The East Asian Tiger Economies
Topic 6: “The East Asian Tiger economies never really recovered from the Asian Financial Meltdown of 1997. And the changes in their economic policies and their domestic economic structures mean they never really will.”
“The East Asian Tiger economies never really recovered from the Asian Financial Meltdown of 1997. And the changes in their economic policies and their domestic economic structures mean they never really will.”
The financial crisis in East Asia is not unique from the standpoint of a region facing an economic downturn; there have literally been hundreds of economic disturbances and recessions in the last few decades. However, what is inimitable in this crisis is the region’s consistent history of high investment and savings rates, its reputation for strong growth, and fiscal stability; nations with such strengths typically do not experience economic downturns of the magnitude of the East Asian crisis. The financial crisis in the Asian-Pacific region was as much about macroeconomic and regulatory fundamentals as it was a crisis of the neo-liberal economic philosophy utilized to assist with the transition of emerging economies. Market liberalization policies had long been supported by the U.S. Treasury, World Bank, and the International Monetary Fund (IMF). Such policies were a means of not only liberalizing previously controlled emerging economies, but were also implemented to allow greater access of Western business interests to such lucrative new markets. The crisis highlighted the disastrous consequences of capital account liberalization in emerging market economies lacking the macroeconomic, regulatory, and financial infrastructures to manage such monumental changes.
Debate over the merits and risks of capital account liberalization ignited during the Asian crisis. Many blamed the crisis solely on the lack of restraints on capital transactions, while moderates understood capital liberalization not as a direct cause of the crisis, but certainly a contributor. The ability to move capital freely started a chain reaction in 1997. It was not, however, the catalyst that started the contraction. The weaknesses in East Asia were amplified by capital account liberalization (Aarts, 1999). Without a strong and systematic sequencing methodology and a strong underlying macroeconomic foundation, the implementation of capital account liberalization leaves economies open to increasing risks in the forms of market asymmetries, currency and market volatility, moral hazards, investor herd behaviour, and finally large swings in both capital inflows and outflows. The result is that an economy’s ability and preparedness to adequately manage the swings in both inflows and outflows without economic upheaval is jeopardized. International financial transactions have exponentially expanded during the last two decades). This growth was driven by a variety of advances in technology, communication, and global trade. In the information age, real-time information is available to investors across the world, which facilitates the ease of international financial transactions in both volume and velocity. As such, capital is far more mobile today than ever before (Felsenheimer, 2008).
The sum of the capital account and current account equals the balance of the payments and measures the payments between a given country and other countries. The capital account is the net result of both private and public investment flows into and out of a given country. Such capital flows include debt, foreign direct investment, market investments including currencies, stocks and bonds, real estate investment, and finally portfolio equity. The full or partial emancipation of restrictions on such transactions is capital account liberalization. The fundamental argument for capital liberalization is similar to that for free trade. Free trade lifts barriers, such as tariffs, import and export quotas, duties, and subsidies to trade, between nations in goods and services. Theoretically, it allows nations to benefit from their comparative advantage and efficiently allocate resources (Fang, 2003). This allows for market expansions and prosperity. Similarly, capital account liberalization, like other advanced-economy policies, can lead to greater market and resource allocation efficiency. It has many derived benefits; as barriers to capital mobility are lifted, investment increases and growth quickens.
None of the member countries of the Organisation for Economic Co-operation and Development (OECD) maintains capital controls. Countries with surplus savings seek out attractive investment opportunities, which offer stronger yields. Thus foreign direct investment and higher yields can become self-fulfilling prophecies. Beneficiaries of capital investment enjoy higher standards of living and market expansions. These benefits trickle down as transportation, communication, and healthcare infrastructures improve. Moreover, investment risk may be spread and mitigated as investors diversify by placing capital abroad. Consumption may also be easily shifted from period to period. For instance, capital liberalization makes it easier for investors, borrowers, and lenders to find and transact with one another. This process shifts resources from period to period (Erdinc, 2004). Furthermore, integration into the global economy is possible as financial transactions are aided and access to new markets and investment opportunities are made possible. Finally, the composition of trade changes as the historical inputs of labor and capital are freed from the confines of space and time.
- Quote paper
- Hillary Mwendwa (Author), 2011, Asian Business Environment, Munich, GRIN Verlag, https://www.grin.com/document/269361