feature articlef

Spring 1999 33333

CRONY CAPITALISM AND THE

EAST ASIAN CURRENCY AND

FINANCIAL ‘CRISES’Helen Hughes

Helen Hughes is Emeritus Professor at the AustralianNational University, and Senior Fellow at The Centre forIndependent Studies.

he East Asian ‘crisis’ has been marked by a plethoraof bad debts, including the, as yet, uncounted debtsto Japanese banks. The figures quoted are running

into billions. They suggest that a large proportion of theprivate flows of capital to East Asia in the 1990s wereegregiously risky. They were not supported by projectand sovereign risk analysis that shareholders and depositorshave a right to expect from financial institutions. Muchof the investment undertaken within East Asia in recentyears was channeled into unproductive enterprises andprojects. Much was stolen. It is deeply mystifying thatthese flows were not perceived as contributing to theweakness of the East Asian economies by the InternationalMonetary Fund (IMF), the WorldBank and the Asian DevelopmentBank, all of which hadresponsibility for monitoring EastAsian countries. In 1993, theWorld Bank (1993: v–vi),ignoring the extensive literatureon monopoly and oligopoly,concluded that the East Asiancountries were ‘… better able thanmost to allocate physical andhuman resources to highlyproductive investment and toacquire and master technology.’

A few perceptive observers (eg. Lingle 1997) providedclearly argued early warnings, but these were ignored bymost observers and the multilateral institutions that hadsurveillance responsibilities for East Asian countries. Theywere not undertaking appropriate analytical work and theywere unwilling to embarrass their member governmentsby pointing out the cost of cronyism. Following the IMF’shalf-century of persistently bailing out any country thatran into balance of payments difficulties, some privatelenders suspended risk assessment, making ‘moral hazard’a serious consequence of IMF operations.

Most analysts have focussed on the collapses of financialinstitutions and devaluations of exchange rates that becamenecessary once the hollowness of much of the unproductiveinvestment and financial cronyism was exposed (Arndt andHill 1999; McLeod and Garnaut 1998; Montes and Popov1999; Radelet and Sachs 1998). They have not explainedwhy countries known for their prudent macroeconomicpolicies for some 30 years abandoned them in the mid-1990s. A more perceptive analysis indicates that ‘the rootcause of the crisis…’ was that ‘financial intermediaries werenot always free to use business criteria in allocating credit…’and ‘well connected borrowers could not be refusedcredit…’ that ‘…was created by implicit or explicit

government guarantees againstfailure’ (Moreno, Pasadilla, andRemolona 1998). That is,corporatist policies led to cronycapitalism and hence to the 1997collapse.

Leading East Asian marketeconomies avoided following thePrebisch-Singer ‘developmenteconomics’ inward oriented modelthat was widely accepted bydeveloping countries in the 1960sand 1970s (Lal 1983), recognisingthat an open market economy was

more likely to bring progress than a dirigiste one.Liberalisation made considerable progress. Competitionin international markets encouraged further reforms.Except in Hong Kong, Singapore and later in Taiwan,however, privileged local entrepreneurs originating inprotected domestic industries were able to prevent the

T

44444 Spring 1999

CRONY CAPITALISM

completion of liberal reforms that would have led tocompetitiveness in domestic markets.

In the middle of the 1990s, crony interests in Thailand,the Republic of Korea (Korea), Malaysia, and Indonesia,desiring to protect the dollar values of their assets, exertedpressure on Ministries of Finance and central banks tomaintain exchange rates at overvalued levels. Short termloans were sought abroad to shore up the overvaluedexchange rates. Current account deficits expanded. Whenacute foreign investors realised the weakness of theinvestments they had funded, they began to withdraw asmuch short-term capital as they could. Local investorsfled to ‘safe’ currencies.

The evolution of dual economiesIn the early post-war years, HongKong, under a British colonialregime, had a trade oriented economy,creating strong employment andeconomic growth. When Singaporeleft the Malaysian Federation, itturned sharply toward export-ledgrowth. As city states, both were toosmall for protectionist illusions. TheUnited States, dismayed by economicstagnation, inflation, dependence onaid and high levels of corruption inTaiwan, persuaded its government toallow liberal technocrats to stabiliseand partially to liberalise the economy.Political opposition made it impossible to reduce tariffs,so export incentives were used to offset protection toproduction. Similar reforms followed in Korea, but thechaebol group of conglomerates was already strong enoughto ensure that it continued to receive privileged access tocapital and to prevent foreign direct investment inflows.In both countries, macroeconomic stability enabledagriculture and service sectors to develop, though dirigistepolicies continued to distort manufacturing. But thePrebisch-Singer model retained a great deal of support inthe domestic economy in Taiwan and Korea; the successof export orientation nevertheless made Taiwan and Koreaas well as Hong Kong and Singapore the ‘tigers’ of economicdevelopment in the 1960s. Their dramatic rates of growthwere marked by unprecedented poverty alleviation.

By the 1970s, the success of the outward orientedcountries encouraged a second echelon of economies–Malaysia, Thailand and Indonesia–to follow export orientedreforms. But in these latter countries, as in Taiwan andKorea, monopolistic groups that had their start inprotectionist policies, made it impossible to complete the

reform process. Production for domestic markets remainedregulated and protected. Large public sectors were fostered.Export incentives thus also had to be introduced to counterthe high costs of inefficient production for domesticmarkets. They created new distortions. The ensuingcombination of import substituting and export subsidiesallowed favoured interests (cronies) to obtain monopolisticpositions. Fiscal and financial policies were distorted tofavour crony capitalists (Hughes 1995).

The Philippines was an exception to East Asian growth(Hughes 1995). It was strongly import substitutionoriented from the 1950s, with accompanying other microand macroeconomic policy distortions. Cronyism becameentrenched. Economic reform was not possible until the

collapse of the Marcos regime. Thereturn of exiled entrepreneurs thenhelped to loosen crony structures.Lifting financial repression (i.e. thesuppression of interest rates) in the1990s has been the principalachievement, limiting the impact ofthe East Asian crisis on thePhilippines.

Neither China nor Vietnam hasadvanced far along the transitionalroad to markets (Hughes 1995).They do not have competitivefinancial sectors. Entrepreneurship isstifled. Overseas Chinese-ownedexport sectors have provided China

with comfortable external reserves, but their economicpolicies are still highly dirigiste. The close regulation ofexchange rates has enabled exchange rate devaluation to beavoided, albeit at the cost of living standards. Botheconomies are extreme examples of distorted development,with Communist Party cadres dominating domestic andjoint venture investment. Except in labour intensive,export-oriented production and some competitivetownship and village enterprises in China, both countriesare following Latin American patterns of industrialisation.Investment in inappropriately capital and technologyintensive processes and industries leads to low levels ofurban employment formation and hence to poverty, notablyin rural areas. Rural-urban migration is not only thwartedby regulation, but also by the lack of job growth.

Policies that create crony capitalismAs the strength of crony entrepreneurs, supported byauthoritarian governments, overtook the liberal impetus,the ‘Japan Inc’ model replaced the Prebisch-Singer paradigmsin East Asia. Inward orientation was succeeded by an

By the 1970s, the successof the outward oriented

countries encouraged a secondechelon of economies–

Malaysia, Thailand andIndonesia–to follow export

oriented reforms.

Spring 1999 55555

Numbers of producers of each group of products werelimited to avoid ‘excessive’ competition. Ministrybureaucrats, working with business, became the judges ofappropriate levels of industrial capacity. In countriescommitted to protection, that is, to closed markets, thereseemed to be a choice between one producer able to exploiteconomies of scale, and several firms producing inefficientlylow levels of output. Bureaucrats believed that they hadto opt either for economies of scale or internal competition.Inevitably they licensed several oligopolistic producers andthus achieved neither competitiveness nor economies ofscale. Production licensing began in industries such assteel and chemicals, but came to be applied to allmanufacturing and some service industries.

Ministry of Industry staff were judged too slow inevaluating industrial investment proposals. The corruptionassociated with import substitution licensing was knownto be widespread. New Boards of Investment weretherefore established throughout the region to administerindustry subsidy protocols, mainly for foreign but also forlocal investors. Efforts were made to link proposedsubsidies to the capital to be invested, the proposed sizeof the work force and the types of new technology to beintroduced to ‘pick’ foreign and local ‘winners’. Conceptsof value added at international prices were ignored in favourof subjective points systems notorious for their doublecounting and arbitrariness.

The Boards of Investment were to be ‘one stop shops’where foreign and local entrepreneurscould complete their negotiationsquickly and efficiently. Severalcommon features emerged. Theproposals placed before Boards ofInvestment bore little resemblance tothe actual investment, employmentand technological inputs that couldbe discerned three, five or ten yearsafter the starting date. Except inSingapore, reliable records were notkept, so that ex-post evaluationscould not be undertaken even in thefew cases where it was thought

desirable to do so. Only Singapore’s EconomicDevelopment Board became a real ‘one stop shop’.Elsewhere investors not only had to negotiate with Boardsof Investment, but also with Ministries of Industry, withCustoms, with public utilities and with local governments.Except in Singapore, negotiations typically took months.Sometimes years elapsed before a satisfactory arrangementwas made. The arrangements lacked transparency. InThailand the initial negotiations with foreign investors

CRONY CAPITALISM

emphasis on exports, but, except in Hong Kong, Singaporeand Taiwan, subsidies were needed to offset continuingprotectionism. Support for public enterprises gave wayto close relations between government and business, easingthe expansion of cronies into public utilities. Policyframeworks remained essentially dirigiste.

Bureaucratic decision-making involved the granting ofprivileges, providing opportunities for ‘favoured’ applicantsto ‘buy’ permission and for bureaucrats to ‘sell’ it (Bardhan1997; Tanzi 1999). Cronies were those able to buypermission to engage in particular economic activities thatwere generally of a monopolistic nature. In thisenvironment, projects that had low socio-economic returnsand often failed in the long run despite the privileges theyreceived, earned considerable benefits in the form of highmanagement incomes, super profits and income in kind,such as the use of cars and housing.

The ‘Japan Inc’ model of crony government and businessmanaged development appeared to work in the short tomedium term, when developing countries were catchingup with advanced industrial countries. Japan’s dismalperformance in the 1990s and the East Asian collapses of1997 indicate that dirigisme can only boost economies inthe short run and at high cost. It breaks down in the longrun (Lindsey and Lukas 1998).

The economic, social and political structures andinstitutions created by the ‘Japan Inc’ model severelydistorted East Asian economies, including Japan’s, and hadnegative effects on political life. Asmonopolistic practices becomeentrenched, reform, as Japaneseexperience underlines, becameextremely difficult.

Industry policiesThe following section is based onresearch from Hughes (1999).

Industry policies, by preventingthe emergence of competitivemarkets, were the core of the ‘JapanInc’ model in East Asia. With thehelp of other distorted micro andmacroeconomic economic policies, the power of largeentrepreneurs spread from manufacturing to construction,real estate and banking. Enterprises in these fields becametightly linked into family held empires. Discriminationagainst medium and small businesses became rampant.

Import substitution policies built bureaucratic supportfor additional selective incentives for manufacturingenterprises. The principal function of Ministries of Industrywas to structure monopolistic industrial development.

Japan’s dismal performancein the 1990s and the EastAsian collapses of 1997

indicate that dirigisme canonly boost economies in theshort run and at high cost.

66666 Spring 1999

took place over lunch in air conditioned, candle-litnightclubs. High level representatives of foreign firmsand their local partners participated. Once the mainoutlines of an arrangement were settled, further negotiationscould take place in the Board’s offices. Well-connectedentrepreneurs, and those wishing to be well connected,were able to scoop the pool of monopolistic businessopportunities.

Incentives to exportsProtection of domestic industry raises costs aboveinternational levels so that exports need subsidies tocompete. Hence, incentives (subsidies) to exporters tooffset the high costs of protectionism and thus be able toearn as much in export as in domestic markets, seemed tobe a clever policy. Incentives to exports can take the formof direct subsidies, tariff exemptions and drawbacks,‘wastage’ allowances, credit subsidies, tax holidays andso on. The bureaucrats who allocate such incentives earn‘rents’ and so do the entrepreneurs who benefit fromthem. These rents do not add to national output (Krueger1974). Deadweight rent seeking becomes a way of life.Protection offsets were particularly important in Koreawhere they made substantial contributions to chaebolprofits while discriminating against other producers.Incentives to exports, and the regulatory regimes thatnecessitated them, were highly praised by dirigisteeconomists (Amsden 1989, 1991; Wade 1991a and b,1992) and accepted by the World Bank (1993). Thestructural damage that the regulatory measures, includingoffsets to protection, imposed on the East Asian economieswere thus condoned.

Tax holidaysThe International Chamber of Commerce in the 1960sargued that to attract foreign investment to developingcountries–predominantly for import substitution–multinational firms should be courted by special incentives.Tax holidays were the most frequent form of subsidy tobe directed to foreign investors, but the Chamber alsosuggested privileged access to land and subsidies for utilitiessuch as energy and water. On equity grounds, such subsidieshad to be extended to domestic investors. They wereadopted widely, even though it quickly became evidentthat they were not effective (United Nations 1968). Aswell as creating deadweight rents and opportunities forcorruption, they undermined countries’ fiscal bases andthe ability to finance social and physical infrastructures.Tax holidays did not benefit investors from countries thatdid not allow tax deduction for taxes ‘forgiven’ by tax

holidays. Tax revenues were thusshifted from poor recipientcountries to rich investingcountries. Tax holidays, however,produced generous rents todomestic entrepreneurs and tobureaucrats. East Asian countriesstill bid against each other inextending tax holidays and othersubsidies, particularly to foreigninvestors, despite the financial costsand corruption they engender.

Foreign investment flows intoprotected industriesThe rule of law, a liberal, openpolicy regime, the absence ofarbitrary regulations andassociated corruption, andcompetitive public utility services are known to be effectiveincentives to domestic and foreign investment. An intensivedebate in the 1960s and 1970s highlighted research findingsthat clearly indicated that the costs and benefits accruingfrom foreign investment flows were determined by recipientcountries’ domestic policies. Incentives underline theeconomic settings that determine cost-benefit outcomes.

A considerable, though unknown (Athukarola and Hill1998) proportion of private foreign investment flows toEast Asia have gone into protected and monopolisticenterprises. Their profits went into other uneconomicprojects such as real estate bubbles that dissipated thebenefits of foreign as well as local investment. Foreigninvestment, stimulated by subsidies and protective tariffs,led to high levels of oligopolistic excess capacity in someindustries. East Asian countries have at least five andperhaps ten times the capacity of likely motor vehicledemand for decades to come. Inadequate scale ofproduction makes exports only possible with subsidies.While the local associates in the East Asian countriesbenefit, the chief beneficiaries are the shareholders, mainlyin the United States and Japan, of the parent motor-vehiclefirms that earn protected monopolistic profits. The losersare the consumers who pay excessive prices for motorvehicles, the taxpayers who pay for the subsidies and thosedenied jobs in competitive industries.

Bureaucrats provide the chief support for incentivehandouts even when they do not benefit from under-the-counter payments. When the issue of replacing tax holidaysfor exports by an across the board tax reduction wasproposed in Singapore in the early 1990s, the reform was

CRONY CAPITALISM

Spring 1999 77777

CRONY CAPITALISM

Paradoxically, growingdemocratisation of politicalprocesses played a counter-

productive role in theevents that led to the

collapses of 1997.

strongly opposed by Economic Development Board staff.They argued that without ‘tax holidays’ as talking points,new firms coming to Singapore, or old firms expandingproduction there, would have no reasons to talk to them.Their jobs were at stake. The reform was defeated.

Financial repressionThe suppression of interest rates below market levels forfavoured borrowers, notoriously practiced in Japan and inmost East Asian economies, prevented the emergence ofsophisticated, competitive financial sectors. Financialliberalisation was too slow, too late and rarely accompaniedby adequate prudential financial regulation (Suwandi 1995).Financial repression was a key concomitant of industrypolicies, magnifying the distortions they created. Creditrationing to favoured recipients by nationalised banksplayed a key role in building up the chaebol in Korea andrestricting the growth of small andmedium sized business. State-ownedbanks also made a major contributionto the emergence of crony capitalismin Indonesia. When, belatedly,Indonesian and Korean banks weredenationalised, industry policies hadcreated the family groupings thatcould play a dominant role in banking.Reasonably open Hong Kong,Singapore and Taiwan financial sectorswere exceptions. The management ofmost East Asian banks did not adoptappropriate transparency andaccountability measures. Internalfinancial transactions within crony groups led to a highproportion of non-performing loans. Foolish internationalfirms were seduced by promises of high returns into lendingon the basis of flimsy information about the bankinginstitutions and the projects for which they were lending.

Paradoxically, growing democratisation of politicalprocesses played a counterproductive role in the eventsthat led up to the collapses of 1997. Before the rise ofcrony capitalism, liberal bureaucrats in Ministries ofFinance and central banks succeeded in protecting domesticand balance of payments stability. In Thailand, Korea,Indonesia, and Malaysia, there were inflationary and balanceof payments blips, but macroeconomic management hadbeen in the national, not sectional, interest for some 30years. By the middle of the 1990s crony lobbyists andparliamentarians were able to ensure that prudent policieswere overruled, leading to the overvaluation of exchangerates and hence to the 1997 ‘crises’.

Fiscal policiesIt has been claimed, notably by the multilateral financialinstitutions, that fiscal policies were in good shape in the‘crisis’ countries in the 1990s. But fiscal policy is notmerely a question of budget surpluses or deficits. Fiscalpolicies cannot be regarded as prudent merely becausebudget deficits were contained until the mid-1990s. Withthe exception of Hong Kong, Singapore and Taiwan,taxation was highly regressive, inefficient, arbitrary, andinadequate for public expenditure needs. Tax avoidanceand evasion by crony capitalists was rampant and othersfollowed suit wherever they could.

Public services, swollen by armies of regulators, ate upa disproportionate share of revenues, leaving inadequateresources for infrastructure. By the mid-1990s it wasbecoming evident that high savings rates did not meanadequate private or public infrastructural investment.

Infrastructure was lagging a long waybehind the needs of most East Asianeconomies. The cronies stole, wastedor siphoned abroad a significantproportion of national savings.Infrastructure privatisation, far fromeasing the situation, has frequentlyexacerbated it. In the absence ofappropriate policies and prudentialregulation of utility sectors,inappropriate joint ventures betweencronies and foreign investors aretaking place. Multinationalinstitutions are encouraging a climateof renewed reckless lending similar

to that which underwrote the flow of private capital toEast Asia in the 1990s.

Energy, telecommunications, highway and otherpotentially lucrative markets are being divided up amongoligopolistic groups of local cronies and foreign investors.The public ownership and management of utilities is oftenhighly inefficient, but it does not follow that privateoligopolies will provide cost effective services. Evidenceof the high costs of ill-conceived ‘build, own, operate, andtransfer’ projects is already pressing for attention(Soonthonsipirong 1999). The next ‘crisis’ is in themaking before the last one has been paid for.

International cronyismThe UN agencies (ECOSOC, UNCTAD, UNIDO,ECLA, ESCAP, etc.) advocated dirigiste policies based onPrebisch-Singer import substitution to acceleratedevelopment. Most developing countries followed this

88888 Spring 1999

at times floods–of liquidity, the World Bank’s conditionalityhas become totally ineffective. Like the IMF, it pouredresources into countries that had no intention of followingprudent economic policies.

The analysis that was ignored before the currencycollapses is still not being undertaken. There is little senseof urgency in seeking trade reforms that would put pressureon inefficient domestic producers. Industry policycontinues to be implemented. No changes are being madein the motor vehicle industry and other attention grabbingforeign investments and local oligopolies. Progress inbankruptcy procedures has been minimal. The cronies arebeing amazingly successful in protecting their privileges

The contribution of ‘Japan Inc’ to 10 years of recessionin Japan and to the problems of thecrony economies of East Asia is onlyrarely mentioned. Fiscal policy is stillsaid to be fine. The aid funds nowflowing into the crisis countries arenot being used to facilitate reforms,but largely to rescue foreign lendersand domestic borrowers.

Because efficient export sectorscontinue to operate in dual East Asianeconomies, exchange rates haveappreciated and confidence isreturning, except, perhaps inIndonesia and Japan. Security prices

are reviving with new inflows of foreign speculative andreturning domestic funds. Foreign investment in inefficientmotor vehicle production is being supported by largesubsidies. National and international cronies are alive andwell in East Asia.

ConclusionsOnce dirigiste policies entrenched crony capitalists in EastAsian economies, liberal reforms become increasinglydifficult to initiate and carry through. Efficient corporategovernance, transparency in government-business relations,and competition policy cannot be achieved until thedirigiste policies, and the institutional structures to whichthey have given rise, are changed. This will entailstrengthening commercial law and accounting standards,dismantling protectionist policies and offsets to protectionthrough export incentives, radically reforming fiscal andfinancial policies, and, above all, ending industry policiesthat ‘pick winners’. The Boards of Investment will haveto go. At present there is no evidence that a start is being

CRONY CAPITALISM

path with ensuing slow growth and little povertyalleviation. The United States Agency for InternationalDevelopment (AID), supported by the IMF and the WorldBank, assisted East Asian countries to move toward stablemacroeconomic and liberal trade policies as the base foroutward oriented growth. But entrepreneurs who hadtheir start in import substituting industries, resisted liberalreforms in favour of ‘Japan Inc’, re-labeled the ‘Asian Way’,to development. Liberal policies were denigrated as‘Western’ and hence alien to Asia. The World Bank, fundedby Japan, in a sharp change ofdevelopment philosophy, attemptedto make ‘Japan Inc’ acceptable by itspromotion of The East Asian Miraclein 1993.

IMF economists in the late 1940s,1950s and 1960s were influential inconverting the economics professionto the thesis that most internationaldisequilibria had domestic origins.The IMF as the guardian of fixedexchange rates until the early 1970s,introduced country surveillancereports to urge policy changes thatwould enable countries to avoid undue exchange ratechanges. Domestic policy reforms were the principalrequirements for the granting of credits and loans. Whenthe world moved to flexible exchange rates, the IMFcontinued its macroeconomic surveillance, fundingcountries with balance of payments difficulties, oftenrepeatedly, because agreed reforms were not implemented.Such funding introduced substantial ‘moral hazard’ intointernational capital markets. Private lenders anddeveloping country public and private borrowers becameconvinced that the IMF, backed by the World Bank, otherregional banks and bilateral governments would provideperpetual credit to developing and transitional countries.Eventually developing country taxpayers would pay off suchloans.

The World Bank management has for long been moreconcerned to achieve a high flow of lending than to ensurethat its resources were efficiently allocated. Recipientgovernments are as well aware of this imperative as WorldBank staff. As the perceived shortage of international capitalthat prompted the World Bank’sestablishment turned into high levels–and

The World Bank has for longbeen more concerned toachieve a high flow oflending than to ensurethat its resources wereefficiently allocated.

Spring 1999 99999

CRONY CAPITALISM

Lindsey, B. and A. Lukas 1998, ‘Revisiting the “Revisionists”:the Rise and Fall of the Japanese Economic Model’, TradePolicy Analysis, Center for Trade Policy Studies, CatoInstitute, Washington DC.

Lingle, C. 1997, The Rise and Decline of the Asian Century,Sirocco, Barcelona.

McLeod, R.H. and R. Garnaut (eds) 1998, East Asia in Crisis:from being a miracle to needing one?, Routledge, London.

Montes, M.F., and V.V. Popov 1999, The Asian Crisis TurnsGlobal, Institute of Southeast Asian Studies, Singapore.

Moreno, R., G. Pasadilla and E. Remolona 1998, ‘Asia’sFinancial Crisis: lessons and policy responses’, in R. Morenoand G. Pasadilla, eds., Asia: responding to crisis, AsianDevelopment Bank Institute, Tokyo.

Radelet, S. and J. Sachs 1998, ‘The East Asian financial crisis:diagnosis, remedies, prospects’, in W.C. Brainard and G.L.Perry, eds., Brookings Papers on Economic Activity, 1: 1-90.

Soonthonsipirong, Nittaya 1999, ‘Are build transfer operateregimes justified?’, Centre for International EconomicStudies, Policy Discussion Paper 99/05, Adelaide University.

Suwandi, T. 1995, ‘Financial deregulation in Indonesia andthe continuing policy issues’, PhD dissertation, AustralianNational University.

Tanzi, V. 1999, ‘Corruption around the world’, IMF StaffPapers, 45(4): 559-594.

United Nations 1968, Foreign Investment in DevelopingCountries, New York.

Wade, R. 1988, ‘The role of government in overcoming marketfailure: Taiwan, Republic of Korea and Japan’, in H. Hughes(ed.) Achieving Industrialization in East Asia, CambridgeUniversity Press, Sydney.

Wade, R. 1991a, Governing the Market: Economic theory andthe role of the government in East Asian industrialization,Princeton University Press, Princeton.

Wade, R. 1991b, ‘How to protect exports from protection:Taiwan’s duty drawback scheme’, The World Economy, 14(3):299-310.

Wade, R. 1992, ‘East Asia’s economic success: Conflictingperspectives, partial insights, shaky evidence’, World Politics,44: 270-320.

World Bank 1993, The East Asian Miracle: economic growthand public policy, Oxford University Press, Oxford.

World Bank 1996, Infrastructure Development in East Asiaand Pacific: towards a new public-private partnership,Washington, D.C.

made to reform these key policies that support cronycapitalism.

The revelation of the depth of East Asia’s financialproblems took unduly long, partly because the greed andincompetence of some private international lendersovercame their commercial judgement, and partly becausethe principal multilateral financial institutions failed intheir monitoring responsibilities. On the contrary, theirsupport of foreign capital flows to East Asia, regardless ofproject or sovereign risk, exacerbated the ultimate depthof the financial collapses. When the excesses of imprudentcapital transfers became evident, multilateral financialinstitutions sought to minimise the costs to internationallenders and to local cronies through rescue packages.Ultimately, the taxpayers in developing countries, that is,low-income families who are already bearing most of thecosts of the East Asian debacles, will have to repay thoseloans. The ‘moral hazard’ created by the IMF, the WorldBank and the Asian Development Bank, undermined thecompetitiveness of international capital markets and wasthus an important factor in the events of 1997 in EastAsia. Putting an end to the multilateral institutions’underwriting of careless lending and borrowing is at leastas urgent as policy reforms in East Asian countries.

References

Amsden, A. 1989, Asia’s Next Giant: Korea and lateindustrialization, Oxford University Press, Oxford.

Amsden, A. 1991, ‘Diffusion of development: the lateindustrializing model and greater Asia’, American EconomicReview, Papers and Proceedings, 81(2): 282-6.

Arndt, H.W. and H. Hill eds. 1999, ‘Southeast Asia’s economiccrisis: origins, lessons and the way forward’, ASEANEconomic Bulletin, 15(3).

Athukorala, P. and H. Hill 1998, ‘Foreign investment in EastAsia: a survey’, Asian Pacific Economic Literature, 12(2):23-50.

Bardhan P. 1997, ‘Corruption and development: a review ofissues’, Journal of Economic Literature, 35: 1320-1346.

Hughes, H. 1995, ‘Why have East Asian countries ledeconomic development?’, Economic Record, 71 (212): 88-104.

Hughes, H. 1999, ‘The evolution of dual economies in EastAsia’, unpublished mimeo.

Krueger, A.O. 1974, ‘The political economy of the rent seekingsociety’, American Economic Review, 64(1): 291-303.

Lal, D. 1983, The Poverty of ‘Development Economics’, HobartPaperback No 16, The Institute of Economic Affairs, UK .