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Trang 4ABSTRACT
Title of Dissertation: THE EAST ASIAN FINANICAL CRISIS:
A CRITITCAL EXAMINATION OF FOUR ALTERNATIVE MODELS
Shiqing Xie, Doctor of Philosophy, 2000 Dissertation directed by: Professor Ernest J Wilson III
Department of Government & Politics
The central purpose of this study is to challenge both the neoclassical and the statist conventional wisdoms about the causes of the East Asian financial crisis By systematically constructing, applying, and testing four alternative models of
explanation (the globalization (GL) model, the speculation (SP) model, the political crisis (PC) model, and the economic structural imbalance (ESI) model) to the financial performance of eight economies in East Asia, I contend that these conventional
wisdoms are dangerously oversimplified and misleadingly inadequate, because the origins of the East Asian financial crisis are much more complicated and
Trang 5Instead, the whole situation appears in the middle: some share the same reasons, some have just one unique reason, and some have more than one reason Finally, by
Trang 7THE EAST ASIAN FINANCIAL CRISIS:
A CRITICAL EXAMINATION OF FOUR ALTERNATIVE MODELS
by
Shiqing Xie
Dissertation submitted to the Faculty of the Graduate School of the University of Maryland, College Park in partial fulfillment
of the requirements for the degree of Doctor of Philosophy
2000
Advisory Committee:
Professor Ernest J Wilson IIT, Chair Professor Virginia Haufler
Trang 8UMI Number: 9982838
Copyright 2000 by Xie, Shiqing All rights reserved
®
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Trang 9©Copyright by Shiqing Xie
Trang 11ACKNOWLEDGEMENTS
[ would especially like to thank the chairman of my dissertation committee, Professor Ernest J Wilson III, Director of the Center for International Development and Conflict Management at the University of Maryland, College Park for his advice, patience, and encouragement not only during the writing of this dissertation, but also in the entire period of my doctoral study
I would also particularly like to thank Professor Virginia Haufler and Professor Margaret Pearson of the Department of Government and Politics for their insightful comments, helpful suggestions, and sharp criticisms, which significantly improved the shape and the content of this dissertation Without their consistent scholarly support, I would have never produced such a solid dissertation Their intelligent insights and professional pursuit of excellence were, are, and will be an inspiration to me [ am deeply indebted to both of them
My sincere gratitude also goes to the other members of the committee, Professor Roger Betancourt, Department of Economics and Professor Quansheng Zhao of American University for their invaluable comments and suggestions on this study In addition, I would like to thank all my professors, colleagues, and friends for their advice, friendship, and help
Trang 12TABLE OF CONTENTS
List of Tables List of Figures
Chapter |: Introduction
Chapter 2: The East Asian Financial Crisis
Chapter 3: Miracle to Meltdown: Theory and Methodology Chapter 4: The Speculation (SP) Model
Chapter 5: The Globalization (GL) Model Chapter 6: The Political Crisis (PC) Model
Chapter 7: The Economic Structural [Imbalance (ESI) Model Chapter 8: Conclusion
Trang 13LIST OF TABLES Number Ll w — 4.1 4.2 4.3 5.1
Four Alternative Models
Major Financial Events in East Asia (July 97-August 98) GDP Growth Rates (1990-1999)
Exchange Rates (June 30, 1997- May 8, 1998) Stock Markets (July 30, 1997- May 8, 1998)
Net Private Capital Flows in Five East Asian Economies Three Categories of the Eight East Asian Economies
Gini Index, Period Average, 1965-90 Major Political Turmoil in East Asia
Fiscal Balances and Gross National Savings Macroeconomic Indictors (1993-1996) External Debt (USS billion)
Increase to Unemployment due to the Crisis (1997-98) Increase to Poverty due to the Crisis (1997-98)
Main Variables of Four Alternative Models Eight East Asian Economies for Case Studies
Testing of the SP Model against the Four late NIEs in East Asia Testing of the SP Model against the Four early NIEs in East Asia Test Results of the SP Model
Degree and Time of Opening Capital Accounts
Trang 143.2 3.3 3.4 5.5 5.6 5.8 5.9 5.10 6.3 6.4 6.5 6.6 6.7 6.8 6.9 6.10 6.11 6.12 6.13 6.14
Time of Starting Financial Deregulation
Net Private Capital Flows to the Five East Asian Economies Current Accounts
Short-term Debts from Banks to BIS Countries (1990-97) Bank Lending to Private Sector
Banking System Exposure to Risk (% of Assets at the End of 1997) Real Exchange Rates (End Year Data)
Testing of the GL Model to the Four Late NIEs in East Asia Testing of the GL Model to the Four Early NIEs in East Asia Test Results of the GL Model
Succession Crises Democratic Crises Ethnic Crises Social Crises Political Instability Policy Uncertainty
Scoreboard for Institutional Performance of Six East Asian Economies Comparison of Corruption Levels: Ranking from WDR+ and ICRG Political Institutions
GDP Growth Rate in 1998
Cumulative Change of Exchange Rate
Testing of the PC Model to the Four Late NIEs in East Asia Testing of the PC Model to the Four Early NIEs in East Asia
Test Results of the PC Model
Trang 157.1 7.2 7.3 7.4 15 7.7 7.8 7.9 7.10 7.13 7.14 7.15 7.16 7.17 7.18 7.19
Firm Size and Sector Characteristics
Intervention Choices and Intervention Results State Strength
State Intervention Level
Closeness between State and Business
Average Sales and Ranks of Top 10 LEs in Asiaweek/000 Sizes of top 10 LEs in East Asia
Top 10 LE Sales/GDP Ratios in East Asia Debt/equity Ratios of Sample LEs in East Asia
Debt/equity Ratios of Manufacturing Firms in Taiwan and Korea Leverages Level in East Asia
Number of Bankrupt LEs prior to Crisis Cumulative Change in Stock Markets
Testing of the ESI Model to the Four Late NIEs in East Asia Testing of the ESI Model to the Four Early NIEs in East Asia
Size Distribution of Taiwan's Establishment by Number of Employees Test Results of the ESI Model
Financial Conditions of Top 30 Chaebols at the End of 1996 Shares of Policy Loans in Total Domestic Credit
Top 30 Chaebols Economic Concentration Level in 1996 Chaebol's Business Diversification in Comparative Perspective Comprehensive Test Results of the Four Alternative Models
Trang 16LIST OF FIGURES
Number
2.1 Gini Coefficient and GDP per Capita Growth Rate, 1970-1990 42 The Logic of the Speculation (SP) Model
5.1 The Logic of the Globalization (GL) Model 5.2 Net Private Capital Flows
5.3 Non-performing Loans in 1996
6.1 The Logic of the Political Crisis (PC) Model 6.2 Total Scores for Six East Asian Economies 6.3 GDP Growth Rate in 1998
6.4 Cumulative Change of Exchange Rates
7.1 Three Channels of Obtaining Foreign Capital to Pay External Debt 7.2 The Logic of Economic Structural Imbalance (ESI) Model
7.3 Average Sales of the Top 10 LEs in East Asia 7.4 Top L0 LE Sales/GDP Ratios
7.5 Leverage, 1996
7.6 Increase in Leverage, 1992 v.s 1996 7.7 Average Leverage, 1992-96
7.8 Cumulative Change in Stock Markets 7.9 Heavy & Chemical Industry Push
8.1 Pie Chart of Order of Importance of Multiple Models
Trang 17CHAPTER I INTRODUCTION
The global financial crisis that began in the summer of 1997 and spread from Thailand and Singapore to Indonesia and South Korea created a watershed in contemporary history: a systematic failure of capitalism struck precisely those economies long held up as models of industrial efficiency— the Asian "tigers"— and no one is quite sure what to do about it or where the crisis will end
— Bruce Cumings, University of Chicago
1.1 INTRODUCTION
Why did East Asia fall into financial crisis? Finding an accurate answer to this question is critically important for preventing future financial crises in East Asia and other developing regions, as well as for current efforts to stabilize financial markets, reform financial systems, and revitalize economies in East Asia It is also an important question for the scholarly study of international political economy
Although the East Asian financial crisis has drawn lots of attention, and many papers, articles, and books have been published to offer explanations for the event, it is curious that there are roughly only two dominant, yet conflicting, interpretations: the neoclassical ‘and the statist” However, even these two seemingly prevailing
' The neoclassical interpretations emphasize that excessive government intervention in markets is the main cause of the East Asian financial crisis Many neoclassical commentators often dismiss Asian state-led capitalism as “crony capitalism,” seeing its corruption, favoritism, and nepotism For them, the crisis indicates the failure of the Asian economic development model and the end of the East Asian miracle One of neoclassical representatives is the chairman of the US Federal Reserve, Alan
Greenspan For details, see “Greenspan sees Asian crisis moving world to western capitalism,” The New
York Times, February 13, 1998, section D, p 1 and also see his talk at the New York Economics Club in early December 1997; Reginald Dale (1998), "Asian Crisis will bolster U.S Prestige," International Herald Tribune, 20 January; and G Pierre Goad (1997), "Government, Not Speculators, to Blame for
Trang 18interpretations hardly provide satisfactory and convincing answers, and there are still many misunderstandings and confusions about the event As a result, despite the importance of this puzzle, little attention has been devoted to examining alternative answers
The lack of critical attention to alternative explanations is due to neither lack of intellectual interest nor empirical information In fact, the East Asian financial crisis has drawn intensive interest from many scholars, commentators, and
policymakers from around the globe, and there is an extensive literature with plenty of empirical data published both in the East Asian countries and in the Westem societies to explore its causes
Instead, the inattention to alternative explanations appears to have been mainly caused by two factors: first, the dramatic, surprising, and far-reaching change from the long-standing East Asian miracle’ to a sudden East Asian financial crisis in
° The statist interpretations, on the other hand, stress that outside speculative attacks are the main causes of the East Asian financial crisis Many statist scholars contend that the developmental state model is the high debt model in which in East and Southeast Asia, and especially in Japan and Korea, corporate
debt/equity ratios are necessarily high They also argue that the high debt model is vulnerable to outside speculative attack One of the statist representatives is Robert Wade See Wade, Robert (1998), “The
Asian Crisis: the High Debt Model vs the Wall Street-Treasury-IMF Complex,” New Left Review, March-April; "The Asian Debt-and-Development Crisis of 1997-?: Causes and Consequences," World Development, August 1998; "From ‘Miracle’ to 'Cronyism’: Explaining the Great Asian Slump," Cambridge Journal of Economics, November 1998; and "Asian Water ‘Torture’, Personal View, The Financial times, 23 June 1998
3 The East Asian miracle mainly refers to a rare phenomenon in which 23 East Asian economies achieved sustained and rapid growth in three decades until the breakout of the East Asian financial
crisis in July 1997 Details see World Bank (1993), The East Asian Miracle: Economic Growth and
Pubic Policy, Oxford University Press; World Development Report 1991: The Challenge of
Development, Oxford University Press; Campos, Jose Edgardo and Hilton L Root (1996), The Key to the Asian Miracle, Washington, DC: The Brookings Institution; Root, Hilton L (1996), Small
Countries, Big Lessons: Governance and the Rise of East Asia, Oxford University Press; Vinod Ahuaja (1997), Everyone's Miracle? Revisiting Poverty and Inequality in East Asia, The World Bank;
Woronoff, Jon (1986), Asia’s ‘Miracle’ Economies, Sharpe, Inc.; Ohno, Izumi (1996), Beyond the
Trang 191997-98; second, the continuing, intense, and ideological clash between the neoclassical orthodoxy ("market-friendly") and the statist ("interventionist," or
"revisionist") views of how to interpret both the East Asian Miracle and the East Asian financial crisis
The financial crisis in East Asia was made more dramatic by the region's performance in terms of economic growth over the preceding decades In the last thirty years, countries in East Asia have achieved a remarkable success of sustained and rapid growth From 1965 to 1995, the region’s 23 economies grew faster than those of all other regions, and income inequality declined dramatically.” This legendary achievement, often referred to as the “East Asian Miracle”, can mainly be attributed to the nine High-Performing Asian Economies (HPAEs): Japan;> the “four tigers” (Hong Kong, South Korea, Singapore, and Taiwan); and the "four cubs" of Southeast Asia (Indonesia, Malaysia, Thailand and the Philippines’)
Yet, a serious and large-scale financial crisis suddenly broke out in July 1997 among the East Asian miracles that had enjoyed decades of robust economic growth The Asian financial crisis first occurred in Thailand, then Malaysia,
Indonesia, and the Philippines, then Singapore, Hong Kong, and Taiwan, and finally South Korea Thus, the Thai crisis of July 1997 soon became the Southeast Asian
Countries, Ithaca, NY: Cornell University Press; and Vogel, Ezra (1991), The Four Little Dragons: The
Spread of Industrialization in East Asia, Cambridge Harvard University Press * Page, John (1994), “The East Asian Miracle,” Finance & Development, March, p 2
* This study mainly focuses on eight newly industrialized economies (NIEs) —“four tigers” and “four cubs” in East Asia It doesn’t include Japan for Japan's case is quite different from those of the eight East Asian economies For details, see the section of methodology about case study in Chapter 3
* Although World Bank's (1993) The East Asian Miracle: Economic Growth and Public Policy doesn't
Trang 20crisis, then became the Asian crisis in October, and finally became the Great Asian Depression.’ The collapse in asset prices, the extent of financial and corporate
insolvency, and the slowdown in economic growth across the region were much worse than expected.® The sudden intensification of insecurity and poverty that confronts hundreds of millions of people in Asia makes this one of the worst economic calamities of the twentieth century.” Indeed, in view of these events, it is hardly disputable that the scale and scope of the crisis surprised most everybody As a result, many scholars were not prepared for the sudden event and tried to fit their standard theories to the new situation, which may have led them to ignore alternative
explanations
Another factor that contributes to this inattention to alternative explanations seems to be the continuing, intense, and ideological clash between the neoclassical orthodoxy and the statist views of how to explain both the East Asian Miracle and then the financial crisis For neoclassicists, East Asian economies were at fault because of excessive governmental intervention which fostered corruption, bribery, moral hazard, and favoritism This Asian state-led capitalism, with widespread political interference with market processes, is often called "crony capitalism" by Western scholars This system invariably created corrupt rent-seeking behavior, resulting in a misallocation of investment, falling returns on investment, and growing fragility in the financial
7 Robert Wade (1998), "The Gathering World Slump and the Battle over Capital Controls," New Left Review, p 14, September
® See The Economist, (November 29", 1997, p.15 and p 21 and p 77; December 20", 1997, p 15;
January 3%, 1998, p.4; January 10 1998, p.66) The Wall Street Journal, (November, 26, 1997; January
8,1998); New York Times, (November 3 and 29, 1997) Time, (January 26, 1998), News Week, (January
26, 1998)
Trang 21system.'° Thus, the crisis is best understood as the consequence of a defective Asian model'' that deviated from the principles of free market economics In their view, the crisis symbolizes the end of the East Asian miracle, the demise of Asian state
capitalism'Ỷ, and the failure of the Asian model
On the other hand, statists contend that the East Asian financial crisis
occurred because of too much market (i.e fully liberalized and rapidly opened markets without proper governmental regulation and supervision), rather than too much
government (i.e excessive government intervention in the market) As Joseph
Stiglitz, chief economist and vice president of the World Bank, puts it, "the crisis was caused in part by too little government regulation (or perverse or ineffective
government regulation)."!? In statist views, "too much market" made their financial systems vulnerable to international market fluctuations and easily invited international speculative attacks Consequently, statist scholars view the crisis as a case of massive market failure, particularly on the part of globally unregulated foreign financial market actors who, despite their greater expertise and global experience, still indulged in excessive lending and investment in Asian markets For them, the crisis indicates the disillusionment with market openness or the failure of globalization, particularly
'° Paul Krugman (1998), "What happened to Asia?" on Website: http://web.mit.edu/krugman/www/, Retrieved on [2 January, and " Asia: What went wrong," on Website:
http://web.mit.edu/krugman/www, Retrieved on 19 February 1998
'' The Asian model generally is also referred to the Asian economic development model in which Japan had a powerful influence on virtually every other country in East Asia as a model of economic
development By and large, the model emphasizes export push, government intervention (industrial policy), macroeconomic stability, accumulation of physical and human capital, leadership and shared growth, and efficient allocation However, a broad definition of the Asian model encompasses Asian
culture and Asian values such as frugality, hard work commitment to the tamily and so on
'? Asian state capitalism also refers to Asian state-led capitalism in which the state plays a crucial role in economic growth, particularly in their rapid industrialization
3 Stigliz, Joseph (1998), "The Role of International Financial Institutions in the Current Global
Trang 22financial liberalization As Ammar Siamwalla, former president of the Thailand Development Research Institute, pointed out, "the currency market is really crazy we are receiving all the punishment because we have opened our currency markets to the forces of globalization (which) in retrospect has been far too rapid."'* Many others also share his views As Park Yung Chul, President of the Korean Institute of Finance, put it, "the West pushed us to open our markets, but what are we getting in return? Through globalization we have created a monster."'°
Thus, the clash in these two views may lead both neoclassical and statist scholars to hunt for new evidence to justify their respective interpretations based on their previous approaches and consequently to overlook alternative explanations Therefore, it is still indispensable to examine alternative explanations to the event This study seeks to provide just such new alternative answers
1.2 THREE ARGUMENTS
The central purpose of this study is to challenge both the neoclassical and the statist conventional wisdoms about the causes of the East Asian financial crisis By systematically constructing, applying, and testing four alternative models'* of explanation to the financial performance of eight economies'’ in East Asia, I contend
'’ Paul Scherer (1998), "Distrust of Western Economics Grows in Thailand Amid Crisis," The Wall
Street Journal, January 20, p Al4
'S Brian Bremmer, Pete Engardio (1998), "What to Do about Asia," Business Week, January 26, p 26 !® The four alternative models are the speculation (SP) model, the globalization (GL) model, the political crisis (PC) model, and the economic structural imbalance (ESI) model, which will be carefully
discussed in chapter 4-7 respectively Here, a model simply refers to an explanation or a pattern of cause led to crisis For details, see chapter 4-7
Trang 23that these conventional wisdoms are dangerously oversimplified and misleadingly inadequate because the origins of the East Asian financial crisis are much more complicated and multidimensional than they suggest, and therefore cannot be simply labeled as "crony capitalism" or "speculation."
The body of this study first constructs four alternative theoretical
frameworks — what I call "models"'® in the very informal sense of the term — about why the East Asian economies fell into a financial crisis; then applies and tests these four alternative models to the financial performance of the eight economies in East
Asia; and finally draws conclusions based on the test results of the models The four
alternative models in this study are the following:
[ “the speculation (SP) model," which holds that the origins of some East Asian economies’ financial crises are mainly due to speculative attacks and the following sudden huge withdrawal of capital;
II “the globalization (GL) model," according to which the origins of some East Asian economies’ crises are mostly due to new problems (i.e
financial vulnerability) which emerged during globalization processes;'” III “the political crisis (PC) model," which considers that the origins of
some East Asian economies’ financial crises are chiefly due to domestic political crises such as succession crisis, democratic crisis, ethnic crisis, and social crisis, political instability, and policy uncertainty;
'§ In this study, a model essentially refers to an explanation or a pattern of causes leading to crisis But it is not a simple explanation or independent variable because each model has a set of relevant
explanatory variables In addition, each model should at least explain a case For details, see chapter 3
Trang 24IV "the economic structural imbalance (ESI) model" under which a financial crisis erupts because a state's economy has a severe economic structural imbalance problem in that a few giant conglomerates
dominate the whole economy
Of these four alternative models, the first model — the speculation (SP) model is an external reason, while the other three (the GL, PC, and ESI models) are domestic reasons that cause financial crises (table 1.1) One thing that should be emphasized is that the GL model is not an entirely domestic model Ít actually includes both
domestic factors (i.e a state's domestic choices to liberalize or open up the market) and external factors (i.e international reactions to that in the form of capital inflows) However, since this study mainly focuses on investigating domestic financial
vulnerability because of a state's mishandling of globalization movement in the 1990s, the GL model is categorized as a domestic factor for the convenience of study
Table 1.1 Four Alternative Models
External
Reason The speculation (SP) model (1)
Domestic The globalization The political crisis one Scone ae
Reasons model (GL) (ID Model (PC) (IID model (ESI) (IV)
Trang 25
a Argument 1: Challenging the neoclassical conventional wisdom in which crony capitalism is the origin of the East Asian financial crisis, I contend that while crony capitalism with its corruption, bribery, moral hazard, nepotism, and favoritism may make some countries’ crises deeper, worse, and longer, the crony
capitalism argument could hardly explain the financial turmoil in some truly liberalized markets such as those in Hong Kong and Singapore
The term crony capitalism was coined by Filipinos to describe arrangements that had transformed a comparative prosperous economy into one with greatly diminished prospects and much poverty At the center of these arrangements stood
Ferdinand Marcos who had systematized known methods of intimidation for
staying in power indefinitely without eliminating democratic institutions like parliament and elections Marcos stole property from politically implacable wealth, families, redistributed wealth among the elite, controlled potential rivals through the threat of expropriation and built an elite constituency by favoring with oligopoly rights a select group of businessmen and sundry courtiers — the so-
called cronies.”
The term crony capitalism, as loosely applied today by Western scholars, editors, and commentators, denotes "a mix of free-market practices, central economic
w2i
planning and systematic corruption,"”’ or "excessively cozy relationships between government and business."** According to the neoclassical perspective, this close relationship between government and business has some inherent shortcomings and weaknesses such as implicit government guarantees, rampant corruption, non-
transparency, and lack of supervisory mechanisms, which are key factors in the origins of the East Asian financial crisis of 1997-98
What's wrong with this picture? The neoclassical view of the crisis is parsimonious; the logic is clear and straightforward; and the theory fits many Western writers’ intuitive belief that the free market is the most efficient and effective approach to development, while crony capitalism is the origin of the crisis because it brings out nepotism, favoritism, and corruption There is no question that nepotism, favoritism,
° Wolferen, Karel Van (1999), "The Global Conceptual Crisis," New Perspectives Quarterly, Winter,
Vol 16 Issue 1, p17
Trang 26and corruption have exacerbated the damage Where systems are not transparent, wrongdoings are difficult to detect and expose Under this circumstance, cronyism indeed can lead to misallocation of resources
But first, the question here is to what extent these attributes were the basic causes of the recent meltdown? The fact is that these weaknesses have been endemic since the East Asian Miracle began nearly 30 years ago If crony capitalism had always been present and compatible with high performance in the pre-crisis period, then it needs to be explained why it should lead to crisis now Actually, no clear evidence indicates that there had been an increase in the extent of cronyism or
interventionism in the years immediately prior to the crisis.”> Thus, it is hard to believe that crony capitalism and its shortcomings are the basic causes of the recent crisis
Moreover, the neoclassical story of crony capitalism cannot convincingly explain the financial turmoil in Singapore and Hong Kong, where there are effective and transparent systems to detect and check abuses of power and privilege, and little, if any, cronyism or corruption distorted the allocation of resources It has been demonstrated that both Singapore and Hong Kong have very good public service systems in which corruption is very low even according to strict Western standards For example, according to the WDR+ survey, both Hong Kong and Singapore are among the countries with the lowest levels of corruption — Hong Kong ranking third and Singapore fifth among 67 countries in the survey.”*
2 Krugman, Paul (1999), "Has Asia Recovered?” Time, 07/05/99, Vol 154 Issue 1, p48
* Lee, Eddy (1998), The Asian Financial Crisis: The Challenge for Social Policy, International Labor Organization, p 15
Trang 27Furthermore, a plausible explanation of financial crisis can be provided without the need to rely on crony capitalism Similar financial crises have occurred in many countries which have been free of the assumed Asian vices.” For example, recent cases were the financial crises in Great Britain and Scandinavia” in the early
1990s It has also been found that little cronyism exists in Great Britain, where the government barely intervenes in the market and the level of corruption there is also among the lowest, ranking sixth among 67 countries in the WDR+survey.””
Finally, the crony capitalism argument also seems to give the impression that much of the argument has been ideologically driven, trying to justify or enhance ideological beliefs that Anglo-American capitalism is the only viable developmental model and that the crisis signifies the failure of state-led capitalism Asa
correspondent for the /nternational Herald Tribune put it, "the sudden collapse of Asia's house of cards is beginning to be seen as the end of an outdated economic and political system — based largely on the mercantilist, government-run Japanese model — much as the fall of the Berlin Wall symbolized the demise of communism."”= Alan Greenspan, the chairman of the US Federal Reserve, also pointed out, "what we have here is a very dramatic event towards a consensus of the type of market system which
nw 29
we have in this country”
*5 Wyplosz, C (1998) Globalized financial markets and financial crises, paper presented at the Conference on Coping with Financial Crises in Developing Countries: Regulatory and Supervisory Challenges in a New Era of Global Finance, Amsterdam, 16-17 March (Forum on Debt and
Development)
** Financial crisis around the exchange rate regime broke out in Finland, Sweden, and Norway in 1992 7 Wedder, Beatrice (1999), Model, Myth, or Miracle, The United States University Press, p 143
8 Dale, Reginald (1998), "Asia Crisis Will Bolster US Prestige," /nternational Herald Tribune, January
20
*? Sanger, David (1998), "Greenspan sees Asian Crisis Moving World to Western Capitalism,” The New
Trang 28In summary, there is no exact proof that crony capitalism is indeed the main reason for the recent meltdown It smacks with too much wisdom after the fact, desperately seeking new sources of weaknesses in the Asian model or Asian values that had been rarely raised earlier In fact, the Asian model never existed in Thailand or Indonesia, both of which simply pursued Japanese-style export-led growth while never making any attempt to create Japanese-style cozy relationships between government and business.*° Thus, the crony capitalism argument cannot provide a convincing answer to the puzzle of the East Asian financial crisis
a Argument 2: Challenging the statist conventional wisdom”! in which speculation is the origin of the East Asian financial crisis, [ argue that while
speculation may cause financial turmoil in some countries, it could not be applied to each case to adequately explain the whole story of the East Asian financial crisis
According to Robert Wade, a statist scholar at Brown University, “the developmental state" includes the following characteristics: high corporate debt/equity ratios, high household savings, bank-firm-state collaboration, national industrial strategy, and investment incentives conditional on international
competitiveness ** Wade argues that the developmental state model is “the high debt
pr3 i
mode n which corporate debt/equity ratios of the higher firms are commonly two or more This was the case in East Asia, especially in Japan and South Korea, which
%° Johnson, Chalmers (1998), “Cold War Economics Melt Asia,” Nation, 02/23, Vol 266 Issue 6, p.16
3' The statist conventional wisdom about the crisis doesn't directly argue that speculation is the main reason causing the crisis Rather it argues that the Asian developmental state mode! is "the high debt model," in which high corporate ratios make their economies are vulnerable to international speculative attacks Thus, outside speculation and the following capital pullout are responsible for the crisis
* Wade, Robert (1998), “The Asian Crisis: the High Debt Model vs the Wall Street-Treasury-IMF
Complex,” New Left Review, March-April
33 Wade, Robert (1998), "The Asian Crisis: the High Debt Model vs the Wall Street-Treasury-IMF
Trang 29made their financial structures vulnerable to speculative attacks and financial shocks as well But in these systems, there are financial rationales to have high debt ratios since there are cooperative, long-term, reciprocal relations among firms, banks and government For statists, there is no fundamental economic flaw responsible for the crisis, in that the state is not the origin of the crisis Rather, the origins of the crisis are mainly due to international speculative attacks, and the following, self-fulfilling, withdrawal or pullout of short-term capital
Admittedly, the speculation argument captures one common characteristic of the crisis — massive speculative attacks Indeed, there was a lot of evidence of
speculative attacks in most East Asian economies And, to an extent, this argument is justified because it can explain the financial turmoil in Hong Kong, Singapore, and
Taiwan fairly well This explanation is also very popular in East Asia because people in the region are willing to accept this story However, there are still problems with this argument
First, the statist story about the East Asian financial crisis is not complete Even Wade™ repeatedly admits that the "Asian high debt model" needs testing Taiwan clearly challenges the statist argument, in that it has been relatively little affected by the crisis; Singapore and Hong Kong may present challenges to the argument too, though he finds that it is hard to treat these city states as comparable to nation states because so much of their growth and wealth comes from their roles as regional hubs In addition, the model he describes, a national industrial strategy of
* Wade, Robert (1998), "The Asian Crisis: the High Debt Model vs the Wall Street-Treasury-IMF
Trang 30state-mediated capital going to large firms trying to conquer foreign markets, with correspondingly high debt-equity ratios in the firms, is not an Asian but a Korean and Japanese model None of the Southeast Asian economies can be characterized in this way, except perhaps, with many qualifications, Malaysia
Secondly, the statist view of the crisis only looks to find reasons from external conditions (such as speculation, financial panic, or withdrawal of capital), which clearly omits many important domestic reasons (such as bad monetary policy, vulnerable financial systems, mismanagement of crisis, and improper economic structure) that may contribute to the crisis to different degrees in different countries As this study will later show, the causes of the crisis are very complicated and multidimensional A comprehensive, balanced, and sound explanation to the puzzle should seriously consider both the domestic and external conditions prior to the crisis in each East Asian economy
Thirdly, the statists have difficulties in explaining why some East Asian economies were seriously impacted by the crisis while other economies were only lightly affected by the crisis For instance, given that speculation is the main reason for the crisis, the statists could hardly explain why Hong Kong could successfully defend its currency exchange rate regime while many other East Asian economies failed to do so In fact, there were two massive speculative attacks on the HK dollars’ peg on October 20, 1997 and in mid-August 1998.°° Because of the strong
55 Hehderson, Callum (1998), Asia Falling: Making Sense of the Asian Crisis and Its Aftermath,
Trang 31fundamentals of the Hong Kong economy and effective intervention to thwart the international speculative attacks, the peg was eventually sustained.*°
In sum, since "the Asian high debt model" cannot be evenly applied to all East Asian economies with different levels of government intervention, the
speculation argument only considers the external condition (speculation) as the primary cause of the crisis, and the statist theory has also difficulty in explaining the different levels of impact of the crisis on different East Asian economies Therefore, the statist conventional wisdom does not provide a satisfactory answer to the puzzle either
a Argument 3 (also the central argument): Challenging both the
neoclassical and statist conventional wisdom, I argue that the East Asian financial crisis has occurred for more than one reason and different cases are best explained by different causal models
Having carefully conducted both case studies and comparative studies on this topic, a particular systematic test of four alternative models to the eight East Asian economies, this study finds that the causes of the East Asian financial crisis are much more complex As we will see from the test results (table 8.1) in the last chapter of this study, it is too ambitious to explain all cases in the crisis by only one model such as crony capitalism or speculation Since each country had different political and economic fundamentals before the crisis arose, and there were also quite different crisis outcomes, it is fairly safe to say that there is no uni-cause to adequately explain all eight cases
* Brooks, Douglas H and Monika Queisser (1999), Financial Liberalization in Asia: Analysis and
Trang 32However, although there is no uni-cause to explain the eight cases, there are still some cases that roughly share the same reasons, which means that there are not eight unique causes for the eight cases Instead, the whole situation appears in the middle: some cases share the same reasons (i.e globalization shared by Thailand, Malaysia, and the Philippines); some have just one unique reason (i.e speculation for Hong Kong, Singapore, and Taiwan); and some have more than one reason (i.e the South Korean financial crisis had four reasons such as speculation, globalization, political crisis, and economic structural imbalance)
To summarize the above two findings — there is (1) neither a uni-cause (2) nor eight different causes needed to adequately explain the whole crisis, this study therefore reaches the following central finding:
@ The central finding: there is neither a uni-cause nor eight unique causes to adequately explain all the eight cases in the crisis Instead, the whole situation appears in the middle: some cases share the same reasons (i.e
globalization shared by Thailand, Malaysia, and the Philippines); some have just one unique reason (i.e speculation for Hong Kong, Singapore, and Taiwan) and
some have more than one reason (i.e South Korea had four reasons such as
speculation, globalization, political crisis, and economic structural imbalance)
From this central finding, it is not difficult to conclude the central argument — the East Asian financial crisis occurred for more than one reason and different cases are best explained by different causal models Therefore, the central argument is essentially based on the central finding of this study
Trang 33small glitches in the road” *” turned to be a severe financial, economic, and political crisis; a crisis previously regarded as a local Thai crisis of July 1997 soon became the Southeast Asian crisis in October, and finally the Great Asian Depression It is also a crisis in which East Asian economies that pursued long-term high economic growth rates have only met a sudden and dramatic financial and economic crash; a crisis in which East Asian economies aimed at integrating into the global economy so as to attract more benign foreign investment capital have only invited unexpected and malicious speculative attacks Thus, the conventional wisdom from either the neoclassical or the statist perspectives cannot untangle the complicated puzzle Therefore, we need new alternative theoretical frameworks with which to understand the East Asian financial crisis In this study I propose to provide these alternatives
13 LITERATURES, MODELS, AND ARGUMENTS
The East Asian financial crisis was undoubtedly one of the most important events in the contemporary world Since it occurred in 1997-98, an extensive
literature has been published to explore its origins Yet, only two major literatures (neoclassical and statist) occupy dominant positions in interpreting the event Both the neoclassical and statist literatures may contain some useful points and provide
partially plausible explanations, they however also suffer many weaknesses as I suggested in argument | and 2 respectively Therefore, neither of them adequately explains the financial crisis in East Asia
37 See President Bill Clinton’s talk on the Asian crisis at the meeting of heads of state of the Asian
Trang 34The 2 Major Literatures and the 4 Models Motivated by the incomplete and oversimplified interpretations of the neoclassical and statist conventional wisdoms to the origins of the crisis, [ carefully examined, compared, and analyzed their
literatures, particularly their arguments Then, through my own abstractly theoretical thinking based on their materials and other information, I constructed the four models, which seek to capture the fundamental characteristics of the origins of the crisis
Many Asian scholars blame globalization for the crisis and some Western statist scholars also question global free capital movement However, neither of them builds up a theoretical framework of globalization, let alone systematically tests the model against the eight cases Many neoclassical economists correctly identify financial vulnerability (particularly short-term foreign debt) as the key reason for the crisis But they also fail to explore further to how financial vulnerability could happen in these miracle economies In the GL model, I tried to combine these theories (financial vulnerability and globalization) together to explore their logical
relationships Although the impact of globalization is an external reason, I mainly focus on inspecting domestic financial vulnerability because of a state's mishandling of globalization Hence, this study considers the GL model as a domestic factor
Trang 35theoretical models to explain financial crises Rather than simply explaining speculation from the statist perspective or getting into neoclassical mathematics modeling details, I focus on empirically investigating the pattern of financial crises when speculative attacks were targeted at fixed exchange regimes The speculation model underscores the triggering effect of speculative attacks, which can seriously shake investors’ confidence and cause a self-fulfilling financial crisis
[ constructed a relatively new model — the political crisis model — from the perspective of a political scientist In this model, I emphasize the importance of politics and argue that political crisis (political instability and policy uncertainty) can be an important element in triggering, or at least deteriorating, a financial crisis | propose this model based mainly on careful observation and analysis of my case studies of the three most affected countries, particularly Indonesia It's my hypothesis in the political crisis model that domestic political crisis shakes investors’ confidence and can trigger a comprehensive crisis
In the ESI model, I incorporated the neoclassical argument that too much government is problematic However, I stress that too much governmental
intervention may lead to an unbalanced economic structure, which is vulnerable to the fluctuation of international markets, instead of assuming that too much government necessarily leads to crony capitalism In the ESI model, I argue that excessive government intervention can lead to an unbalanced economic structure dominated by few giant conglomerates, and the failure of these conglomerates can trigger an
Trang 36The 4 Models and the 3 Arguments This study defines the dependent variable as the extent of financial crisis in each of the eight East Asian economies As we will see in chapter 2, the extent of financial crisis includes mainly financial
performance such as sudden collapses of pegged foreign exchange rates, wild depreciation of foreign exchange rates, crash of stock markets, and huge net private capital outflows, and partially economic performance such as sharp falls in GDP growth rates Since there was a significant variance in the dependent variable across different cases, this study thus essentially explains slightly different aspects of the same event (the Asian financial crisis) Correspondingly, in each data chapter, the data on the dependent variable are slightly different
A model refers to an explanation or a pattern of causes that led to the crisis However, a model is not a simple explanation because each model contains a set of explanatory variables — independent variables (see table 3.1) For example, in the PC model, the independent variables include succession crisis, democratic crisis, ethnic crisis, social crisis, political instability, policy uncertainty, and political institutions Besides, each model also contains data on the dependent variable For example, in the PC model, the data on the dependent variable include GDP growth rates in 1998 and the cumulative change of exchange rates from July 30, 1997 to May 8, 1998 Asa result, models themselves are not really variables — but they can tell us which variables to look at
Trang 37develop three arguments Conclusion ten also presents the central test finding — neither a uni-cause nor eight unique causes can adequately explain the crisis This central finding will provide strong support for the central argument — the East Asian
financial crisis has occurred for more than one reason and different cases are best explained by different causal models As a result, this central argument challenges both neoclassical and statist interpretations while argument | focuses on challenging the neoclassic story, and argument 2 concentrates on challenging the statist model
The Literatures, Models, and Arguments The logic relationship between literatures, models, and arguments can be illustrated by the layout of the dissertation The dissertation is organized as follows First, based on extensively reading and analyzing the literatures (including the neoclassical, statist, and others), I created the four alternative theoretical models Overall, the four alternative models are conceptional innovations They may incorporate some useful elements from the two major literatures, but they are significantly different from them Models are constructed to facilitate research so we can systematically check a set of relevant independent variables for one certain pattern of crisis Models play a crucial role in the study since they are closely related to literatures, arguments, and propositions
Trang 38Third, having thoroughly compared the comprehensive test results, I draw ten conclusions The purpose of drawing conclusions is to further systematically summarize, analyze, and explore the test results of the four altemative models The conclusions will provide a basis to further analyze the relationship between the multiple models, and the order of importance between them
Finally, according to the test results and the main conclusions, particularly the final conclusion (also the central finding of this study), [ then develop three main arguments Argument | focuses on challenging the neoclassic story, while argument 2 concentrates on challenging the statist model Argument 3 (also the central argument) challenges both the neoclassical and statist conventional wisdom
1.5 CHAPTER LAYOUT
Chapter 2 provides a factual background about events in East Asia in 1997- 1998 The chapter first examines the extent of the crisis, particularly the impact of the crisis on GDP growth, exchange rate index, and stock market index in the eight East Asian economies Data analyses of other variables of financial performances are also presented in the chapter The chapter then analyzes the characteristics of the East Asian financial crisis Finally, the chapter presents the social impact of the crisis In other words, this chapter explains what happened in East Asia and why it is important for us to find out what caused the crisis
Trang 39statist The chapter first reviews the neoclassical theoretical contexts, its explanations for the East Asian Miracle, and its interpretations of the East Asian financial crisis, then does the same for statist theory The chapter then introduces the alternative four models and how they are related to the neoclassical and statist perspectives Finally, the chapter details the methodology (including procedures and methods) employed in this study As to the procedure, this study first designs a research question, then constructs, applies, and tests four alternative models for eight cases, and finally reaches conclusions based on the results of the test As to the methods, the chapter favors case study and comparative methodology
Chapter 4 primarily concentrates on the speculation model The chapter first examines the theoretical foundations of speculation, particularly the "first- generation crisis model” and the "second-generation crisis model." Special attention has been paid to hedge funds, including the backgrounds of hedge funds, means of speculative attacks, and performances of the hedge fund industry After investigating evidence of speculative attacks in each case in the crisis, the chapter then tests the validity of the model The chapter also presents the financial turmoil in Hong Kong in
1997-98 as a case study of the speculation model Finally, the chapter tries to draw some policy significance from the speculation model
Trang 40especially explores two key variables of the globalization model — capital account liberalization and financial deregulation in the East Asian economies in the 1990s The chapter also carefully checks other important variables such as net capital inflow, current account deficit, foreign debts (particularly short-term foreign debts), foreign reserves, and foreign exchange rates in the globalization model
Chapter 6 explores the political crisis model to unravel the puzzle of financial crisis The chapter first builds up a theoretical mechanism of the model, identifies main variables, including political instability and policy uncertainty, proposes relevant data on the eight cases, and finally tests the validity of the model The chapter also draws some lessons of policy implications from the PC model
Chapter 7 primarily scrutinizes the economic structural imbalance model The chapter first creates some theoretical bases for the model, then examines the relevant data of the eight cases, and tests the extent to which the model fits each case, and finally explores the policy implication of the economic structural imbalance model The chapter emphasizes the case study of South Korea to illustrate how an unbalanced economic structure can trigger an economic crisis
The concluding chapter reviews the major findings of the study and draws ten conclusions based on the test results The chapter further explores the logical relationships between the four models and the order of importance between multiple models in a case The chapter then uses the four models to reinterpret the East Asian financial crisis 1997-98 Finally, the chapter presents the general theoretical