The Challenges for Government Policy and Business Practice

Linda Y.C. Lim

The Asian Economic Crisis
February 1999

Asia Society

The Significance of the Crisis

The ongoing Asian economic crisis that began in mid-1997 ranks as Asia’s second biggest event in since world war ii. the crisis abruptly halted the region’s unprecedented three decades of rapid economic growth. It has also had wider global repercussions-not only in terms of its effects on non-Asian economies but also its implications for established canons of Western economic theory and policy-making, particularly with respect to exchange rate management and open capital markets. Many noted American economists and international capital market actors now publicly disagree on these matters.

Within Asia itself, the crisis has had not only serious domestic social, political, and economic impact, it has affected intra- and extraregional international relations, as well as intellectual and policy discourse. It has precipitated a full-scale emotional debate on the fundamental values and practices of Asian societies as a whole, not only in the crisis-dominating realms of economics and business but also in their collateral political, social, and cultural spheres. The crisis has given rise to questions of the extent to which so-called Asian ways of managing economies and businesses contributed to the situation and must change as a result. This change would be, both implicitly and explicitly, toward the universalist free-market capitalism preached by Western economics textbooks and conservative ideologues.

At the same time, the crisis has almost contradictorily, spawned the deepest skepticism yet among Asian government and business leaders and the public at large about the wisdom of following the universalist (but really Western, especially American-propagated) capitalist doctrine of free markets, private enterprise, international openness and political democratization as the most secure path to economic prosperity and social well-being. The Asian economies in crisis have long been considered the freest and most open of emerging economies, in some cases even in comparison with advanced industrial economies. They have been also constantly liberalizing, especially in the decade prior to the onset of crisis. Yet this relative openness and freedom did not protect them or help them recover from the crisis. Indeed, many Asians and others argue that openness exacerbated these countries’ vulnerability and has made their recovery more difficult.

This essay will explore Asia’s future major policy issues that have been raised by the crisis and the intellectual debates it has generated, particularly among Asians and Western scholars of Asia. It will begin with a brief review of the origins of the crisis, the policy responses to it, and their effectiveness to date. This will be followed by an evaluation of the current status and near-term prospects for Asian economies. The essay will then consider the need for further shifts in policy and practice at both the macro- governmental and micro-enterprise levels and the problems such shifts are likely to generate. It will end with some tentative conclusions as to what the Asian crisis to date suggests about the likely durability of “Asian ways” of economic and business management and the attendant implications for Asian political systems, cultures and societies at large. The goal is to sketch the outline of what Asia may look like “beyond the crisis,” focusing particularly on the likely configuration of state control versus market freedom in both the economic and political arenas. While it is acknowledged that regional, international market, and political forces and institutions play an ongoing role both in the crisis and its resolution, they will not be fully considered here because of space constraints, their lesser importance relative to domestic factors, and because the crisis has deeper implications for the future behavior of Asian national governments and enterprises.

 

The Origins of the Crisis

There is now more or less a consensus that the domestic origins of the Asian crisis lay in macroeconomic imbalances, structural deficiencies in financial sectors, and shortcomings in political and corporate governance. Some or all of these problems were more severe in the countries most affected-Thailand, Korea, Indonesia, Malaysia-than in those that were relatively unscathed-Philippines, Singapore, Taiwan.

At the macroeconomic level overvalued exchange rates tied to an appreciating U.S. dollar led to large current account deficits and inadequate or declining long-term capital inflows. This resulted in heavy dependence on short-term external debt and the depletion of foreign exchange reserves, making a currency devaluation inevitable and attracting speculators eager to benefit from it. Domestic financial sectors with inadequate professional expertise, transparency, and prudential regulation overextended credit, some of it sourced from abroad, to local borrowers, fueling excess capacity and domestic asset bubbles that were bound to burst. Weak governments lacked the political autonomy or will to enact the deflationary policies necessary to reduce current account deficits and domestic asset bubbles. They also contributed to the cronyism and ethical problem that encouraged overborrowing, overlending, and overinvestment in the private corporate sector as well as in state projects. Delay and various ill-considered government policy responses to the crisis exacerbated the loss of market confidence, which precipitated massive capital flight. In the private sector weak corporate governance led to neglect of risk assessment, overleverage and an excess of foreign borrowing, related-party lending, and bad investments, which contributed to huge external debts, domestic asset bubbles, and excess capacity. Attempts by corporations to hedge their external debts by buying dollars after the currency devaluations began only led to more capital flight, deeper devaluations, and higher debt burdens.

In addition to these domestic origins, the severity of the crisis was deepened by the herd behavior of international capital market actors, whose influx of foreign capital into Asian markets in the 1990s contributed to overvalued exchange rates, excessive leverage, and the buildup of domestic asset bubbles. Their precipitous exit in 1997 contributed to the subsequent collapse of these currencies and asset prices as well as the escalation of debt burdens. The crisis was also worsened by regional contagion effects, via impacts on export markets, export competitiveness in third markets, and regional investment inflows; the portfolio rebalancing efforts of investors; and heightened global perceptions of regional risk-all of which contributed to lower foreign exchange earnings and investment inflows and higher borrowing costs for individual countries.

But while these international and regional causes might appear to be exogenous, they were in fact very much brought about by domestic government actions. International capital market actors (foreign lenders, fund managers, and other portfolio investors) were attracted to Asian markets not only because they were booming domestically and open to foreign capital inflows and outflows, but also because fixed or semifixed exchange rates set by governments limited their exposure to currency risk, and because of their belief, based on past experience, that governments were likely to bail out large, strategic, state- or crony-owned borrowers in the event of business failure. (The role of the International Monetary Fund, the IMF, also added to this moral hazard.) The failure of governments to ensure the prudential regulation and transparency of private-sector financial transactions, along with their restriction of foreign institutional competition in heavily protected domestic financial markets, also increased the likelihood of overleverage, bad loans and investments, and reliance on political connections rather than well-informed risk assessments to ensure the security of those loans and investments. Lack of transparency additionally caused investors to err on the side of excessive pessimism and risk aversion, pulling out their capital at the first sign of trouble later.

Government action or inaction on many fronts also magnified the market’s loss of confidence, provoking capital flight and raising regional as well as national risk premiums. In Malaysia, Prime Minister Mahathir Mohamad’s repeated verbal attacks on foreign currency speculators, open capital markets, the IMF and austerity policy; his growing political division with his then deputy and finance minister Anwar Ibrahim; controversial bailouts of politically well-connected companies and deepening friction with Singapore, made both domestic and foreign investors (the latter including many Singaporeans) nervous. This caused them to withdraw their capital even though the economy’s fundamentals were stronger than those of its neighbors-with, for example, limited foreign debt exposure and dependence on long-term direct rather than short-term portfolio foreign investment. In Indonesia confidence had been eroded by the Suharto government’s inability to deal with over a year of domestic turmoil, including increasingly tumultuous political challenges to his rule, his own worsening health condition, his children’s continued government-sanctioned rapacious expansion of their business empires, deadly riots in the outer island provinces, church and Chinese-shop burnings on Java and elsewhere, the severe drought and crop failure brought on by El NiÒo in eastern Indonesia, massive forest fires, and the haze problem in Kalimantan and Sumatra. Though not as severely affected by domestic political turbulence, Thailand, Korea, and Hong Kong all underwent government transitions in 1997, while the Philippines’ presidential election was forthcoming in 1998.

These origins of the Asian crisis-macroeconomic imbalances, structural deficiencies in the financial sector, loss of market confidence, and rising political risk-can all be attributed to some extent or other to failures in political governance. But local business communities also contributed to the crisis through the traditional practices of predominantly family-owned conglomerates, which contributed to overborrowing and overlending and the resultant buildup of domestic asset bubbles. These practices included preference for debt over equity financing (in order not to dilute family ownership) and consequent high debt-equity ratios; lending based on trust, network relationships, and political connections rather than business plans and risk assessment; related-party lending and cross-guarantees among conglomerate affiliates, including the siphoning of capital from public to privately owned companies and the extension of loans from banks to industrial companies within the same business group; investing to maximize growth and market share rather than profit and to diversify rather than concentrate businesses across different industrial sectors; and general disregard of accounting standards, financial disclosure, corporate governance, and the creation of shareholder value (unnecessary because of the prevalence of trust and patient capital from long-term family or related investors). Many of these business practices had contributed positively to Asia’s previous rapid growth, by enabling enterprise expansion in the absence of well-developed market institutions, and in the presence of imperfect information, imperfect markets and high transaction costs, risk, and uncertainty. As these economies developed, however, these practices became less capable of accommodating the large sums of money that accompanied more capital-intensive projects, especially foreign money subject to currency risk. Governments contributed to the problem of misallocation of capital by engaging in directed lending and industrial policies that also had once spurred growth but now were arguably distorting it in capital-intensive and foreign-capital-dependent projects.

While both government policy and business practices contributed to the Asian crisis, government policy played a much bigger role, as suggested by the experience of the countries less affected by the crisis. Despite similar vulnerability to international market forces (including open capital accounts) and similar local business practices (such as crony capitalism), sound macroeconomic management, more prudent financial sector behavior, and political stability enabled these countries to avoid the worst of the crisis. The Philippines escaped the worst because it had a floating exchange rate, manageable foreign debt, limited domestic asset bubble, experienced government economic managers and private sector business actors, and market confidence inspired by its long period of coverage by IMF funding and reform programs, which were still in force when the crisis hit its neighbors.

Singapore-the region’s most open economy with the greatest dependence on international capital flows-also managed to avoid a severe recession despite the large declines in the economies of Malaysia and Indonesia, with which it is integrated. Taiwan, another relatively open economy, maintained 5 percent growth in 1998. Both Singapore and Taiwan have managed float currencies, large current account surpluses and foreign exchange reserves, little external debt, and globally oriented high-tech manufacturing sectors exporting to still-growing markets in the United States and Western Europe. Both economies also had stable domestic political situations and highly respected government macroeconomic policymakers who had the confidence of domestic and external investors. Taiwan’s domestic asset bubble had burst some years earlier, while the Singapore government had cooled off its property market with a series of supply-increasing, demand-depressing measures undertaken in 1996.

Hong Kong’s experience has contrasted adversely with that of Singapore and Taiwan, even though China, the economy with which it is most closely integrate, has to date maintained its rapid growth and its currency value. Unlike Singapore and Taiwan, Hong Kong’s fixed currency and heavy dependence on the domestic property market and regional service exports made it extremely vulnerable to recession and speculative attacks in both its currency and stock markets when its neighbors devalued. The territory’s reversion from British to Chinese rule the day before the baht devalued also introduced an element of political uncertainty about the new government’s willingness to tolerate the deflationary consequences of the currency board system that was tested by speculators.

China’s own fixed exchange rate has threatened its export competitiveness and attractiveness to foreign investors from other Asian countries. But a large current account surplus and foreign exchange reserves, controls on capital account convertibility, stability of the government regime, and successful pump-priming of the large domestic market have for the time being warded off crisis despite the problems of burgeoning excess capacity in industrial production and urban property developments, along with a (largely state-owned) financial sector that may be nearly insolvent.

 

Policy Responses to the Crisis and Their Impact

Except for Hong Kong and China, all the Asian economies devalued their currencies in the crisis, with the intent to conserve and rebuild depleted foreign exchange reserves by reducing current account deficits, attracting new capital inflows, and discouraging further capital outflows. Exports were initially slow to increase, because export competitors had also devalued and because export markets in neighboring crisis countries, especially Japan, were in recession. The higher prices of imported inputs, the scarcity and high cost of import credit, and transportation bottlenecks also restrained the increase in exports. But by the end of 1998, high local content export sectors, particularly agriculture and simple manufactured goods in Southeast Asia, as well as steel and a range of other industrial products in Korea, were booming. This, together with the collapse of imports following devaluation and recession, resulted in the rapid transformation of current account deficits into huge surpluses. Devaluation has also lowered asset prices for foreign buyers, who are only just beginning to return to the region, as political situations stabilize and IMF-mandated policies and reforms-including foreign investment liberalization-are implemented. New capital inflows are adding to the disbursement of IMF funds and accumulation of current account surpluses in rebuilding foreign reserves, strengthening currencies, and lowering interest rates. On the down side devaluation has also increased external debt repayment burdens. Private sector foreign debt is being renegotiated, but the process is difficult and slow, given the large number of lenders and borrowers involved.

Thailand, Korea, Indonesia, Philippines, Malaysia initially, and Hong Kong effectively under its currency board system, also implemented austerity policies-raising interest rates, tightening credit, cutting government expenditure, and in some cases raising taxes-to reduce the current account deficit and post-devaluation inflationary pressures by deflating domestic demand, as well as to increase savings, discourage capital outflow, and attract new capital inflow. This has worked-current account deficits have turned to surpluses, inflation is much lower than the currency devaluations would lead one to expect, and capital outflows have ceased, strengthening currencies-but at the cost of exacerbating post-devaluation recessions. Since public sector fiscal profligacy was not among the causes of the crisis, many felt that government social expenditures should be increased rather than reduced to cushion the impact of recession on the poor. As the severity of the recession exceeded initial expectations, the IMF and national governments did relax fiscal austerity, while declining demand for credit and the injection of IMF funds and private foreign capital has lowered interest rates, in some cases to pre-crisis levels.

Besides devaluation and austerity, "structural reforms" are usually part of IMF policy conditions. They include trade liberalization to increase export competitiveness, investment liberalization to attract and allow more foreign capital inflows, financial sector reforms to reduce debt burdens and correct the misallocation of capital, privatization of state enterprises, and the dismantling of private as well as public-sector monopolies to reduce government expenditure, increase efficiency, and attract new capital inflows. Reforms in IMF clients Thailand, Korea, and Indonesia have proceeded slowly, due to reluctance on the part of governments and private enterprise owners to sell off strategic industries and family crown jewels to domestic competitors and, especially, foreign investors, at fire sale prices, and to abandon government policies and business practices that had appeared to work so well in the past. Thus Korean chaebol are reluctant to sell off parts of their diversified conglomerates to each other and to foreigners in the government-sponsored Big Deal; Korean labor unions are vigorously resisting layoffs; Thailand has delayed establishing bankruptcy procedures and still limits foreign majority ownership of Thai financial institutions to ten years; and Indonesia has been slow in privatizing its state enterprises. Yet such reforms are necessary not only to attract new capital inflows for the purposes of currency stabilization and liquidity creation but to reduce interest rates. They are also needed to inject new capital into otherwise insolvent banks, other financial institutions and corporations to prevent their collapse, and to consolidate excess capacity so that healthy enterprises can prosper without the presence of less efficient but subsidized competitors that are not allowed to fail by their banks or governments.

While Thailand, Korea, and Indonesia have followed the standard IMF prescription of devaluation, austerity, and structural reforms with visible if limited success to date, Malaysia and Hong Kong have followed different routes. Malaysia first tried both devaluation and austerity. But without the benefit of IMF funding or structural reforms, and in the context of domestic political discord, it failed to boost confidence, attract new capital, stabilize currency, and prevent a deep recession. So the government turned instead to foreign exchange controls, which permit a relaxation of austerity policies, providing for the stimulation of domestic demand and alleviation of domestic debt burdens by lowering interest rates, relaxing credit restraints, maintaining or increasing government spending, and cutting taxes-without precipitating capital flight and weakening the currency.

In theory controls provide a government with a temporary opportunity to undertake the structural reforms necessary to reduce the current account deficit, reverse capital flight, and attract new capital inflows. These reforms are those that are part of the standard IMF policy package investors want to see, that is, financial and corporate sector restructuring in the direction of greater transparency, prudence, and efficiency. The problem with controls is that they do not necessarily lead to an acceleration of structural reforms, but, by providing a temporary breathing space for highly leveraged enterprises may actually discourage or delay such reforms. Controls also increase the transaction costs of international trade and have a history of creating bureaucratic inefficiency and corruption with the obvious incentives to evade controls or gain privileged access to rationed foreign exchange. The constraint on capital exit also discourages the capital inflow required to support the fixed exchange rate that controls are designed to maintain. Thus the Philippines, for one, has explicitly eschewed a return to exchange controls, which did not serve it well in the past, and even Chile, the model for controlling capital inflows, has recently lifted some of its controls in an attempt to increase liquidity, reduce interest rates, and relieve the economic downturn it is currently suffering.

In the case of Malaysia the controls were on capital outflows imposed at a time when conditions in the country were not conducive to their success. There were reports of rising domestic political discord and apparent popular dissatisfaction with the rule of Prime Minister Mahathir and with serious friction with Singapore-the prime source of foreign capital for Malaysia and the offshore home of most of its domestic flight capital as well as its largest trading partner. At the same time structural reforms were being avoided or reversed rather than accelerated. The government continued to spend on controversial projects and perceived bailouts of politically well-connected companies. Financial reforms, such as tougher definitions of non-performing loans and limitations on property lending, which the central bank had been pursuing before the downfall of former finance minister Anwar Ibrahim in order to reduce the domestic asset bubble, were reversed, then partially reinstated. But hints by new finance minister Daim Zainuddin that exchange controls may be lifted sparked new investor interest in the country’s assets-an indicator of how much the controls themselves had discouraged the new capital inflows required for recovery. Finally in early February, five months after the imposition of controls, they were relaxed, with a graduated exit tax imposed only on repatriation of investments of less than twelve months.

Faced with declining export competitiveness and investment inflow caused by its neighbors’ devaluations, China has tightened its capital controls to stop a leakage of foreign exchange abroad through unofficial channels, while using fiscal and monetary stimulus to pump-prime the domestic economy and holding off on structural reforms especially in the state-owned banking and enterprise sectors. So far this has helped maintain growth at the 8 percent level, though some of the production may be going into inventory accumulation rather than domestic consumption.

Hong Kong has sought to maintain its currency peg to the U.S. dollar, even as all its neighbors except China (and Japan) have devalued, severely damaging the competitiveness of the Special Administrative Region’s service exports. This, together with speculative attacks on the overvalued currency that forced domestic interest rates up under the currency board system, has led to a deep recession and deflation, including in property values. When speculators also attacked the interest-sensitive stock market, the Hong Kong government stepped in to buy large quantities of the mainly property and (property-dependent) finance stocks and introduced new controls on futures purchases to curb speculation. The currency was successfully defended and interest rates have fallen, but a severe recession and asset-price deflation continue.

The apparent bottoming-out of the Asian economies’ decline and their start on the road to recovery is, of course, not entirely the result of the working through of domestic policy responses and market reactions to the evolving crisis. Important too has been the impact of global forces, particularly the drop in U.S. interest rates and decline in the value of the U.S. dollar versus the yen, which occurred in the last quarter of 1998, and helped stabilize currencies and lower interest rates in Asian countries.

 

Current Economic Status and Prospects

Thailand

In macroeconomic terms, Thailand’s recent economic performance is being touted as a success. The baht has strengthened by nearly 40 percent since its low in February 1998 and is currently trading at 36 baht to the U.S. dollar. This is the result of a current account surplus that reached nearly 10 percent of Gross Domestic Product (GDP) in 1998 and the rebuilding of foreign exchange reserves to around $28 billion. Short-term interest rates are below pre-crisis levels, at just under 8 percent, and inflation, which reached 8 percent in 1998, is expected to decrease by half in 1999. These numbers are remarkable for an economy whose currency has fallen by 40 percent since the onset of the crisis in July 1997 and may be considered to reflect simply the depth of the recession. With real GDP growth reaching minus 8 percent in 1998, deflationary pressures resulting from collapsed import, credit, and domestic demand have strengthened the currency and lowered interest rates and inflation. But despite the deep recession, unemployment is expected to peak at only 11 percent in 1999 as the economy hits bottom-which is also remarkable and a testimony to the flexibility of Thai labor markets. GDP growth projections range from minus 1 percent to 1 percent for 1999, and the current account surplus should fall as imports increase with economic recovery.

Thailand has made some progress in the structural reform of its financial sector, with the closure, merger or sale of banks and finance companies, and the beginnings of debt restructuring and asset sales by a government agency. But corporate sector restructuring, which will involve bankruptcies, mergers, and acquisitions, has barely begun, and there has been little inflow of new foreign capital to achieve this. On the political side there have been legal and constitutional changes, and confidence in government stability and competence has increased.

South Korea

In Korea, as in Thailand, deflationary pressures from minus 7 percent GDP growth in 1988 have kept inflation relatively low-below 8 percent in 1998 with a halving of the rate expected in 1999-and short-term interest rates below 8 percent and pre-crisis levels, despite a won devaluation of 25 percent since October 1997 (an improvement of 25 percent over the currency’s low in February 1998). Because of collapsed import demand, the current account surplus reached a record of 14 percent of GDP in 1998 and should fall as growth recovers to zero or a low positive number in 1999. Foreign reserves have risen to a record $50 billion. Unemployment is reaching 10 percent and is likely to rise further as bankruptcies and layoffs that have been resisted by companies and unions finally occur.

Financial restructuring has progressed further in Korea than in Thailand, with the closure, merger, and recapitalization, including sale to foreigners of several institutions and the improvement of prudential and disclosure standards. The government is also aggressively pursuing restructuring of the chaebol, including investment liberalization, consolidation of their various excess capacity businesses, such as automobiles and electronics, and the improvement of transparency and corporate governance. Korea is attracting a substantial amount of international investor interest, to the extent that there are even fears that large-scale purchases of Korean assets might strengthen the won prematurely and reduce export competitiveness and some of the pressure to restructure businesses may be alleviated if they can be sold without such restructuring. Politically, President Kim Dae Jung appears to be entrenched despite considerable opposition to his policies both in parliament and among the public.

Indonesia

After contracting by an estimated 14 percent in 1998, real GDP is expected to decline by a much smaller 3 percent to 4 percent in 1999. With the collapse of imports yielding a current account surplus of 8 percent of GDP, and the influx of IMF funds, foreign reserves total $20 billion and the thinly traded rupiah has climbed back to a rate of under 8,000 to the U.S. dollar compared with its low of 15,000 in mid-1998. This still leaves it devalued by about 60 percent from pre-crisis levels, resulting in inflation of nearly the same amount in 1998, now declining to an expected 25 percent in 1999 and interest rates that have declined but are still around 40 percent. Unemployment may be as high as 25 percent, and 40 percent of the population is living in poverty.

The government has taken only the first steps toward solving the crisis in the banking sector, where non-performing loans may amount to 75 percent of total loans and credit consequently remains scarce, hobbling business recovery. Banks are being closed, merged, and recapitalized, essentially with public funds, and state enterprises and private sector corporations are seeking foreign investors. But social unrest, violence, and political instability preclude the return of domestic flight capital and new foreign capital inflow. The interim government of President Habibie is attempting some business sector reforms in response to public protests against the "nepotism, collusion, and corruption" associated with the preceding Suharto era, but it lacks power and credibility in this effort. The military also has been compromised by some of its recent and past actions and has not been adept at maintaining public security. Unrest is likely to continue and even increase in the run-up to the June 1999 presidential election, the outcome of which is uncertain.

Malaysia

Malaysia’s real GDP contraction will moderate from minus 7 percent in 1998 to minus 1 percent in 1999, as the government stimulates the economy through fiscal and monetary means. The contraction has collapsed import demand, creating a current account surplus of 10 percent of GDP in 1998 and maintaining foreign exchange reserves at $20 billion. The ringgit remains fixed at 3.80 to the U.S. dollar, inflation has hovered around 5 percent, and interest rates have fallen to 6.5 percent. Financial rescues of heavily indebted, politically connected, and strategic companies by various government-controlled funds and state-owned companies had dampened domestic and international confidence. But the recent relaxation of capital controls is likely to reassure existing investors and encourage more portfolio inflows as intended. So is the continuation of bank mergers, initiated two years ago before the crisis, and the cessation of exhortations to banks to increase lending to the overbuilt property sector. The political situation has stabilized with the appointment of a new deputy prime minister and finance minister, and the cessation of street protests, but the media still reports popular discontent with Prime Minister Mahathir’s rule, and it is unclear how this will be resolved in the next general elections scheduled for late 1999 or 2000.

Philippines

Real GDP growth is expected to recover from zero in 1998 to as much as 2.5 percent in 1999, pushing the current account back into deficit after a small surplus in 1998. Inflation, which was 10 percent in 1998, is coming down, as are interest rates, and the peso has stabilized at 38 to the U.S. dollar (up from a low of 45), with foreign reserves of $9 billion. Financial and corporate restructuring have not been major issues, but there is ongoing privatization and liberalization. The political outlook has stabilized following the election of President Joseph Estrada in May 1998, and his continuation of the economic policies of the previous Ramos government. The country is attracting more interest from foreign direct as well as portfolio investors.

Taiwan

GDP growth is expected to slow from 4.8 percent in 1998 to around 4 percent in 1999, as a result of slowing growth in global markets for Taiwan’s electronics exports and the continued impact of regional contagion. Inflation and interest rates remain low, the current account in slight surplus, and foreign reserves high at $88 billion. The NT dollar has strengthened somewhat but remains more than 10 percent below its pre-crisis ratio to the U.S. dollar. Although the status quo largely prevails in domestic economic and business policy, there are some concerns about banking sector weaknesses, and financial reforms and liberalization are ongoing. The domestic political situation is stable, and relations with China "normal."

Singapore

After barely avoiding recession in 1998, GDP growth will be slightly negative in 1999, due largely to regional contagion effects as the economies of Malaysia and Indonesia remain in (milder) decline. Inflation is negative, short-term interest rates are very low at 1.6 percent, the current account is in slightly larger-than-normal surplus at 20 percent of GDP, and foreign reserves total $70 billion. At 1.68 to the U.S. dollar, the Singapore dollar remains 10 percent below its pre-crisis rate. The government has responded to the crisis domestically with a mix of fiscal stimulus, wage- and cost-cutting measures, and a strategic thrust to further develop regional financial services, information technology, and electronic commerce capabilities through liberalization and new investments. The political situation remains stable.

Hong Kong

The 5 percent decline in GDP in 1998 will moderate to a still negative 1 percent drop in 1999 as Hong Kong maintains its currency peg, relying on domestic deflation to restore its diminished export competitiveness. With zero inflation, nominal interest rates at 5.6 percent are still relatively high in real terms, and asset deflation is expected to continue. The current account is in slight surplus, and foreign reserves amount to $70 billion. Besides measures to prop up the property and stock markets, and to curb speculation, the government has done little to alleviate the crisis, though it is considering developing a high-tech sector to reduce the economy’s dependence on regional service exports. Criticism of the government and of big business, along with demands for social relief from the recession, have increased among the domestic political opposition.

China

Real GDP growth in China is expected to slow from 1998’s reported 8 percent to 7 percent or less in 1999, maintained largely by domestic pump-priming, which will reverse 1998’s negative inflation rate. The current account will remain in (lower) surplus of about 1 percent of GDP, and with capital controls and foreign reserves at $145 billion, China should not need to devalue its currency in 1999. State enterprise and financial sector reform are on hold, and despite a recent crackdown on pro-democracy activists, the domestic political situation remains essentially stable.

Global and Regional Developments

Besides domestic policy and politics, Asian countries’ prospects for recovery in 1999 also depend on external economic developments. Chief among these is the expected slowdown in economic growth in the United States and Western Europe to around 2 percent, which will reduce Asian export growth and thus slow recovery. Most important is demand in the electronics sector, particularly computers and components; if it continues to pick up, export and thus recovery prospects become brighter for Korea, Taiwan, the Philippines, Singapore, Malaysia, and Thailand. But if the record U.S. current account deficit, which may reach 3 percent of GDP in 1999-the reverse of Asia’s current account surpluses-leads to protectionist measures to reduce imports (of steel, for example), then Asian exporters, particularly South Korea, could be hurt. Adjustment to the euro could also have a short-run contractional effect on European economies, which would increase protectionist pressures there as well.

As important is what happens in Japan, where aggressive fiscal stimulus, negative real interest rates, and government-led bank recapitalization efforts are expected to moderate but not reverse the minus 2.8 percent real GDP decline experienced in 1998. Lack of external and domestic confidence in government economic management and the pace of financial and corporate sector restructuring is continuing to restrain domestic consumption and asset purchases by foreign investors. The yen’s more than 20 percent appreciation against the U.S. dollar since mid-1998 dims the prospects for an export-led recovery in Japan, even as it brightens export prospects (to Japan and third markets) for other Asian countries and reduces the politically sensitive bilateral current account surplus with the United States. The country’s overall current account surplus is expected to fall below 3 percent in 1999. With continued recession and financial turbulence at home, Japan cannot contribute much to its neighbors’ recovery through increased imports or private investments, though it has put together a $30 billion package of government-guaranteed loans for trade financing.

Post-Crisis Policy Challenges

The above discussion clearly shows that though the Asian crisis may have bottomed out in terms of macroeconomic aggregates such as GDP growth, exchange rates, and interest rates, the timing and strength of recovery are still very much in doubt. Optimists predict a U-shaped recovery, while pessimists foresee an L-shaped trajectory such as Japan has experienced over the past decade. Some have not even ruled out the likelihood of future crisis for some countries in the region. Post-crisis recovery policy is thus a subject of crucial importance, not only to Asia but also to the rest of the world economy, for which it was assumed previous to the crisis that Asia would serve as the primary growth engine in the 21st century.

The relative roles of government and market actors, and the relationship between them, are at the heart of the debate surrounding post-crisis economic policy. Prior to the crisis, there were two polar views about this subject in Asia. A so-called Western orthodoxy (propagated by Asian as well as Western scholars and policymakers, and favored by economists) held that Asia’s rapid growth resulted from following the well-trodden paths of Western-style free-market capitalism-openness to foreign trade and capital flows, specialization according to shifting comparative advantage, reliance on the initiative of private enterprise, and the maintenance of small governments with prudently balanced budgets, whose expenditure concentrated on investments in productivity-enhancing sectors, such as education and infrastructure, rather than on social consumption and conservative monetary policy, which kept inflation low. Low taxes, low inflation, positive real interest rates, favorable demographic profiles, and to some, cultural values in Confucian and Islamic societies, led to high savings rates, which, together with welcoming policies and attitudes toward foreign investment, enabled high investments and thus rapid output and income growth. "Asian values" in this model reflected strong family commitments to education, savings, hard work, entrepreneurship, self-reliance, and upward mobility, with a minimal role for the state-resulting in dynamic, flexible market economies.

In this view the crisis resulted from deviations from the free-market model toward reliance on government to direct, favor, promote, protect, subsidize, guarantee, or otherwise distort investment, leading to the misallocation of capital, which resulted in domestic asset bubbles, excess capacity, and low or declining returns on capital. Industrial policy to develop particular strategic sectors was seen as a major culprit here, as were government loans, subsidies, guaranteed contracts, or affirmative action privileges awarded to state-owned or politically well-connected private enterprises. Such crony capitalism-together with the existence of the IMF and its role as international rescuer-created the moral hazard that fostered risky capital investments in the expectation that in the event of failure they would be bailed out by national governments, the IMF, or other members of the international community.

Thus recovery from crisis requires a dismantling of these state-promoted market distortions, including the privatization of state banks and enterprises, the dismantling of monopolies and public-private crony-capitalist networks, the introduction of more market competition, including from foreign investors, and to some, the abolition of the IMF and the reliance on private capital markets only for risk insurance and recovery from business failure. This in turn would force governments to more carefully manage their macroeconomic policies to avoid currency overvaluation, the buildup of domestic asset bubbles, current account deficits, and excessive external debt. It also would force private sector financial institutions and industrial enterprises to make more prudent assessments of loans, borrowings, and investment projects. More broadly, openness to international capital flows would subject governments not only to external economic but also domestic political disciplines to maintain the confidence of domestic as well as foreign market actors.

At the same time the much-admired Asian flexibility and discipline-for example, in terms of downward wage and price adjustments-and entrepreneurial dynamism-in terms of rebuilding enterprises and national economies in decline-continues to contribute to recovery. It is notable that despite the severity of the crisis, neither unemployment nor inflation in the affected Asian countries has hit more than 10 percent (with the exception of Indonesia, where political factors play a much greater role), in stark contrast to the historical experience of Latin American countries and the current trend of high unemployment coinciding with economic growth in Europe.

Although this Western orthodoxy appears conservative in the Western sociopolitical context, much of its analysis commands significant support in Asian countries among the public as well as among more radical, anti-government and anti-establishment groups and some local scholars. "Crony capitalism" was first widely used in Southeast Asia to refer to the powerful cronies of the Marcos martial-law era, whose monopolistic business practices did much damage to the economic growth and prospects of the Philippines. "Nepotism, collusion, and corruption" or "NKK" has become the rallying cry of anti-Suharto pro-democracy activists in Indonesia, opposed particularly to the extensive business interests of the former president’s family and associates and to the monopolistic activities of large Chinese conglomerates heavily networked with them and each other. The NKK slogan also has been appropriated by the nascent reformasi movement in Malaysia, where many outside the movement have long expressed concerns about perceived nepotism and crony capitalism built up around the government’s affirmative action program and ruling party politics. In Korea the chaebol have long been the target of anti-monopoly and anti-corruption popular movements, one of the strongest champions of which has been the current president Kim Dae Jung during his years in opposition. Corruption is also a burgeoning issue in Thailand, where financial sector bailouts before and since the crisis have been attributed to the political connections of the rescued or protected firms. Notably, many Asians who subscribe to much of the analysis of the free-market model of Western orthodoxy do not subscribe to its policy conclusions that more openness and greater reliance on markets are the answer because market actors are assumed to be both monopolistically inclined and politically manipulative.

The other, non-market polar view of the relative roles of states and markets in Asian economies before the crisis (popular among Asian government officials and academics and Western political economists who are scholars of Asia) held that Asia’s rapid growth resulted from positive state intervention in resource allocation, which made "latecomer industrial development" possible. State industrial policies involving a mix of import protection, export subsidies, preferential government procurement, investment promotion, tax breaks, state equity, loans, grants, research, training, and infrastructure provision, etc., enabled countries to leapfrog technological barriers (accelerating shifts in comparative advantage) to enter strategic sectors essential for their industrialization at particular stages of development-from garments and electronics to steel, chemicals, automobiles, semiconductors, and computers. In this model, the relevant Asian values are group or communitarian motivations, willingness to sacrifice individual desires (such as competitive profits) for the good of the group (such as collective growth), long-term perspective and future orientation, deference to state authority, and the primacy of good government. The belief is that openness, macroeconomic stability, and reliance on individual initiative alone would not have brought about rapid growth. There is more of a tendency to distrust free-market forces and thus to resist dismantling industrial policy not because of support for cronyism but because of nationalism and/or a belief that state support is necessary for the development of viable industries. In the aftermath of the crisis state-subsidized industries risk losing their financing under fiscal austerity and credit tightening, as has already happened in Indonesia’s controversial aircraft and national car industries.

Besides industrial policy, the use of networks and relationships has been considered a hallmark of Asian business. This "network capitalism" or "alliance capitalism," in one view, is both culturally determined and has enhanced enterprise efficiency and expansion by compensating for market imperfections in underdeveloped economies. In another view it is simply "crony capitalism" with all its attendant inefficiencies and inequities.

The complex and historically specific experiences of Asian economies before, during, and since the crisis do not in my opinion support any particular ideological position with respect to the relative economic roles of governments and markets, both of which are obviously necessary. The discussion above suggests that governments’ failure to carry out their policy obligations with respect to both macroeconomic stabilization and financial sector regulation and supervision were mostly responsible for the crisis-not an excess of government micro economic interventions such as industrial policy. There were also management failures on the part of foreign and domestic private market actors, not wholly attributable to imperfect information and moral hazard. An examination of the situations in the four Asian economies that have best survived the crisis to date illustrates the difficulty of making any policy generalizations based on their experiences.

The Philippines is by most measures (such as the ratio of trade or investment to GDP) one of the less open Association of Southeast Asian Nations (ASEAN) economies, with well-known structural flaws in its economy, including high levels of trade protection and domestic regulation, serious market imperfections, weak infrastructure, and only moderate savings and external reserves. But despite these weaknesses, and an open capital account and floating exchange rate, responsible and responsive macroeconomic and private sector management (and recent IMF tutelage) succeeded in containing the damage the country suffered from regional contagion.

Taiwan’s performance during the crisis period has been the best among the market economies of the region. Largely for external security reasons, it has a strong independent central bank that supervises the managed float currency and retains some formal and informal controls on capital account convertibility. Taiwan also has followed an active industrial policy, which helped to build its globally competitive high-tech manufacturing sector, a major reason for its relative resilience in the regional crisis. But the economy is also very open to trade and foreign direct investment and dominated by small and medium-sized private enterprises funded largely by equity rather than debt, though large state monopolies still control the economy’s commanding heights in strategic industries like steel, arms, and chemicals.

China has been insulated from the regional crisis largely by its large and growing domestic market, by persistent current account surpluses and huge foreign exchange reserves (suggesting its currency is not much overvalued), and by the absence of capital account convertibility for its currency, which limits capital flight. China also has been stimulating domestic demand by monetary means and delaying structural reform of its financial and state-owned enterprise sectors. While this is succeeding in maintaining current growth, it risks exacerbating the existing problems of a domestic asset bubble, excess industrial capacity, and financial insolvency of state banks and enterprises. China’s export competitiveness and ability to attract foreign investment also has been hurt by the devaluations of its neighbors, from whom it has drawn much of its inward foreign investment and with whom it competes both for third-country investments and export markets.

Singapore is by far the most open economy of these four in terms of free trade and capital flows, but domestically the government exerts significant control over land, labor, and capital markets; follows a pro-active industrial policy, which has built up a globally competitive high-tech manufacturing sector (dominated by rich-country multinationals who adhere to global standards of financial management); and operates government-linked corporations that dominate large sectors of the economy. By one estimate, the government controls about half the country’s GDP. It thus has many potential policy levers with which it can adjust the economy to cyclical downturns and external shocks such as the recent crisis. These levers include a managed-float exchange rate and huge foreign exchange reserves amassed over decades of running high forced savings and large current account surpluses. The government’s key strategic response to the crisis, beyond standard counter-cyclical measures such as cutting costs and taxes, has been to accelerate financial sector liberalization, including allowing foreign funds to manage a portion of Central Provident Fund compulsory savings.

The five other Asian economies most adversely affected by the crisis-Korea, Thailand, Hong Kong, Malaysia, and Indonesia-are equally diverse and also share overlapping features with the less affected four. For example, crony capitalism in one form or another and to some degree or other is identifiable in both sets of economies, as is industrial policy, yet with different outcomes in different countries, and in different periods. Policy responses to the crisis itself have expanded rather than reduced the role of the state, with virtual nationalization of bank assets in Thailand and Indonesia, and the Hong Kong government and Chinese "red chip" state enterprises together now owning roughly half of all equities on the Hong Kong stock exchange. These apparent contradictions suggest that it is necessary to look beyond broad economic categories to their historically specific realization, which extends beyond economics, and particularly into the political arena and intersection of historically and perhaps culturally defined political and business interests.

The post-crisis policy challenge for Asian governments, then, is not simply to adopt a uniform and universal blueprint to restore and sustain economic growth, but rather to craft policies appropriate to their individual circumstances, needs, and preferences on a pragmatic rather than ideological basis and in the political/institutional as well as economic arenas. Thus constitutional and legal changes have been part of the road to recovery in Thailand and Korea, and must be in Indonesia as well. And in the economic arena countries must decide what is most important to them in terms of various trade-offs. For example, a country that wants to maintain domestic ownership and control of strategic assets-say in the financial or industrial sector-rather than maximize income and growth, may continue to limit foreign ownership in those sectors, accepting that this in turn will reduce foreign capital inflow and technology transfer and thus economic growth. This choice should, of course, be made democratically by all citizens, in order to avoid the decision being taken solely by and for the benefit of the class of domestic private owners of these strategic assets, whose own earnings will increase with the limitation of competition, at the expense of consumers and workers.

A country wishing to maximize income and growth by being completely open to foreign capital must also recognize that such openness does not imply an abdication of government responsibility but rather a shift toward creating the conditions that will minimize potential disruptions from free capital flows. The case of Singapore suggests this may require more rather than less government intervention and control on the domestic front and in political as well as economic spheres. A country that wants to limit its dependence on foreign capital needs to ensure that its domestic savings are used as efficiently as possible in order not to sacrifice growth. Paradoxically, the more efficient utilization of domestic savings is likely to require the same sorts of financial and corporate governance reforms that the IMF and foreign capital market actors demand.

The post-crisis management challenge for Asian enterprises depends in part on the changed policy environment they will face. But whatever this is like, business will be driven by one overriding motivation, the need to be profitable in a market economy in order to attract capital. Because of the crisis and crisis-induced structural reforms, state subsidies and protection, and investor and lender patience and appetite for risk will decline, while demands for financial disclosure, good corporate governance, and competitive profit performance will escalate. Small family firms in non-capital-intensive sectors, such as distribution, services, and labor-intensive manufacturing, may escape some of this, but firms that require funding from non-family sources-banks and capital markets-will need to keep up with tightening lending and listing requirements. This will spur a move to improve technology, accounting standards, and management practices. But it does not necessarily mean an end to traditional Asian business practices, such as reliance on social networks and the management and labor of family members, which will continue as long as they contribute to rather than detract from profitability. For example, social and cultural factors may continue to define the origin and maintenance of business networks, but they will continue to function as modern arm’s-length networks do, to improve information flows, reduce transactions cost and delivery times, and reduce inventory and risk.

 

Asia Beyond the Crisis

Once Asia recovers from the current crisis, its longer-term economic prospects remain the brightest in the world. The region still has many natural resources and most of the world’s people (labor and markets), whose low current levels of income and consumption enhance the prospects for growth. The good long-term economic fundamentals of small governments, flexible wages and prices, entrepreneurial populations, high savings and, in the case of South and Southeast Asia, favorable demographics (low dependency ratios for the next thirty years), ensure that Asian countries can still grow faster than the rest of the world for many decades, once they recover. Crisis-induced reforms will help ensure better government policies and private sector business practices, with improved market institutions, regulations, and competition helping to ensure a more efficient channeling of domestic and foreign savings into investment and growth. Foreign investment will increase because of reduced barriers to entry and the lower prices in foreign currencies of regional assets. Indeed, the recent upsurge in Asian stock markets had led some observers to worry that capital may be flowing back to the region prematurely, before the required financial and corporate reforms and restructurings that are necessary to avoid future crises and ensure a stable and sustainable recovery.

Getting from here to there is obviously the challenge. Japan’s long delay in engineering its own recovery casts a large shadow about immediate prospects for recovery in the rest of Asia, which depends on it as a most important export market and source of capital inflow. It may also send a negative signal in terms of demonstration effect to world capital markets on the ability and willingness of Asians to reform their economies and businesses, and thus to recover quickly-even though most observers are more optimistic about the prospects for restructuring in Korea and Southeast Asia than they are about the prospects in Japan. Unlike stagnant but affluent Japan, other Asian countries are not rich and have been made much poorer by the crisis, so recovery is more urgent for them. They have fewer domestic resources-in capital, technology, and expertise-to help them recover, and smaller home markets with which to attract foreign investors who can help them recover. Their local enterprises are much smaller, weaker, and less competitive than giant Japanese global firms. They also have more volatile domestic political situations that require fast recovery to be stabilized. Thus they have much less freedom than does Japan to resist Western style market and institutional reforms. The relative absence or weak presence of Japanese private firms as partners in post-crisis restructuring also increases other Asian countries’ dependence on Western financial and industrial enterprises for their recovery, and thus their need to comply with more Western standards of government policy and business practice. On the other hand, a Japanese recovery that successfully retains aspects of Asian ways of governing economies and managing businesses-such as industrial policy and social networks-might provide a useful alternate model to the Western orthodoxy for other Asians. This does not appear likely to happen.

But as Asian governments, financial institutions, and industrial corporations restructure in the direction of greater transparency, efficiency, and openness to foreign ownership and foreign competition, they may fear losing national sovereignty not only in terms of ownership and control of their own economies, financial systems, and enterprises, but also in terms of political and social autonomy and cultural integrity. This is one reason for the resistance to such restructuring that Korean chaebol, Malaysian banks and privatized conglomerates, Thai financial institutions, and Indonesian state-owned enterprises, not to mention Japanese banks and industrial corporations, have exhibited to date. There is a fear of surrendering control of and returns from painstakingly built-up national corporations and becoming relegated to the status of mere branch-plant economies and subsidiaries of global companies owned and controlled by foreigners from very different cultures and societies. In this view-of which Malaysia’s Prime Minister Mahathir is the most vividly articulate proponent-Asia’s otherwise glorious economic future would be held hostage to, and would disproportionately benefit, powerful external agents, whether governments or market actors.

Besides nationalist political reaction to economic and business restructuring, other potential pitfalls hamper Asia’s economic recovery and resurgence. Chief among these are domestic political institutions and interests, which have contributed to the crisis by undermining state capacity and autonomy in economic management by fostering crony capitalism and moral hazard. Governments need institutional capacity and management expertise to impose austerity policies, monitor capital flows, and establish prudential standards. They also need autonomy from state and private sector vested interests who would suffer from and hence oppose these policies-such as tighter credit standards, higher interest rates and taxes, and reduced government subsidies. Changes here are likely to take time, just as they did in the political development of today’s democratic Western industrial nations, especially in the evolution of their present state-of-the-art financial market institutions, regulatory infrastructures, reporting requirements, and prudential safeguards. This took many decades if not a century to evolve in particular historical contexts, and the results are still extremely diverse. Thus to the extent that domestic political institutions and interests, and financial and business institutions and practices, did contribute to the Asian crisis, the risk of their doing so again remains for some time to come.

More immediately, political and social unrest in the wake of economic crisis remains a very serious threat to the restoration of social stability and political confidence throughout the region. Indonesia is only the most obvious case here, with the dynamics of political and generational transition, ethnic division, religious conflict, military security, social order, hunger, unemployment, and the very nature of the post-Suharto economic system, including the relative roles of Chinese and non-Chinese, state, private, and cooperative enterprise, being both in flux and at stake in the present turmoil. Less dramatically, political transition, the economic role of the state, the direction of economic development, the future of affirmative action policy, and the fate of the class of bumiputra big business, are all also at stake in Malaysia. Korea, Thailand, and Philippines may be further along the road in terms of democratic political development, but deep fissures remain between urban and rural communities, haves and have-nots, capital and labor, and regional, ethnic and religious group affiliations, which simmer barely below the surface and could still complicate recovery or become further entrenched and even boil over if it is delayed. Political risk thus remains a major issue that governments must manage through their social and security as well as economic policies.

In the realm of political economy, there is no simple choice to be made between state control and market freedom, between Asian and Western modes of political, economic, and corporate governance. Not only must every country choose its own system of governance, appropriate to its own historical and cultural circumstances, but for each country, different ways of organizing politics, government, economy, and enterprise are possible, depending on history and current preferences. The trajectory of the crisis to date-from its origins through its policy responses and consequences-appears to suggest that reliance on open markets and international capital flows brings increased vulnerability to bad politics and bad policy choices as well as bad loans and bad investments that can only be resolved through more openness, more competition, and more exposure to political and market disciplines. At the same time, the experiences of Asian countries can be variously interpreted to suggest that (a) the cost-benefit calculus of external openness can perhaps be best managed by strong domestic political and economic controls (Singapore); (b) some restraint on external openness and domestic market freedoms, e.g., strong central control of macroeconomic and industrial policy, can coexist with and perhaps even permit non-disruptive domestic political liberalization (Taiwan); (c) eschewing an open capital account can avoid contagion and maintain growth (China); and (d) good macroeconomic and financial management (and following IMF prescriptions) can forestall crisis and limit contagion even in the presence of market distortions from government intervention and crony capitalism (Philippines). There is no evidence that market freedoms are always in opposition or superior to state controls-they may in fact coexist neutrally or even be complementary.

Whatever the individual models of government and business management that emerge out of the post-crisis policy ferment, there is no indication that Asians need to feel threatened about a loss of cultural integrity or political autonomy (as opposed to economic dependence, which is a global condition that arguably cannot be avoided especially by smaller economies). The countries of Europe, for example, have retained political independence and much of their individual cultural uniqueness even in business practices and despite their progressive economic integration over the past four decades. Within Asia itself, the most open and "Westernized" economies in terms of government economic management and business practice, Hong Kong and Singapore, retain their distinctive cultures, even from each other, and, at least in the case of Singapore, political autonomy. Even when countries arrive at the same stage of economic development and income level, which will not be the case in Asia for several generations yet, and even when they become more economically interdependent and integrated, they will remain, survive, and even prosper with many differences in political systems, economic management, cultural regimes, and business practices. There are, and will always be, many national capitalisms, in post-crisis Asia as in other times and places.

One final consideration that has not been fully explored here is the extent to which beyond the crisis Asia will function as a more cohesive regional unit in the world economy. It has been acknowledged that regional economic integration in trade and investment flows, especially in the decade prior to the crisis, increased the vulnerability of Asian nations to regional contagion, particularly from the downturn in Japan. Globally oriented sectors, such as high-tech export manufacturing in Taiwan, Singapore, and the Philippines, fared better during the crisis than regionally oriented sectors, such as financial and business services and tourism in Hong Kong. Exports to still-buoyant U.S. and Western European markets increased in 1998, while exports to depressed Asian neighbors collapsed. Recovery today depends on continued exports to and new investments from non-Asian countries, whose relative role in Asian economies will consequently increase while that of Asian neighbors shrinks, at least in the short to medium term. Some countries like Singapore are already undertaking efforts to strengthen economic ties with countries outside Asia to aid in their recovery.

At the same time, efforts are under way to strengthen regional economic linkages as another aid to recovery. The ASEAN countries have advanced the inaugural date of their regional Free Trade Area (AFTA) by one year to 2002. But an important reason for this is to increase the group’s attractiveness to foreign investors by presenting a larger regional market. The Asia-Pacific Economic Cooperation (APEC), on the other hand, has failed to liberalize regional trade in lumber and fisheries, which would have improved access of Southeast Asian resource exports to the Japanese market, thus aiding in their export-led recovery. ASEAN countries have also agreed to improve and share the information from monitoring of members’ financial data, but this itself is contingent on improved domestic disclosure in both the public and private sectors. The feasibility of the proposal for an Asian Monetary Fund as a supplement or eventual alternative to IMF funding also depends on the national interest of donor countries within the region, who cannot be assumed to be willing to accept less stringent policy conditions than the IMF or to donate their own extensive reserves to regional stabilization when they are required for national stabilization. Thus Japan may need its reserves to stimulate its own economic recovery and recapitalize its banking system; Hong Kong needs its reserves to defend its currency peg; Taiwan requires them for security reasons; and Singapore must give its economy flexibility in responding to external market shocks or speculative attacks. The extreme delay in disbursement of Singapore’s promised bilateral aid to Indonesia, and the absence of any aid to Malaysia to date, is an indicator of the tough conditions that potential donors are likely to demand of their neighbors in terms of guaranteeing the security and return of any funds loaned to help them recover from crisis.

In short, regional and even international institutional innovations in financial markets are likely to be at best adjuncts to, not substitutes for, national self-reliance, which requires sound macroeconomic management, structural reform and good political and corporate governance. It is in the building of strong national capitalisms more than in the construction of new global or regional financial architectures that Asia’s recovery from the present crisis, and its insulation from future crises, lies.