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This presentation is the intellectual property of Professor Timothy C. Lim • Most images, pictures and charts are from third party sources

POLS 459 Politics of POLS 459 Politics of East AsiaEast Asia

The Asian Financial The Asian Financial Crisis: The Demise of the Crisis: The Demise of the

East Asian Model?East Asian Model?

Professor Timothy C. LimProfessor Timothy C. Lim

California State University, Los AngelesCalifornia State University, Los Angeles

[email protected]@calstatela.edu

The Asian Financial CrisisDemise of the East Asian Model?

The Asian Financial Crisis: BackgroundThe Asian financial crisis, according to the UN, was “perhaps the most serious financial crisis since the breakdown of the Bretton Woods system in the early 1970s, in terms of both its scope and its effects”The effects of the crisis were far

reaching, as this image (produced by BBC news) shows. The crisis started in Thailand, but spread to much of Asia,

and indirectly hit Europe, Latin America, and North America. Ultimately, the

damage was limited, but, for a time, there was fear that the crisis would

cause a global depression.

The effects of the crisis were far reaching, as this image (produced by

BBC news) shows. The crisis started in Thailand, but spread to much of Asia,

and indirectly hit Europe, Latin America, and North America. Ultimately, the

damage was limited, but, for a time, there was fear that the crisis would

cause a global depression.

http://news.bbc.co.uk/1/hi/special_report/1997/asian_economic_woes/34514.stm

http://news.bbc.co.uk/1/hi/special_report/1997/asian_economic_woes/34514.stm


The Asian Financial Crisis: Background“East Asian Financial Crisis was a period of economic unrest that started in July 1997 in Thailand and South Korea with the financial collapse of Kia, and affected currencies, stock markets, and other asset prices in several Asian countries, [which] many considered [the] Four Asian Tigers. It is also commonly referred to as the East Asian currency crisis or locally as the IMF crisis although the latter is somewhat controversial. There is general consensus on the existence of a crisis and its consequences, but what is less clear are the causes of the crisis, its scope and resolution” Source

http://www.answers.com/topic/1997-east-asian-financial-crisis


The Asian Financial Crisis: Background

The series Commanding Heights provides a useful overview of the Asian financial crisis and its global effects. We will watch a short 20+ minute excerpt from this three-part, six hour documentary. The entire series is available for viewing. Click here

http://www.pbs.org/wgbh/commandingheights/hi/story/index.html


The Asian Financial Crisis: ExplanationsAs with any significant social, political, or economic event, there are many explanations about the causes of the Asian financial crisis. Our old friend, Chalmers Johnson, provides a summary of three of the most common …

The ____________ - crunch explanation

The _______________ explanation

The end-of-the- _______________________ explanation

liquidity

overcapacity

Cold-War-in-East-Asia

1.1.2.2.3.3.


The Asian Financial Crisis: ExplanationsExplanations

A Fourth Explanation

One additional explanation is the One additional explanation is the “crony capitalism” explanation“crony capitalism” explanation

What is crony capitalism?Crony capitalism is a pejorative term describing an allegedly capitalist economy in which success in business depends on corrupt relationships between businessmen and government officials. It may be exhibited by favoritism in the distribution of legal permits, subsidies, low-interest loans, government grants, special tax breaks, and so forth.

Crony capitalism is a pejorative term describing an allegedly capitalist economy in which success in business depends on corrupt relationships between businessmen and government officials. It may be exhibited by favoritism in the distribution of legal permits, subsidies, low-interest loans, government grants, special tax breaks, and so forth.


The Asian Financial Crisis: ExplanationsExplanationsCrony Capitalism

Johnson dismisses crony capitalism as a prominent cause almost out of hand: “Throughout the region,” he writes, “thecurrent crisis was caused much more byunder-regulation than by corruption orany other side effects of an overly closerelationship between business and government”


The Asian Financial Crisis: ExplanationsThe Liquidity Crunch Explanation

Asserts that the Asian financial crisis was essentially a ___________ problem, rather than a crisis in the “real economy”

Definition: A liquidity crunch is a business condition that results in having too little cash and other current assets tobe able to pay current liabilities as the liabilities mature. A liquidity crunch is a timing issue: not having enough liquidity

can force you to make an emergency borrowing at a less than favorable interest rate.

financial


The Asian Financial Crisis: Explanations

The Liquidity Crunch Explanation

Basic problem: Asian countries borrowed too much, too fast, and invested the funds in a foolhardy manner: either in speculative projects or in mature or overly competitive export industriesWhy is it a problem to invest in mature or overly

competitive export industries? Why is it a problem to invest in mature or overly

competitive export industries? QUESTION




When a few countries--beginning with Thailand--were experiencing difficulties repaying loans, this caused foreign investors to start withdrawing huge amounts of money from Asian companies, regardless of their underlying strength

This, in turn, raised the possibility of vicious circle, not just in one country but in many Asian economies simultaneously: this is exactly what happened




The “crunch” was turned into a crisis due to the globalization of financial markets, the lack of effective safety valves, and the unwillingness of major creditor governments (especially the United States) to allow borrowers simply to default on their loans and declare bankruptcy



The Overcapacity Explanation

Asserts that the Asian financial crisis was much less a financial problem than a fundamental economic problem. This explanations tells us that the problem is deeply rooted and long-term

Most simply, it tells us that Asian economies were catastrophically ______________ in the wrong industries--e.g, cars, shipbuilding, steel, petrochemicals, and semiconductors, light manufacturing, among others

overinvested



The Overcapacity Explanation

Why was overcapacity a problem (why is it a growing problem, even today)?

Why was overcapacity a particularly important problem for countries following an EOI strategy, including South Korea?

discuss



The Overcapacity Explanation: Reasons for Overcapacity

China’s economic rise, its undervalued currency (in 1994, the yuan was devalued by 35%), and its subsequent domination of export markets

Devaluation of Japanese yen by 60% in mid-1990s

Trend toward relocation of manufacturing to low-wage countries: low wage workers cannot buy the products they make

1.1.

2.2.3.3.

All three reasons reflect significant, ongoing issues in the global economy; in this view, then, overcapacity will

remain a problem for many, many years

All three reasons reflect significant, ongoing issues in the global economy; in this view, then, overcapacity will

remain a problem for many, many years



The End-of-the-Cold-War-in-East-Asia Explanation

This explanation relates to the second in that it starts by asking how so much overcapacity came to be built in East Asia in the first place

So, how did so much overcapacity come to built in East Asia in the first place?An American soldier standing guard at Panmunjom,

in the demilitarized zone (DMZ) separating North and South Korea. Until 1989, the US maintained a force

of at least 43,000 troops in South Korea.



The End-of-the-Cold-War-in-East-Asia Explanation

Until the end of the Cold War, the United States would not let its essential East Asian allies fail: with the collapse of the Soviet Union, however, all bets were off

The Asian economies have, for the most part, been put on a level field: the problem is that their economies were molded and geared to take advantage of a very different economic environment

It is not wonder that they suffered severe problems less than a decade after the end of the Cold War



What is to be done?

The solution to the Asian “financial” crisis, of course, depends on the explanation you accept

Alternatively, one can accept elements of all three explanations, which suggests that the solution is complex and not prone merely to quick fixes

How might the three explanations (“Liquidity Crunch,” “Overcapacity,”

“End of the Cold War”) be classified from a theoretical perspective? What does our

theoretical categorization tell us about possible solutions?

How might the three explanations (“Liquidity Crunch,” “Overcapacity,”

“End of the Cold War”) be classified from a theoretical perspective? What does our

theoretical categorization tell us about possible solutions?

QuestionsQuestions



Geopolitics of the Asian Crisis

Embedded in Johnson’s analysis is the Embedded in Johnson’s analysis is the assumption that any explanation of the Asian assumption that any explanation of the Asian “financial” crisis must take into account “financial” crisis must take into account international or global factors (and actors)international or global factors (and actors)

This is the starting point of analysis for This is the starting point of analysis for the article by Stephen Gill, “The the article by Stephen Gill, “The Geopolitics of the Asian Crisis”Geopolitics of the Asian Crisis”

A quick question before proceeding: What is Gill’s basic

argument?

A quick question before proceeding: What is Gill’s basic

argument?




““The East Asian crisis shows how, in the so-The East Asian crisis shows how, in the so-called new era of ‘globalization,’ there is an called new era of ‘globalization,’ there is an intense intense interstate conflictinterstate conflict over the form and over the form and direction of regional and global patterns of direction of regional and global patterns of capitalist development. Central to U.S. strategy capitalist development. Central to U.S. strategy is the is the imposition of a specific neoliberal model imposition of a specific neoliberal model of restructuringof restructuring. In the context of the recent . In the context of the recent crisis, state-directed and controlled forms of crisis, state-directed and controlled forms of political economy have been, and are being, political economy have been, and are being, pressured to liberalize”pressured to liberalize”




The key concept in Gill’s analysis, to repeat, is …

____________________________

Neoliberalism

So what is neoliberalism?So what is

neoliberalism?



What is Neoliberalism?

Neoliberalism refers to a historically-specific reemergence of economic liberalism's influence among economic scholars and policy-makers during the 1970s

Broadly speaking, neoliberalism seeks to transfer control of the economy from the public to private sector

Neoliberalism is generally associated with what is known as the “Washington Consensus”



What is Neoliberalism? Specific Policies Low government spendingLow government spending Competitive exchange ratesCompetitive exchange rates Free tradeFree trade PrivatizationPrivatization Undistorted market prices, limited state Undistorted market prices, limited state

interventionintervention Deregulation, reduced capital controlsDeregulation, reduced capital controls ““Labor market restructuring”Labor market restructuring” Export-led developmentExport-led development

QUESTIONHow could the push for these policies explain

the Asian crisis?

QUESTIONHow could the push for these policies explain

the Asian crisis?


The Asian Financial Crisis: ExplanationsThe Geopolitics of the Asian Crisis

To understand how neoliberalism could cause the Asian crisis, it is important to understand that, at base, it is designed to strengthen “a particular set of class interests, principally the power of private investors” [in the the world’s dominant economy, the United States]

Simply put, it was American powerand its geostrategic interests thatled to the Asian crisis



The Geopolitics of the Asian Crisis

During the Cold War, it served American and European (class) interests to have strong Asian allies: thus, the US provided access to its markets, transferred technology and capital (in the form of FDI and aid), and allowed Asian economies to practice “state capitalism”

Even before the end of the Cold War, though, this geopolitical strategy became problematic …

Why? A simple answer: The Asian allies were turning in economic

“Godzillas”

A simple answer: The Asian allies were turning in economic

“Godzillas”



Preventing a Power Shift

Asian economic success threatened to undermine long-term American dominance, if not globally, at least regionally

The Asian crisis, therefore, represented an opportunity for the United States to reassert control and unrivaled dominance in East Asia and Asia more generally

This helps explain the U.S. efforts to block the creation of a Japan-led Asian Monetary Fund (AMF), which was to be modeled along the lines of the IMF

Japan

U.S.

Japan

U.S.



Preventing a Power Shift

“The blocking of the AMF is analogous to the struggles over the future direction of Europe when communist rule collapsed in the 1980s….What was at issue, in a geopolitical sense, was the prevention of a restructuring that would allow greater regional political cohesion … and thus would limit the prospect of … regionalization developing beyond U.S. control”

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