The Determinants of Financial Crisis in Asia - Essay Example

Multinationals, Asian Success and the Global Economy Paul Blustein and Clay Chandler (1998) summarized that the Asian crisis was caused by the combination of huge devaluations and IMF and U.S. government backed financial liberalization and recovery program that heavily contracted liquidity which resulted in the "biggest peacetime transfer of assets from domestic to foreign owners in the past fifty years anywhere in the world, dwarfing the transfers from domestic to US owners that occurred in Latin America in the 1980s or in Mexico after 1994" (qtd. in Wade & Veneroso 1998:20). Why did the Korean government allow this to happen Sharma (2003) noted that Kim Young Sam desperately wanted to be a member of the OECD and opening financial markets was made into a condition by U.S. and IMF (p.203). Pride as a motivation can be inferred, as Korea being an OECD member would be an achievement from being one of Asia's poorest countries. Furthermore, Kim Young Sam, like many people, students and business leaders during the 90s, may have been blinded by the 'globalization hype' in the media and academic institutions (Sharma 2003:184). Likewise, foreign investors and creditors also believed the "Asian Miracle" hype which may have encouraged them to issue more loans to Asian corporations. Wade & Veneroso (1998) emphasized the relentless campaigning by 'Wall street-U.S. Treasury and IMF' for Asian governments to open their capital markets and mentioned allegations of bribery of key people by Western and Japanese financial institutions (p. 9). Jaddish Bhagwati, pointed out that Secretary Rubin came from Wallstreet and huge firms such as Morgan Stanley aim to open overseas market and promote 'capital convertibility' so they can operate and earn profits everywhere (p.19). Washington (like Korea), is also controlled by corporations because they finance election campaigns (Perkins: 2005). Winters (2006) sought to answer why the Asian Crisis hit 98-99 and not earlier when the weakness of Korean 'developmentalism' was already chronic for years. He explained how each country was affected depended on the openness of the country's financial system, lack of controls/regulations or enforcement of these controls, currency convertibility, short-term foreign loans exposure, and attractiveness of the country to foreign investors (p. 84). Asian corruption was not a significant factor as asserted by the propaganda of free market capitalist that claimed financial liberalization/de-regulation will free Asian economies against corruption (Wade & Veneroso 1998:20). Bhagwati, also added that foreign investments are not necessary for economic growth since Korea already has huge domestic savings which can capitalize businesses (qtd. in Wade & Veneroso 1998:19-20). On the other hand, Woo-Cumings (1998) rejected the Western Imperialism argument and asserted that 'the Asian Crisis' was bound to happen because of the inadequacy and failure of Korean 'developmentalism' to meet the changes in the world market (p.116). Firms were not profitable and have made massive wrong investment decisions (p.123). Lieberman & Mako (1998) stated that by 1997, more than half of the thirty 'chaebols' employing 25 million workers with a debt of 103.4 trillion won, were at risk of defaulting on their debt (qtd. in Woo-Cumings 1998:123). World trade especially in semi-conductors was also slowing down due to glut in the market (p. 120). Investors and creditors were already growing concerned about Korean firms (Sharma 2003: 186). Most significantly, Cumings (1998) highlighted an important issue in Korea which is the strong motivation of the 'chaebols' to acquire foreign loans to free themselves of repressive government control (p.125). Government policy also deepened this problem by only allowing short-term foreign loans and not placing financial controls (Sharma 2003: 184). However, as Wade & Generoso and Bhagwati (1998) have insisted; there would have been no credit crunch that destroyed even profitable and viable small and medium sized businesses in Korea if the financial market was not de-regulated and opened to foreign investors. Hamilton (1999) clarified that the deeper cause of the crisis was the structural change in the world economy wherein "producer-driven-manufacturing systems" were replaced by "demand-responsive-reflexive manufacturing" (p.60). Korean 'developmentalism' was not organized to operate competitively in such a market and must therefore restructure itself. Wade & Veneroso (1998) also claimed that 'developmentalism' could still work for Korea if there was 'better coordination' between the state and the 'chaebols'. However, I disagree with their claim because 'better coordination' is not feasible when democracy and respect for human rights of workers and property rights of business owners do not exist. Moreover, 'developmentalism' encourages the concentration of wealth to the few elites and the state. The power struggle between state and 'chaebols', also destroys effective coordination due to lack of trust (Woo-Cumings 1998:124,128). Moreover, how can 'chaebols' be efficient and responsive to market demands if the state continues to direct production and bail them out of debt (Sharma 2003: 193) How can large businesses, controlled by a heavily bureaucratic government move with flexibility in the changing world economy (Woo-Cumings 1998:126) Lack of linkage to the market can be seen by the desire of the chaebols to build car companies due to personal interests (Sharma 2003:210). Furthermore, Korean citizens' demand for democracy and their human rights have grown steadily through the years. Thus, due to changing Korean social consensus and structural shift in the world economy; 'state control without democracy' or 'developmentalism' needs to be replaced a democratic society with the state exercising its sovereignty through laws and regulations that protect the rights of its citizens and firms. But the question is could Korea have restructured without the crisis Woo-Cumings (1998) and 'Noble & Ravenhill (2000:100)' believe that without the Asian crisis and IMF intervention, restructuring in Korea was not possible (qtd. in Sharma 2003:199). Effective state leadership with Korean popular support is necessary to restructure without panicking creditors. If the Korean people placed Kim Dae Jung in power before the crisis or at a critical time before panic ensued; I believe that Korea would have the chance to restructure without putting the country under the drastic IMF program which plunged the country into 'deep crisis' and exacted a high toll on the Korean people. Kim Dae Jung's popular local and international support would have been able to allay creditor and investors fears (Sharma 2003). But he was placed in power, when there was already growing panic by the creditors in the Asian region. However, Kim Dae Jung was able to grab the opportunity to use IMF and the Asian crisis to restructure the 'chaebols' (Cumings 1998:131). The accountability for the 'Asian/Korean Crisis' belongs to the Asian governments (Korean government), its corporate firms (chaebols), IMF, and U.S. government. The IMF and U.S.' insistence to open Asian capital markets and the Asian/Korean governments' capitulation to this demand without placing financial controls to short-term loans, currency convertibility and capital markets make them accountable for the crisis (Sharma 2003:183-184). IMF can be held further accountable for aggravating the crisis by fueling the panic of the creditors and worsening Korea's credit crunch which also destroyed viable businesses (Wade & Veneroso 1998:5,11). However, the Korean government headed by Kim Young Sam is more accountable for aggravating the crisis by 'wrong policy decisions' in only making short-term loans available, wasting foreign reserves by defend the position of its currency and for lying which further eroded investors' confidence (Sharma 2003:214, 217). Wade & Veneroso (1998) further contended that, the Korean government and IMF could have renegotiated the rescheduling of loans (p.5). However, as previously discussed, IMF was working for the interests of U.S. Banks and Kim Young Sam did not have the political capacity to lead Korea out of crisis (Sharma 2003:214). Both foreign creditors and Korean firms must also share the blame for unwise business decisions. One of the most important lessons from the Asian crisis is to be critical of "praise' and 'hype'. Just a few months before the crisis, IMF and other credit rating companies have lauded the "Asian Miracle' (Wade & Veneroso 1998:3) which makes it easy to understand why everyone was caught sleeping from foreign banks, to 'chaebols' and Korean government that restructuring was needed . Human greed was also a factor as banks did not want to lose the opportunity of making money out of the 'Asian Miracle' (p.9). Furthermore, the "Wall street-U.S. Treasury and IMF" "corporatocracy" mentioned earlier encouraged reckless loans (Perkins 2005, Wade & Veneroso 1998:13). (This is once again illustrated by the on-going sub-prime lending crisis in the U.S.) In hindsight, 'rogue currency traders' played a vital role in removing the romanticism about 'globalization.' As countries deepen their integration into the global community; 'sovereignty of the nation' becomes more critical. Responsibility of government leaders become more complex as they must take advantage of the benefits of globalization but at the same time protect its citizens from threats of external shocks. Aside from the 'Asian Currency Crisis'; Korea was already at a point wherein 'developmentalism' cannot go on and political, economic, and social restructuring was desired by Korean citizens. Koreans already wanted a democratic form of government. Most importantly due to the shift in the world economy to "demand-responsive-reflexive manufacturing"; there was an urgent need for Korean businesses to restructure and for governments to change their policies to enable Korea to succeed in the emerging world economy (Hamilton 1999). It is also interesting to point out that although corporate America profited from Asian markets, as noted by the outflow of wealth from Korea and the purchase of assets at 'fire-sale prices' (Wade & Veneroso 1998:20); Koreans and other Asian countries also benefited by becoming more competitive. More efficient management systems were introduced by the Americans (Cherry 2006). As of 2008, the US has become the biggest source of foreign investments in Korea (Wu, 2007). However, due to the way in which IMF/U.S. government handled the crisis, Korean social consensus is now against further infringes in their sovereignty (Sharma 2003:221, Cherry 2006). Moreover, Asian and Latin American countries are starting to form alliances and seeking other foreign markets to lessen their exposure to U.S. demands. According to U.S. Commerce Secretary, Carlos Gutierrez; 27 of the 34 Asian countries surveyed showed a decrease in US market share since 1990 (US Losing its Economic Muscle in Asia 2008). This backlash was predicted by Kissinger during the Asian crisis, when he warned that U.S. cannot be viewed as a bully but must be seen as a partner in pulling Asia out of the crisis; for these countries will re-emerge as key players in the world economy (Wade & Veneroso 1998:21). In conclusion, banks of tiger economies did not directly cause the crisis. In my view, the U.S and IMF can be regarded as unethical for urging Asian governments to open their financial capital markets which created the environment in which the 'Asian Currency Crisis' inevitably occurred 'despite sound macroeconomic fundamentals' and for serving as the catalyst to the crisis through their faulty analysis of the problem and drastic reform measures which heightened fear of creditors (Sharma 2003:225-226). Thus, Western institutions have been rightly criticized for making the Asian Crisis happen and profiteering from it however, responsibility still largely belongs to the Asian governments for not exercising their sovereignty against Western demands and carelessness in not instituting prudent financial controls. Furthermore, the 'Korean Asian Miracle' due to changing world economy cannot be sustained through 'developmentalism'. Numerous signals were present to indicate that industrial and financial restructuring were needed (e.g. huge decrease in sales of Korea's top exports, 'chaebol' bankruptcies). However, complacency may have been induced by buying into the 'Asian Miracle and Globalization hype.' Finally, the 'Asian Crisis' has shown that economic and political structures can be made obsolete by global changes (in which no one country has control) and that one has to 'anticipate change' in order to stay competitive. Interestingly, there are on-going changes in political structures of formerly colonized countries around the world which is also making 'U.S. Imperialism and Free Market Capitalism' outdated in today's world economy (Hart-Landsberg & Burkett 1999). 1,977 words (Maximum Limit: 2000 words) References Cherry, J. 2006. Killing Five Birds with One Stone: (1) Inward Foreign Direct Investment in Post-Crisis Korea. Pacific Affairs, 79(1) p. 9+. Hamilton, G. 1999. Asian Business Networks in Transition: or, What Alan Greenspan Does Not Know About the Asian Business Crisis. In: Pempel, T.J. (ed.). The Politics of Asian Economic Crisis, Ithaca: Cornell University Press. Hart-Landsberg, M., & Burkett, P. 1999. East Asia in Crisis: Beyond Tina, toward Socialism. Monthly Review, 51, p. 53+. Perkins, J. 2005. Confessions of an Economic Hitman. London: Ebury Press. Sharma, S. D. 2003. The Asian Financial Crisis: Crisis, Reform, and Recovery. Manchester: Manchester University Press. US Losing Its Economic Muscle in Asia. 2008. Manila Bulletin, 12 January. Wade, R., & Veneroso, F. 1998. The Asian Crisis: the High Debt Model Versus the Wall Street-treasury-Imf Complex. New Left Review,a(228), p. 3-24. Winters, J.A. 1999. The Determinants of Financial Crisis in Asia. In: Pempel, T.J. (ed.). The Politics of Asian Economic Crisis, Ithaca: Cornell University Press. Woo-Cumings, M. 1999. The State, Democracy, and the Reform of the Corporate Sector in Korea. In: Pempel, T.J. (ed.).The Politics of Asian Economic Crisis, Ithaca: Cornell University Press. Wu, F. 2007. The Asian Myth: The Notion That the Asian Economies Have Somehow Insulated Themselves from the United States Is Nonsense. The International Economy, 21p. 34+. Read More