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POLS 459 Politics of East Asia
The Asian Financial Crisis: The
Demise of the East Asian
Model?
Professor Timothy C. Lim
California State University, Los Angeles
tclim@calstatela.edu
The Asian Financial Crisis
Demise of the East Asian Model?
The Asian Financial Crisis:
Background
The 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 Asian Financial Crisis
Demise 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 Crisis
Demise 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 Crisis
Demise of the East Asian Model?
The Asian Financial Crisis:
Explanations
As 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,
liquidity of three of the most common …
1.
provides
a summary
2.
3.
overcapacity - crunch explanation
The ____________
Cold-War-in-East-Asia
The _______________
explanation
The end-of-the- _______________________
explanation
The Asian Financial Crisis
Demise of the East Asian Model?
The Asian Financial Crisis:
Explanations
A Fourth Explanation
One additional explanation is the
“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.
The Asian Financial Crisis
Demise of the East Asian Model?
The Asian Financial Crisis:
Explanations
Crony Capitalism
Johnson dismisses crony capitalism as a
prominent cause almost out of hand:
“Throughout the region,” he writes, “the
current crisis was caused much more by
under-regulation than by corruption or
any other side effects of an overly close
relationship between business and
government”
The Asian Financial Crisis
Demise of the East Asian Model?
The Asian Financial Crisis:
Explanations
The Liquidity Crunch Explanation
financial
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 to
be 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.
The Asian Financial Crisis
Demise 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 industries
QUESTION
Why is it a problem to invest in mature or overly
competitive export industries?
The Asian Financial Crisis
Demise 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 Crisis
Demise 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 Crisis
Demise 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
overinvested
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
The Asian Financial Crisis
Demise 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 Crisis
Demise of the East Asian Model?
The Asian Financial Crisis:
Explanations
The Overcapacity Explanation: Reasons for
1.
Overcapacity
China’s economic rise, its undervalued currency (in 1994,
2. the yuan was devalued by 35%), and its subsequent
3. domination of export markets
Devaluation of Japanese yen by 60% in mid-1990s
Trend toward relocation
of manufacturing
low-wage
All three reasons
reflect significant, to
ongoing
issues in the
global economy;
this view, then,
will remain
countries: low wage
workersin cannot
buy overcapacity
the products
they
a problem for many, many years
make
The Asian Financial Crisis
Demise 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 Crisis
Demise 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 Crisis
Demise 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
Questions
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?
The Asian Financial Crisis
Demise of the East Asian Model?
The Asian Financial Crisis: Explanations
Geopolitics of the Asian Crisis
Embedded in Johnson’s analysis is the assumption that
any explanation of the Asian “financial” crisis must take
into account international or global factors (and actors)
This is the starting point of analysis for the article by
Stephen Gill, “The Geopolitics of the Asian Crisis”
A quick question before proceeding:
What is Gill’s basic argument?
The Asian Financial Crisis
Demise of the East Asian Model?
The Asian Financial Crisis: Explanations
Geopolitics of the Asian Crisis
“The East Asian crisis shows how, in the so-called new
era of ‘globalization,’ there is an intense interstate
conflict over the form and direction of regional and global
patterns of capitalist development. Central to U.S. strategy
is the imposition of a specific neoliberal model of
restructuring. In the context of the recent crisis, statedirected and controlled forms of political economy have
been, and are being, pressured to liberalize”
The Asian Financial Crisis
Demise 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?
The Asian Financial Crisis
Demise 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 Crisis
Demise of the East Asian Model?
The Asian Financial Crisis: Explanations
What is Neoliberalism? Specific Policies








Low government spending
Competitive exchange rates
Free trade
Privatization
Undistorted market prices, limited state
intervention
Deregulation, reduced capital controls
“Labor market restructuring”
Export-led development
QUESTION
How could the push
for these policies
explain the Asian
crisis?
The Asian Financial Crisis
Demise of the East Asian Model?
The Asian Financial Crisis: Explanations
The 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 power
and its geostrategic interests that
led to the Asian crisis
The Asian Financial Crisis
Demise 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”
The Asian Financial Crisis
Demise 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
The Asian Financial Crisis
Demise 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”