International Affairs Forum:
Your book focuses on Asia’s economic growth from the 1960s and the Asian Financial Crisis of 1997-1998, examining not only the history but also the reasons behind such developments. What do you see as the positives leading up to and deriving from the economic growth and negatives that led to the Crisis?
David A. Hollingsworth:
The major plus is, of course, the phenomenal economic growth of the Southeast Asian region, and the steps it took to initiate that growth: namely land reform policies, income distribution, improvement in health care, education, and infrastructure in general. Facilities were by and large improved to better facilitate transport of materials and products and eventually trade. Moreover, and this was fundamental, the governments of the region encouraged greater political involvements and participation, doing away with the traditional hierarchical pattern of rule. And as the economy of the region started to take a different turn, the governments also encouraged savings and investments. Altogether, the coordinated moves between the governments, the people, and the business communities, exemplified the far-reaching, far-seeing principle, the social bargain (or social contract).
Import-substitution industrialization (ISI) was essentially the first phase for the growth the region would later enjoy. This phase involved protectionism not excluding trade barriers and subsidies. But it also involved tapping its resources, engaging in knowledge spillover, and developing its labor pool while strengthening infant industries’ production capabilities to better position themselves for their eventual participation in the global markets.
This in turn began the next phase of economic growth, namely export-oriented industrialization, which involved: 1) shifts in production of low-valued goods (rubber, shoes, umbrellas) to higher-valued goods (such as computer peripherals, electronics, and so forth), 2) financial liberalization (making capital available and mobile), and 3) deregulation. During that phase, multinational corporations (MNCs) and financial institutions were allowed to set up subsidiaries and branches and as a result, not only new services were introduced, but new technologies, new production methods, and new managerial skills were likewise introduced as well. Moreover, the employment picture improved due to increased involvements and commercial activities of domestic and international firms. Consequently, the poverty rate decreased from 60 percent in 1975 to 20 percent in 1997. Moreover, GDP growths in the Asia Pacific region reached above 5 percent on average by 1990.
Onto the negatives, and if I have to choose the main culprits that caused the infamous Asian Financial Crisis of 1997-1998, I would choose crony-capitalism, moral hazard, and policy imbalances. As the region got further exposed to the global markets, the governments in Southeast Asia by and large were not prepared to deal with that exposure (though Singapore, Taiwan, and to some extent, Malaysia, were the exceptions to this). And as a result, risk management and transparency became huge issues. Then the region had crony capitalism in the midst of it all. In Indonesia, for example, Suharto engineered Indonesia’s growth after his rise to power in 1966. However, many people close to Suharto benefited because of their connections to him: whether they were members of his own family or political friends.
They also had issues of capital mobility. By the 1980s, there were enormous influxes of capital going into these countries, much of it cheap capital. But when there’s too much capital and capital mobility in an economy, any significant outflow of it from a particular economy can spell economic/currency distresses. And that was what happened by the spring of 1997, when investors and speculators began to examine the Asian financial & commercial markets and saw numerous weaknesses and distortions. And when problems and fundamental weaknesses in those markets became apparent, then a pro-cyclical type of behavior kicks in: that is, when the going got tough, they began pulling money out and financial distresses in countries like Thailand, Indonesia, Korea resulted. And in fact, Thailand’s currency, the baht, lost about 43 percent of its value from December of 1996 through December of 1997. In addition, the misallocation of capital into speculative and non-competitive sectors became widespread and thus, the returns on investments fell in countries like Korea, Indonesia, and Thailand. And when there’s little income generated due to poorly conceived investments, payments to financial institutions became problematic and non-performing loans increased in volume consequently. Before the investors/speculators started pulling money out of these countries, most of the banks in Asia were technically insolvent.
What we learned from behavioral economics is that there are always rational and irrational forces at play in an economy (and in finances), and should something goes wrong or trigger an alarm, that in turn will trigger certain behaviors of investors that can have widespread ramifications (contagion in short) which could be disastrous. And this was what happened not only in Asia, but also in Latin America, and countries in Europe like Turkey, Russia, and now Iceland and Spain. Look at the United States and the UK and where we are as we speak.
The underlying weaknesses were the internal policy imbalances, lack of prudential regulation and enforcement, as well as the lack of effective risk management tools to deal with the growing globalized economy and ensuring that, in the event of future financial surprises, that models and mechanisms were well in place. In the end, that did not happen. The economic development after the 1960s was phenomenal, but in a sense, they (the governments of the region) got ahead of themselves by not regulating the amount of financial and manufacturing activities to ensure and safeguard transparency, accountability, and discipline. Moreover, the governments in the region (Singapore and Taiwan excluded) were guilty of making poor investments that yielded very little return or value (like, for instance, petrochemicals) as alluded earlier.
So, there was a mix of two worlds, really, in terms of the steps the countries took towards economic growth and what resulted from that. But also the series of missteps that simply went largely unnoticed and largely ignored that decisively exacerbated the severity of the Asian Financial Crisis.
It should be noted that the Asian Crisis, although a defining moment in its own right, was not at all an isolated event of the 1990s. The 1990s was the decade of crises (in Mexico, Venezuela, Venezuela, Turkey, and so forth) and it was that decade where a plethora of weaknesses and policy imbalances were exposed in many parts of the world. For example, Argentina lost about half of its middle class population and its poverty rate reached about 52 percent in the summer of 2002 because of its financial crisis that emerged in 1999. This came after periods of emergences and prosperities during the 20th century where Argentina was among the top ten economic forces in the world, ranking with Great Britain and France. But hyperinflation of the ‘80s and mismanagement of policy of the ‘90s spelled doom for any prosperity in Argentina, and its financial crisis was particularly acute.
How did the affected countries respond to the Asian Crisis?
The countries of the Pacific region were especially vigilant in dealing with the problems that brought about the crisis in the first place (distortions, lack of transparency, accountability, corruption, and the like). The Anti-Corruption Conference of 2003 (held in Kuala Lumpur, Malaysia) is an example of that step towards greater financial stabilities on national and regional levels. The countries of the region after the Crisis were clearly thinking ahead and preventatively. But the Asia Pacific region is still highly dependent on overall global trade and any major challenges that will come the advanced economies’ way will inevitably have an impact on that region. This was what happened to Singapore in the fall of 2008, for example, during the current Great Recession. Singapore, the country that was more or less unscathed during the Asian Financial Crisis of 1997-1998, went into, as its prime minister asserted, “the most severe recession in Singapore’s history.” Taiwan, which also went relatively unscathed during the Asia Crisis, likewise fell victim to the current global financial downturn.
Would you expand on a country of particular interest in Asia?
For one, Indonesia. After it gained independence from the Dutch in the 1950s, it soon found itself in a very volatile political climate. President Sukarno was very much into economic isolationism and autarky. Suharto came in by force (coup d’état), overthrew Sukarno, established rule dictatorially, and almost immediately began to build his country into an economic power to be reckoned with. But Suharto was forced to resign because matters went awry and the people became wary, vocal, and determined for change. Riots became quite common by 1998 and the killings of four students later that year spelled doomed for Suharto and his dynastic era.
The year 2004 was an amazing year, for really for the first time, Indonesia experienced a series of elections that were democratic and with its people who were politically active and vigilant. And that year culminated into the election of Susilo Bambang Yudhoyono, widely known and revered for his honesty and integrity. Although poverty remains a major concern, Indonesia continues to be on the right path for re-emergence and economic stability from the Asian Crisis of 1997-1998.
What about Taiwan?
Taiwan had an abundant resource base. After the Second World War, Taiwan began manufacturing lower-valued goods such as shoes, rubber, and umbrellas. By the early 1970s, however, with the aid of the United States (and to some extent, Japan), Taiwan started shifting its manufacturing capabilities of higher-valued products such as electronics, computers, and computer peripherals. Seeing Taiwan’s potential as a major trading partner, computer manufacturers in Japan, Europe and the United States began investing in Taiwan: namely by setting up subsidiaries while transferring technological knowledge into the country. Needless to say, the rest is history.
Any special things about those other countries that really jump out at you in terms of policies that they had enacted?
Mr. Hollingsworth: Well, Singapore, for example, which is essentially a city state. It had very little resources to work with, and yet was the most educated country in the hemisphere. But its domestic market was small and Singapore joined the Malaysian Federation in 1963 to help attract import-substitution investments. But the partnership was short-lived and the Federation was dissolved after a couple of years. So what Singapore did was to strengthen its financial position, which included setting up and then granting banking licenses to domestic and foreign banks, relaxing prudential rules, and so forth. It also became a major country for the manufacturing and assembling of electronics.
What are your thoughts on the economic growth and economic importance of China?
China is indeed an (or should I say, the) emerging economic superpower. I think China’s becoming the Japan of the 1980s in large part because of the huge influx of foreign direct investment (FDI). For China, it’s a matter of making sure that the economy does not overheat, making sure that its currency remains robust and healthy, and making sure they do not take too much risk. Also, China’s economic growth remains uneven, with the southern and western provinces lagging behind in capital investments, infrastructural improvements, educational and medical accessibities, and overall labor reforms. Moreover, the issues of income disparity and wealth effects gaps remain not only valid, but huge as well. But China’s university system continues to improve and is becoming even more competitive in the changing global community. So, Jim Roger’s claim that China will be the force of the 21st Century does not at all sound too far-fetched.
Are you planning a follow-up book?
Yes. The last two chapters of the book discuss a few lessons we should learn from the Asian Financial Crisis and others like it. In my next book, I want to take over where my one leaves off to discuss the state of our world today, with the lessons we’ve learned and those we’ve yet to learn, with all of its changes (in leadership in particular), and what must we do to shape this century into a more stabilizing, fruitful one. And I think there’s a growing collective recognition that a sound government with a sound economy is the way to go. And changes in leadership (in France, in Argentina, in Chile, in the United States, in Liberia), reflect that. There’s hunger to not repeat the misfortunes of the past, though the hunger is lacking in organic unity and coherency. And there is hope, but a very uneasy hope. That’s really the theme for the next book, how to take this hope along with our understanding of the past to develop something more pragmatic, more integrated, and more visionary.
The key thing is to develop and shape prosperity, but with the social aspects of development in mind which include proper risk management, accountability, and vision. You’ll want that social bargain to ensure that as many people prosper and benefit from economic growth as much as possible (and ideally at all times). In an increasingly globalized economy, the incentive must always be to democratize that economy so that it will work for you, for me, and for as many people as possible. You want to deal with income distribution. You want to deal with quality employment and education. You want to deal with investment, whether it’s education or infrastructure or whatever.
What we have found is that we must never separate society and culture from the overall economic picture and vice-versa. Economies are very intertwined with our everyday lives and its qualities. People should be involved and have that overall sense of purpose. And a country must foster that, like what the U.S. did in the FDR and the Kennedy years. Unfortunately, we’ve lost sight of those virtues for too long. But, although the damages and the destructions were done, there are plenty of things to savor that will help bring mankind to new heights.
So, although we should always keep hope alive, we must always move boldly beyond that. And I hope to help facilitate that in my current book and the one I’m planning, for it is not too late, either for me or for anyone.
David Anthony Hollingsworth is author of The Rise, The Fall, and The Recovery of Southeast Asia's Minidragons, published by Lexington Books.
|Comments in Chronological order (2 total comments)
| Taiwan never be an independent state. It is part of China for almost thousand years. It was occupied by force by Miltarial Japan in 19 century. Although UK is the most evil state in earth.( it carried out opium trade, slave trade, colonized the Hong kong which is not far away to Taiwan area and southeast Aisan states), Taiwan's colonization has no relation with UK
| To the person who commented on Jan. 13, 2010 at 7pm, while historically Taiwan was part of China for centuries (and then under Japanese rule for 50 years until 1945), it is for all practical purposes, an independent state since 1949 when the Nationalist Party was formed. It does have its own autonomy, even though China's Central Bank continues to exercise at least some influences over Taiwan's economic and financial matters through its monetary moves. Furthermore, the Taiwanese do consider themselves autonomous, and have been doing so since that fateful year of 1949.
David A. Hollingsworth