust to the extent that international flows fueled the economic expansion, albeit driven by unproductive activities, and for as long as export-oriented strategies remained viable for rapid economic growth. When the Asian Crisis occurred, capital was quick to rush out of the region, making the adjustment process in each economy very difficult and, indeed, quite painful. The Asian Crisis was thus intense and caused wide-scale damages. Yet, domestic players were not unaware of the brewing domestic problems within the region and each economy; and they did want reforms to deal with the vulnerabilities. However, both domestic and international players were more determined to consolidate their control over capital and trade flows even as they pushed governments to relax regulations and controls, hence making the crisis inevitable. The economic fundamentals and welfare were upset as the Asian Crisis spread across the region and got worse. Days after the Asian Crisis erupted in Thailand, the Philippine peso was devalued when its central bank realized that it could not fight the situation with only very limited international reserves. Malaysia next took the ringgit off its peg. The Indonesian rupiah was hit next and also went off its peg. By the end of August 1997, the four economies had adopted flexible exchange rates. As the Asian Crisis gained momentum, Indonesia announced some revisions in its spending plans for the year, which actually did not happen: the budget announced in January 1998 indicated that Indonesia was not determined to pursue reforms. By late 1997, Thailand, the Philippines, and Indonesia had signed on rescue packages or standby arrangements with the IMF, World Bank, and the Asian Development Bank (ADB).3

3

Thailand and Indonesia signed on a US$17.2 billion rescue package in August and US$23 billion in October, respectively, while the Philippines had a standby package.

Starting the Recollection

5

The unexpected turn of events was the devaluation of the Taiwanese dollar in October 1997, which sparked serious concern that the Asian Crisis was already spreading outside Southeast Asia. Thereafter, speculative attacks on the Hong Kong dollar ensued. The sell-offs in the Hong Kong stock market reverberated in the stock markets of Japan, Europe, and the United States. The collapse of Yamaichi Securities Co. Ltd., the fourth largest brokerage in Japan, deepened the herd behavior. South Korea followed, with the devaluation of the won in November 1997. By the end of the year, it had been forced into a flexible exchange rate. Of course, bankruptcies had earlier hit the chaebols: Hanbo Steel in January and then the most publicized closure of Kia Motors in June. By the end of 1997, South Korea had signed on an IMF rescue package of US$57 billion. Other actions followed in due course, like an ADB emergency assistance package of US$3.5 billion and US$4 billion for Indonesia and South Korea, respectively. The United States and 12 other advanced economies pledged US$10 billion assistance to South Korea if additional funds would be needed to stabilize its economy. Speculations of President Suharto having a stroke in 1998 renewed fears in Indonesia, thereby sending the rupiah to plunge further. The fall of the rupiah ignited another herd behavior in other stock markets and currencies in the region. As if problems in the region were not serious enough, Southeast Asian sovereign debts were downgraded to junk bond status by Moody’s Investors Service. Another round of panic thus hit the region. Singapore devalued its dollar in January 1998. By then, the Asian Crisis had already affected other economies in Asia, like India and Pakistan, and was extending to the Pacific Rim as Australia and New Zealand were hit, too. When Indonesia removed food, fuel and electricity subsidies in April 1998, social unrest and violence erupted across the country. Panic escalated and riots overwhelmed Jakarta, plunging the Indonesian rupiah to its historic low. President Suharto was forced to resign by May of that year.

6

Chapter One

Just when everyone thought that the Asian Crisis was confined only to Asia, the Russian stock market crashed in June 1998. Meanwhile, Asia had to cope with the worst of the Asian Crisis as rescue and bailout packages were long-drawn. When these arrived, they provided some assurances for regaining economic stability. Complicating the ongoing troubles in Asia was the announcement in mid-1998 that Japan was in an economic recession. In fact, earlier in January, Japan released what could be the bleakest assessment of its economy in more than twenty years. It was a frustrating — albeit not an unexpected — development because the region looked to Japan for economic intervention. The yen plunged in June, which subsequently triggered attacks on other currencies in the region. And as though a fire was being reignited, renewed attacks ensued starting with the Hong Kong dollar. Speculations that China would devalue the renminbi did not help ease anxieties. Then Russia defaulted on its domestic debts, declared a moratorium against its foreign creditors, and devalued the ruble. The next wave of the Asian Crisis in September 1998 hit the Latin American markets. Brazil’s stock market plunged first. As stock markets across Latin America reacted to the Brazilian and Russian debacles, sell-offs in the stock markets occurred, with investors rushing out of Latin America. The tragedies in Japan, Russia and Brazil rattled Wall Street, where like in other markets sell-offs continued briskly as sentiments became bleak, with no hope that the Asian Crisis would slow down anytime soon. Only in September 1998, when a hedge fund company called LongTerm Capital Management (LTCM) was found on the brink of financial collapse, did the Asian Crisis become a serious threat to the United States. It became apparent that if LTCM collapsed with its exposure of at least US$1 trillion, the United States financial system would fail and set off a global economic meltdown. To avert the Asian Crisis

Starting the Recollection

7

from sparking in the United States, the Federal Reserve Bank of New York coordinated a private bailout of US$3.5 billion for LTCM. Other actions followed in late 1998 to deflate the crises and regain stability: the Federal Reserve cut interest rates three times between September and December 1998 to help ease speculations, and the European central banks followed by cutting their interest rates in October. Meanwhile, back in Asia, Malaysia introduced capital controls in September to insulate the economy from further attacks, reasoning that controls were needed for the country to pursue countercyclical measures and bounce back to good economic health. But it should be noted that the political conflicts between Prime Minister Mahathir bin Mohamad and Deputy Prime Minister Anwar Ibrahim, as well as the repeated denouncements by the Prime Minister of currency traders and financial speculators (including George Soros), did not help stabilize the economy. Fortunately, by late 1998, the financial markets had responded positively to the actions of the Federal Reserve, European central banks, and the various rescue operations. The following Miyazawa Plan of a US$30 billion assistance package would contribute to further stabilize the situation. Eventually, the Asian currencies and stock markets rebounded with strong recoveries; and, by the start of 1999, there was a realization that the Asian Crisis had finally subsided. The poor international response as the Asian Crisis was unfolding indicated clearly that there was limited appreciation of what was going on. The mishandling by the IMF in dealing with the crisisaffected economies did not improve the situation. Even the United States did not appreciate what the Asian Crisis meant. It actually took a neutral stance when the Asian Crisis erupted in Thailand in July 1997, thinking perhaps that Thailand was not a significant economic and strategic partner. Besides, Thailand or the Asian region in general was halfway across the globe from the United States or Europe that the latter regions would not be adversely affected by a small economic shock. There was little appreciation then that global

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Chapter One

financial integration would serve as a conduit for amplifying a minor tremor in one place into a tsunami that would devastate another country located elsewhere. Contractionary actions of the Asian governments did not help regain stability either. With domestic political turmoil and social disintegration in some economies, economic recovery efforts were not only difficult to be had but also painful when introduced. Uncertainties in the political leadership complicated the policy responses and limited the options open to governments. A decade hence, the impact of the Asian Crisis remains recognizable. At one level, the Asian Crisis ushered in much needed reforms in the region that have led to desirable outcomes, such as the strengthening of financial governance, introduction of social insurance and related measures to mitigate the adverse effects of economic adjustments, and so forth. At another level, however, the Asian Crisis was a traumatic experience. Economic performance in the post-crisis period is not as dynamic as that in the 1980s and early 1990s. Recent performances of crisis-affected economies have fallen to rates considered as “pragmatic,” that is, at a pace that will not lead to overcapacity and overproduction. Investors have become more cautious after experiencing large losses and have become hesitant to undertake investments without the guarantees they previously enjoyed from governments. The conspicuous rise in international reserves of crisis-affected economies attests to the fear of reliving the painful experiences of dried-up liquidity and the consequent economic contractions. Reserves accumulation is evidently a precautionary stance against future crises. While adequate international reserves are desirable, the direction has become too defensive, downplaying possibilities of using some of the funds for raising expenditures on public goods and services. In most cases, the reserves have been recycled into equities and securities or to finance the deficit spending in the industrialized region, especially in the United States and Europe, thereby stimulating further

Starting the Recollection

9

reserves accumulation in Asia. At the micro level, investors are more concerned about shifting funds away from physical capital accumulation into short-term or liquid assets, not only because profitability in the real economy has significantly fallen with reduced economic growth but also because the preferred investments are those that can be easily pulled out from the region in the event of a crisis or an unfavorable development. There are other emerging threats like high oil prices and rising commodities and food prices (albeit they have stabilized recently), overheating of the Chinese and Indian economies, or even a hard landing in the United States because of a homemade financial crisis that has rippled across the globe. A serious economic shock will certainly disrupt Asia once again, especially because intra- and interregional economic integration has tightened since 1997. Since the Asian Crisis has reconfigured the region into a qualitatively different form compared to that in pre-1997, there are other issues that the region must confront today, the most important of which are regional economic integration and the manner by which to proceed with it with an Asian character. As this integration progresses, economic difficulties and challenges are inevitably extended across the region. How to safeguard the economy from and respond to future crises are important considerations that must be addressed by both government and the private sector, bearing in mind that future crises to hit the region will take different forms, ignite through other means, or trace new channels to hit the economy. Without a doubt, future crises to hit the region will be more violent and virulent than the Asian Crisis. Unless the Asian economies have solid economic and political foundations, or Asian governments are sufficiently equipped to deal with problems generated by, say, regional economic integration, or the fluctuations and magnitudes of capital and trade flows are managed well, or a sound international financial system is in place to allow international cooperation for the effective regulation of cross-

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Chapter One

border flows to secure economic growth, and so forth, economies will continue to be interrupted and disrupted from realizing longterm economic expansion because of crises. This book raises three issues that have been underplayed in the retrospection of the Asian Crisis. The first concerns the economic performance of Indonesia, Malaysia, the Philippines, South Korea, and Thailand in the post-crisis period, which has been inferior compared to their pre-crisis experience. In the two decades prior to 1997, the average GDP per capita growth rate of the four miracle economies was 5.6 percent; in the decade prior to 1997, the average was even higher, at 6.9 percent. After the Asian Crisis, however, their growth rates were just about half the previous rates (or an average of 3.7 percent with and 3.9 percent without the Philippines). As such, this study presents another analysis of the economic consequences of the Asian Crisis. The second issue brought up in this book is that the crisis-affected economies have yet to recoup their losses produced by the Asian Crisis. There remains a lot to be done to achieve full economic recovery, or at least regain the standings prior to 1997. For Indonesia, Malaysia, and Thailand, the results suggest that the costs of the Asian Crisis have risen continuously in the following decade, albeit at different rates, while those for the Philippines and South Korea have shown some cost recoveries. Based on a cost accounting exercise (Chapter 3), Indonesia needs to recoup a total social cost of US$94.8 billion; Malaysia, US$39.1 billion; the Philippines, US$6.7 billion; South Korea, US$52.3 billion; and Thailand, US$95.1 billion. These amounts are indeed large by any measure. Stronger economic performance is clearly needed to reclaim the losses. If performance mellows down to supposedly “pragmatic” levels, it will surely be difficult to recoup the losses. Downgrading the economic growth targets in the economic plans to conform to the projections announced by international institutions and rating agencies is unwarranted, given the sufficient capacities available for robust

Starting the Recollection

11

economic expansion. Such aversion to rapid growth is symptomatic of callousness to the unsatisfactory performance of the region. The above points suggest that dynamic performance is very much needed; otherwise, the burden of the lost opportunities will persist, which will, in turn, engender social instability in the long term. In the case of the Philippines, the challenge is tougher because, unless extraordinary economic growth rates are realized, it will, yet again, be left behind when the other four crisis-affected economies regain growth accelerations. For the country, at least, there is greater urgency to realize dynamic performance. Whether or not these crisis-affected economies will be able to recoup their losses is an important issue that needs to be grappled with if the Asian region is to demonstrate that it can cope with the problems that come with, say, regional economic integration and globalization. At the same time, how well the economies recover is a benchmark for assessing the overall health of the international financial system to promote and support economic expansion. Lastly, it is important to stress that unless policies in the crisisaffected economies move in a positive direction — that is, reviving strategies that have proven effective in getting robust economic expansion going, and then employing new ones to meet current challenges — future economic progress will likely be limited and punctuated by crises. Full economic recovery from past crisis will be difficult, and the adverse consequences from it will linger. Complacency with a seemingly stable economic environment will be misplaced as long as massive and volatile capital and trade flows continue to characterize the international financial system, and most economies remain ill equipped to deal with the challenges produced by these flows. So if the international financial system is the culprit in creating and propagating crises in the international economy, it is reasonable to demand changes not only in the nature of policies but also in the fundamental structure of the system if only to address the threats and thereby obtain stability and sustain economic expansion.

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Chapter One

Decisive actions are needed from governments so that they can accomplish their economic and political goals. Accordingly, together with dynamic performance and sound government interventions to produce the needed structural transformation, complementary actions for international cooperation and policy coordination toward capital and trade flows management are equally important. Other concerns like environmental sustainability, including climate change, must not be forgotten. The effectiveness of policies will largely depend on political willingness and the courage to proceed with rather unpopular measures, especially in the eyes of the private sector, as well as the skillfulness of government in forging cooperative arrangements that draw out timely actions directed toward obtaining desirable outcomes that will benefit everyone in the end.

2
How to Frame Crises

H

ow a crisis impacts the long-term economic performance of an economy remains a highly debated topic. At one level, analysts argue that an economy can bounce back from a crisis with robust economic expansion, just like a strong spring bouncing back after it is pushed down. Accordingly, the stronger the crisis (push), the stronger will be the economic recovery (bounce). What remains an issue then is how quickly the economy will recover after it is hit by a crisis. In a way, a crisis is a mechanism — a wakeup call — which forces government to take serious adjustments and reforms that will ensure sound fundamentals and support long-term economic growth.

If a crisis is short and transitory, economic performance will exhibit a V-shape pattern (figure 2.1), which means no serious consequences on the economy. While losses are incurred due to the crisis, these will be recouped rather quickly when the economy bounces back

13

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Chapter Two

to economic recovery. In another case, a crisis is extended but transitory, forming a U-shape pattern (figure 2.2), which means serious impacts on the economy for some time. In this case, the crisis is prolonged perhaps because policy takes some time to be implemented or the impact of policy takes some time to work out in the economy or there are complicating subsequent events that delay recovery. The U-shape pattern may turn out to be deep or shallow, or wide or narrow, but the actual shape will depend on the extent of the crisis. Nonetheless, the economy will eventually be able to get its bearing and regain the losses when it starts to move toward recovery.

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0 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Fig. 2.1. Short and transitory impact of crisis

In the two cases mentioned, it is possible that the economy will regain its old pace of economic growth, or even exceed it, as momentum leads to growth acceleration. In figure 2.1, one-shot adjustments

How to Frame Crises

15

may be sufficient to push the economy into economic recovery mode; in figure 2.2, a series of adjustments may be needed. In any case, the crisis may be considered as non-consequential on the overall constitution of the economy if compared with the overall direction of subsequent economic expansion. In the end, the economy will be thrust to stronger performances. A crisis, in this view, is thus an anomaly to long-term growth.

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0
1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Fig. 2.2. Extended but transitory impact of crisis

At another level, analysts contend that an economy may face difficulties in recovering from a crisis. One possible reason is that the economic and political apparatuses are not designed to respond to a shock or may have been damaged by a shock, becoming useless and even contributing to subsequent difficulties in economic recovery. Another reason could be that the apparatuses needed for a recovery

16

Chapter Two

to take place are not available because government did not consider them as necessary to be erected or they were removed with deregulation and financial liberalization. Here, the economy is caught flatfooted when the crisis hits. Studies have also found that even if the right apparatuses are available, repeated shocks could progressively undermine them until they break. Of course, repeated crises push an economy to a lower growth trajectory, causing the resiliency of the economy to degenerate in due course. The description suggests that an economy is damaged from a crisis because either it does not have the right spring to bounce back or it only had a weak spring that was permanently distorted after it was pushed down by a shock. The spring could have decayed over time because of poor maintenance, misuse or even no use. That is, the restorative capacity could have been seriously damaged, rendering the economy unable to recover from a crisis. If a shock has a non-transitory or permanent negative impact on the economy, an L-shape pattern of economic performance could occur (figure 2.3). In this case, serious problems need to be addressed to return to the earlier growth trajectory. It is a mistake to assume here that a crisis ultimately has no consequence on the economy, that the impact would come to pass after a given time. With permanent impacts, the resulting growth trajectory would likely be lower when compared with what would have been if the crisis had not occurred, and so a one-shot adjustment would be insufficient to regain the losses. Thus, if shocks have permanent impacts, the economy would necessarily be pushed to derailment and it would be misguided to treat a crisis as an anomaly. Serious adjustments would be needed. The expectations from government would be more demanding.

How to Frame Crises

17

150

125

100

75

50

25

0 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Fig 2.3. Permanent (negative) impact of crisis

There are also cases in which a shock pushes the economy to a positive direction, forming a reverse L-shape pattern instead (figure 2.4). There will be non-transitory effects, too, but positive consequences on the economy. The shocks may be due to the discovery of an important natural resource (say, oil deposits that can be commercially exploited), which in due course will relieve the economy from its foreign exchange constraints as well as provide funds for expenditures on public goods and services, allowing government to build the economic and political foundations for long-term economic growth. How that natural resource will be exploited, how the earnings will be utilized toward capital accumulation, and so forth, are empirical issues and dependent on domestic circumstances like culture, politics, and other factors. In some cases, earnings are squandered

18

Chapter Two

or misappropriated to fuel conspicuous consumption or are appropriated by elites for their own benefit, and so forth. In due course, a so-called “Dutch disease” will manifest and push the economy into economic stagnation or crisis. Because the economic foundation will be destroyed when the problem manifests, a shock will likely be magnified and the consequences in terms of losses enlarged. In the end, the economy will be pushed to an L-shape pattern of economic performance.

150

125

100

75

50

25

0 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Fig. 2.4. Permanent (positive) impact of crisis

Still, a shock may take the form of large capital inflows because of the reorganization of the international production system due to economic integration and globalization. Parallel to that development, large labor migration for employment will lead to high remittance inflows, creating the same effect of relieving foreign exchange

How to Frame Crises

19

constraints and providing funds for vital expenditures. The inflows of capital may be caused by a shift in investment locations prompted by, say, abundant human capital in developing economies, thereby matching capital with labor to sustain cheap production. In the same manner, capital may shift from places where the population is aging to places where it is relatively young and productive, with the latter enabling large opportunities for capital to realize higher returns on investments. Or, the inflows of capital may be caused by speculative activities as investors seek quick profit opportunities that become available with deregulation and financial liberalization. If these episodes are not exploited in a positive way, that is, ensuring adequate public goods and services, technology, research and development, human capital build-up, and so forth, to effectively capture the potential benefits of new capital, economic bottlenecks will emerge, creating vulnerabilities, and the economy will risk a crisis in the long run. If the international production system is being reorganized with the relocation of operations in the developing economies while the markets of commodities remain in the advanced economies, there might be a mismatch in the commodities markets. Recall that the commodities supply gluts in the past resulted in economic recessions. Another mismatch could be due to policies in response to domestic and international challenges. The changes introduced by government might not be appropriate to remove vulnerabilities or to insulate an economy from the current threats. But if policymakers do not seize the opportunities to steer the economy away from potential problems as they become known, introduce changes to block potential crises, or make adjustments to deal with new vulnerabilities, the economy might be caught in a trap of institutional and policy rigidity. Failure to allow dynamic adjustments in institutions and policies might push the economy into crisis.

3
Recalling the 1997 Asian Crisis

T

en years after the 1997 Asian Crisis, the economic recovery of the crisis-affected economies is being revisited to assess the economic performance in the region and to begin a search for alternatives to the Asian model of economic growth. The World Bank (2007) highlighted the remarkable recoveries in the region, although it said in its report that there remained tough challenges, like how to push the recoveries further. The International Monetary Fund (IMF) also came up with similar conclusions, but its report stressed the unaddressed concerns that might limit the recoveries, such as the apparent worsening of income inequalities since 1997 and the increasingly unstable capital flows since 2000 (for example, Burton and Zanello [2007]). The Asian Development Bank (2007) pointed out that a normal economic environment has returned in the region, albeit there is a faint recognition that the crisis-affected

20

Recalling the 1997 Asian Crisis

21

economies have grown at lower-level trajectories. In these studies, there is a perceptible tone that the losses in 1997 have already been fully recovered, and therefore the Asian Crisis has had transitory impacts on the crisis-affected economies. The United Nations Economic and Social Commission for Asia and the Pacific (2007) noted a complete economic recovery in the region. How big really was the damage inflicted by the Asian Crisis on Indonesia, Malaysia, the Philippines, South Korea, and Thailand? Earlier studies presented only preliminary estimates because it was difficult then to filter out the dramatic changes in the late 1990s or even in the early 2000s.1 Retrospective studies have come out in an attempt to inform future policy actions, given the remaining vulnerabilities and emerging challenges like regional economic integration and how to deal with it the Asian way, and this book is no exception. Ten years hence, this study has the advantage of a longer history on which to base a review.2 The complicating and conflicting factors that manifested in the late 1990s or continued to be at play even in the early 2000s have by now fully worked themselves out. Using the framework discussed in Chapter 2, this book revisits the impact of the Asian Crisis on the crisis-affected economies. RE-ANALYZING THE 1997 ASIAN CRISIS Data on gross domestic product (GDP) per capita (constant 2000 prices) were obtained from World Development Indicators and Asian Development Outlook, covering the period 1987 to 2000. Data were

1

Knowles, Pernia, and Racelis (1999), Robison et al. (2000), and Chu and Hill (2001) are some earlier studies that explore the costs of the Asian Crisis. For related arguments, see Craft (1999), Barro (2001), Cerra and Saxena (2003, 2005), and Hutchison and Noy (2005).

2

22

Chapter Three

normalized to 1996.3 Figure 3.1 shows that Indonesia took eight years (i.e., in 2004) to regain its 1996 GDP per capita. Malaysia regained its 1996 GDP per capita in 2000. Both the Philippines and South Korea bounced back quickly from their contractions in 1998, exceeding their 1996 GDP per capita by 1999. Thailand regained its 1996 GDP per capita level after seven years, in 2003.

200 190 180 170 160 150 140 130 120 110 100 90 80 70 60 50 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Philippines
Indonesia

South Korea

Malaysia

Thailand

Fig. 3.1. GDP per capita, normalized to 1996

What is more interesting to note in figure 3.1, however, is that between 1987 and 1996, Indonesia, Malaysia, South Korea, and Thailand had a tight pattern of economic performance — especially in

3

The implication is that 1996 is a good benchmark for conducting an analysis of economic performance. Appendix A discusses the procedures for computing the costs. Appendix B presents the results of the cost accounting exercise.

Recalling the 1997 Asian Crisis

23

the first half of the 1990s — as if they were increasingly chained to one another. That of the Philippines is not in sync with the others and is expected to be so because its economy was basically stagnant throughout the 1980s and early 1990s. As expected, the economic performance of Thailand diverged from the group in 1997, when it experienced an economic growth of 2.4 percent in GDP per capita. Notice in figure 3.1 that, starting in 1998, the patterns of the other crisis-affected economies have become increasingly unbundled. Indonesia has moved the farthest, relative to, say, South Korea, while Malaysia, the Philippines and Thailand have bundled closer to Indonesia beginning 2003, as they are “converging” to their natural groupings as Southeast Asian economies. These patterns are expected to continue in the coming years, especially because the growth rates of the crisis-affected economies have decelerated after 1997. And with the global economy slowing down because of a financial crisis in the United States and the potential problems in China and India, growth rates in the region will further fall. Rotational analysis is applied to transform the representation in figure 3.1, particularly using the trends between 1987 and 1996 as reference points, and to reveal a different interpretation of the situation. Because the trend of the Philippines is distinct from the others, the control information excludes it. The next step is to draw a “rotated axis” (i.e., Line A), tracing a line that captures the cluster of information of the four economies in 1987–1996, ensuring that it crosses at 1996 = 100, and extending it to 2007. The drawn axis is treated as the “horizontal axis” for the rotational analysis. Then a “vertical axis” (i.e., Line B) is drawn at 1996 = 100, producing perpendicular angles, thus forming a new Cartesian plane with 1996 = 100 as the new “origin” of the axes.

24

Chapter Three

It is clear in figure 3.2 that the crisis-affected economies have all moved away from the “horizontal axis,” with the possible exception of South Korea, which appears to have been moving parallel to, but below, it. Both Indonesia and Thailand have moved the farthest from the “horizontal axis” over time. Even in 2007, their trends appeared to be still moving in the same direction. Malaysia and the Philippines have also moved away from the “horizontal axis,” but their trends after 2005 have converged at a higher level compared to Indonesia and Thailand. Yet the falling trend of Malaysia has become pronounced from 2001. For the Philippines, the trend seems to have been on a constant decline since 1987. Using a longer data series, it could be seen that the downward trend for the Philippines actually started much earlier.

200 190 180 170 160 150 140 130 120 110 100 90 80 70 60 50 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Philippines
Indonesia
Line B

South Korea

Line A

Malaysia

Thailand

Fig. 3.2. GDP per capita, rotated at 1996

Recalling the 1997 Asian Crisis

25

More importantly, figure 3.2 presents a counterfactual scenario for the crisis-affected economies in the post-crisis period. The conjecture is that the socioeconomic conditions between 1987 and 1996 might have continued into the late 1990s and early 2000s had the deterioration of the economic and political apparatuses been remedied and governments maintained effective management of their economies, even allowing for a well-planned sequence of deregulation and financial liberalization, which would have supported industrialization and economic growth, and so forth. Of course, the counterargument to the counterfactual is that the crisis-affected economies would still experience a deceleration in economic performance by the early or mid-2000s if they had sustained the same rate of economic growth over such an extended period.4 Nonetheless, the deceleration would not be as dramatic as that in the late 1990s, when the Asian Crisis hit their economies. In the counterfactual, there would be adjustments in policies that could have averted economic debacles like the Asian Crisis. Such adjustments could propel the economies to higher growth trajectories, producing a reverse L-shape pattern (like figure 2.4). With
4

During the early/mid-1980s, Indonesia, Malaysia, South Korea, and Thailand embarked on adjustments and reforms to produce dynamic performance in the following decade. In the counterfactual, these economies could have taken similar actions in the 1990s that would allow dynamic performance until the 2000s. While this scenario might be difficult to defend for the Philippines, considering its dismal economic performance in the 1980s and early 1990s, it must be pointed out that the policy mistakes and misguided economic agenda in the mid-1980s could have been avoided if the government had policy autonomy and capacity to institute sound adjustments and reforms. Moreover, the economic history of the Philippines points to the fact that the deterioration of governance and capacities started much earlier, in the 1970s. It is still interesting to note that in the 1950s and 1960s, the country had solid foundations that it provided capacity building and training to Southeast Asian countries for them to embark on sound structural transformation and economic expansion. The foundations in the 1950s and 1960s supported the economic performance of the 1970s. In the mid-1990s, the IMF and World Bank were optimistic that robust economic growth rates in the region would continue for another five years or until the early 2000s.

26

Chapter Three

figure 3.2, there is a straightforward conclusion about the economic performance in the post-crisis period: while it could be argued that the crisis-affected economies have exceeded their 1996 GDP per capita levels, it could not be easily argued that they have regained dynamic performance that distinguished the region before 1997. Unimpressive economic performance in the decade after the Asian Crisis suggests that the crisis-affected economies have not fully recouped the costs even by 2007. But how big have these damages been in the five economies? Indonesia As the Asian Crisis went into full speed, Indonesian GDP per capita fell to US$777 in 1998 and further down to US$773 in 1999. The economy plunged to a -14.3 percent GDP per capita growth in 1998 and continued to contract by 0.5 percent in 1999 (figure 3.3). Its GDP per capita in 1999 was 88 percent of the 1996 figure (US$878). The contraction means that foregone output per capita was US$175 in 1998 and US$223 in 1999. As such, opportunity costs per capita on those losses were US$184 and US$233, respectively, while accumulated cost per capita was US$241 over those two years, falling within the range of 29–31 percent of GDP per capita. The figures clearly suggest heavy burdens on the economic welfare of Indonesia. Five years after the Asian Crisis, Indonesian GDP per capita remained below the 1996 level, reaching an average income of US$844 in 2002. Foregone output per capita in 2002 increased to US$280, while opportunity cost per capita of the foregone output reached US$284. These constituted at least 30 percent of GDP per capita. Accumulated cost per capita in 2002 was US$321, accounting for close to 40 percent of GDP per capita.

Recalling the 1997 Asian Crisis

27

2,000

1,500

1,000

500

0 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Fig. 3.3. GDP per capita and counterfactual, Indonesia

The trend, as shown in figure 3.4, indicates that the costs continued to rise over time, meaning, heavy burdens on the Indonesian people persisted. As figure 3.1 illustrates, it took Indonesia eight years to increase its GDP per capita to a level comparable to that of 1996. During this period, the country incurred losses. The implication, as GDP per capita remained below the counterfactual scenario (figure 3.3), was that the costs got bigger over time. Such gains from the economic recovery were not large enough to offset the lost opportunities that resulted from the Asian Crisis and its fallout. As expected, by 2004, foregone output per capita was bigger than the previous years’ amounts. After eight years, opportunity cost per capita reached US$310 and accumulated cost per capita reached US$355. These figures were about 30 percent of GDP per capita in 2004, which means that the burden on economic welfare remained the same.

28

Chapter Three

1,500

1,250

1,000

750

500

250

0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Foregone Output

Opportunity Cost

Accumulated Cost

Fig. 3.4. Estimated costs per capita, Indonesia

The average income for 2007 would continue to exceed the 1996 figure, projected to be US$1,338. Indicators suggest that GDP per capita growth could slow down, so the projected 2007 costs would still be bigger amounts. However, there is a positive sign that the trends would flatten out, suggesting that foregone output and opportunity cost per capita figures would not exceed US$350. The expectation of course is that GDP per capita growth would not slow down in the coming years. What is alarming in figure 3.4 is that accumulated cost per capita would continue to increase and is projected to reach US$418 in 2007. Even if the current economic growth is maintained, accumulated cost of the losses would still be growing. Thus, it is only with accelerated GDP per capita growth — higher than the projected rates for Indonesia — over a long period that these costs could be significantly reduced and wiped out in time.

Recalling the 1997 Asian Crisis

29

At present, however, it is disappointing to note that because of serious or unaddressed constraints to growth, Indonesia would be unable to move to a higher gear of economic performance. Weakened public investments, deteriorating delivery of basic services (including the civil service and the legal system), and falling competitiveness are some of the important issues that hinder Indonesia from regaining the dynamic performance of the pre-crisis period. Significant progress on these issues needs to be achieved. Malaysia Malaysian GDP per capita decreased from US$3,938 in 1997 to US$3,560 in 1998 as GDP per capita growth dropped to -9.7 percent (figure 3.5). Despite countercyclical policies in 1998 and unorthodox measures to insulate the economy from further panic, average income still fell. This decline resulted in a foregone output per capita of US$571 or an opportunity cost per capita of US$598 in 1998, which was about 16 percent of GDP per capita. Economic growth rebounded to 3.7 percent in 1999. It could thus be argued that, to some extent, the capital controls helped lessen the losses in economic welfare. As figure 3.5 shows, Malaysia recovered its pre-crisis level of GDP per capita in 2000 and growth was sustained but its economic expansion in the past two years was still not strong enough to recoup the losses (figure 3.6). By 2000, foregone output per capita was US$614, down from US$646 in the preceding year. Opportunity cost per capita was US$650, but accumulated cost per capita was US$719. Nonetheless, there were encouraging trends in the economic recovery period (figure 3.6). Unfortunately, the economic recession in 2001 reversed the gains of the previous years, as the country sputtered to a 1.9 percent growth rate, resulting in the increase in foregone output per capita to US$891, opportunity cost per capita to US$922, and accumulated cost per capita to US$1,015.

30

Chapter Three

10,000

7,500

5,000

2,500

0 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Fig. 3.5. GDP per capita and counterfactual, Malaysia

What these trends clearly illustrate is the importance of sustaining GDP per capita growth throughout the economic recovery period. After 2001, the economic growth of Malaysia remained slower than that during the immediate years of the recovery period or the precrisis trends. Figure 3.6 indicates that the costs continued to increase. By 2006, foregone output per capita had reached US$1,130 and opportunity cost per capita was US$1,193, accounting for about 25 percent of GDP per capita. Accumulated cost per capita as of 2006 stood at US$1,434, or at least 30 percent of GDP per capita. For 2007, the figures would be larger: foregone output per capita of US$1,178, opportunity cost per capita of US$1,225 and accumulated cost per capita of US$1,487.

Recalling the 1997 Asian Crisis

31

1,500

1,250

1,000

750

500

250

0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Foregone Output

Opportunity Cost

Accumulated Cost

Fig. 3.6. Estimated costs per capita, Malaysia

By 2007, however, it is unclear if a flattening in the trends of the costs is taking shape. The pattern appears cyclical — rising as economic growth slows down then flattening out and rising again as growth eases up once more. As Malaysia gains its momentum, a flattening in the costs per capita is expected. With sustained dynamic performance, the cyclical pattern of the costs may be addressed as the amounts are cut down. Nonetheless, the social costs will still increase in the coming years before they decrease. As such, only with GDP per capita growth accelerating faster than the projected rate and at sustained levels can costs be cut down. As the economic performance of the country is constrained by the pace of global economic growth or at least the performance of its major trade partners, it faces some stumbling blocks in returning

32

Chapter Three

to its pre-crisis growth trajectory. The exports sector remains crucial in buoying the economy in the short and medium term, but it is vulnerable to global conditions. Over the long term, however, Malaysia must deal with the infrastructure requirements to keep the economy in competitive shape and raise its exports sector on the industrial ladder. There is a need to build up the workforce in terms of human capital and productivity to complement the available physical infrastructure. Philippines Figure 3.7 suggests that Philippine GDP per capita remained relatively flat from 1987 to 1996, reflecting the impact of the boomand-bust economic performance that troubled the country much earlier. But there appeared an economic turnaround from 1993: the country re-entered the international capital markets, allowing the economy access to external funds. For a long time, the Philippines had not experienced dynamic performance that distinguished the Asian miracle economies in the pre-crisis period. Regaining access to the international capital markets was seen as an opportunity to catch up with the rest of the region. From figure 3.2 earlier, it is clear that economic welfare in the Philippines had been on a constant decline. In fact, stretching the analysis back to the 1970s reveals that the Philippines regained its GDP per capita of 1982 only in 2002, at slightly above the US$1,000 mark. In a way, the impact of the Asian Crisis was only small because the country was basically passed over by capital flows into the region throughout the mid-1980s to mid-1990s. At the same time, the Philippines had difficulty raising its volume of trade as its economy progressively lost competitiveness and its industries lost strength. Earlier crises in the period 1980 to 1995 brought larger damages to the country. Another crisis in 1997 would not have produced significant costs.

Recalling the 1997 Asian Crisis

33

2,000

1,500

1,000

500

0 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

i i d f l hili i Fig. 3.7. GDP per capita and counterfactual, Philippines

As figure 3.7 shows, GDP per capita fell by a relatively small amount, from US$970 in 1997 to US$945 in 1998. The figure in 1998 was comparable to that in 1996, which was US$942. Foregone output per capita in 1998 was US$51 and opportunity cost per capita was US$54, which were 5 percent of GDP per capita in 1998. The small reduction in economic welfare in 1998 supports the contention that the country had the least damage among the crisis-affected economies. Stronger economic growth in 2000 meant more reductions in the costs (figure 3.8) while a slowdown of growth in 2001 reversed the gains of the previous years. By 2002, foregone output per capita was US$89 and opportunity cost per capita was US$90, comprising approximately 9 percent of GDP per capita. Accumulated cost per capita stood at US$100, which

34

Chapter Three

1,500

1,250

1,000

750

500

250

0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Foregone Output

Opportunity Cost

Accumulated Cost

Fig. 3.8. Estimated costs per capita, Philippines

was 10 percent of GDP per capita. The costs were further cut down as economic growth was sustained beginning 2002. By 2006, there was a decrease in foregone output per capita, to US$55, and in opportunity cost per capita, to US$58. These accounted for less than 5 percent of GDP per capita and, more importantly, were comparable to the 1998 figures. Accumulated cost per capita was down to US$77, already 7 percent of GDP per capita in 2006. It is clear in figure 3.8 that the country has started to recoup the costs. Because of relatively mild growth, the reversal of the trends is delayed. The forecasts for 2007 suggest continued reductions in costs, although not at significant levels. If the forecasts would hold, the estimated figures for 2007 are encouraging: foregone output per capita of US$53, opportunity cost per capita of US$55, and accumulated

Recalling the 1997 Asian Crisis

35

cost per capita of US$78. As with the other crisis-affected economies, the Philippines has to sustain its current direction of economic expansion but still needs to achieve dynamic performance if it were to fully recover from the Asian Crisis. Even with these positive developments, there is a concern that the country’s recent economic performance is becoming highly consumption-driven and too dependent on foreign workers’ remittances. Notwithstanding the contribution of remittances to buoying the economy from another balance of payments crisis (as was the case in 2005), there is a budding “Dutch disease,” taking into account the narrow and shallow performance suggested by recent economic expansion (for example, Habito and Beja [2006]). The country remains vulnerable to global economic performance and to swings in domestic agriculture production. National elections in 2007 turned out to be respectable, and progress of the remaining reforms agenda is expected to proceed at a pace like that in the earlier years of the 14th Philippine Congress. What needs to be stressed at this point is that figures 3.7 and 3.8 focus on the costs inflicted by the Asian Crisis alone. For the Philippines to recoup the lost opportunities from its crises between the 1980s and early 1990s and improve the economic welfare of Filipinos, it needs to produce exceptional rates of GDP per capita growth. The prospect for that to occur, however, is not good, given the weakened economy. South Korea South Korea acted vigorously but prudently introduced policy adjustments that led to its quick economic rebound. In a way, it smartly ignored prescriptions to restructure the economy drastically and proceeded instead on a course to regain its competitiveness. After facing a dramatic economic collapse in 1998, South Korea rebounded dramatically in 1999. Such a quick turnaround has been

36

Chapter Three

regarded as a confirmation of the fundamental strength and sound constitution of the South Korean economy (for example, Park and Choi [2004]). Of course, among the crisis-affected economies, South Korea has the most developed financial sector and most mature economy. An IMF-orchestrated infusion of US$52 billion — at that time the largest bailout package — must not be disregarded as a factor in the rapid economic recovery. Still, the Asian Crisis produced large costs in the country. In 1998, Korean GDP per capita fell to US$9,307 from the 1997 level of US$10,064 (figure 3.9). The figure was much lower when compared with the GDP per capita in 1996, which was US$9,707. Its foregone output per capita in 1998 was US$1,281 and opportunity cost per capita was US$1,343, which were 14 percent of the 1998 GDP per capita. As South Korea went into economic recovery mode, economic growth jumped to 10 percent in 1999, and the country was able to cut down the heavy burdens on economic welfare. Sustained growth into 2002 cut the losses by half. While there was a setback in 2001, South Korea rebounded in 2002, with reduced foregone output per capita of US$666, opportunity cost per capita of US$677, and accumulated cost per capita of US$850. The amounts were between 6 and 7 percent of GDP per capita. Indeed, economic recovery periods require strong economic growth when recouping the lost opportunities. Since 2001, however, South Korea has experienced a cyclical pattern of growth, perhaps constrained by global economic performance or at least the performance of its major trade partners. The pattern further points to the challenges that South Korea faces as it navigates reforms with competing domestic interests. Figure 3.10 shows that the costs remained relatively steady until 2006, with US$795 foregone output per capita, US$834 opportunity cost per capita, and US$1,117 accumulated cost per capita. Again, strong growth in the succeeding periods meant continuous reductions in the burdens on economic welfare.

Recalling the 1997 Asian Crisis

37

20,000

15,000

10,000

5,000

0 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Fig. 3.9. GDP per capita and counterfactual, South Korea

Given the forecasted economic growth of South Korea for 2007, the trends from 2005 are expected to continue. Further reductions in costs may be expected in 2007, with foregone output per capita of US$717, opportunity cost per capita of US$745, and accumulated cost per capita of US$1,074. Investments, consumption, monetary and fiscal policies, and a stable won, among other factors, are anticipated to contribute to raising confidence in the South Korean economy.5 While steady progress has been achieved in reforming the economy, it is still important to reignite the robust growth of the pre-crisis period in order to recoup the losses. A slowdown in exports performance
South Korea was hit by a consumer credit problem in 2003, which led to an examination of its reform programs. There are indications that the country is accumulating short-term debts, which could derail economic recovery if interest rates rise or debt servicing and repayment become problematic.
5

38

Chapter Three

1,500

1,250

1,000

750

500

250

0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Foregone Output

Opportunity Cost

Accumulated Cost

Fig. 3.10. Estimated costs per capita, South Korea

(especially electronics) will disappoint growth. Indeed, there are indications that in the case of South Korea, full economic recovery from the Asian Crisis is just around the corner. Thailand At the outset, the Asian Crisis was thought to inflict modest costs on Thailand. Because the country followed the advice to close several banks and standard prescriptions, like raising interest rates and so forth, panic escalated. In the end, Thailand contracted. Its GDP per capita growth shrank by 2.2 percent, stemming from the reduction in average income from US$2,154 in 1996 to US$2,101 in 1997 (figure 3.11). As the Asian Crisis gained momentum and extended to 1998, the serious impacts on Thailand became apparent.

Recalling the 1997 Asian Crisis

39

In 1998, economic growth further contracted by 12 percent. Foregone output per capita was US$612 and opportunity cost per capita was US$641, which were at least 33 percent of GDP per capita. Accumulated cost by 1998 had reached US$652, or 35 percent of GDP per capita.

5,000

4,000

3,000

2,000

1,000

0 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Fig. 3.11. GDP per capita and counterfactual, Thailand

While Thailand registered above average economic growth after the Asian Crisis, it faced difficulties in realizing growth accelerations. It embarked on expansionary spending programs in 2000 to put the economy on track for a rapid economic recovery, but growth tumbled down to one percent in 2001 owing to the global economic slowdown, with the costs mounting in the subsequent periods. In 2001, the costs registered foregone output per capita of US$892, opportunity cost per capita of US$922, and accumulated cost per

40

Chapter Three

capita of US$1,040. The accumulated cost exceeded 50 percent of 2001 GDP per capita. The figures for 2002 were even worse, even though Thailand regained its GDP per capita of 1996 that year. Except perhaps in 2003, when some momentum in economic growth was achieved, growth from 2002 to 2006 remained steady, at an average of 4.6 percent. However, the apparent slowdown in economic growth since 2005 suggests that the costs would increase, as figure 3.12 shows. By 2006, foregone output per capita was US$1,040 and opportunity cost per capita was US$1,089, both accounting for at least 40 percent of GDP per capita. Accumulated cost per capita stood at US$1,345, which was still above 50 percent of GDP per capita. Interesting to note is how the pattern of cost recovery in Thailand since 2001 closely resembles that of Malaysia. While a flattening in some of the trends could be expected if Thailand maintains decent economic performance in the coming years, the social costs would continue to increase with growth that is not as strong as it should be. Yet to date, the prospects for Thailand are not as good as in the previous years. Growth is expected to be at its worst in six years but would hopefully improve after 2007. The estimated costs for 2007 are foregone output per capita of US$1,093, opportunity cost per capita of US$1,136, and accumulated cost of US$1,444. The costs as shares of GDP per capita would not be significantly different from those of the preceding years, which means that the burden on economic welfare would continue to increase. As already pointed out, only with exceptional economic growth sustained over a long period could costs be significantly cut down. However, problems remain to constrain economic performance while developments inside and outside the country limit economic growth. The tsunami of December 2004, for instance, adversely affected the tourism industry, which, in turn, affected growth. Tourism expectedly went into a lull for most of 2005, but it has now

Recalling the 1997 Asian Crisis

41

recovered. The delayed economic recovery in tourism was attributed to political unrest in the southern part of the country. While export performance is expected to be robust, they remain unstable as competitiveness is lower and the global economy is unstable. Nonetheless, large public infrastructure projects would contribute to growth as in the past.

1,500

1,250

1,000

750

500

250

0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Foregone Output

Opportunity Cost

Accumulated Cost

Fig. 3.12. Estimated costs per capita, Thailand

Recent developments in Thailand have raised concerns about the capacity of the economy to regain dynamic performance. For instance, the coup d’état in September 2006 sparked fears of a return to the pre-crisis period, wherein political conflicts were resolved through military interventions. Compounding the situation was an economic faux pas in December 2006 in which capital controls were introduced but were quickly reversed when they did not work out as planned. Political and economic uncertainties weaken business confidence in

42

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Thailand and of course reduce investments, and so forth, which, in turn, weaken prospects for economic growth. Credible elections in 2007 are important in bringing the confidence back; and hopefully, credible policies would be crafted to reignite the economic recovery process. However, recent developments in the country seem to emphasize inward-looking strategies, self-reliance, and internal networks of the wrong kind, typically disguised as efforts toward economic recovery and the creation of a stronger economy to reverse the post-crisis trend. It is disappointing that Thailand is losing steam and moving to a lower gear of economic growth. Somehow, it is having a hard time recovering. COMPARATIVE ANALYSIS OF THE COSTS That the costs inflicted by the Asian Crisis have yet to be fully recouped as of 2007 is a point that differs from mainstream discussions, even among retrospective studies. There is no doubt that economic growth improved after 1997, but poorer economic performance in the 2000s actually means that the cost reductions have not been sustained, and so costs have mounted in the succeeding periods (figures 3.13 to 3.15). Persistent gaps between the counterfactual scenarios and actual GDP per capita, as shown by the figures in the previous section, emphasize the long-lasting impact of the Asian Crisis. Among the crisis-affected economies, the Philippines and South Korea have attained some successes in cutting down the costs. The experience of the Philippines, in particular, is to be expected because it did not actually face serious damages as the others. And so even with relatively mild economic growth after the Asian Crisis, the country has been able to recoup its costs. Again, the amounts covered in studying the cost accounting exercise concern the impact of the Asian Crisis only.

Recalling the 1997 Asian Crisis

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As noted previously, earlier crises in the Philippines were successful in derailing the economy, which took twenty years to regain the 1982 GDP per capita. Interestingly, some analysts (particularly from government and supporters) believe that the past dismal economic performance of the country was, in a way, providential because, in the end, the economy did not get to experience large capital flows that led to the Asian Crisis. But it was unfortunate that the country was passed over by these capital flows because it lost an opportunity to raise its performance.

100

75

50

25

0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Philippines

South Korea

Malaysia

Indonesia

Thailand

Fig. 3.13. Share of foregone output to GDP per capita

The experience of South Korea is perhaps more useful to support the argument that robust economic growth is crucial to cost recovery. Its post-crisis performance, without a doubt, demonstrates the crucial role that robust and sustained growth plays during

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economic recovery. Its strong rebound in 1999 was important because it means that recouping the losses began immediately once the Asian Crisis subsided in 1998. Of course, recovery was made possible in part by the US$57 billion capital infusion and another US$15 billion standby facility put up by Asian Development Bank, the Organization of Economic Cooperation and Development, and the United States. Having relatively well-developed institutions was significant because they made the jumpstarting process easier to materialize. Strong solidarity and patriotism helped counterbalance the imperatives of adjustments. So the core of Korean society was not undermined even with the strong conditionalities imposed by the IMF. Of course, full recovery was delayed, as growth sputtered in 2001 and then fluctuated throughout the succeeding periods until 2006.

100

75

50

25

0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Philippines

South Korea

Malaysia

Indonesia

Thailand

Fig. 3.14. Share of opportunity cost to GDP per capita

Recalling the 1997 Asian Crisis

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For 2007, the two countries will face total social costs of US$7 billion (7 percent of GDP) and US$53 billion (8 percent of GDP), respectively. Although the amount for South Korea appears large in absolute terms, its relative size to GDP is actually small and, in fact, comparable to that of the Philippines. Based on the relative sizes, their economies can internalize the costs as long as they are able to maintain solid economic expansion. What is interesting to note is that, after ten years, the Philippines is still unable to make a significant reduction in its costs from the Asian Crisis. Perhaps, this is suggestive of fundamental weaknesses in its economy. All other things the same, the trends as of 2007 indicate that both countries are in the right direction.

100

75

50

25

0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Philippines

South Korea

Malaysia

Indonesia

Thailand

Fig. 3.15. Share of accumulated cost to GDP per capita

A more interesting observation in figures 3.13 to 3.15 concerns the costs of the Asian Crisis to Indonesia, Malaysia, and Thailand. The first item to point out is that decent economic growth was not

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enough to get meaningful reductions in costs. When growth slowed, the costs quickly mounted such that, as of 2007, the standing costs had even exceeded their 1998 levels: at least 30 percent for foregone output, about 34 percent for economic cost, and more than 40 percent for social cost. The figures indicate that, by 2007, the projected total social cost for Indonesia would be US$95 billion (41 percent of GDP). Malaysia would be burdened with US$39 billion (31 percent of GDP), and Thailand, US$95 billion (55 percent of GDP). In both their absolute and relative amounts, the numbers are quite large indeed. Their economies would simply be overwhelmed if these amounts are internalized. Of this group, the burden of the Asian Crisis has been heaviest on Indonesia and Thailand, and both continue to experience difficulties in recouping the costs because their economic performance has been below par. To some extent, too, the destruction of the social fabric in Indonesia in 1998 compounded the impact of the Asian Crisis, and thus made economic recovery quite difficult. In Thailand, the large costs are partly results of the tentative approach of the IMF and World Bank in 1997 as the Asian crisis unfolded, and even of the international community, including the United States, in dealing with the crisis as it expanded in 1998. In a way, Thailand was left to dry and serious damages were inflicted on the economy as a result. The failure of interventions in Thailand and Indonesia at the critical moments of the crisis also explains, to a significant degree, why the crisis has had such a huge impact on these economies. Of course, the lessons of going in slowly led to quick actions in South Korea so the impact of the Asian Crisis was relatively lesser there. In addition, Indonesia and Thailand have weaker institutions relative to Malaysia; thus, their recovery was delayed until their governments were able to recollect institutions to make them function once again. The trends in the 2000s fortunately imply that the increases in the costs have

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somewhat stabilized. All things the same, therefore, robust economic growth in the coming years would lead to reductions in the costs. Rapid economic growth is crucial for full economic recovery to happen in all five economies. Indications that the costs will stabilize in 2007 assume that growth will remain steady even with the emerging threats to the region coming from its major trading partners, particularly the United States, the European Union, Japan, and even China. Figures 3.13 to 3.15 stress that the crisis-affected economies have endured the trauma of the Asian Crisis, albeit with different extents of suffering; with new shock, recovery will be further delayed and costs extended. Again, the conclusion from the results is quite straightforward: dynamic performance is crucial in the post-crisis period to compensate for the lost opportunities. If subsequent shocks further reduce economic performance, the upsets need to be compensated as well with robust economic growth. Social safety nets are necessary to cushion the impact on economic welfare. Needless to say, protection is more difficult during a crisis because both the availability and the capacity to mobilize funds are limited. In the post-crisis period, if economic growth targets are mellowed to supposedly tolerable levels, it will definitely be difficult to recoup the lost opportunities. Stabilizing the crisis is important; but once the economy is on track to an economic expansion, appropriate policies also need to be introduced to realize growth accelerations. A lot is expected therefore from the government during and after the crisis, including in terms of how to prevent future shocks from inflicting serious harm on the economy. The next chapter outlines some policy imperatives.

4
Looking Back to Move Ahead

he weakened economic performance in the post-crisis period and the incurred losses from the 1997 Asian Crisis must not make governments brood over the past. This retrospective analysis is a challenge to them. What policies have to be adopted in the here and now? While it is recognized that past performance cannot govern present policies, the losses due to a crisis still represent opportunity costs for wrong, delayed or misguided actions. The challenge to the Asian governments for progressive actions is great because the costs confronting their economies remain significant. The premise of this chapter is that it is undesirable for crisisaffected economies to relive the painful experiences of the Asian Crisis and the difficulties that arose from its fallout. There is an urgent need for decisive actions to reverse the situation. What policies are therefore needed to regain dynamic performance and prevent future

T

48

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crises in the region? Below are five policy issues for consideration, in the hope of salvaging the past standing of the crisis-affected economies. ECONOMIC GROWTH A foremost consideration is economic growth in the post-crisis period. Policies need to be such that they do not compromise growth, including the variability of the growth, over the long term. In other words, policies must be such that they maintain the stability of growth. This objective is important because incomes need to expand to enable people to have greater command over goods and services and realize improvements in economic welfare. Growth must create jobs to enable people to acquire incomes and, in turn, contribute to growth. Gross domestic product (GDP) per capita growth can be enhanced if nominal economic growth increases or population growth stabilizes, if not decreases. Accordingly, complementary social programs that provide for basic needs and social insurance have to be in place not only to stabilize population growth but also to contribute to the formation of a productive labor force, a setup needed to bring people to participate more in the economy. Public goods and services have to be provided and, in fact, demanded by people from their governments. This function does not necessarily mean, however, that governments will provide all what is required for growth and capabilities formation to take place, but the essentials need to be available to engender growth and capabilities formation. As such, governments have to play the role of enabling agents, allowing civil society and private sector to be their productive partners in this endeavor. Some analyses have suggested that current levels of investments in the crisis-affected economies are already satisfactory, especially after their elevated levels prior to the Asian Crisis (for example, ADB

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[2007]). The contention of analysts is that investments were speculative, creating financial bubbles and economic vulnerabilities. Accordingly, the Asian Crisis was seen as inevitable as a way to trim down these excesses. In a way, the current levels reflect the appropriate investments for the region. It is important to stress that previous flows were facilitated by ignoring the long-term implications of weakened regulations on international flows (for example, Jomo [1998]). Today, investments need to be facilitated to boost economic growth to reach previous heights, although the manner of facilitation requires sound management of international flows to encourage capital deepening and avoid unnecessary indebtedness. Investments also have to be facilitated to broaden industrial capacities and enhance competitiveness. Unfortunately, the crisis-affected economies are unable to reach their previous heights of economic expansion because investments have fallen to levels that are not enough to stimulate robust growth. And because the pace of growth has not picked up, there are, in turn, lesser investments. Economic growth has to be above the projected normal levels for the crisis-affected economies. In the two decades prior to 1997, the average GDP per capita growth rate of the group — but excluding the Philippines — was 5.6 percent; in the decade prior to 1997, this was 6.9 percent. After the Asian Crisis, the average growth rate fell to just about half. Full economic recovery could only be realized if economic performance is raised back to pre-1997 rates and sustained. Depending on the population growth rate of the country, GDP per capita growth rate needs to be at least 6 percent (or a nominal annual economic growth target of above 7 percent) today. This target is only to recoup the costs from the Asian Crisis, and so going beyond cost recovery requires faster growth rates. Downgrading growth targets is unwarranted, given the sufficient capacities available for robust economic expansion. It is unfortunate that governments in

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the region are easily swayed with ratings and are too careful to stimulate their economies for fear of some inflation or larger budget deficits. Economic growth itself produces structural changes. In the end, growth facilitates transition to the superior structures. These changes need to be managed well by governments in order to avert destabilizing forces from frustrating the economic transformation. Otherwise, latent social conflicts could materialize, undermining economic performance. For this reason, democratic environments that allow for meaningful social participation in deciding, say, the direction of the economy and an effective bureaucracy are very important to the whole process. Recall the chaos in Indonesia when its bureaucracy and social fabric collapsed in 1998. At the same time, it is important to emphasize that economic growth strategies of the past are not to be replicated nor sustained today. Indeed, past growths were achieved at the cost of the environment (for example, Bello [1982], Bello, Cunningham, and Li [1998], and Barry and Eckersly [2005]). The destruction of habitats and biodiversity as human activities expand, solid waste accumulation and mismanagement of wastes, urban blight due to congestion, resource pollution and toxic contamination, and global warming, to highlight some, are important issues that have to be integrated in economic plans. These are not to be taken as token issues, included as appendages or after-thoughts in economic planning. Economic strategies must include, for instance, the preservation of ecological carrying capacities to absorb the stresses imposed on the ecosystems as economies expand. There are available strategies allowing a balance between economic expansions and sustainable environments. Governments simply need to do more and think harder so that present generations do not bestow a damaged environment on future generations.

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OPPORTUNISM AND HESITATION The misdiagnosis of the Asian Crisis — from its causes to its impacts, both immediate and subsequent — and the overloading of rescue packages with policy conditionalities have contributed to the escalation of the crisis and the costs (for example, Jomo [1998]). Even mainstream evaluations have come to the same conclusion (for example, Radelet and Sachs [1998], Lane et al. [1999], and IMF [2003]). To some extent, the interventions in the crisis-affected economies were opportunistic in character, driven by the longing to introduce reforms that earlier were difficult to bring in or were parried away by governments. As Hewison and Robison (2006) have pointed out, these economies never completely adopted the Washington Consensus model of growth but were more strategic in introducing reforms while preserving the overall character of their respective approaches to economic growth. And the Asian Crisis provided the opportunity to push for the complete adoption of the Washington Consensus model. When the interventions succeeded, the results were short of the desired outcomes. So, in due course, adjustments were modified when operationalized to fit the domestic circumstances and save the economy from devastation, as what happened in South Korea. Elsewhere, government took a radical break and instituted policy that was abhorred by the mainstream, such as capital controls in Malaysia. Of course, as long as the miracle economies story worked well, such yearning to introduce changes in the region was allowed to pass. The Asian Crisis resuscitated that engagement and, as noted in Chapter 1, the crisis-affected economies were quickly branded as principals of crony capitalism, corruption, large inefficiencies, and so forth, as if overnight these economies became basket cases from being showcases earlier. Indonesia is the best illustration of this shift in perception (for example, Pincus and Ramli [1998]). External interventions forcing structural changes in the crisis-affected economies while

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their economic environment went increasingly volatile and uncertain in the end undermined the effectiveness of policy interventions and thereby became part of the problem. The initial hesitation of international institutions like the International Monetary Fund (IMF) and governments like the United States to provide support in a crisis situation was understandable because, in part, there was no appreciation for the severity of the problem in Asia. The way the Mexican Crisis of 1994 was handled by the IMF contributed to the hesitation, as the rescue and bailout operations in 1994 were found to have benefited international finance — especially American financiers — much more than the crisis-affected economies, especially Mexico. The United States did not see any serious consequences of the Asian Crisis — Thailand was far removed from the United States in terms of economic relations and the Asian Crisis, in general, was not considered a relevant strategic issue (for example, Yergin and Stanislaw [2002] and Blustein [2003]; see also Blustein [2006]). Concerns about moral hazard were valid, too. After all, intense capital flows to the region occurred because governments encouraged them with various forms of guarantees and loose or weak regulations. Unrestrained debt accumulation (mainly, short-term) and dangerous exposures to risks brewed economic disaster. In a way, the Asian Crisis was thought to be a necessary episode to cut off the extra fat in these economies. It was also thought that moral hazard was present everywhere in the developing world no matter the nature of the crisis that occurs. Of course, in the past, well-intended rescue efforts ended up bailing out the private investors and creditors themselves, with the domestic residents often footing the bill in terms of higher taxes, reduced public goods and services, and so forth. The extended reluctance of the international community and governments to render assistance to Asia, even as the crisis was deepening and hitting other economies outside the region, is difficult

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to understand. In the end, this caused the Asian Crisis to escalate the way it did. Precisely because of the inaction or delayed actions, the Asian Crisis produced an outcome that was largely preventable. When actions came, they targeted the structural problems of the crisisaffected economies rather than first establishing economic stability, and so the interventions added to the problem. However, the failure of governments to address the moral hazard problem does not expunge the case that an international lender-oflast-resort is, on balance, very important in regaining confidence and reestablishing economic stability during crises or in putting up alternatives, say, an Asian Monetary Fund that may be more effective in addressing pressing concerns in the region. The crisis-affected economies could have been steered away from experiencing the debilitating impacts of a full-blown crisis if measures were introduced in a timely fashion and in appropriate ways. Concerns about moral hazard could have been dealt with effectively if at the outset guidelines on lender-creditor duties and responsibilities were clear. On this latter issue, the concerns could have been addressed well if the creditors and investors actually shared in the responsibility for the prudent management of international flows and were not simply interested in profits and securing their capital. One way to achieve the proposal of shared responsibility among governments and private sector is to ensure the formulation of sound lending policies, to have some involvement in the disbursement of funds or some related arrangements that allow for collective determination. For instance, if the external borrowings were misused or proof is not presented to demonstrate that the funds were actually used to improve the social conditions of domestic residents, or it could not be traced where the borrowed funds went, the burden of proof to demonstrate that the money was indeed not diverted into private pockets would be upon the lenders. If lenders pretended not to see

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that the borrowed funds were misused and benefited elites, or did not act to redress the situation, the progressive position would be that creditors are accountable for the misallocation of funds. Similarly, if investors are involved in fueling speculation, the burden is on them to show that their activities are not creating vulnerabilities on the economy. Of course, governments need to guarantee fair play, transparency, and predictable procedures to encourage the expansion of productive economic activities. INTERNATIONAL FLOWS OF CAPITAL AND TRADE An important dimension to the understanding of the Asian Crisis is how financial liberalization brought about lax regulations and weak, even weakened, capacities to manage international flows. The consequent rapid increase and volatility of capital flows were driven by speculative and unproductive activities and not intended to deepen industrial capacity. These developments underpinned the Asian Crisis; and, in some contexts, mindless financial liberalization was a culprit of the Asian Crisis (for example, Jomo [1998, 2003]). Pundits of financial liberalization point to the benefits of having access to capital and how capital mobility provides the disciplining mechanism for domestic policy. Financial liberalization also means that governments engage the reality of policy trilemma with open economies contexts, that is, the incompatibility of simultaneously achieving the goals of capital mobility, fixed exchange rates, and having autonomous policies (for example, Fleming [1962] and Mundell [1962]); or the difficulty in balancing effectively the goals of the state, democratic politics, and full economic integration (for example, Summers [1999] and Rodrik [2002]).1

1

It needs to be noted that there are opposing arguments to the policy trilemma (for example, Rose [1996], Calvo and Reinhart [2001, 2002], and Bordo and Flandreau [2003]).

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However, such an interpretation is weak on closer inspection because the presumption, for instance, is that capital mobility implies that the unfettered flows are always welfare-improving. As another example, there is a presumption that economic integration implies sacrificing political participation. Because the experience in Asia (and elsewhere) shows that large costs were produced from crises generated by unregulated capital, the burden of proof is on advocates of unrestrained capital movements to demonstrate that the purported gains of unrestrained flows not only materialize but, more importantly, accrue to domestic residents. Or else, there is a basis for policy intervention to manage capital so that it not only supports but also complements production and contributes to economic expansion. Lucas (1990), and subsequently Tornell and Velasco (1992), Beja (2006), Alfaro, Ozcan, and Volosovych (2008), and Forbes (2008), among others, had actually queried why capital was flowing out of developing economies, where capital is most needed because of scarcity, and moving into advanced economies, where capital is plenty. If capital flows from these economies in the form of, say, capital flight or even legitimate capital outflows, and if capital surges create fragilities and increased risks in the domestic economy, as well as reduced effectiveness of policies, there is indeed a valid case for intervention. Crotty and Epstein (1996, 1999) and Epstein, Grabel, and Jomo (2003) note that capital flow management is warranted in such circumstances. What needs to be emphasized, though, is that the objective of the intervention is not to revert to economic repression, which has been found unsuccessful in engendering robust economic growth. Rather, intervention is intended to regain control of policies and the direction of domestic development, thereby enabling countries to retain (not only attract) capital in their economies and use the inflows to fuel economic expansion.

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For example, capital management techniques may be used to direct capital flows into the productive sectors, which will, in the process, bring about real industrialization and raise the economy to higher levels of production. They may also be deployed to affect the volume and composition of capital formation in order to insulate the economy from short-term or speculative flows that disrupt the creation of hospitable domestic conditions needed for rapid economic expansion. Indeed, privatization, deregulation, financial liberalization, and globalization, together with the processes attached to them, require sound institutions for governance, effective mechanisms for administrative controls, and regulation for smooth adjustments to occur. As long as the rules are clear and enforcement is fair, capital management techniques will contribute to raising economic welfares. It will thus be a tragedy if fear of capital regulation results in a situation wherein capital stops flowing to Asia or to developing economies in general. The case of the Malaysian capital controls illustrates the necessity of timely intervention during crisis, although it remains a topic in policy debates whether or not the capital controls helped at all in insulating the country in 1998. There is some agreement among analysts like Jomo (2001a, 2007), Kaplan and Rodrik (2002), Johnson and Mitton (2003), and Ching, Jomo, and Fay (2005) that if the capital controls were not introduced in 1998, the situation might have led Malaysia to suffer greatly from the capital outflows and speculation and from social unrest in the country, albeit there might be other reasons for the introduction of capital controls. Another needed policy intervention takes the form of trade management techniques to complement the capital management techniques mentioned earlier (for example, Stiglitz [2002, 2006] and Stiglitz and Charlton [2005]). Beyond the issues associated with trade access and facilitation, trade coordination among Asian economies is very important in averting the domestic disintegration and social dislocations that accompany free-market international trade regimes.

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In general, the crisis-affected economies have had, on balance, strong emphasis on export-oriented economic growth. Yet, in each of these economies, it could be observed that there was no clear program on how to push industries to higher levels of production and deepen industrialization (for example, Jomo [1997, 2001b, 2003]), with perhaps South Korea as an exception. Their strategies mainly focused on capturing the export markets in the major industrial economies, and there was little attention to developing their economies as outlets of their own production to balance the economic expansion and serve as a cushion against external shocks. Crowding out effects have manifested in the global exports market (especially in electronics), thus putting the sustainability of the old strategies to doubt. As pointed out by Krugman (1994), intensive production can definitely produce robust economic growth despite structural inefficiencies or defects in the domestic economy, but it cannot go on forever. Ultimately, these constraints become imposing enough to put a stop to economic expansion. Accordingly, the crisisaffected economies have to build up their domestic capacity to generate the alternative demand plus the infrastructure to raise productivity and advance their economies through the exploitation of scale economies and complementarities in productive infrastructure. Crucial to this endeavor, however, is the execution of real income and wealth distribution to empower the productive sector of the economy to contribute significantly to economic expansion. Hence, trade management techniques may be used to administer production, facilitate industrial deepening, and propel the economy to higher levels of industrialization. As such, sound industrial policies and planning are crucial. They need to be flexible also to allow for adjustments as circumstances change. Still, trade management techniques have to be implemented in a way that allows for steady progressions from low to higher levels of industrialization. Policies need to adjust to encourage constant upgrading of production on the industrial ladder while gradually reducing reliance on imported

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inputs and capital goods and embarking on technological adaptations, as well as introducing innovations, deliberately enhancing international competitiveness, and so on. It also needs to be pointed out that part of industrial policy is a competitive exchange rate, which is important for the efficient allocation of resources to support industrial production as well as for industrialization itself. Of course, economies need to strategize when entering into trade arrangements so that they will facilitate rather than limit trade flow. But export-oriented economic growth need not be incompatible with domestic-oriented development (for example, Palley [2002], Felipe [2003], and Felipe and Lim [2003]). The bottom line is that economies need to be strategic in their policy interventions, compete in the global market, and prevail in the competition to secure domestic economic welfare but, ultimately, global economic welfare, too. As with the case of capital, the burden of proof is to demonstrate that the purported gains of free trade do not only materialize and exceed the costs but, more importantly, accrue to domestic residents. If the modes of interventions and the conditions of trade facilitation are clear, trade management techniques will contribute to raising economic welfares. Thus, it will be a tragedy if the uneasiness with strategic interventions results in a situation wherein economies end up closing their borders to trade or introducing protectionist policies to limit trade, as this will adversely affect their own economic performance, as well as that of the global economy, and limit economic progress. THE ROLE OF GOVERNMENTS The way reforms had been executed in the past typically created opportunities that undermined the economies in the end. Of course, in the initial phase of reforms, governments overlooked this issue because their economies experienced robust economic growth. It was thought that growth compensated for the institutional constraints.

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As this arrangement continued, however, governments found it increasingly difficult to direct, say, investments into productive endeavors that supported industrialization, enlarged aggregate outputs, and created more jobs. Capital flows became increasingly short term or went into speculative and nonproductive activities, which then generated financial and asset bubbles that encouraged further risky investments and eventually produced the Asian Crisis. In the end, governments thought that the best way to address the situation was for them to step back progressively from active economic management. It needs to be stressed that while economic indicators suggested that robust economic expansion would be sustained into the medium term, the increasingly large capital flows generated complacency, raised risks, and enlarged the imbalances that made the Asian Crisis inevitable. Some of the capital inflows ended up as unrecorded transactions, as large volumes could not be absorbed by the economy, and they, too, became difficult to control (for example, Beja [2006]). Of course, capital inflows would not contribute to industrial deepening and economic growth if they are not preceded by reforms that produce enhanced demand for investments (for example, Obstfeld and Taylor [2005] and Prasad, Rajan, and Subramanian [2007]). Meanwhile, governments backed up the situation with all sorts of guarantees, consequently creating perverse incentives that actually encouraged risky, unproductive, and unrecorded activities as well as the revolving of capital out of the economy. Governments concluded that by withdrawing from active economic management, they were in the right direction: the less they intervened, the more correct the policies were, and the volumes of capital flows validated their actions. Thus, it could be seen in all the crisis-affected economies that deregulation and financial liberalization became almost complete by the mid-1990s. Or, in the case of South Korea, the complete opening of its economy was made a requirement for its admission to the Organization of Economic Cooperation and Development (OECD) in 1995.

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There is therefore a need to rethink the direction of policies if governments of the crisis-affected economies want to remain relevant, to rethink the significance of active economic management and the crucial role of a sound execution of reforms. Unsuccessful governments face larger pressures to remove themselves from further participation in the economy. In turn, they become weaker, more ineffective, or worse, they become failures. The weakened governments find it hard to stabilize their economies or secure the basic needs of their peoples. The weakening governments, on the other hand, find it increasingly difficult to maintain the same level of effectiveness they once enjoyed. They fail if economic recovery does not occur. Governments that allow external forces to undermine their autonomy and capacity find that they degenerate quickly. Governments that casually wait for the market or events to unfold and produce for them the needed stabilities and securities are also bound to fail. Those afraid to take serious measures in the interest of their economies fail as well. In the end, years of economic progress are wiped out overnight, and governments become part of the problem, rather than solving the problem. It also needs to be stressed that when governments weaken or fail, they violate the fundamental economic rights and liberties of their people to enjoy a decent, meaningful, and substantive existence. They are therefore responsible for the injustices and miseries experienced by their people. As the Asian Crisis and its fallout illustrate, governments of the crisis-affected economies had difficulty in guaranteeing the securities of their people and societies precisely because they no longer had the autonomy and capacity to address the problem. The collapse of Indonesia in 1998 was perhaps the extreme form of fallout during the Asian Crisis, but in other economies, like the Philippines and Thailand, people were pushed into poverty overnight. Frustration and despair made people commit suicide in South Korea. The consequences of child malnutrition, withdrawal of students from schools,

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unemployment and defeat, and so forth, would have to be reversed by governments. Issues that continue to trouble developing economies in general, including unsustainable current account deficits, unhealthy fiscal positions and limited fiscal space, spiraling prices, uncompetitive foreign exchange rates, unattractive interest rates, and unfavorable environments for investments, need to be addressed by governments. And these issues remain challenges to the crisis-affected economies today as they try to find the right mix of policies to achieve robust economic expansion in the post-crisis period and in an environment that was considerably changed because of the Asian Crisis and the emerging challenges from outside the region. Together with the expectations from governments mentioned above, sound macro-organizational fundamentals, like the institutional capacity to negotiate internal and external challenges to reforms and to economic growth itself, and the effective implementation of programs, to list some, are crucial. Where privatization, deregulation, and financial liberalization have been introduced, it is imperative that governments introduce compensating measures to catch up with changing contexts and thereby remain effective, ease adaptation or adjustment, and secure and stabilize economies. Strong governments mean effective governance, in which governments are at the center of economic management. They see the challenges and act on them in a timely manner to avoid any economic derailment, and they are effective when responding to the challenges. Strong governments are able to negotiate ingeniously the external demands imposed by globalization. They facilitate cooperative relations with the private sector and civil society without compromising competition, enabling broad-based actions and plans that focus on long-term goals rather than on immediate political gains. They also pace the progress of reforms such that adequate regulatory institutions and supervisory mechanisms are put in place as reforms work themselves out. They establish clear rules for capital and trade

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management with the domestic economy in mind. In short, these are governments that maintain their autonomy and continuously improve capacity to meet changing conditions, and they succeed in steering their economies to higher growth trajectories and, in the end, raise the economic welfare of their people. To some extent, it is important to challenge governments, especially those of the crisis-affected economies, to take decisive actions to stabilize and secure their economies. Government interventions are not only expected but need to be demanded. Strong governments have to consider legitimate social concerns, such as aspirations for balanced and healthy economies, peaceful societies, clean environments, and so forth. They have to rethink how reforms had been done in the past, the costs of misguided policies and wrong implementation, the consequences of lost autonomies and capacities, and so forth. It is likewise important to rethink proactive engagements that lead to the identification of legitimate alternatives. To date, however, governments of the crisis-affected economies appear to remain stunned from the Asian Crisis that they have yet to move from the sidelines and step into the center of economic progress. INTERNATIONAL COOPERATION The above points are some of the institutional underpinnings that create a strong domestic economy necessary to stabilize and sustain economic performance. Understanding their importance and operation is crucial to knowing how the underlying structure explains a particular kind of performance. Yet that understanding is also needed to know how to bring about change in the structure, and thus sustain or change that performance. One role of the international community is to contribute to creating the underpinnings that produce a strong external economy which does not compromise the domestic economy. Efforts that enhance the transparency of international flows, mechanisms that monitor

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the regional dimensions of vulnerabilities, associations that allow for collaboration, and so forth, are in the right direction toward meaningful international economic cooperation. International cooperation needs to be sincere. As the Asian Crisis pushed economies to collapse, the difficulties were blamed to crony capitalism, to corruption and wide-scale inefficiencies, and to structural defects, not to mention wayward external borrowings and unsound investments. But there was little attention to stabilizing the economies in the initial phase of the crisis. Issues about faulty politics and other institutional concerns might be relevant to long-term structural reforms, but they were not urgent as the crisis unfolded in 1997. As pointed out earlier in Chapter 1, even in the weeks before the Asian Crisis erupted in Thailand, the crisis-affected economies were hailed for their successes in producing virtuous economic expansion that brought about rapid poverty reductions, stable prices, and provision of basic goods and services to all, and it was said that developing economies ought to follow their lead. Of course, the Philippines did not perform as well as the Asian tiger economies, but it did well beginning in 1992 or compared to its economic performance in the 1980s. The sudden turnaround in attitude of the international community — that pointed to the same factors that produced robust performance as the causes of the crisis — could be understood as a result of expediency, forcing reforms in the crisisaffected economies as a precondition for bailout and rescue. International assistance was therefore opportunistic. International cooperation needs to be real and respectful of the uniqueness of contexts and differences in backgrounds. Governments that pledge assistance have to be truthful to their promise. Those that extend assistance need to lay bare their intentions. In either case, governments have to undertake efforts to get the best understanding of the situation before considering and planning what actions to take.

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Governments cannot be indifferent to the consequences of a crisis. Therefore, the primary consideration in a crisis is how to stabilize the situation; only after stability has been achieved can structural changes be taken up for consideration. Actions toward structural reforms need to be genuine reforms that deal with the root causes of problems and not palliatives that give merely temporary solutions only to be undone with another but more powerful crisis. The avoidance of similar crises is a fundamental measure of a successful cooperation. The Asian Crisis clearly illustrated how a shock in one country could snowball into a serious crisis in the region and elsewhere if no solid international cooperation to address the problem happens right away. Since Thailand was a minor trading partner, the crisis was not seen as significant enough to affect the United States, and so it was downplayed by inaction (for example, Yergin and Stanislaw [2002] and Blustein [2003]). This attitude from the United States contrasts that toward Mexico, where a similar crisis occurred in the 1990s. A massive bailout and rescue package was timely orchestrated and averted an economic disaster in the Americas. The rest of the OECD was also lukewarm to Asia in 1997. In Indonesia, the IMF initially advised that a standby facility was not needed, arguing that the economy had sound fundamentals and could withstand the ripples coming from Thailand (for example, Kenward [2003]). When things turned out to be different, the IMF took the opportunity to introduce reforms far removed from stabilization. Malaysia initially thought that following IMF prescriptions was the right way to shield its economy. Eventually, however, it saw problems with the IMF approach and decided to embark on unorthodox policies, which were denounced by the international community as dangerous and foolish. The situation in Malaysia turned out to be better than in Indonesia, Thailand, and South Korea, partly due to the unorthodox policies.

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Interestingly, the sentiments changed, favoring the application of capital controls to shield economies from further external assaults. Governments need to be given the policy space to determine how to address their predicaments while the international community helps them out to engage the problem successfully. Governments faced with a crisis need to be truthful and forthright concerning their problem. Recall that days before the Asian Crisis erupted, Thailand denied that there was an escalating problem. It pledged to defend its currency to the hilt because it had the resources to do so and to parry away speculation against its currency. In the end, the declaration was empty. Similarly, South Korea went through a denial stage. Days before its currency collapsed, South Korea declared that its reserves were enough to insulate the economy from the ripples coming from Southeast Asia. In reality, though, its reserves were quickly depleted in only a matter of days. Meanwhile, Indonesia made meaningless declarations to adjust its budget and expenditure programs, albeit pronounced under duress. Somehow, the Philippines had the good sense that it would not succeed the onslaught because it did not have enough reserves in the first place, and so it rapidly sought standby facility from the IMF. Governments need to be sincere in presenting the extent of their problems. While this action could be humbling for some governments, it is an important step toward cooperation and reaching the appropriate solutions. The international community needs to work toward redesigning the global “rules of the game,” that is, management of international flows, mechanisms for international engagement to reduce global uncertainties, creation of a stable international economy, and securing of international polity. It has to place on governments the responsibility for regulating activities within their economies so that unregulated operations do not create unacceptable or unfavorable outcomes that will threaten the integrity of the global economy. It needs to coordinate policies so that international flows, for example,

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do not again cause havoc elsewhere. In fact, the increased trade among economies — even intra-regional trade — means that the global production setup is largely interconnected and this situation, too, has important implications for domestic economic performance. An export slump, for example, may translate into reduced performance and produce a crisis. Likewise necessary are serious actions to curb, if not reverse, illicit or unrecorded international flows that undermine developing economies. Such transactions continue to pull resources into haven locations in the OECD that, in a way, benefit from the deprivation of developing economies, which in turn lose the needed funds for economic development. The recipients of these illicit or unrecorded flows need to take steps to redress the situation, starting with their policies that attract or induce such flows into their economies in the first place. In addition, rigorous monitoring of international flows and information sharing among governments are very important toward clamping down the illicit or unrecorded flows. Finally, the international community has to forge quick solutions to rehabilitate the crisis-affected economies and avert the crisis from transforming into a virulent kind like the Asian Crisis. Timeliness is crucial. With quick responses, lost opportunities are minimized and rehabilitation is easier and less expensive. Of course, the effectiveness of international cooperation and planned actions will largely depend on the political willingness and courage of governments to forge collective responses, to move sometimes with unpopular measures, and the skillfulness of the leadership in sustaining cooperative arrangements which lead to coordinated economic expansion that is not only agreeable to everyone but also capable of obtaining desirable outcomes that will benefit all in the end.

5
Conclusion

T

he study presented a review of the economic performance of Indonesia, Malaysia, the Philippines, South Korea, and Thailand in the decade following the 1997 Asian Crisis. It showed that the crisis-affected economies have been performing unsatisfactorily relative to their previous decade’s performance. Moreover, the Asian Crisis inflicted serious costs on these economies which have yet to be fully recovered. Full economic recovery, however, requires robust economic growth which can be sustained in the long term, in order to compensate for the lost opportunities in 1997. This growth may perhaps be at least 6 percent of gross domestic product (GDP) per capita growth each year. If growth mellows down to supposedly pragmatic rates, these economies will still face difficulties in recouping their losses. Downgrading growth targets in economic plans to conform to the projections announced by international institutions and rating agencies is unwarranted, given the sufficient capacities available

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for robust economic expansion. Such aversion to rapid growth is symptomatic of callousness to the unsatisfactory circumstances in the region, as well as withdrawal from active economic management. The study presented results to concretize the consequences of the Asian Crisis. By the mid-2000s, the crisis-affected economies had exceeded their 1996 GDP per capita but had done so only after some years of significant lost opportunities. The cost accounting exercise projected a total social cost for Indonesia of US$94.8 billion (41 percent of GDP) by 2007, which translates into a per capita social burden of US$418. Malaysia would still be burdened with US$39.1 billion (31 percent of GDP) or, in per capita terms, US$1,487. In the Philippines, the total social cost would be US$6.7 billion (7 percent of GDP), or a per capita social cost of US$78. South Korea would have to deal with US$52.3 billion (8 percent of GDP), or a per capita social cost of US$1,074. Thailand would be overloaded with US$95.1 billion (55 percent of GDP), or a per capita social cost of US$1,444. These are nontrivial figures that these economies have faced and endured. Put another way, the economic gains from the long hard work in the past were quickly erased in one to two years. Thus, from an economic justice point-of-view, these amounts provide a basis why it is imperative for economies to avoid another crisis. Lastly, the study stressed the need for decisive policy actions from governments of the crisis-affected economies and from the international community to realize robust economic performance and recoup the costs. These actions need to ensure economic stabilities and preserve political securities. While reforms were already introduced in the post-crisis period, challenges remain and new issues have come up, like how to raise economic growth to levels that characterized the Asian miracle economies prior to 1997, to address the regulatory and supervisory constraints that remain the weak points of an open economy, and to allow for meaningful changes in the international financial architecture in order to secure the external economy and make it support the domestic economy, to name a few. It is important to put in the missing instruments for the present context

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while maintaining the useful components of the past arrangements. Accordingly, together with dynamic growth and sound government interventions toward a positive structural transformation, complementary actions of capital and trade management techniques, the corresponding international cooperation and policy coordination, and improvements in the global “rules of the game” are needed to strike a balance between the domestic and external objectives and generate broad-based economic outcomes that are beneficial to everyone.

Postscript

he present Global Crisis prompts an addendum to the book. It provides an opportunity for a comparative analysis between the crises in the late 1990s and late 2000s. However, as the Global Crisis is still evolving, what follows is only a preliminary analysis which could serve as a foundation for a more detailed examination in due course, as the book did for the 1997 Asian Crisis. At this point, though, it would be useful to inquire whether the lessons from the Asian Crisis were learned at all. That way, it would be possible to appraise the steps taken thus far by governments to hopefully contribute to policy debates and help direct actions toward the suitable route to economic recovery. PARALLELS BETWEEN THE GLOBAL AND ASIAN CRISES Beyond the fact that the present Global Crisis and the Asian Crisis are, in essence, capitalist crises, there are important elements between
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the two that warrant consideration. Five items are discussed below to highlight their similarities and differences. Wreckage After the Storm One element that the Global Crisis and the Asian Crisis share is their deep and wide-ranging negative impacts in the crisis-affected economies. Both pushed the world to the brink of another depression. Yet before the crises wreaked havoc, there was elation about the prospect of unstoppable economic growth. There was a view that the last crisis was too far back in history and could be considered irrelevant to the current circumstances. Analysts also thought that the advanced and developing economies had already decoupled from each other, there was resiliency to external shocks, and there was space to proceed with the current mode of policies, so it was possible to ignore the consequences of global imbalances. The situation was hopeful, especially for the developing economies — at last, economic development was possible despite the continued dominance of the advanced economies in international capital and trade flows. When the crises broke out, however, the notion of decoupled economies was quickly quashed. Economies were, in fact, more tightly connected to each other because of economic integration and globalization. Because of their interconnection, external shocks — both good and bad — turned out to be more forceful than before in impacting economies. Negative shocks were magnified because capital and trade flows overreacted by quickly retreating from crisis areas and, nevertheless, consolidating in advanced economies, where financiers and investors felt relatively safer than in developing economies. Flows became conservative or even hesitant to go outside advanced economies. Economic growth prognoses became grimmer as economies continued to contract. On balance, the impact of the negative shocks was asymmetric for both crises, that is, the advanced economies did better in sheltering their societies from harm than the developing economies simply because the former had the resources to do so.

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As explained in the book, Asia was salvaged from its crisis in the late 1990s only after the advanced economies had put their acts together with the reduction of interest rates, deployment of sizeable rescue packages, and reversal of the pro-cyclical prescriptions like those imposed by the International Monetary Fund (IMF). There was concerted effort from the advanced economies because the Asian Crisis was already threatening their economies. However, the challenge is greater in the case of the Global Crisis. If the experience of Japan during the 1990s is any indication of what the advanced economies would have to endure in the process of adjustment during and after a crisis, the advanced economies need to put their acts together quickly and embark on unprecedented measures in order to stabilize their economies and (yet again) avert a depression that would pull everyone down as the world shrinks to find its balance. The book pointed out that the Asian Crisis radically altered growth trajectories in the region. The crisis-affected economies have yet to recover their losses today, more than a decade past the crisis. In fact, they are still burdened with large costs that seem too difficult to undo because of the limitations imposed by subdued economic growth rates and external pressures. That the Global Crisis will change the growth trajectories of advanced economies and those affected by it is no longer an issue. In fact, an L-shaped growth trajectory has been conceded to be the scenario for the United States once the bottom of the Global Crisis is reached. The other advanced economies will experience the same pattern, albeit of differing magnitudes, given the variations in contexts. Meanwhile, economic contractions are proceeding unabated. As this book goes to print, the Global Crisis is not near the bottom of the contraction. Indeed, there has been no easing up in the descent of key indicators. Thus far, no one has a clear idea how deep the plunge will be before a turnaround occurs. What is disturbing is that the Global Crisis will push many economies into serious difficulties

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and burden them with huge losses despite having no direct involvement in the production of the crisis. It is also saddening, if not ironic, that developing economies will actually suffer more from the Global Crisis even if they are at the sidelines of the global economy. Deregulate and Liberate Deregulation and financial liberalization are common features of both the Asian Crisis and Global Crisis; they are the preconditions for the problem. Basically, financial systems were opened in response to demands for greater competition and freedom of capital and trade to cross borders, but the rules and institutions to manage competition and international flows were not established in or even removed from the process of deregulation and financial liberalization. In fact, the way regulations were removed precluded the introduction of new regulations to discipline international flows when it was found necessary by governments to do so. It is important to understand the context of deregulation and financial liberalization. Right-wing economics and politics moved to remove market regulations; they extolled the virtues of free markets and despised any form of government intervention, which was identified as the cause of economic problems. It was believed that markets always worked well because they are self-rational, selfregulating, and therefore self-reproducing. Indeed, the mere existence of markets is itself self-legitimizing of their virtuosity and the possibilities they provide to the economies. If markets were not carrying out their role as understood, they would be easily replaced through competition — it was thought that competition was enough to discipline the market. Government intervention simply arrested progress, which was believed to be possible only with unregulated markets. Indeed, there was the assurance that society should not worry about market operations because, on their own, markets evolved

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smoothly; they were preprogrammed to reach equilibrium no matter what. All that was needed was to unleash the market. And with economies performing well as the regulations were progressively being removed, governments were emboldened to embark on more aggressive deregulation and financial liberalization. Markets insisted to be free, to do whatever they desired, and to go wherever they wished, and so governments had no choice, so to speak, but to deregulate and liberalize their economies to accommodate the demand. In the case of the Asian Crisis, massive capital and financial inflows ensued in the decade prior to 1997. Because the domestic productive capacities did not expand as fast as the pace of the inflows, more funds went increasingly into speculative and unproductive activities. Thus, by the early 1990s, the prices of stocks and assets such as real estate had accelerated. With the weakened regulatory institutions in the region, capital flight proceeded without restraint, as if governments were indulgent to the revolving nature of the international flows. The inflows also contributed to an expansion of consumption as currencies appreciated and cheapened imports, in turn, undermining industrial strength. Easy money enabled governments to pursue easy credit, too. In the end, flows of funds reinforced the consumption binges and unproductive expansion in the region. The Asian Crisis unveiled the weaknesses in the Asian region. Rapid economic growth in the decade before 1997 was therefore only possible because capital continued to flow to the region. With the crisis erupting in 1997, the flows stopped then reversed. In the end, the region did not have enough funds to keep up with the outflows as capital rushed to safety. The debacle in 1997 radically changed the perception about Asian economies. As the book pointed out, the region was quickly rebuffed for its cronyism, corruption, inefficiencies, and structural rigidities, supposedly the causes of its collapse. Interestingly, these elements were present all along even in Asian economies labeled as miracle

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economies. There was, however, belated recognition that the main problem was liquidity: funds were not enough to restart financial systems and governments were inutile to stop the bleeding of their economies. Not surprisingly, the Global Crisis shares the same trends with the Asian Crisis. In the United States, where the Global Crisis erupted, the separation of commercial banking and investment activities mandated by the Glass-Steagall Act of 1933 was abolished with the passage of the Gramm-Leach-Bliley Financial Modernization Act of 1999, which effectively opened the United States financial system to free-for-all competition among commercial banking, investment, securities, and insurance entities. Of course, there were earlier pieces of legislation that weakened the Glass-Steagall Act of 1933. The rapid advances in computing power, information processing, and financial know-how actually contributed to accelerating the process of removing regulations even as they facilitated the rapid expansion and sophistication of financial markets. As financial activities progressed, more activities occurred outside regulatory control; nobody knew how much transactions occurred in the so-called shadow financial system. Besides, the removal of regulatory power pushed out authorities from intervening in the financial markets. The aggressiveness of finance led to the creation of highly sophisticated and very complex financial instruments that did not have secondary markets; no one could resell the instruments when they went bad even at discount prices. Worse, a lot of the financial instruments were not backed by real values. In other words, changes were increasingly focused on the secondary problems of financial markets, that is, on market operations through the use of prices. Increasingly, the primary problems of financial markets were downplayed, that is, the requisite structures and institutions for market development were set aside as irrelevant to a deregulated and financially liberalized economy. It was enough to assume that deregulation and liberalization generated the demand

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for sound structures and institutions. Again, the view was that markets cleared and the economy stabilized with them, and international flows were enough to discipline both the market and government. Observe how the Global Crisis was caused by the wobbling of the United States financial system, which, in turn, has threatened the collapse of the global financial system. The Global Crisis showed once again that unregulated financial markets are not durable and do not promise long-term benefits even in the most advanced economy. Put in another way, the most sophisticated financial system is fragile. In economies with less advanced financial systems, there is an embedded wisdom toward a precautionary approach to deregulation and financial liberalization. This time, however, the United States was caught in a gridlockcum-vacuum because the financial system was rapidly sucked out of liquidity even as it was infused with huge funds. The United States problem burrowed deep into the financial system in complex ways. Because of the linkages, a stalling United States financial sector stalls the United States real sector. Owing to the international linkages between the real and financial sectors, the United States problem has extended to the world. In short, the nature of the problem is worse than that in 1997 because of the greater scope. Recall that the Asian Crisis put to doubt the notion that markets could operate well by themselves. There were efforts to reign on markets through government regulations in the wake of the Asian Crisis. After a while, though, as the world recovered and, in due course, regained its pace of economic expansion during the 2000s, the attitudes changed and government intervention was again seen to be unnecessary. Interestingly, the Global Crisis revived the convictions declared due to the Asian Crisis, namely, to redefine the international economic architecture and to institute sound regulation for managing international capital and trade flows.

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The Global Crisis is once again a reminder to return to the structures and institutions in order to soften market operations, to the fundamentals of production, and to balanced economic growth, including the interactions of various factors, which are needed for dynamic performance and improved economic welfare. Part of this recollection is to recall how to re-embed finance in the economy and, again, make it support production, contribute to growth, and help improve economic welfare. People who believe in regulation should be tasked to run the regulatory agencies and given ample room by government to execute regulations. It is meaningless to have financial regulatory agencies or an integrated financial regulatory body when the people placed there do not believe in regulation or think that any regulation is bad or see that the removal of regulations is their mandate. Re-regulation is in no way a suggestion or an approval to embark on authoritarianism or antidemocratic measures. It is not even close to such view. Rather, it is a challenge to the position that unregulated markets are the best way to organize economic activities. There is a need to reconsider the essential roles of government in a market economy and find a balance between planning and market, to return to the fundamental purpose of economic management. The fundamental principle that underpins re-regulation is the promotion of a shared society where economic progress does not create extremes of wealth and poverty, a shared society which provides access and creates opportunities for everyone to overcome adversities and challenges through hard work and dedication, tempered with the mutual responsibility to ensure that the economy continues to be robust in the long term. Success Breeds Failure It is natural that success raises confidence. That continued success will breed contempt of failure is equally natural. There will always

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be a belief in the permanence of success and the emergence of a new stage of advancement. Thus, a period of exuberance always precedes a crash. Another interesting parallel between the Asian and Global Crises is that they are both results of economic successes that lasted for some time. The successful period was thought to be the consequence of policies that stressed limited strategies or government action, setting markets free with the removal of regulations. In Asia, the success of the export-oriented growth strategy masked the ersatz nature of economic progress. Asia was thought to be coherent in constitution, relative to the other developing regions. Indeed, two-and-a-half decades of continuous economic expansion among roughly contiguous economies was unprecedented, even a miracle, because such a scenario was statistically improbable.1 In fact, Asia was thought to be the economic model that the developing world should emulate and aspire for. In a way, the Asian economies were Janus-faced economies. The region had macroeconomic discipline and maintained balance. It had adequate physical infrastructure and provided basic social services like public education and health. Governments were embedded in that they coordinated investment activities, supported the rising industries, and encouraged reinvestment of capital for further production. More importantly, the region became an aggressive exporter to the advanced economies. Behind the competitiveness of its open economies, however, Asia had uncompetitive domestic sectors. There were aspects overlooked, too, like increasing inequalities and environmental destruction. Domestic adjustments were not pushed because economic growth masked the problems. Rapid growth was thought to assuage demands for redistribution and environmental sustainability.
1

The probability that another Asian miracle reoccurred elsewhere is 1 in 60,000 (Jomo 2001c).

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By the 2000s, the Asian economies had geared back to growth momentum. The export-oriented growth strategy was functioning again. New drivers of economic growth emerged, like China and India, to supersede earlier drivers like Japan and South Korea. Because of the painful experience with the Asian Crisis, Asian economies accumulated international reserves as precautionary resources against illiquidity or another crisis. This huge pool of Asian liquidity had to take some form and was placed somewhere in the interim that it was not utilized by the economies. Thus, there emerged the international liquidity glut that characterized the 2000s. The United States was willing to take in Asian and other economies’ international reserves because it needed to finance its trade and fiscal deficits. The United States no longer produced most of the goods it consumed, and so it imported a lot from the world, especially from China. It also did not want to be worried about basic services for its workers and so it opened its doors to immigrants, albeit offering the latter relatively lower wages and lesser social security than American workers. United States authorities encouraged the situation by reducing interest rates and keeping them low for a while despite key indicators pointing to the need for a reversal of policy. The sustained capital inflows, of course, provided easy money that, in turn, supported consumption binges and the rapid expansion of the United States financial markets. With tougher competition, financial standards were lowered and thus emerged the sub-prime mortgage bubble in the 2000s. The capital flows to the United States left little resources to developing economies. China, for instance, has the largest international reserves today, but a large part of its funds is locked in United States treasuries and other fixed instruments. China and other developing economies are effectively providing foreign aid to the

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United States. This unhealthy pattern, together with the fleeting nature of flows because of deregulation and financial liberalization, has not only limited economic development but also created and enhanced the existing vulnerabilities of developing economies. The United States enabled other economies to flourish because, as the global consumer-of-last-resort, it gobbled up goods from the world. Again, global imbalances have supported United States consumption since the 2000s. Needless to say, the current international economic architecture requires one or two global consumer-of-lastresort economies to enable global economic growth. Now that the United States is unable to perform its role, the world is devastated. Still, the Global Crisis impacts the developing economies in significant ways despite being at the margins of global economics. Of Debts and Bubbles There are two essences of the Asian Crisis and Global Crisis. The first is debt. Both crises originated in borrowings. They are different only in terms of the nature of indebtedness and its development. For the Asian Crisis, there was a mismatch of maturities and liquidity, that is, the Asian economies borrowed funds in international currencies but lent out in local currencies; they borrowed in short term but lent in long term. When the crisis struck, economies found it difficult to meet debt obligations and respond to the massive international outflows. The Global Crisis, in contrast, originated in the securitization of debts. Securitization is basically the creation of hybrid financial instruments by (re)combining existing instruments and (re)selling them like conventional financial instruments to, say, investment banks, hedge funds, insurance companies, and so forth. The most recognized of these instruments because of the Global Crisis is the collateralized debt obligation. The securitization process was thought to be safe, clean, and transparent. Again, competition guaranteed that it would proceed just fine and bring benefits to the economy in the long term.

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Recall that in the conventional approach, banks extended loans to households and businesses. If borrowers defaulted on the loans, banks suffered. Thus, there were strong incentives for banks to ensure that good loans were made and the borrowers paid. In the United States, things markedly changed in the 1990s. Banks shifted to the so-called originate-and-distribute system in making loans. In the new approach, banks still issued loans as before, but then they had other financial institutions or, on their own if they had enough capitalization, packaged the loans into hybrid instruments. Notice that the issuer of loans need not be the holder of loans. In contrast to the conventional approach, there was no strong incentive to make good loans in the new approach. With no strong regulations or monitors because of deregulation and financial liberalization, the transactions continued like ordinary business, expanded, accelerated, and then went out of hand. There was a perverse incentive to create more hybrid instruments, sell them off, get bigger fees and bonuses, and then redo the process all over. Why should market players worry about defaults when they got their big fees and bonuses already? Besides, government allowed, if not encouraged, the expansion of such transactions. Rating agencies contributed to the securitization process, too. The business of rating agencies is exactly that: to rate securities and related financial instruments. Their business is fundamentally linked to selling and underwriting financial products. Put simply, those who sold the hybrid instruments got rating agencies to rate their products. The perverse incentive was to give very high ratings to earn more and not be concerned about the integrity or truthfulness of hybrid instruments like collateralized debt obligations. As competition in the financial market intensified, more loans were extended to people who did not have the capacity to pay loans, or the so-called sub-prime borrowers. Because United States

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housing mortgages were basically non-recourse debts, there was a big problem right from the start. It is easy to understand why loans need collateral. In the case of the United States sub-prime lending, the collateral was (still) the house. But loans were non-recourse debts, which means, in case of default, recovery of the loan is limited to the mortgaged property. The rest of the borrower’s properties (if there are any) are not covered by the mortgage. In short, it is possible for the borrower to return the mortgage to the bank because of inability to pay and then walk away. Indeed, since the housing bubble burst in 2007, people had been walking away when they defaulted. There was therefore a perverse incentive on the part of the borrower to not make good on the loan. Besides, insurance against defaults was available to the bank, which is called credit-default swaps or insurance derivatives. Simply put, the bank could purchase insurance on a loan that was given in the sub-prime market to cover losses in case that loan went bad. Again, there was perverse incentive to not make good loans. What was overlooked during the securitization episode was that the transactions evolved into hybrid instruments that remained outside regulatory controls. In short, nobody recognized the profound changes in the financial system; in the end, nobody knew the amount of toxic materials created during the securitization episode. Moreover, the hybrid instruments did not have secondary markets. In short, nobody could resell their toxic materials if people did not want to hold them anymore, even at discount prices. What made things worse is that these instruments were actually not backed by real value; thus, it was difficult to stabilize the situation when the crisis broke out in the financial system. And because the regulatory infrastructure was decimated throughout the 1990s, it was difficult to intervene in the financial system. In short, securitization set the course toward catastrophe. After the bubble burst, a financial gridlock-cum-vacuum emerged.

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The Global Crisis is, however, a bigger problem than the Asian Crisis simply because, first, the advanced economies are affected and, second, which is a consequence of the first point, it is global in scope. Interestingly, the Global Crisis obliged governments to reconsider nationalization, albeit for the wrong motivations. This move would have been unimaginable during the Asian Crisis, when governments were forced to close and privatize the erring banking and financial institutions and corporate enterprises. At the same time, massive bailout packages were provided to failing institutions and enterprises, which, again, were ruled out as a viable response during the Asian Crisis. As a matter of fact, several advanced economies have posited that nationalization is a necessary step to distinguish the good from the bad assets, remove the toxic ones, and facilitate the recapitalization of financial institutions to restart capital flows. But that idea is mistaken because nationalization should be done primarily to secure the real productive sector and not to alleviate the problems that the financial sector created on itself. In the United States, a serious financial cleanup is needed. Bailout is definitely an expensive endeavor. It needs to be acknowledged, though, that the United States capitalist system today is characterized as “corporate welfarism,” or a predisposition to first attend to the demands of corporate and financial interests and not to have second thoughts about cutting budgets for healthcare, education, housing, and other basic services. Like it or not, United States taxpayers are going to assume a disproportionate burden of the bailout as the toxic assets are socialized. With the labor already weak and powerless after years of assault, the working class is going to suffer the most despite the bailout. It seems that those who profited from their irresponsible actions would not be asked to take the burden of paying for the bailout. There is simply no socialization of profits for the rich and powerful.

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As the events unfolded in 2008, bailout was extended to giant finance players like Bear Stearns, Lehman Brothers, Merrill Lynch, Morgan Stanley, Goldman Sachs, and Citigroup; insurers like Fannie Mae, Freddie Mac, and American International Group; regional banks like Washington Mutual; and auto companies like General Motors, Ford, and Chrysler. The United States financial sector needs to bail itself out because the alternative scenario of a United States financial collapse is worse in terms of its impact on its economy and the world, as well as on global security. The alternative scenario of reliving another depression is unacceptable to the United States and the world. The amounts for the United States bailout are large in any yardstick. But United States authorities can carry it out because their economy does not have a currency constraint problem, unlike most other economies. Put another way, United States authorities can provide the liquidity needed to have a successful bailout and save the financial system by simply allowing the release of money. But the fundamental issue is whether United States authorities realize that a bailout would necessarily help those who profited and took advantage of the situation that brought the United States financial system to the brink of collapse or that the bailout would necessarily help those who were complacent in building the United States productive sector. A related important issue is whether United States authorities have the seriousness to fight the good cause and take up actions in good faith to avert the greater costs because, in the event of a financial collapse, there would be no “soft landing” for everyone. An equally important issue is whether United States authorities would run after those who placed the financial system in the United States at the brink of collapse, or for other economies, to break down. Because of the financial mess, those who have placed their money in, say, pension funds for a good objective will not be able to look

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forward to a secure retirement. Many people will lose incomes, jobs, and houses as the financial mess spreads through the United States economy. Since it is not well understood how the money will be recovered, bailout will create a huge hole in the financial system even if it saves the financial markets. As those who have profited from irresponsible actions are not going to take any burden, bailout will strengthen the view that the United States has become a society that protects the wealthy and powerful and gives token care to the poor and powerless. The bailout will penalize the taxpayers for a long time, even as United States authorities purge the toxic financial products. No doubt, the United States financial mess requires a quick and solid resolution because, even in the interim of the Global Crisis, the costs have become too large to be fathomed. After that, there would be serious re-regulation to discipline capital, resuscitate the financial regulatory structures and pull the financial system out from its setup that encourages financial casinos and, more importantly, make finance once again serve the people rather than the reverse. There would also be serious actions against those who took irresponsible and arrogant transactions without the actual capital to back them up. Like the Asian Crisis, the Global Crisis originated in a bubble. Bubbles do not usually have any effect beyond the domestic sector. The Asian Crisis evolved into a more virulent crisis because the advanced economies and international organizations like the IMF were disinclined to provide assistance to extinguish the problem as it hit other regions. The opportunistic nature of the intervention did not help ease the problem in Asia because the economic contraction led to a general doubt on the integrity of developing economies in general. Economic integration and globalization also facilitated the transmission of the problem. The Global Crisis, however, is different from the Asian Crisis because the United States bubble has burrowed quite deeply into the United States financial system. Securitization has transformed the bubble in complex and intractable ways. Owing to the domestic

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linkages, a stalling United States financial sector stalls its real productive sector. Consider the following transmission. The collapse of the housing industry affects the sectors that are directly connected to housing, like construction and materials, furnishing, and utilities, and eventually the workers and incomes in these associated sectors as well. Of course, it does not necessarily mean that if the housing industry collapses it will automatically affect the other real sectors, say, automobile, airline, shipping, and so forth. There may be secondary effects of a housing industry collapse. For instance, as the furnishing industry is adversely affected, people lose their jobs and income. Thus, there may be fewer people who want to travel, thereby affecting the airline industry in due course. The same goes for industries linked to airlines, and so forth. In short, a problem like housing collapse may lead to secondary problems that can immobilize the whole real sector of the economy. Of course, the speed of transmission and extent of the effect greatly depend on the health of the economy. The housing sector and the other industries are linked to the financial system. It is possible for a housing company to put up its own lending company, providing people who bought houses with access to some form of financing. Similarly, a conglomerate may put up its own bank to establish some form of direct payment facility for its clients. These linkages make the financial system function like the circulatory system of the economy. Thus, a problem in the financial system affects the whole body. Indeed, Alan Greenspan (2007) says that, as of 2006, the daily volume of payments in the United States financial system was around US$5 trillion. Unlike the real sectors of the economy, the financial system has direct linkages to all parts of the economy. In the case of the United States financial crisis, companies lent to each other but turned a blind eye on the unusual situation: no one actually had enough money to

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pay all the obligations. It was generally thought that nothing unusual was happening because, again, competition was extensive. Then the bubble burst, the “house of cards” built with housing mortgages fell apart, and a major heart attack to the financial system occurred, incapacitating the United States. As the repercussions in the real sector manifested, the financial sector found that it did not have enough money to support the untangling of debts. The linkages within the United States also serve as the conduit for extending the United States mess to the global economy. With the retreat of capital to the advanced economies for security, the real sector of developing economies would suffer as economic contractions ensue following reduced capital and trade flows. This way, the Global Crisis is like the Asian Crisis because in the latter, capital fled the region to seek safer places, especially the United States. The Global Crisis is similar to the Asian Crisis because of the linkages across the financial and real sectors. The problem in the United States hit the European and Asian financial systems as they were unable to recover their exposures. As their financial system stalled, their real sectors were compromised in the end. Because economies are now rather tightly linked to each other, the slowdown resulted in secondary effects on other economies as well. Thus, as advanced and developing economies slowed down, the world fell into economic trouble. During the Asian Crisis, capital pulled out from the region and shifted to the advanced economies to start another bubble, so the amount of capital in the end remained intact or, at least, capital was able to recover the losses from the Asian Crisis rather quickly. In fact, the same general process could be observed with the Mexican Crisis in 1994, Brazilian and Russian Crises in 1998, Turkish Crisis in 2000–2001, and Argentine Crisis in 2001–2002. Even the United States dot-com bubble in 2001 came from the same cycle of boom and bust.

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But this time, the Global Crisis hit capital in its core. Capital was vacuous because it did not have (enough) value to support or back up its expansion with securitization. Thus, when the bubble erupted in 2007, asset evaporation ensued. Large write-offs and write-downs have continued since 2008, creating a downward spiral of valuation and sentiments. The effect is that capital would now have much difficulty reconstituting or restoring itself in the post-crisis period. This time, bubbles would not be quick to emerge. Besides, the amount of capital would not be enough to start another bubble, at least during the mediate post-crisis period. The failure of another bubble would therefore be problematic for reviving global economic growth. Of course, there would be subsequent problems, especially in developing economies, where capital is already scarce. In fact, some of them already had difficulties repaying their debts before the Global Crisis. Poor ones would face a much tougher problem in meeting their debt obligations. If debt problems emerge, certainly, there would be another layer of complications to the Global Crisis. Nobody Saw “It” Coming The Global Crisis emerged in the heart of the world. It did not occur in some developing economy with faulty financial institutions or broken politics, but in the United States, the richest, arguably the most democratic, country with the most advanced financial system in the world. While serious crises occurred in advanced economies in the past, like the 1980s United States savings and loans debacle, the 1990s Scandinavian banking crises, or the 1990s European Monetary System breakdown, none of them actually threatened the world. Perhaps this is because there is something odd with the present-day variety of United States capitalism, or the Global Crisis came out in the United States that it was not expected. Contrary to popular perception, the Global Crisis was actually foreseen by a number of analysts. The economist Jomo K. S., along with the United Nations, warned about an impending global crisis.

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Nobel Laureate Joseph Stiglitz and economists like Robert Shiller and Nouriel Roubini noticed the alarming trends even before 2007.2 There are other analysts who raised the alarms, of course. The United States Federal Bureau of Investigation warned, in 2004, of problematic and unhealthy financial practices linked to securitization (for example, Black [2009]). Warren Buffet warned of the dangers of derivatives, as early as 2002, calling them “financial weapons of mass destruction” (for example, Berskshire Hathaway [2002]). What is incomprehensible is that precautionary measures were not adopted despite these early warnings, including in the United States. It seems that the world was content to dismiss these analysts as doomsayers (for example, Greenspan [1998, 2007]), or, as in the case of Asia in the 1990s, authorities did not want to let go of the vision that global economic performance was heading to a higher level of advancement. Perhaps, authorities and their analysts operated within a setup that predisposed them to take self-serving analyses which rule out the possibility of a brewing problem. If their analyses succeed in identifying the problem, the setup is such that it precludes them from taking actions because doing so risks the loss of confidence and produces panic. Of course, there is the matter that the Global Crisis, like earlier crises, is a systemic problem inherent in capitalism. That is, while no economic system is free of crises, it is argued that only capitalism is genetically structured to fall periodically into crises. But people find it difficult to accept that capitalism is fundamentally flawed. As such, it is better to forget about the flaws. It is relaxing to believe in the infallibility of capitalism and to dismiss dissenters as doomsayers. The onslaught against alternative proposals has been successful because the notions that the capitalist system will eventually sort itself out if crises occur, and that competition will temper it, dominate
2

Recall that Joseph Stiglitz and Nouriel Roubini were among the first to present a provocative analysis of the causes of the 1997 Asian Crisis. Robert Shiller has been credited for predicting the housing bubble collapse, while Roubini, for predicting how the US financial system would break down as a result of the bubble bursting. See Shiller (2006) and Roubini (2008).

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policy and analysis. The situation is unfortunate because the collapse of capitalism today is an occasion to engage in a serious fundamental analysis of the capitalist system. AFFIRMING A DECLARATION OF INTERDEPENDENCE After analyzing the impacts of the Asian Crisis, the book proceeded to discuss some policy directions to revive economic growth and prevent the occurrence of a crisis of the same kind.A review of those policies is useful in light of the Global Crisis. Chapter 4 laid out five considerations for the post-Asian Crisis period, namely: reviving growth, eliminating opportunism and hesitation, managing the international flows of capital and trade, enhancing the role of government, and forging international cooperation. Are they also applicable to the Global Crisis? Economic Growth The first policy challenge in the wake of the Asian Crisis was reigniting economic growth in the region. The same applies to the economies adversely affected by the Global Crisis. As in the Asian Crisis, sustaining growth over the long term across the world will, in fact, be the bigger challenge in the post-Global Crisis period. Recall that, as discussed in this book, after the Asian Crisis, growth trajectories of the crisis-affected economies did not return to their previous path. This pattern need not reoccur if outputs, incomes, and jobs expand in the post-crisis period. In the interim, the world is seeing the advanced economies on a downward spiral. The contractions have adverse impacts on the economic performance of developing economies that, in turn, can aggravate the conditions of the poor who comprise more than half of the world’s population.3 The collective decline of economies will
3

This statistics is based on the US$2.50 daily benchmark to be classified as international poor. With the US$10 threshold, however, 80 percent of the world is poor.

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be problematic because global economic welfare will fall, too. With the bottom of the Global Crisis not yet in sight as this book goes to press, there are serious concerns about the depth of the dive and, accordingly, the magnitude of the damages. As stressed in this book, recovering these costs will be a huge challenge to economies in the post-crisis period. It is imperative therefore to prevent the Global Crisis from escalating into global collapse. The scenario of a depression must not be allowed to happen. As such, stimulus programs are needed to pull economies out of the crisis. Put simply, aggressive spending is needed to improve the outlook in the succeeding years. The purpose is not only to realize an improvement today but also to reinvigorate the economy for the future. To have profound effects, the stimulus programs need to emphasize complementarities, exploit scale economies, and minimize duplication so that there will be generalized expansion across sectors and economies. Stimulus spending is crucial during a crisis because it is quick to stimulate economic growth. But it needs to be timely so that spending will actually contribute to the expansion of production, generation of jobs, and increase in incomes. Enlarged income, in turn, creates successive expansions that materialize into a larger gain than the initial outlay. Stimulus spending needs to be coordinated so that demand will be spread out across economic sectors. The challenge is more difficult in the case of the Global Crisis because the spending also needs to be coordinated across economies to see improvements in global economic performance (see discussion below). At the same time, it is important that stimulus spending is sustained in the medium term to avoid an economic relapse. Depending on the domestic capacity, a meaningful stimulus spending needs to be between 2 and 5 percent of gross domestic product (GDP) over a four- to five-year period, with gradual reduc-

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tions midway into the program.4 A conservative determination is to first obtain the total contraction as a share of GDP at the bottom of the crisis, then divide the figure by four or five years to get the size of a stimulus program for each year.5 For example, if the total contraction reaches, say, 10 percent of GDP at the end of the crisis (using the procedure used in Chapter 3), then stimulus spending needs to be in the range of 2 to 2.5 percent each year. Recall that this approach could bring an economy back to its pre-crisis trend. To recoup the costs, however, stimulus spending needs to exceed the calculated low-end amount. Of course, downgrading economic growth targets is inevitable during crises; but it is precisely because of this that stimulus spending has to be introduced quickly and to be as decisive as possible in order to reverse the distressed scenario swiftly. In the ideal scenario, reduction in spending is done once the economy is back on track to its original growth trajectory. At this stage, it is important to institute counter-cyclical spending. Thus, there is a need to set up a mechanism that will enable interventions to manage growth fluctuations via spending. Because of the Asian Crisis experience, there is consciousness that improving the economic performance of crisis-affected economies is a priority concern before going into the structural changes. Opportunism and Hesitation A major mistake during the Asian Crisis was the misdiagnosis of the crisis and, because of that, the wrong prescriptions. The Asian Crisis was thought to be a current account problem, forcing the

4

Two percent of the total output is a generic IMF prescription for stimulus programs. Obviously, the calculation assumes perfect foresight to determine the bottom of a crisis. In the absence of perfect information, historical analysis will be useful (for example, Reinhart and Rogoff [2008, 2009]).

5

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crisis-affected economies to execute current account measures. In actuality, the Asian Crisis was more of a capital account crisis which affected the current account, since economies suffered from liquidity as capital flows ran out. Recall that the Asian Crisis was attributed to cronyism, corruption, and so forth, so the prescriptions focused on structural changes and other reforms that were not directly related to the liquidity problem faced by the crisis-affected economies. Of course, entrenched interests were upset. Elites did not support the reforms, resulting in the mere token acceptance of the prescriptions handed by the IMF and others. In the end, there was default on the reforms. If the liquidity problem were addressed head on (i.e., with access to funds to stabilize the situation), a bitter crisis could have been avoided. There were other mistakes, of course. But, again, the Asian Crisis escalated the way it did because of the incorrect analysis and prescriptions. In a way, the Global Crisis started out as the result of incorrect analysis and prescriptions. As mentioned earlier, warnings in as early as 2004 pointed to unhealthy financial market practices. Warnings in 2006 referred to an impending crisis in the United States housing sector. It is unlikely that the United States Federal Reserve did not see the unhealthy trends. Recall, for instance, how the United States stock market adjusted in December 1996 after then Federal Reserve Chairman Alan Greenspan marginally commented in a speech that the 1990s stock market boom exhibited “irrational exuberance.” In due course, the dot-com bubble burst. In other words, if United States authorities wanted to act to deal with a potential problem, they did so with binding threats of intervention and regulation. The fact of the matter is that the United States Federal Reserve refused to intervene in the 2000s. To the Federal Reserve, the brewing problem was merely froth in the financial system that would just disappear when competition fixed the exuberance. Accordingly, the Federal Reserve did not acknowl-

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edge a housing bubble problem. It even went on to relax its monetary policy and maintained loose policy for too long. It also supported the removal of the remaining safeguards against speculative activities. In a way, the Federal Reserve acquiesced to the financial markets. Market players, in turn, were emboldened to engage in more speculative activities. There were also implicit promises that government would lend a hand in the event that help was needed, strengthening the notion that market players were too big to fail. In short, not only were structures and institutions weakened with deregulation and financial liberalization; the incentives were unsound as well, and the environment encouraged speculation. Moral hazard was part of the problem. On one level, there was hesitation to say that there was a problem in the financial system despite the deregulation and financial liberalization. If the Federal Reserve made such declaration, panic, and thus a crisis, would break out. If it did not do anything, however, a crisis would still occur. In these alternative scenarios, the latter was easier to pursue. The above argument avoids the issue of the roles of financial regulators, which are, necessarily, to ensure the soundness of the financial system and make it resilient against shocks, ascertain the veracity of financial products sold in the economy or elsewhere, check market players if they engage in financial casinos or prey on people or fool everyone else to consume financial products that would be unsafe for the economy in the end, avoid situations which would bind the government to bail out those who acted irresponsibly, impose the burden on those who acted carelessly, and, more importantly, discipline capital so that it supports the economy. In addition, there must be effective regulation and capacity to discipline market players. Apparently, when the situation was ripe for a financial crash, the Federal Reserve did not and could not act to extinguish a crisis. The bailout and rescue activities comprised the first phase of the effort to resuscitate the financial system, and the stimulus programs

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are the next steps. Institutional reforms are, without a doubt, desperately needed to address the source of the problem, but they are to be done in the appropriate fashion and timing. An important lesson from the Asian Crisis is that fundamental reforms should be introduced once the crisis-affected economies are on a steady course to economic recovery, which in itself is important to sustain the reforms. Some measures could be urgent, like strengthening the rule of law and apprehending the culprits, which signal the seriousness of government, and conveying the message that things would not go back to the way things were before the crisis. Safety nets are needed to minimize the adverse impact of the crisis on the poor and the vulnerable. In such cases, actions need to be creatively introduced by the authorities to convey the correct message that government defends public interest not private interests. It is apparent when reviewing past major crises, like the Great Depression of the 1930s, that urgent measures were done without delay and reforms were introduced in due course. 6 The Federal Deposit Insurance Corporation, the Securities and Exchange Commission, and other agencies, as well as social security, wage and labor standards, and so forth, were introduced by the mid-1930s. An alphabet soup of regulatory agencies was prepared between the 1930s and the 1960s. Together with regulatory reforms, the United States government raised taxes on the elites. Naturally, such measures were objectionable. In the end, however, the policy transformed the United States society. In particular, taxes on the elites and, subsequently income taxes as well, produced the great compression in wealth and inequality, creating the middle-income American society that attracted many people to the United States (for example, Piketty and Saez [2003]
6

There were also policy mistakes. In 1937, the Roosevelt administration decided to balance the budget. The result was a recession. Realizing the mistake, the Roosevelt administration changed direction and embarked on a stimulus program to revive economic growth.

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and Krugman [2007]; for advanced economies’ experience, see Piketty and Saez [2006]). Regulatory agencies produced a managed economy. Eventually, there were parallel growths in wages, profits, and accumulation which sustained expansions in production, consumption, and economic welfare. Thus, the United States experienced the longest expansion in the post-World War II period ending in the 1970s. At the broader level, reforms are needed to repair the capitalist systems that were damaged by unbridled deregulation and financial liberalization. Equally crucial are measures to take care of the frightening challenges to society caused by mindless capitalist expansions, namely, climate change and environmental destruction. Reforms are likewise necessary to shift attitudes from focusing on corporate profitability to emphasizing public safety and security. Measures that penalize those that funnel resources into useless and destructive activities have to be enacted in the post-Global Crisis period. Those who engage in speculation need to be liable for their mistakes. In the meantime, governments must institute caps on irresponsible and callous actions that seem insensitive to the Global Crisis. Reforms that encourage and reward productive activities, initiative, and good business need to be enacted, too. At the same time, reforms like redistribution and income and wealth taxation have to be revisited. Lastly, research and development needs to be stressed in order for societies to devise context-specific measures, strengthen regulatory institutions, and improve bureaucracies. This is also necessary in finding alternative routes to economic progress so that rapid economic growth will not compromise environmental sustainability and the global economy. In areas where agriculture plays a key role in terms of employment and income, there needs to be greater attention to, say, enhancing agricultural and technical services to improve farming and harvesting techniques, as well as exploring viable off-farm livelihood programs, especially during the growing season. Obviously, free public education and health services and employment must be

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guaranteed to anyone who wishes to attend school, needs medical care, and wants work. Skills improvement and training, together with technological research and advancement, are key components of an invigorated capitalist system. Their availability — both the quantities and qualities — will bring about sustained growth. They are all needed in the post-Global Crisis period in order to recoup quickly the lost opportunities. Managing International Flows of Capital and Trade The challenges learned from the Asian Crisis with regard to capital and trade flows are even more relevant to the Global Crisis. Deregulation and financial liberalization without the corresponding regulatory reforms to strengthen institutions and respond to the new conditions, together, were the preconditions for the Asian Crisis. In the end, with the virulence of the crisis, massive capital flowed out from the region while trade contracted, eliminating the source of funds for debt financing and pushing economies to a very difficult and painful experience. By 2000, capital had started to flow back to developing economies. More funds returned to Asia. However, globally, these flows remained predominantly within the advanced economies. A fraction of global flows actually went to the developing economies, albeit to a dozen of high-performing developing economies. The other areas, like Sub-Saharan Africa, received very little capital flows and did not have access to capital to support economic growth. With the crises in the late 1990s and earlier 2000s, capital was reluctant to flow to the developing economies without guarantees or privileges, like tax breaks or safe passage if it wanted to take the exit. Meanwhile, unrecorded flows intensified as capital flowed in because there were few regulations in place. Any adverse development amplified the rush to the exit. At the same time, capital could

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circumvent the remaining regulations because the infrastructure was weak for the administration of the remaining regulations. Moreover, capital flows became more short term in character. The composition of flows also turned out to be increasingly liabilities rather than assets and green-field investments. The consequence was that capital did not take root in the domestic economy, nor did it contribute to enhancing productive economic activities. In short, capital was only after profits then quickly left to search for other profitable opportunities. As Asia started to stabilize, efforts toward further deregulation and financial liberalization were revived. The view changed from deregulation and financial liberalization as preconditions for the Asian Crisis to being indispensable measures in the post-crisis period to pull the region to higher growth trajectories. Indeed, the latter view was the argument in the early 1990s as Asia had enjoyed uninterrupted expansion since the 1980s. With governments instituting financial measures and other reforms like capital adequacy and accounting standards, confidence was raised that even if deregulation and financial liberalization were pursued the old way, the safeguards introduced were already sufficient to forestall another crisis. Of course, governments were cautious with embracing capital flows but more amenable to the removal of regulations. Even today, capital flow management (as explained in Chapter 4) remains weak. In regard to the capacity to control capital flows, such as directing capital into the productive sectors, affecting the composition of the flows from short-term to long-term capital, or preserving capital in the economy, developing economies in general remain weak. Malaysia removed its capital controls in 1999 and, thus far, there is no comparable capital management setup in place there. Not surprisingly, when capital controls were removed in 1999, Malaysia experienced a massive outflow of capital. As the world gathered economic momentum in the early 2000s, capital management techniques became more difficult to introduce in developing economies; capital

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became stronger and launched a strike against an economy that contemplates regulating capital flows, causing problems to the economy. There also remain problems in trade flows management. Global trade continues to be predominantly within advanced economies. The developing economies, on the other hand, take part in a small portion of global trade, albeit high-performing economies like those in Asia are able to participate more than other economies. Trade access and facilitation and coordination continue to be difficult challenges to overcome despite the solid conviction of the advanced and developing economies that greater trade is good for economic performance and the international community. Of course, an associated problem concerns the composition of trade flows from the advanced and developing economies. What remains consistent is that developing economies trade mainly in primary or low- to medium-technology goods, which are easily absorbed by the advanced economies. There have been improvements, but these are seen only in the high-performing developing economies. In general, though, developing economies cannot easily absorb the flows in high-value manufactures or high-technology goods, which differentiates the trade in the advanced economies. The latter’s goods are more expensive relative to those of the developing economies, which therefore creates an imbalance in trade financing. The asymmetry of global trade flows happens partly because investments into the developing economies do not often allow transfer of technology or even permit adaptation to help ignite the drive for the formation of domestic industries. Trade flows management has focused on the protection of intellectual property rights and the standardization of production that little attention is given to how to utilize existing technologies to create industrial diversity across economies. Developing economies are thus forced to specialize in diminishing returns intensive production that fails to not only bring in large returns because the prices of their goods decline with greater production but also generate large employment opportunities for

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workers. Participation in global trade turns out to be limited and potential for economic growth is constrained. Trade management techniques that result in solid industrialization and trade deepening are important in transforming the developing economies. Each economy needs the policy space to be able to design industrial policies that account for local characteristics and conditions. The setup may include industrial protection coupled with the appropriate incentives for competition and the weaning of industries from protection as industrialization takes root. For instance, protection may be linked to utilizing local resources and labor or attaining bigger shares of the global markets, and so forth. Since industrial deepening is a long-term endeavor, adequate domestic capacity is crucial to succeed in this complex engagement. As with the capital management techniques, trade management techniques require the integrity of policy space to have the control to set a course of development that is appropriate for the economy. There are reemerging challenges that the Global Crisis brought to the surface. The first concerns the reversal of capital flows as the Global Crisis intensified. Because economic contraction continues and the turning point of the advanced economies is not yet in sight, capital flees the developing economies to seek safety in the advanced economies. Meanwhile, developing economies face more difficulties in getting financing to meet present obligations because capital flows have significantly slowed down, if not stopped, the cost of financing has markedly increased, or investments are already withdrawing from the rest of the world and are consolidating in the advanced economies. Rating agencies also downgrade the investment appraisal of developing economies. These changes actually began in 2007 but have worsened since 2008. With the intensifying capital outflows, developing economies are facing grave difficulties in sustaining their economic performance because of trade flows contraction. With the Global Crisis escalating

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in 2009, there is lower demand from advanced economies for goods from the developing economies, which complicates foreign exchange constraints that deepen the external debt financing problem and the ability to obtain inputs of production. As above, there is negative feedback that ultimately reduces economic growth. There are added complications, like the currencies and stock markets get battered and then international reserves are depleted. The negative feedback from this side of the economy accelerates the fall in growth. Naturally, reduced capital flows, coupled with the hesitation to extend credit to the developing economies, add risk. With remittance flows decreasing because jobs and wages fall during crises, developing economies have fewer options in terms of accessing credit or rolling over existing debts. The most serious risk that the Global Crisis places on the developing economies is debt defaults which, if they materialize, will transform the Global Crisis into a depression. Therefore, capital and trade management techniques are actually more pressing today than in the late 1990s. The above issues concerning capital and trade flows management deal with the macroeconomic dimensions. But the Global Crisis has brought forward the microeconomic dimensions concerning capital and trade flows. On the former aspect, there is a need to reemphasize the microeconomic aspect of regulating the domestic financial system that encompasses banking, securities, insurance, and other institutions to manage risk and direct resources to productive economic activities. As explained in the first part of the postscript, deregulation and financial liberalization facilitated the removal of the setup that compartmentalized the financial system to avoid speculative and unhealthy activities. Re-regulation of capital flows is now needed to put the economy back in shape, with capital supporting domestic productive activities onto smooth economic expansion, thereby contributing to the improvement of public welfare rather than the other way around.

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Obviously, capital and trade flows management in developing economies needs to address both resource direction and supervision of risk to avoid crises. In advanced economies, on the other hand, the task is more on regulation to take control of risk rather than direct resources, since their financial markets are more developed than elsewhere. What needs to be stressed is that capital and trade flows management entails separate but complementary policies. In this regard, governments have even more important roles to play today in balancing strategies with respect to both domestic objectives and international cooperation because, if mismanaged, either one can be deleterious to economic growth. The Role of Government There is no need to rehearse here what was said in Chapter 4 about the role of government. The arguments remain the same. In fact, one of the encouraging developments because of the Global Crisis is a marked shift from market fundamentalism that had characterized economic management since the 1970s toward more active government participation. Governments need to be steadfast in their task to protect their societies. They are once again reminded that they could actually lessen the frequency and severity of crises if they fortify their economies with solid institutions, inoculate themselves with reasonable regulations and vigorous supervision, and, at the same time, institute changes to respond to changing conditions. There is no doubt that markets could be efficient if they are efficiently regulated as well. There is also no question that more competition is possible with more rules (for example, Helleiner [1994], Vogel [1996], and Yeung [1998]). Of course, governments need to build capacity so that they are able to fairly govern and quickly move to deal with threats to economic growth and institutional integrity at the initial stages rather than after a crisis erupts. That is, they need to assume a precautionary

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rather than reactionary stance in economic management. They also need to enhance their bureaucracies in order to have a base on which to launch a strategic course for stable economic performance. They likewise need to be able to achieve a balance of competing demands coming from beneficiaries and learn when to withdraw support because it is no longer needed, unleash competition at the right time and amount, or return intervention when needed. While the role of government is contingent on the prevailing trends that are likewise changing, governments cannot, under any circumstance, forego their regulatory responsibilities over their economies. Needless to say, regulatory capture and corruption emasculate governments from doing their job. Principled leadership is of the essence during crises. What the Global Crisis revealed is that corporate interests have captured the government and transformed the economy to fit their interests. For instance, as the Global Crisis evolved, the United States did not throw its weight to discipline capital. In fact, as pointed out in the first section of this postscript, the United States government progressively removed regulations to respond to the demands of capital. It was a long process of transformation, but eventually, government was dominated by capital when elites entered government to run it. In the end, public interest was tossed out and capital defined change as it pleased. Capital was therefore not deployed to support the economy; rather, the economy was made to serve capital. The United States government, for example, embarked on massive bailout and rescue operations to save the bankers (not the banking system), as they were unable to reign on capital. With the Global Crisis, governments resolved to salvage their position, strengthen their capacity, and embed once again in the economy, so that they would regain their positions as key agents of transformation. It is worth noting that, in the history of the advanced economies, their governments creatively intervened in the economy

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to promote and manage advancement. The interventions came in different forms like industrial policies, regulations, preferential treatment of the domestic sector while pushing it to engage the external sector, capital flow management to maintain economic stability, and other similar actions. With governments of advanced economies repositioning to undertake these roles once again, governments of developing economies need to be allowed these roles as well in order for them to achieve real transformations, too. It is worthwhile to point out the argument made for the Asian Crisis and reapply it to the Global Crisis: the way reforms were executed in the past created opportunities that ultimately undermined the economy, made it vulnerable to crises, and thus damaged the purpose of having governments manage the economy. As such, if governments let go of regulation and remove regulatory structures, they lose control over their economies, resulting in diminished sovereignty. What is needed is a government that works and is intelligent enough to be able to navigate successfully through the challenges today and still produce results. The Global Crisis is yet another reminder that focus and success are consequential, for they mark the future path of governments and, by extension, of their economies as well. The last item concerns the need for governments to be involved in international cooperation but not compromise their sovereignty. More is discussed below about the first part, but at the national level, the challenge is how to achieve democratic control and maintain identity, given the reality of economic integration and globalization. In other words, the reasons for regulation within national borders are clear, but the imperative for international regulation is apparent with the present realities. Governments need to bring to bear efforts to enhance their capacities and bureaucracies for domestic management as well as to engage effectively in international cooperation. It is the whole package that guarantees efficient market operations and the attainment of robust economic performance.

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International Cooperation The construction of an environment that could engender global economic expansion of all economies while enhancing economic welfare within individual economies remains a very important objective of international cooperation. This end was emphasized in the late 1990s, as the Asian Crisis caused havoc in the region and threatened the advanced economies. There was a consensus that undertaking structural reforms in the international economic architecture was needed to stop the recurrence of crises, a position that was aggressively pushed by the advanced economies, particularly the United States. The existing setup was dominated by the Group of Seven as the global steering committee for economic cooperation. The conclusion was that the structure forged in the 1940s was no longer adequate for the twenty-first century. It could no longer avoid the recurrence of crises, and much less stop a crisis in one area from spilling over to another. It sustained unequal economic relations,7 and so it facilitated the creation of economic imbalances that were not easy to solve. With deregulation and financial liberalization proceeding to open economies, capital and trade carried on without a meaningful management of cross-border flows and consideration of their impacts. There were policy responses within individual economies as each grappled with the flows, especially when they became volatile and massive to adversely impact economic growth; but at the international level, no one actually cared if capital or trade flows from one area had adverse effects elsewhere. Since the Asian Crisis, various schemes have been established, such as the Chiang Mai Initiative for some bilateral currency swap
7

The Group of Seven consisted of Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States. With Russia, the grouping becomes the Group of Eight. The European Union is part of the grouping, but it can neither host nor chair the Group.

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arrangements to respond to short-term requirements if economies in the region face difficulties with liquidity (i.e., to avoid reliving the experience of the late 1990s); and the Basel II, which deals with the international standards for banking regulation, such as capitalization requirements. However, nothing significant has happened since the issue of international economic architecture reform was raised in 1999. Instead, there appears to be a desertion from the conviction to change what was already considered an obsolete setup. Once the Asian Crisis — and the subsequent crises, like Brazil and Russia in 1998, Turkey in 2000–2001, and Argentina in 2001–2002 — was contained, the issue of reform was moved into the backstage and, in the end, evaporated from the discussions. Talks about the international architecture became passé, even misplaced with the supposed recoveries. Rather than grapple with the difficult task of how to execute reforms in the international economic architecture, the debate was refocused on the reasons for the quick turnaround of the economies affected by the Asian Crisis. It was pointed out in Chapter 3 that these economies were considered to have already recovered because they were deemed robust. The difficulty in the late 1990s was merely an anomaly to their overall growth trajectories. Further debates on what to do in the post-crisis period needed to focus only on how to sustain the progress of the crisis-affected economies, as if the crisis did not alter growth trajectories. Of course, the advanced economies rode with the trend because they were not willing to give up the existing setup. There was no need to continue with the proposal, as the Asian Crisis no longer threatened the advanced economies. The reawakening today of discussions to change the international economic architecture suggests that previous efforts were not an intention to change the setup but were merely token responses to the clamor for reform. But notice, too, that there is again downplaying in the present discussions with the rhetoric that crisis-affected economies are already showing signs of imminent turnaround and

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economic recovery is therefore forthcoming. Let the setup be and it would reconstitute itself in due course. What is apparent in the debates is that, as before, attention is being moved to a stance on how to muddle-through with the present setup with the least reforms in the international architecture. The silver lining, so to speak, with the Global Crisis is that the economic performance of the advanced crisis-affected economies is expected to exhibit an L-shape growth pattern similar to that of the Asian crisis-affected economies (see figure 3.2). Such is the case today because the Global Crisis destroyed a lot of capital. In other words, the amount of capital would no longer be intact when the bottom of the Global Crisis is reached. As explained earlier, this disappearance of capital is attributed to vacuous investments (i.e., not backed up by real values) and the write-offs and write-downs that led to a downward spiral of valuation, making it difficult for capital to rekindle an economic expansion. With the slump and the phobia toward unleashing capital, global economic performance would be moribund for some time. Ironically, and sadly enough, the situation would be a valuable opportunity to push once more the long-postponed reforms in the international economic architecture because, with the Global Crisis, the advanced economies would want changes in the setup as this time they got seriously hurt. Accordingly, the recent development that supplants the Group of Seven with the Group of Twenty (G20) as the alternative global steering committee for economic cooperation is an encouraging step because the latter provides a valuable opening for greater participation of developing economies in the international economic architecture reforms.8 Regardless of the issues about membership, legitimacy, representation, and so forth, that the G20 has to address, the main
8

The G20 is composed of Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, the United Kingdom and the United States.

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problem that the globe faces today is how to reignite economic growth. 9 As suggested above, changes have to be made in the international architecture once the crisis-affected economies stabilize and growth is revived. That is why, in the interim, stimulus spending is of high priority in the G20, including forging international cooperation in global spending in order to distribute effective demand across all economies. Desperate moves, like wayward currency devaluations and similar actions, need to be avoided by cooperating economies because they not only undermine collective action but also generate protectionist responses from the affected economies, ultimately destabilizing global spending and prolonging global economic recovery. This is also why the success of the G20 is crucial to the realization of international architecture reform in the medium term. For these reasons, the G20 needs to define the short- to long-term goals and convey to the world how the outcome of reforms and interventions will look like and, ultimately, what will be the benefits to each economy. The G20 needs to take decisive steps and not justify inadequate actions with explanations that global economic performance was reinvigorated because the Global Crisis was contained. It has to focus on four emerging broad themes in order to solve the Global Crisis and carry out reforms to transform the international economic architecture into something that would finally make the global economy a better environment for all. The first item that the G20 needs to be concerned about is the institution of changes in the conditions that make crises recurring
9

Relevant issues include: Why not merge the Group of Twenty-Four (G24) and Group of Seven to form an encompassing grouping in terms of, say, representation and balance of power; or why the disparity in the memberships of the G20 and G24 that comprise the International Monetary and Financial Committee of the IMF? The G24 is composed of Algeria, Argentina, Belgium, Brazil, Canada, China, Egypt, France, Gabon, Germany, India, Indonesia, Italy, Japan, Netherlands, Russia, Saudi Arabia, South Africa, South Korea, Spain, Sweden, Switzerland, United Arab Emirates, the United Kingdom, and the United States.

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problems. It basically means that changes in the international economic architecture have to provide a framework for policies adopted by individual economies. The global imbalances, which partly underpinned the Global Crisis, are now straightforward to be unhealthy states for long-term economic growth, and need to be avoided in the future. For this change to materialize, appropriate regulations at the macro (i.e., capital and trade flows management) and micro levels (i.e., prudential regulatory controls and supervision of the domestic financial system) must be pursued. With economic integration and globalization, the task is more difficult because economies need to forge cooperation by making each one commit to cooperation over the long term. Added to this, the regulations need to operate within the domain of capital and trade at various levels. That is, if the concern is about cross-border flows, then the domain of regulation needs to be supranational; or if the concern is securitization, the domain is more domestic management of capital. Obviously, the core of the problem is that economies do not want to give up on their sovereignty. Again, as long as the “rules of the game” are made clear and enforcement is fair and transparent, global cooperation will benefit all economies in terms of stable economic growth and collective improvements in economic welfare. In the end, economies need to experience the gains of cooperation so that each one commits rather than opts out. The second item for the G20 covers two things. One is crisis management. Clearly, no capitalist economy is immune from crises. Thus, if a crisis happens, there must be sufficient international liquidity to extinguish the problem at the quickest time and in the least costly way. Decisive action is necessary; otherwise, the costs would mount and, as shown in the Asian Crisis, economic recovery would be extended. The IMF needs to be strengthened with additional financial stock that is ready for deployment. Of course, there might be objections to the IMF taking a bigger role in crisis management, but it is the only international institution designed for that purpose.

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As the G20 proceeds to define the changes in the international economic architecture, it has to look into the role of the IMF, the World Bank, and the Bank for International Settlements (BIS), and see how they could be put together in an overarching organization that constitutes a supranational regulatory agency (see discussion below). In the meantime, modifications have to be made in the way the IMF approaches crisis management because, in the past (and specifically during the Asian Crisis), it became part of rather than the solution to a crisis. The other item in the second theme is the possibility of having debt standstill and orderly debt workouts, especially for developing economies. All past major crises, including the Global Crisis, were about indebtedness. Developed economies do not have problems with debt rollovers because they hold reserve currencies and could embark on debt workouts. Developing economies, on the other hand, do not enjoy such command over creditors. If they go on unwelcome debt standstill, for instance, they face the risk of capital sudden stop and flight, which worsens their problem. What might have been a manageable fiscal difficulty could turn into a major liquidity problem and then a crisis. Debts of developing economies need to be reviewed, too, because corruption or dodgy activities could have funneled the borrowed funds into private pockets, in which case debt standstill or workouts might be constructive to finance developmental targets like the Millennium Development Goals. Or, at least, the G20 must define a mechanism that alleviates the burden of debt financing during crises. Third, the G20 needs to deal with issues about development financing. Access to finance remains a major challenge to developing economies despite international agreements supporting development financing. The circumstance is especially serious with regard to the poor economies. Because they are poor, they are considered risky areas from the point of view of capital, do not get access to capital, and, in turn, realize only limited economic growth, which further

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restricts their access to capital, thereby aggravating economic performance. Because they are poor, their industrial capacity is limited and does not allow for diversified exports. The problem can be addressed if the international economic architecture is changed in a way that it is not only open but extends considerable support that will pull out the poor economies from their difficulties. During crises, when the sources of capital dry up and trade shrinks, the international architecture needs to guarantee financing to developing economies so that they will not be derailed with economic shocks. Access to capital is also crucial in the post-crisis period to facilitate recouping of costs. Finally, the G20 needs to work toward a global social contract between advanced and developing economies. For the advanced economies, there has to be stronger commitment and action that support the aspirations of developing economies for real progress and transformation. Moreover, advanced economies need to be steadfast in efforts to shape a global environment that is conducive to global economic growth and able to pull everyone up the economic ladder. Global imbalances therefore need to be avoided. If adjustments are necessary in the advanced economies, they must be done in such a way that they would benefit both advanced and developing economies. If relief from indebtedness is needed, developed economies must be ready to cancel debts especially if it could not be demonstrated that the funds were used as intended or were misused or cornered by a privileged few or diverted into private accounts or money havens. Accordingly, prudence calls for the advanced economies to initiate appropriate action to correct such unacceptable situation and, if established, the burden needs to be imposed on those involved in the offense. For developing economies, they must work hard to develop their own economies. Sound policies are important; as such, expanding and enhancing their policy space will be crucial to success. At the same time, developing economies need to be confident that, as they

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pursue reforms, they will not be exposed to volatile and massive flows of capital or unfavorable trade flows from advanced economies. At the same time, they need to have access to financing during the transformation process to sustain economic progress but, at the same time, avoid the accumulation of illegitimate or odious debts. Those that take part in such activities are accountable for the unfavorable outcomes and must not impose the burden on their societies nor have the legitimacy to seek redress for their problems. Indeed, prudence requires that appropriate actions be first taken in the economy to correct an unacceptable situation. Obviously, as development takes shape, developing economies need to face up to tougher competition and thus engage the developed economies in a less privileged playing field. Accordingly, developing economies need to be ready for this inevitability. Finally, international cooperation has to move to the next stage of international control and commitment to global economic management with the creation of a supranational agency like a World Financial Organization (WFO) — a necessary response to bring that which is outside the system into something that is part of the system (for example, Eatwell and Taylor [2002] and Griffith-Jones and Ocampo [2003]).10 The WFO will be a body with surveillance powers over banking supervision and settlements-related issues akin to the BIS, securities matters like the International Organization of Securities Commission, insurance activities as in the International Association of Insurance Supervisors, and stabilization, payments, and related transactions similar to the IMF.11 The World Bank, with strengthened linkup with regional development banks, may be brought into the
The classic argument for a supranational agency to control capital flows is in Keynes (1980). Recent discussions on the Keynes Plan include Iwamoto (1997), Thirlwall (1998), Harcourt and Turnell (2003), and Constabile (2007). See Beja (2008) for a parallel discussion on the need for a supranational arrangement to control trade flows.
10 11 There needs to be parallel supranational organizations for other cross-border flows like trade and labor and transboundary issues such as climate change and

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WFO setup to focus on global developmental goals. Furthermore, there is a need for a financial audit agency to meet evaluation and assessment requirements, a financial products safety agency to look into the substance of capital flows, and an international credit regulatory agency to cover ratings practices, and so forth, to complete the supervisory functions of the WFO. Thus, the G20 may have to look into bringing together existing institutions into one structure with a single framework for the international economic architecture but with each branch focusing on specific operations and services that are relevant to accomplishing global economic objectives. Notice that comprehensiveness is essential in setting up a WFO. As a supranational organization, the WFO needs to pursue at least two important tasks. One is to build shared management of cross-border risks. The purpose is straightforward: policy mismanagement in one location may spill over to another as a crisis, which in the process may evolve into a bigger problem that affects a larger area. Because of economic integration and globalization, the transmission of risks is faster and more profound. To have effective risk management, the WFO may impose binding regulations covering facets of on-shore and off-shore as well as on-balance and off-balance sheets transactions. Consultations with member economies on how to proceed with regulations are crucial. At the same time, the WFO needs to provide guidelines for the management of currencies and interest and inflation rates, which are relevant to capital flows. Additionally, the WFO has to function as the global lender-of-lastenvironmental sustainability. For trade, there is already the World Trade Organization, but it needs major adjustments in its operations to function as a supranational regulatory agency for trade flows management. In the case of labor, there is no supranational agency as yet. The International Labor Organization may evolve into a World Labor Organization focusing on trade flows, among other things. Similarly, there is no supranational organization for climate change and environmental sustainability. A supranational body may be called World Environmental Organization. These are necessities to meet the challenges of economic integration and globalization. Certainly, a lot needs to be done in terms of research and dialogue to come up with functioning supranational organizations.

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resort and be able to mediate problems in regard to debt standstill and workouts. A sizeable capital base is thus needed for the WFO to embark on emergency operations and provide guarantees to creditors as debt problems are being managed. For such activities to succeed, however, the WFO needs to provide the overall direction for member economies, say, what the desirable global economic expansion and advance look like. Such a vision will bring everyone in solidarity with global targets. At the operations level, though, it is crucial that the WFO has solid technical capacity to embark on sound global regulation and supervision, given that capital will necessarily find a means to stay ahead or avoid controls. It is important that the WFO possesses institutional integrity so that its interventions will be effective. It is also important that the WFO not only works to respond promptly to challenges like global imbalances and crises but also remains fully engaged with other global players like large transnational companies. The second task of the WFO is to engender collective action in the management of domestic risks, which may arise from various sources like information asymmetries, market imperfections, and elite capture of regulations. At this level, however, the WFO needs to assume the indispensable supporting role to its member economies because domestic regulation still remains the responsibility of governments. Accordingly, technical assistance to governments in all aspects of domestic regulation is crucial not only for capacity building but also for parallel international regulation over capital flows. In short, there needs to be a relatively tight correspondence between domestic and international capital flows management. Of course, the big hurdle is with the developing economies that are at various levels of development, both in terms of the state of their economies in general and financial systems in particular. What is important, though, is that all economies contribute to global regulation and supervision and are willing to allow intervention in solidarity with the global goal of mutual economic growth and enlargement of economic welfare.

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Needless to say, the implementation of domestic regulations remains within each economy. The formula for success is the WFO’s building a track record in the effective management of capital flows, a rather difficult item to fulfill, since there is no comparable organization existing to date, with the possible exception of the IMF and BIS. Of course, the IMF and the World Bank have been attacked for disastrous interventions. The BIS, on the other hand, does not enjoy an extensive clout, unlike the IMF or the World Bank. If the G20 proceeds with creating the WFO, it is highly important that the WFO is embedded in the global economy at the outset, that is, unaffected by the demands of capital or captured by the interests of a small group of economies. It is also necessary that the WFO is able to demonstrate, at the beginning, that it can ingenuously navigate the competing demands, maintain legitimacy, and take fair and transparent actions to safeguard global economic balance. There will be no debilitating concerns about the effectiveness of interventions during volatile conditions or in the post-Global Crisis period if the WFO can demonstrate success during normal conditions. If the G20 instead pursues small-scale versions of the WFO, like a regional organization approach, the expectations will be the same. Certainly, with multiple regional organizations, there will be challenges with regard to coordinating regional actions. In any case, global- or regional-cum-domestic coordination of policies can lead to sound global economic growth and tangible improvements in global and domestic economic welfare that are long overdue. As long as economies come to an agreement on the basic principles of cooperation, their articulation into codes and procedures, including their interpretation and application, and the modes of participation at the global or regional level — again, the “rules of the game” — the WFO may be a major step toward the construction of a global economy that succeeds in balancing increases in incomes, wages, profits, and economic welfare and a healthy environment for all.

Appendices

APPENDIX A The first part of the calculations involves obtaining the counterfactual economic performance. Similar calculations have been done in, for example, Beja (2007), Fogel (2007), and Taylor and Rada (2007). 1 Here, the regression model is yt = a + ß time + n yt-1 + et, where y is gross domestic product (GDP) per capita and e is the residual. The setup basically says that current GDP per capita is determined by a time trend (as proxy for the general direction of economic progress), all past information embedded in past GDP per capita (so yt-1 proxies for other factors that influence current performance, including yt-1, due to yt-[1+i]), and the residual for the other factors affecting yt and not accounted in it. Another reduced model of the form yt = a + ß time + et is estimated as well.
1

Counterfactual analysis is a fairly common technique in the social sciences but not so in economics. See Tetrock and Belkin (1996), Ferguson (2000), Lewis (2000), and Morgan and Winship (2007) for applications of counterfactuals in the social sciences.

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The two specifications obtain estimates of y, and their geometric means are derived. This procedure ensures that the increase in the estimated y has zero as its lower-bound as time increases. It is an approximation of the Inada conditions used in standard economic growth theory. Therefore, if a crisis has transitory impacts on an economy, the differences between the actual GDP per capital, y, and the estimated counterfactual, y-est, are small. Subsequent values are expected to be small as well. If the impacts are non-transitory, the reverse applies: the differences between y and y-est are large and are expected to be long-lasting. Where no real economic recovery occurs, the subsequent differences will be bigger over time because the effects of the gap between y and y-est accumulate. Of course, it is not discounted that growth accelerations may occur in subsequent periods, resulting in full economic recovery. In the interim, however, large differences between the actual and estimated values will be observed. As such, y-est represents the counterfactual economic performance. Additional calculations are performed on y-est to complete the cost accounting exercise. Total direct cost is foregone output per capita multiplied by the population at time t, where the foregone output is (y-est,t – yt). Total economic cost, ec, is “opportunity cost” multiplied by the population in time t and valued using the US three-month Treasury bill interest rates, r; that is, [(1+rt)(y-est,t – yt)]. Total “social” cost, sc, is accumulated cost per capita multiplied by the population at time t, where the accumulated cost is [(1+r)sc t-1 + (ec t – ec t-1)]. Note that ec and sc are zero in period t-1, and both are equal in period t. Note further that using r is a rudimentary way of calculating costs. Some relevant items are obviously not included in the calculations, such as the cost of being unemployed or people going hungry because the crisis pushed them into poverty, the long-term costs of malnutrition to children, the consequences of being pulled out from schools in terms of, say, human capital accumulation, the psychological

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costs of the crisis that resulted in suicides, and so forth. In short, the estimated total “social” costs are clearly rough measures. They are thus better seen as low-end estimates. Obviously, if other costs are included, both ec and sc will be much larger than the ones reported here. The cost accounting exercise does not look into the distribution of the costs simply because of data constraints. Proxies may be used, of course. One way to see how the costs may be distributed is to utilize the sectoral composition of output as weights. Another is to see the factor shares in output as weights. Or even the income distribution in an economy may be used as weights. In any case, the results will be only indicative of the distribution of costs. Further adjustments through calibration of the calculations may be used to approximate actual distribution of costs. APPENDIX B Table 1. Total accounting costs (in US$ million)
Year 1998 1999 2000 2001 2002 2003 2004 Indonesia 35,159.4 22.5 45,289.3 28.8 49,095.4 29.8 54,596.8 31.9 59,212.8 33.1 63,193.0 33.7 66,463.8 33.8 Malaysia 12,528.2 16.0 14,529.4 17.5 14,125.1 15.6 20,928.6 23.1 24,192.9 25.6 26,408.3 26.5 26,767.1 25.1 Philippines 3,717.7 5.4 4,906.6 6.9 4,253.1 5.6 6,625.9 8.6 6,967.8 8.7 7,182.5 8.6 5,993.3 6.7 South Korea 59,288.1 13.8 45,489.7 9.6 33,469.8 6.5 41,650.6 7.8 31,705.8 5.6 41,094.3 7.0 40,588.2 6.6 Thailand 37,231.2 32.9 42,904.1 36.3 47,872.3 38.6 55,792.8 44.1 59,566.9 44.7 60,631.6 42.5 62,302.8 41.2

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Table 1 (cont.)
Year 2005 2006 2007 Indonesia 68,504.3 33.0 69,894.1 31.8 71,658.8 30.9 Malaysia 28,800.8 25.6 29,409.8 24.6 30,958.6 24.5 Philippines 5,350.9 5.7 4,653.3 4.7 4,560.2 4.4 South Korea 43,421.5 6.8 38,569.2 5.8 34,937.5 5.0 Thailand 66,155.7 41.8 67,958.4 40.7 72,003.1 41.5

Note: Numbers below aggregate figures represent shares of GDP. (Author’s calculation.)

Table 2. Total economic costs (in US$ million)
Year 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Indonesia 36,853.8 23.6 47,398.6 30.1 51,962.2 31.5 56,481.3 33.0 60,167.6 33.6 63,833.4 34.1 67,376.5 34.2 70,663.3 34.0 73,194.3 33.3 74,479.8 32.2 Malaysia 13,131.9 16.8 15,206.1 18.3 14,949.9 16.6 21,651.0 23.9 24,583.0 26.0 26,675.9 26.8 27,134.7 25.4 29,708.5 26.4 30,798.4 25.7 32,177.3 25.5 Philippines 3,896.8 5.7 5,135.2 7.2 4,501.4 6.0 6,854.6 8.9 7,080.2 8.8 7,255.3 8.7 6,075.6 6.8 5,519.6 5.9 4,873.1 5.0 4,739.8 4.6 South Korea 62,145.3 14.4 47,608.3 10.1 35,424.2 6.9 43,088.2 8.1 32,217.0 5.7 41,510.7 7.1 41,145.6 6.7 44,790.0 7.0 40,390.3 6.0 36,312.9 5.2 Thailand 39,025.5 34.4 44,902.3 38.0 50,667.7 40.9 57,718.6 45.6 60,527.4 45.4 61,246.0 43.0 63,158.5 41.7 68,240.7 43.2 71,167.2 42.6 74,837.6 43.1

Note: Numbers below aggregate figures represent shares of GDP. (Author’s calculation.)

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Table 3. Total social costs (in US$ million)
Year 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Indonesia 36,853.8 23.6 49,138.2 31.2 56,632.0 34.3 63,194.2 36.9 68,003.2 38.0 72,473.1 38.7 77,142.2 39.2 83,026.8 40.0 89,700.4 40.8 94,790.6 40.9 Malaysia 13,131.9 16.8 15,832.4 19.1 16,535.9 18.3 23,854.2 26.3 27,223.6 28.8 29,649.0 29.7 30,578.3 28.6 34,196.0 30.4 37,011.5 30.9 39,067.3 31.0 Philippines 3,896.8 5.7 5,320.3 7.5 5,007.1 6.6 7,546.2 9.8 7,909.0 9.9 8,181.1 9.8 7,132.6 8.0 6,823.9 7.3 6,528.2 6.7 6,685.6 6.5 South Korea 62,145.3 14.4 50,523.4 10.7 41,338.6 8.1 50,483.4 9.5 40,471.7 7.1 50,218.0 8.6 50,588.3 8.2 55,875.8 8.8 54,174.8 8.1 52,300.3 7.5 Thailand 39,678.3 35.0 47,427.3 40.1 56,011.9 45.2 65,062.8 51.4 68,995.7 51.8 70,493.3 49.4 73,460.3 48.5 80,964.5 51.2 87,853.9 52.6 95,153.4 54.8

Note: Numbers below aggregate figures represent shares of GDP. (Author’s calculation.)

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About the Author

Edsel L. Beja Jr. does research in the following themes: (1) anomalies in cross-border flows of capital and finance, trade, and labor; and (2) structural-cum-historical analyses of capitalist expansions and crises. In 2008, he was declared Outstanding Young Scientist in Economics by the National Academy of Science and Technology and was awarded the Outstanding Scholarly Work in the Social Sciences by Ateneo de Manila University. He holds a PhD from the University of Massachusetts Amherst.

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