East Asia: From Miracle to Debacle and Beyond?

Jomo K. SUNDARAM (University of Malaya, Malaysia)

While there has been considerable work critical of the East Asian record and potential, none actually anticipated the East Asian debacle of 1997-98 (e.g. see Krugman 1994). Although some of the weaknesses identified in this critical literature did make the region economically vulnerable, none of the critical writing seriously addressed one crucial implication of the greater role of foreign capital in Southeast Asia, especially with international financial liberalisation, which became more pronounced in the 1990s. As previously noted (Jomo 1998), dominance of manufacturing -- especially the most technologically sophisticated and dynamic activities -- by foreign transnationals subordinated domestic industrial capital in the region, allowing finance capital, both domestic and foreign, to become more influential in the region.

In fact, finance capital developed a complex symbiotic relationship with politically influential rentiers, now dubbed 'cronies' in the aftermath of 1997-98. Although threatened by the full implications of international financial liberalisation, Southeast Asian financial interests were quick to identify and secure new possibilities of capturing rents from arbitrage as well as other opportunities offered by gradual international financial integration. In these and other ways (e.g. see Gomez and Jomo 1999; Khan and Jomo 2000), trans-national dominance of Southeast Asian industrialisation facilitated the ascendance and consolidation of financial interests and politically influential rentiers.

This increasingly powerful alliance was primarily responsible for promoting financial liberalisation in the region, both externally and internally. However, in so far as the interests of domestic financial capital did not entirely coincide with international finance capital, the process of international financial liberalisation was necessarily partial. The processes were necessarily also uneven, considering the variety of different interests involved and their varying lobbying strengths in various parts of the region.

The objectives of this paper are modest. The first part will review the causes of the crises in the region. Macroeconomic indicators in the three most crisis-affected economies -- i.e. Thailand, Indonesia and South Korea -- and Malaysia are briefly reviewed to establish that despite some misdemeanours, the crises cannot be attributed to macroeconomic profligacy. Instead, the consequences of the reversal of short-term capital inflows are emphasised. In this regard, Malaysia will be shown to have been less vulnerable owing to pre-crisis restrictions on foreign borrowings as well as stricter central bank regulation, but more vulnerable due to the greater role of capital markets compared to the other three economies. The role of the IMF and financial market expectations in exacerbating the crises is also considered.