Question: The Asian Financial Crisis of 1997 demonstrated the power of globalised financial markets to trump the power of national governments over governing the economy. Do you agree or disagree? Explain why.
1.0 Introduction
Asian Financial Crisis was a period that East Asia was gripped by very disastrous economic or perhaps political crisis in July,1997. Many countries in other regions also feared that this crisis might further lead to worldwide economic meltdown. All the global financial markets were also negatively affected. Before 1997, it seemed that major East Asian economies, such as Japan, Korea, Taiwan, Singapore, Thailand and so on, had enjoyed economic “miracles”. The tremendous economic growth had attracted investors from all over the world to invest heavily in the East Asian Region. However, when the East Asian companies started to default on their foreign debt repayments, many local and foreign investors became extremely anxious. When they withdrew their investment and capital out of the Asian market, many economic problems such as unemployment, inflation, and so on. These economic problems further led to political instability. In January 1997, Hanbo Steel, a very huge Korean industrial conglomerate suddenly collapsed(Mathews, 1998). It defaulted a total amount of $6 billion debt. From then on, people started to question about the sustainability of the business development model of borrowing huge amount of money from foreign investors. Between June and July, Thai’s financial market begun to collapse. In fact, as early as the previous month, Thai baht had been attacked by the speculation of foreign currency trader(Radelet and Sachs, 1999). As Thai’s currency had long been manipulated by the local government, when the financial crisis started, the power of global financial market soon became very strong. The international financial market pushed the Thai currency to appreciate uncontrollably. It made the Thailand’s exports become more expensive to other countries. It thus lost its competitive advantages of cheap prices. In order to stabilize the currency of Thailand, Philippines and other Asian countries, even IMF set in and provided them with financial assistance. Malaysia also abandoned its defense on ringgit. The Asian currency market, on the whole, was more determined by market mechanism. It remarked that the power of national government is weakening significantly. Lately in August, rupiah, Indonesia’s currency had also collapsed. The Indonesian government officially stated that the “managed float” policy was formally abandoned. In other words, the local government admitted that it could no longer control or manipulate the currency floating any longer. However, it attributed this “fault”to Soros, who was accused of initiating the financial crisis through withdrawing money from the Asian stock and financial market(Radelet and Sachs, 1998). By the end of August 1997, IMF had offered over $17 billion financial package for Thailand(Punyaratabandhu, 1998, p161). Indonesia, later on, applied for financial support from IMF as well. IMF offered another $23 billion to Indonesia. In November, the stock market of South Korea was also collapsed. IMF also offered a $10 billion rescue package for South Korea(Goldstein, 1998). Throughout the Asian financial crisis, it is not very difficult to observe that to a very large extent, the power of global financial market significantly outperformed the role of national government over governing the local economic activities.
2.0 Globalization process surpasses the power of local government
From the lessons of Asian Financial Crisis, it is rather indisputable that the globalization is a irreversible outcome of the economic development. From neo-liberalist’s perspective, the international organizations should take more important roles as compared with the local governments(Williams, 2012). Through the globalization process, the concept of sovereignty or state would be tremendously weakening. Ohmae (1991) states that the globalization process is both inexorable and unstoppable. The major reason is that technological advancement, bilateral or multilateral trade has been promoted very remarkably. For instance, due to the rapid development of internet and communication technology (ICT), the geographical barriers and time constraints are no longer a serious factor which might negatively affect the regional or international trade activities(Kobrin, 1999, p165). As such, it is undeniable that the role of government or the concept of “state” would be very much weakening. On the other hand, the power of global financial market or international national organization would be stronger and stronger under such context. For instance, initially Malaysia did not seek for financial assistance from international financial organization such as IMF during Financial Crisis(New York Times, 1999). The Malaysian government also did not implement IMF policies. It tried to employ capital control and other speculative measures to secure the value of ringgit. The capital control measures mainly stipulated that the short-term offshore trade would be officially banned. However, large MNCs such as Dell, Microsoft and Intel were exempted from capital control policies(ADB, 2000). It showed that Malaysia’s government was still welcoming foreign direct investment. It was just that the short-term capital or hot money was not welcomed because it would lead to great financial instability. Besides the tight capital control, Malaysia also imposed very heavy exit tax on investment less than a year. However, lately, it seemed that all the above-mentioned measures could not stop ringgit from collapsing. Foreign investors were continuing to withdraw money and capital from Malaysia. The high exit tax further stopped foreign direct investment from entering. During the economic “miracle” period, many local companies were rather ambitious in their business activities. But these business operations usually required huge amount of financing. In other words, they were heavily dependent on FDI. When the foreign investors were suddenly withdrawing money due to the lack of confidence in local financial market, all the production activities would be devastatingly affected. The major local companies would be defaulted on their repayments, which further exacerbated the financial situation in Malaysia. It was very much like a vicious cycle. Originally, local government wished to employ very tight capital control measures and impose heavy taxes but these government intervention polices were rather weak on affecting the final outcomes. In the end, the exit tax were first removed for investments exceeding one year in Feb 1999. lately, the capital control policies were relaxed further by stipulating that the exist tax were only imposed on gains instead of the full values of investment. From economist’s perspective, it might be justifiable for Malaysia government to impose these tight capital control polices to counter the side-effect of financial crisis. At the beginning stage, it was also true that the interest rates had been decreased with further stimulating domestic consumption and the cost of borrowing money from the bank. The capital squeeze had also been relaxed further. All of the above-mentioned measures could not effectively address the economic problems such as inflation, unemployment or collapse of ringgit. When Malaysia government realized that it had made a mistake, it started to correct it by following IMF’s advice. For instance, IMF’s programs had successfully helped Malaysia to turn the balance of payment deficits into surpluses within three months after relaxing the exit tax on the net value of FDI. The net capital flow was finally stabilized at a relatively healthy level at the third and fourth quarters of 1999. The currency was also secured and stabilized within six months after implement IMF policies. The net inflation rate was also reduced to an optimum level. Through very similar measures, the currency of South Korea was also stabilized through very structural transformation. Therefore, it is obvious that the power of international financial market had played a very dominant row in regulating the local financial market(Haggard and McIntyre,1998, p381). The government measures, on the other hand, would not address various financial and economic problems very effectively.
3.0 The concept of state or sovereignty becomes passe
Moreover, it is also irreversible that the concept of state or sovereignty is become obsolete especially in regards to governing the local financial activities. In the late 1960s, Kindleberger(1969, p207) “the state is about through as an economic unit’. As matter of fact, many other economists also have the very similar ideas. Adam Smith, the founder of modern economics, also worried that the government intervention would tremendously destroy the local financial market. Due to the excessive government intervention, it is inevitable that the structural deficiency would take place. It is also the major reason why the financial systems of Asian countries were handicapped during the 1997 financial crisis. Even though many people still assert that the economic miracle before 1997 was attributable to strong government presences in all economic and financial activities, it is still undeniable that the Asian Financial was also due to these intervention measures. The crisis itself implies that the market-distorting policies were actually destabilizing the local financial systems. The miraculous leap forward of economic development made East Asian government over-optimistic about their economic situation and growth capacity. With the FDI or net outflow of capitals were significantly increased, the fragile local industries soon collapsed due to the lack of essential cash flow and liquidity. It might be true that government played an important role in the development of Asian financial market. However, when the government tried to withdraw from the market, all economic activities were turned into absolute chaos. For instance, one major reason of the Asian Financial crisis was owing to the real estate bubble burst. At the beginning of 1997, the vacancy rate of office buildings in the Central Business Districts (CBDs) of major Asian cities such as Jakarta was nearly 10%. Thailand was also suffering from the similar problem. The vacancy rate in Bangkok was as high as 15%. Besides, the Chinese communities in Malaysia, Indonesia and so on, were very keen in joining the property market in order to make quite and short-term profits. It resulted that the housing price was driven up very fast. Many people foresaw the increasing price of real estate property. Therefore, they started to apply for housing loans for speculative purposes. However, when the local financial market was collapsing, the housing price stopped climbing. People who applied for heavy loans from the bank could not make any repayment at all. The burden was more on local financial institutions because many people could not pay back the housing loan. When the real estate bubble burst, not only the Asian people were suffering, the local financial market was also collapsed within a short period of time. It was because the real estate properties were deemed as a kind of collateral. Once the value of real estate properties depreciated, the bank would have tremendous economic loss as well. In fact, many of these Asian countries had rather weak manufacturing sectors. The local governments of Malaysia, Indonesia, Thailand and so on, wished to have very significant economic growth through boosting the growth of real estate market. It might be true that the local economy might be improved through property market speculation. The government could sell the public land area to developers with a much lower prices. The developers would contact consultation companies and construction firms to complete the real estate projects. It could create job opportunities for all related or inter-related industries such as cements, tiles, and so on. Besides, through property market speculation, more people would borrow money from the bank and invest in real estate properties. It will boost the local financial market as well. However, local government did not realize that this kind of economic growth was rather unsustainable. It was because there were not enough people who needed these properties apart from speculative purposes. Therefore, when the housing marketing was collapsed, all financial systems were also destroyed at the same time. Other countries such as South Korea, mainland China or Taiwan were not suffering as terrible as these above-mentioned countries, because their economic structures were more stable. For example, the major economic growth of South Korea or Singapore came from the manufacturing sectors. As long as the products produced were in desirable quality, the overall demand would not be dropped. In other words, the economic or financial activities would not be affected very much by government polices. They would be more determined by global marketing mechanisms.
4.0 Counter-Argument
However, from realist’s perspectives, the concept of state or sovereignty should not be replaced by “globalization” or international organizations(Williams, 1992). In fact, they still believe that the power of national government on governing domestic economic activities is still very strong, perhaps stronger than the global financial market. Realists believe that all countries only consider about their own benefits. So their decision-making processes of government strategies or policies are solely dependent on a country’s own interest. The international relationships could be more explained by a zero-sum game. in this sense, they still insist that government regulation is still playing a very important role even in the Asian Financial Crisis.The government of Taiwan, for instance, decided to transform its domestic economy firmly toward knowledge-based economy(KBE). It realizes that government could play a very important role in such economic transformation. After carefully evaluating its own strengths and weaknesses, Taiwan decided to develop its semiconductor sectors. Now Taiwan Semiconductor Manufacturing Company (TSMC) is the world’s largest semi-conductor production company. Other companies such as Foxconn had also become leading a leading firm in this industry as well. It shows that Taiwan had successfully transformed its economic structure from labor-intensive toward the capital-intensive industry. In this process, it has to be admitted that government had played an important role in this process during the Asian Financial crisis. Very similarly, when the South Korea government learned about the disastrous consequence of Asian Financial Crisis, it started to provide cheap loan to automobile exporters(Betts, Giri&Verma, 2017). It would be considerably easier for local automakers to apply for loans as compared with producers in other industries. Most importantly, the interest rate of these loans were reduced by nearly 70% . Moreover, Korean Export-Import Bank, as required by Korean Government was also offering tremendous interest subsidies for automakers. For instance, the interest rate of export-related loans in the automobile industry is as low as 3%. in fact, the interest rate in the market was as high as 8% on average(Mah, 2010). Moreover, in order to reduce the economic loss which might be experienced by automobile exporters, the Export Insurance Act was enacted by the local government. Besides, the Export Insurance Fund was also established to help exporting companies when they have financial difficulties. Now, it is not difficult to observe that the respective measures employed by Korean government did significantly affect the local economic development and avoid potential economic loss. Hyundai, Kia and other famous Korean automobile brands were soon popularizing in the global market after the Asian Financial Crisis(Mah, 2010, p17). It created millions of jobs for local people and helped to stabilize the general price level.
5.0 Conclusion
However, in my opinion, the government did play an important role but certainly the power of global financial market was much stronger. Originally the Asian Miracles might be attributable to government intervention and manipulative measures. For instance, Asian government tried to manipulate its domestic currencies such that the price of exporting goods became cheaper and more competitive than the goods from the Western countries. The Asian governments also heavily subsidized its major industries to boost economic growth. But from the perspective of globalization, the international trade should be more regarded as a kind of win-win outcome. In other words, all countries or parties should be benefited in this process. Even government intervention might help the domestic industries in the very short-run, this benefit would not last very long. Ultimately, the economic development model of major Asian economies should be moved toward a Anglo-American model. It means that the free capital flows should be guaranteed in the local financial market. Many economists predict that if no so, economic problems such as unemployment, increasing FDI or capital outflow, inflation would take place. Even some Asian economies may earn a huge profit in the short-run, it will not hold for the future. But it is also necessary to point out that these IR theories may only work for small Asian economies. More observations should be made on countries such as China and India. Now, the U.S, who previously was an strong advocate for globalization or free trade, started a trade war on China. It seems that the power of global financial market could not effective counter the government interventions such as manipulating currencies. There is still a huge trade deficit between China and the U.S. Hence, maybe the lessons of Asian Financial Crisis is not so applicable on huge Asian countries such as China. In the future, more researches should be on investigating the possible outcome of superpower trade war.
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