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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.
The Asian Financial CrisisDemise of the East Asian Model?
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
The Asian Financial CrisisDemise of the East Asian Model?
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
The Asian Financial CrisisDemise of the East Asian Model?
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 CrisisDemise of the East Asian Model?
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 CrisisDemise of the East Asian Model?
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 CrisisDemise of the East Asian Model?
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 CrisisDemise of the East Asian Model?
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
The Asian Financial CrisisDemise of the East Asian Model?
The Asian Financial Crisis: Explanations
The Liquidity Crunch Explanation
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 Asian Financial CrisisDemise of the East Asian Model?
The Asian Financial Crisis: Explanations
The Liquidity Crunch Explanation
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 Asian Financial CrisisDemise of the East Asian Model?
The Asian Financial Crisis: Explanations
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 Asian Financial CrisisDemise of the East Asian Model?
The Asian Financial Crisis: Explanations
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 Asian Financial CrisisDemise of the East Asian Model?
The Asian Financial Crisis: Explanations
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 Asian Financial CrisisDemise of the East Asian Model?
The Asian Financial Crisis: Explanations
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 Asian Financial CrisisDemise of the East Asian Model?
The Asian Financial Crisis: Explanations
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
The Asian Financial CrisisDemise of the East Asian Model?
The Asian Financial Crisis: Explanations
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
The Asian Financial CrisisDemise of the East Asian Model?
The Asian Financial Crisis: Explanations
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 Asian Financial CrisisDemise of the East Asian Model?
The Asian Financial Crisis: Explanations
Geopolitics of the Asian Crisis
““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 Asian Financial CrisisDemise of the East Asian Model?
The Asian Financial Crisis: Explanations
Geopolitics of the Asian Crisis
The key concept in Gill’s analysis, to repeat, is …
____________________________
Neoliberalism
So what is neoliberalism?So what is
neoliberalism?
The Asian Financial CrisisDemise of the East Asian Model?
The Asian Financial Crisis: Explanations
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”
The Asian Financial CrisisDemise of the East Asian Model?
The Asian Financial Crisis: Explanations
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 CrisisDemise of the East Asian Model?
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 Asian Financial CrisisDemise of the East Asian Model?
The Asian Financial Crisis: Explanations
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”
The Asian Financial CrisisDemise of the East Asian Model?
The Asian Financial Crisis: Explanations
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.
The Asian Financial CrisisDemise of the East Asian Model?
The Asian Financial Crisis: Explanations
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”