Asian capitalism’ and the financial crisis
VII. 2 Policy implications
What are the policy implications of these conclusions? The basic policy issues which are closely interlinked are as follows:
1 how to restore investor confidence so that normal capital flows in the region are resumed;
2 how to ensure that long-term growth in the real economy is restored as quickly as possible; and
3 how to provide immediate assistance to the millions of people who are likely to become unemployed or pushed back into poverty once again.
The importance of the last issue cannot be exaggerated. This is not just for humanitarian reasons but it is also necessary for maintaining social peace (see further Singh, 1998a). To provide such assistance effectively and on an adequate scale will require not only considerable imagination but also a large expansion in government activity and often direct intervention in the market processes. Such emergency safety net programmes may include wider subsidies, food-for-work
schemes and public works projects, including the kind of labour intensive infrastructural projects which the ILO has pioneered in countries like Indonesia.
How to pay for these measures within the limits of fiscal prudence, let alone within the IMF fiscal austerity programmes, will be a major issue of political economy for these countries.
Turning to the first policy issue, the most important requirement for achieving a resumption of normal capital flows to the affected countries are economic policies which are credible and have wide domestic political support. Such credibility is much more likely to be achieved if there is political unity in the country and if there is close co-operation not only between government and business but also labour and civil society organisations in a national programme to resolve the economic situation. This would inevitably mean that the burden of adjustment would need to be equitably shared by all sections of society. Thus, the traditional Asian model of capitalism essentially based on corporatism becomes all the more essential if the present acute economic crisis is to be overcome.
The first best approach to resolving the present crisis of confidence is for the IMF and the affected countries to co-operate closely on the essential and immediate narrow task of restoring their access to the international capital markets.
For this purpose, the IMF should act as an intermediary between the international banks and other major creditors on the one side and the private sector debtors on the other, in order to achieve a rapid restructuring of the debt.
In this role, the institution needs to reiterate to investors and creditors the healthy fundamentals of these countries, their proven strong supply-side potential, their export orientation and therefore their ability in the medium to long term to service their debts. It is significant and most encouraging that in response to the criticism of its policy programmes, the IMF has already made some important changes such as softening the strong demand restraint measures required of Thailand and Korea. Although somewhat late in the day (rather than before the crisis began) the Fund has also been participating in discussions to facilitate the re-scheduling of the debts. However, the institution needs to go a great deal further in the direction of its critics. For the long term, the IMF should seriously re- examine its whole project of promoting capital account liberalisation in developing countries.23
Notes
1 Quoted in the International Herald Tribune, 13 February 1998.
2 See, for example, Mr Camdessus’s speech to Transparency International reported in the IMF Survey, 9 February 1998.
3 This chapter is an abbreviated and updated version of Singh, 1998a. The author and the editors are grateful to the ILO, Geneva for permission to reproduce material.
4 This is not to deny that some East Asian countries have denied trade union rights and thus repressed their labour force for certain periods. Nevertheless, East Asian
workers have enjoyed a far higher growth of real wages than workers anywhere else.
5 The source of these figures is Maizels (1963), quoted in Amsden and Hikino (1993).
6 The World Bank’s conclusion of declining income inequality in East Asian economies is, however, subject to important qualifications. See further, Singh (1995a, 1997a) and UNCTAD (1997).
7 ‘Restoring the Asian Miracle’, Wall Street Journal, Europe (3 February 1998, p.
4).
8 Although China has a different political system, there is evidence that during the last two decades of the relative liberalisation and marketisation of the economy, the country has attempted to emulate the East Asian model. See further, Nolan (1995) and Singh (1996a).
9 The significance of this contribution is discussed in Singh (1995a).
10 As late as 1978, long after Japan had become a member of the OECD and had greatly reduced or abolished most formal import restrictions of the earlier era, its manufactured imports were only 2 per cent of GDP. The comparable figures for countries like France, Germany and Britain were at that time five to six times as large. See Singh (1994).
11 As indicated earlier, the World Bank’s Chief Economist, Professor Stiglitz, takes a rather different view of the crisis than that of the Fund. However, as Wade and Veneroso (1998) suggest the position is closer to that of the IMF than to Professor Stiglitz.
12 For comprehensive critical analyses of the World Bank (1993) theses, see the contributions in Amsden (1994); see also Singh (1995a).
13 See Singh (1995a, 1997a, 1997b, 1998b); see also Okimoto (1989), Tsuru (1993), Amsden (1989), Wade (1990) and Amsden and Singh (1994).
14 For a fuller discussion, see Amsden and Singh (1994).
15 Krugman reports that in the case of South Korea, the price of its corporations to foreign buyers essentially fell by 70 per cent during 1997. Thus, the stock market value of Korean Air Lines with a fleet of more than 100 aircraft at the end of 1997 was only $240 million. This is approximately the price of two Boeing 747s.
However, any acquirer would also have to take on the Korean Air Lines debt of $5 billion.
16 See for example Calvo and Mendoza (1996), Sachs, Tornell and Velasco (1996), Cole and Kehoe (1996), Krugman (1998).
17 See IMF Survey, vol. 26, no. 16, 18 August 1997.
18 Thus Mr Camdessus (1998): ‘In Korea, for example, opacity had become systemic.
The lack of transparency about government, corporate and financial sector operations concealed the extent of Korea’s problems—so much so that corrective action came too late and ultimately could not prevent the collapse of market confidence, with the IMF finally being authorised to intervene just days before potential bankruptcy.’
19 See further Singh (1995b).
20 There is a large literature on these issues. For a fuller discussion, see further Singh (1996b); Singh and Weisse (1998).
21 See also Sachs (1997); Stiglitz (1998a, 1998b); Feldstein (1998a, 1998b); Wade and Veneroso (1998); Amsden and Euh (1997); Akyuz (1997).
22 Chang (1998) notes that a major ambition of the previous South Korean government was for the country to become an OECD member during its own term of office. In pursuit of that ambition the government was willing to forsake important parts of the Asian model, particularly control over investment activity and the financial transactions of large firms and banks.
23 For a fuller discussion of the issues concerning capital account liberalisation see further Singh (1997b), Singh and Weiss (1998).
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