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The East Asian financial crisis plunged the most rapidly growing and successful economies in the world into financial chaos and deep depression. At the time of writing, 18 months from its onset, neither the events them selves nor the appropriate policy responses are properly understood; but the outlines of a picture are becoming clear.
We see the Asian crisis – as many others do – as the outcome of a flawed process of financial liberalisation. But the trouble with that diagnosis is that it has often been served up accompanied by a rather loose list of mistakes, and buttressed by no very clear argument. Accordingly, the question which we set ourselves is a precise one: why was the crisis so bad? In other words, why did ‘crisis’ turn into ‘collapse’? Our answer to this question is that it was because of the inter-relationship between currency crises and financial crisis. Our argument proceeds in four stages, which are set out schematically in figure 2.1.
(1) We argue that vulnerability was created both by liberalisation in the presence of a bank-based financial regime (which contained implicit promises of bail-out if its balance sheet deteriorated), and by liberalisation in the presence of a monetary policy regime based on pegged exchange rates (which led to boom and bust). These vulnerabilities were interconnected, and led to a risk of currency and financial collapse (levels 1 and 2 in figure 2.1).
The magnitude and speed of the contagion effects that materialised in East Asia in the second half of 1997 has attracted much attention. This chapter asks to what extent the observed contagion may have had ‘real’ underpinnings, in the sense that the pattern of production, consumption and trade increased the vulnerability of East Asian countries to external shocks. In particular, we explore two major possibilities that are relevant in this connection: the ‘competition-cum-export similarity’ story or the ‘flying-geese-cum-Asia Inc.’ story which puts greater emphasis on regional integration and specialisation in complementary production structures.
The competition story posits that Asian economies have specialised in similar export bundles. In a longer-term perspective, the competition story hinges importantly on the emergence of China as a major exporter to world markets. An implication is that given a major devaluation by one country, others are forced to follow in order not to lose export market share. The complementarity story is based on the recent experience of Asianwide growth based on intra-regional trade and geographically cascading investments. In the past two decades, labour-intensive production gradually moved down from Japan, first to the Tigers – the ‘newly industrialised economies’ (NIEs) of Taiwan, Singapore, Hong Kong and Korea – then on to the Dragons (Thailand, Indonesia, Malaysia and the Philippines) and then to China and Vietnam. As a result East Asia became more integrated, its growth path generated by a constant process of industrial upgrading, in turn driven by a rapidly expanding stock of skills and real assets.
Chapter 10 is about the role of trade linkages in the Asian crisis. The authors argue that a proper understanding of these linkages is essential for an adequate understanding of the crisis. In doing so, they draw attention to the importance of differences between countries, and they note that much existing analysis of the crisis is unsatisfactory in that it has treated countries as if they were essentially similar. Their central idea is that the impact of events in one country on outcomes in an another will differ, depending on whether the countries in question have complementary or competitive trade structures.
The chapter deals with two distinct aspects of the Asian crisis. First it describes the way in which the onset of the crisis would be expected to be different for competitors and complementary countries. It then goes on to examine how contagion might have occurred between the different groups. Our comments are addressed mainly to the first issue. At the end of our comments we offer some rather brief remarks on the second.
In describing the onset of the crisis, and ascribing causes, the chapter first sets out a trade-competition story which describes the situation for countries producing in the same market segments, with high export concentration and similar export share structures. In such a story, an external shock, such as China's devaluation in 1994, affects all such countries similarly. A higher rate of Chinese growth would also increase competition in export markets and so would also have negative effects on them.
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