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THE MYTH OF

RECOVERY





THE MYTH OF

RECOVERYThe Asian Crisis More Than a Decade Later

Edsel L. Beja Jr.

INSTITUTE OF PHILIPPINE CULTURE

Ateneo de Manila UniversityQuezon City, Philippines

2009



Institute of Philippine CultureAteneo de Manila University

Loyola Heights, Quezon City

P.O. Box 154, 1099 Manila, Philippines

E-mail: [email protected]

Website: www.ipc-ateneo.edu

Copyright 2009 by Institute of Philippine Culture,

Ateneo de Manila University

Cover design by Reamur David

All rights reserved. No part of this publication may be reproduced,

stored in a retrieval system, or transmitted in any form or by any

means, electronic, mechanical, photocopying, recording, or

otherwise, without the written permission of the Publisher.

The National Library of the Philippines CIP Data

Recommended entry:

Beja, Edsel L.

The myth of recovery: The Asian Crisis more than a decade later/

Edsel L. Beja — Quezon City: Institute of Philippine Culture, Ateneode Manila University, c2009.

p.; cm.

1. Financial crises—Asia. 2. Asia—Economic conditions—1945-.

3. Indonesia—Economic conditions. 4. Malaysia—Economic

conditions. 5. Philippines—Economic conditions. 6. South Korea—

Economic conditions. 7. Thailand —Economic conditions. I. Title

HB 3808 332.042095 2009 P092000199

ISBN 978-971-8610-56-5



De Omnibus Dubitandum

If you would be a real seeker after

truth, it is necessary that at least

once in your life you doubt, as far

as possible, all things.

René Descartes (1596–1650)

I am speaking of a ruthless criticism

of everything existing, ruthless in

two senses: the criticism must not be

afraid of its own conclusions, nor of

conflict with the powers that be.

Karl Marx (1818–1883)





Table of Contents

List of Figures ix

List of Acronyms x

Acknowledgments xi

Executive Summary xiii

1 Starting the Recollection 1

2 How to Frame Crises 13

3 Recalling the 1997 Asian Crisis 20

Re-analyzing the 1997 Asian Crisis 21

Comparative Analysis of the Costs 42

4 Looking Back to Move Ahead 48

Economic Growth 49

Opportunism and Hesitation 52

International Flows of Capital and Trade 55

The Role of Governments 59

International Cooperation 63

5 Conclusion 68

vii



viii

Postscript 71

Parallels Between the Global and Asian Crises 71Affirming a Declaration of Independence 91

Appendices 117

References Cited 122

About the Author 133



ix

List of Figures

2.1 Short and transitory impact of crisis 14

2.2 Extended but transitory impact of crisis 15

2.3 Permanent (negative) impact of crisis 17

2.4 Permanent (positive) impact of crisis 183.1 GDP per capita, normalized to 1996 22

3.2 GDP per capita, rotated at 1996 24

3.3 GDP per capita and counterfactual, Indonesia 27

3.4 Estimated costs per capita, Indonesia 28

3.5 GDP per capita and counterfactual, Malaysia 30

3.6 Estimated costs per capita, Malaysia 31

3.7 GDP per capita and counterfactual, Philippines 33

3.8 Estimated costs per capita, Philippines 34

3.9 GDP per capita and counterfactual, South Korea 37

3.10 Estimated costs per capita, South Korea 38

3.11 GDP per capita and counterfactual, Thailand 39

3.12 Estimated costs per capita, Thailand 41

3.13 Share of foregone output to GDP per capita 43

3.14 Share of opportunity cost to GDP per capita 44

3.15 Share of accumulated cost to GDP per capita 45



List of Acronyms

ADB Asian Development Bank

BIS Bank for International Settlements

G20 Group of Twenty

G24 Group of Twenty-Four

GDP gross domestic product

IMF International Monetary Fund

LTCM Long-Term Capital Management

OECD Organization of Economic Cooperation andDevelopment

WFO World Financial Organization

x



xi

Acknowledgments

his book is based on a research project that was completed under

the auspices of the Merit Research Awards of the Institute of

Philippine Culture (IPC), Ateneo de Manila University, with funding

support from the Ford Foundation. Wilfredo F. Arce was IPC director

when the research grant was awarded in 2007, and he gave me full

flexibility in pursuing my study. The research was thus completed

without being concerned about ruffling feathers, so to speak. I am

grateful to Czarina A. Saloma-Akpedonu, current IPC director, and

Ma. Elizabeth J. Macapagal, IPC deputy director, for their constant

interest in my study and for seeing through the publication of this

book.

The Department of Economics of Ateneo de Manila University is

a special place in the Philippines because it embraces and provides

the sustenance to anyone interested in pursuing progressive thinking.

Faculty members welcome alternative analyses, notwithstanding the

predominance of the so-called “there-is-no-alternative” mode of

thinking in Philippine economics, as it is elsewhere.

My findings debuted, as in my earlier works, at Ateneo de ManilaUniversity, with my students as captured listeners. If I was able

to convince them with my ideas, I am sure that you, too, would

T



xii

be convinced and find the book provocative to the soul. I also had

opportunities to present my study elsewhere, namely: A Decade After:Economic Recovery and Adjustment Since the 1997 Asian Crisis (Bangkok,

July 2007); Singapore Economic Review Conference (Singapore, August

2007); Annual Conference on Development and Change (Johannesburg,

December 2007); ASEAN Inter-University Conference on Social

Development (Manila, May 2008); and IPC-MRA Lecture Series (Quezon

City, August 2008). I thank the seminar and conference participants

for their inputs.I also wish to thank an anonymous referee and external readers

for their constructive criticisms, suggestions on how to improve

my analysis, and pointers on useful references. Of course, the usual

disclaimer applies.

Finally, Maria Donna Clemente-Aran did an excellent work on

improving my written English and gave considerable effort into

putting this book in its final shape for publication. Many thanks

indeed to her for helping make the message of my book a lot easier

to grasp and simpler to read.



xiii

Executive Summary

hree issues are raised in this book, issues that have been under-

played in the analyses of the 1997 Asian Crisis.

The first concerns the economic performance of Indonesia, Malay-

sia, the Philippines, South Korea, and Thailand in the post-crisisperiod, which has been inferior relative to their respective pre-crisis

performance. In the two decades prior to 1997, the average gross

domestic product (GDP) per capita growth rate of the group —

excluding the Philippines because its performance was an outlier

throughout the 1980s and 1990s — was 5.6 percent; in the decade

prior to 1997, it was 6.9 percent. After the Asian Crisis, the average

growth rate was about half (3.7 percent with and 3.9 percent withoutthe Philippines). In short, the Asian Crisis played an important part

in undermining the dynamic performance of the region.

The second pertains to the fact that the crisis-affected economies

have yet to recoup the losses they incurred during the Asian Crisis.

The task of achieving full economic recovery remains daunting. A lot

needs to be done to regain the lost economic momentum. Indonesia

has to recoup a social cost of US$94.8 billion; Malaysia, US$39.1 billion;the Philippines, US$6.7 billion; South Korea, US$52.3 billion; and

Thailand, US$95.1 billion. These figures have remained large partly

T



because of deficient economic growth. These economies have also

not completed the needed reforms to regain their dynamism.

Stronger but sustained economic growth is crucial to economic

recovery. Excessive pragmatism that characterizes the actions of the

crisis-affected economies has impeded their recovery. If economic

performance slows down to less ambitious levels, recovery will

simply be difficult. Downgrading growth targets in economic plans

to conform to the projections announced by international institutions

and rating agencies is unwise, given the sufficient capacities available

for robust economic expansion. Such aversion to rapid growth betrays

a wanton disregard for the unsatisfactory performance of the region

in recent periods.

Lastly, it is important to stress that, if the policies of the crisis-

affected economies do not move in a positive direction, their economic

progress will likely be limited and punctuated by crises. A positivedirection is one where governments revive strategies that have

proven effective in achieving dynamic performance and then strategi-

cally employ new ones to meet current challenges.

Full economic recovery from the Asian Crisis remains difficult.

Complacency with a seemingly stable economic environment will be

misplaced as long as massive and volatile international flows continue

to characterize the global financial system and most economies remainill equipped to deal with the challenges produced by this highly

mercurial global setup. If the international economic architecture is

the origin of the crises, it is reasonable to demand changes in it so

that more space is opened for governments to realize dynamic

performance and for the world to achieve economic stability. Decisive

action is needed from governments so that they can achieve such

goals. Dynamic performance may require a robust private sector,

but timely and appropriate government interventions are very

important to succeed in an integrated and globalized environment.

Environmental sustainability, income distribution, social safety nets,

and international policy coordination have to be included as additi-

xiv



onal goals. Of course, the efficacy of policies will largely depend on

the capacity of the incumbent leadership and the political will of gov-ernments to implement unpopular measures. Ultimately, everything

rests on the capacity of the leadership to orchestrate policies in pursuit

of its goals.

The study that became the basis of this book was completed in

mid-2008, a few months before the Global Crisis began. The US

housing bubble burst in 2007, but the bigger financial mess did not

start until the second semester of 2008. As this book goes to press,

the Global Crisis is unremitting, evolving and pulling many economies

to much deeper contractions.

The analysis presented in this book on the Asian Crisis remains

valid, if not more relevant, given the Global Crisis. In view of the

present crisis, however, it was deemed necessary to write a postscript

to, first, present a preliminary analysis of the Global Crisis — perhapsa prelude to another study using the same approach as this book —

and, second, pull out the policy guidelines outlined in this book and

apply them to the present crisis. In other words, were the lessons

from the Asian Crisis learned by the crisis-affected economies? At a

general level, were the lessons from the Asian Crisis learned by other

economies to forestall the Global Crisis? Or, in the case of advanced

economies, were they basically going about their usual do-as-we-

tell-you-and-not-as-we-do approach to policy?

Thus, the basic message of the postscript is that there has been

little progress within Asia in institutionalizing the reforms that were

found necessary because of the Asian Crisis. More importantly, the

lessons of the Asian Crisis were not learned by many economies

outside Asia. Once the Asian Crisis was contained and eventually

disappeared as a menace to the region and the world, governments

took a lighter approach to reforms, even in Asia. The Asian Crisis

became a bad dream, so to speak, that could be forgotten when

pursuing deregulation and financial liberalization. Indeed, the

mainstream rhetoric vigorously accentuated the notion that the crisis-

xv



affected economies were able to bounce back rather quickly despite

the severity of the problem, thus shifting attention away from probingthe underlying causes of the Asian Crisis to accumulating huge

international reserves as buffer funds against future crises and the

ensuing global imbalances owing to increasingly larger current

account surpluses experienced by Asian economies as a result of their

economic performance after the Asian Crisis.

Even mainstream literature accentuated the recovery by 1999 or

2000, pointing out the V-shape pattern of economic growth rather

than the actual L-shape pattern, as shown in this book. The result of

such analysis extinguished progressive views inquiring about basic

items for a sound economic management of present-day capitalist

systems, namely, fundamental reforms in the international economic

architecture, determination of the appropriate modes of cooperation

and policy coordination, including the procedures for intervention

during crises, and the introduction of structural changes that wouldenable domestic economies to pursue appropriate industrial policies

and erect institutions that could withstand external shocks.

There are, of course, historical and structural antecedents that

explain why economies could not internalize the lessons of the Asian

Crisis. Many explanations have been made elsewhere, among others,

Minsky (1986), Wade and Veneroso (1997), Dumenil and Levy (2004),

Harvey (2005), Bello (2006), Brenner (2006), and Klein (2007). Notsurprisingly, the policy guidelines relevant to the Asian Crisis are

found likewise relevant to the Global Crisis. A lot remains to be

done to change the international economic architecture and make it

conducive to balancing domestic and global goals so that economic

welfare is enlarged without undermining national sovereignty.

xvi



he 1997 Asian Crisis was unprecedented in its breadth and

impact. There is large literature on its causes, and there is no

need to rehearse them here.1 Analysts continue to study their impli-

cations, and policies move in a particular manner as a result. Before

the Asian Crisis, the consensus shaped by the World Bank, the Inter-

national Monetary Fund (IMF), and mainstream analysis in general

was that the Asian miracle economies of Indonesia, Malaysia, South

Korea, and Thailand would continue to have rapid economic growth

even in the early 2000s, as gross domestic product (GDP) per capita

growth rates averaged 6.9 percent in the preceding decade. In fact,

Indonesia and Thailand had not experienced a negative growth rate

prior to 1997. While Malaysia and South Korea went into economic

1

Important studies that appeared in 1998 are Bhagwati (1998), Chang andVelasco (1998), Corden (1998), Corsetti, Pesenti and Roubini (1998a, 1998b),Furman and Stiglitz (1998), Goldstein (1998), Jomo (1998), Krause (1998), Krugman(1998), Lee (1998), Montes (1998), Radelet and Sachs (1998a, 1998b), Wade (1998),and Wade and Veneroso (1998). This list expands if country studies and subsequentperiods are included in the count.

Starting the Recollection

1

T



recessions in the early 1980s, they recovered quickly to achieve rapid

economic expansion beginning in the late 1980s. The inclusion of SouthKorea in the Organization of Economic Cooperation and Development

(OECD) in 1995 raised prospects that other miracle economies would

follow suit in due course.

The Asian Crisis affected the Philippines, but not to a significant

degree as it did the four miracle economies. Although the country

faced minor damages, it needs to be stressed that its economic

performance had not been impressive for some time, as its GDP percapita growth rate averaged only 1.4 percent between 1987 and 1996,

and zero between 1980 and 1996. Studies have found that its boom-

and-bust performance contributed to a failure to reach growth

acceleration, in turn, stalling the country from economic takeoff to

higher growth trajectories similar to what the four miracle economies

had accomplished by the 1980s. Of course, political troubles led to

the doldrums that have characterized the Philippines since the late

1970s.

It is now clear that the Asian Crisis uncovered the weaknesses of

the miracle economies and that the debacle led to a change in

sentiments toward the Asian model of economic growth. From being

successful emerging economies — lauded in mainstream analysis as

embodiments of virtuous economic expansion coexisting with rapid

poverty reductions, stable prices, and provision of basic goods andservices to all — they were quickly condemned as principals of crony

capitalism, bastions of corruption, facilitators of wide-scale inefficien-

cies, and initiators of structural defects, not to mention their wayward

external borrowings and unsound investments that altogether caused

the collapse.2 Thailand, where the Asian Crisis erupted, experienced

2 The oil price shocks of the 1970s, the recession in the OECD in the late 1970s, theLatin American debt crisis in the early 1980s, the commodity prices slump andthen the oil price crash in the mid-1980s, the European financial debacle of theearly 1990s, and the reverse Plaza Accord in 1995, among others, brought economicproblems to Asia. The dramatic economic contraction produced by the AsianCrisis is unprecedented to the region in the post-World War II period.

2 Chapter One



a 2.4 percent contraction in GDP per capita growth in 1997 then went

on to face the worst in 1998, as its growth contracted by 11.4 percent,or a total of 13.8 percent contraction over two years. Negative growth

rates were reported in Indonesia, Malaysia, the Philippines, and South

Korea by 1998, as the Asian Crisis worked itself out in the region. In

fact, the growth rates in 1997 indicated that these economies were

already shaken by the shock from Thailand. As the 1998 data show,

Indonesia had the worst fate, with a contraction of -14.3 percent.

Malaysia had -9.6 percent, and South Korea had -7.5 percent. The

Philippines was injured the least, with a -2.5 percent contraction.

The Asian Crisis bared the incompatibility of the Asian model of

economic growth with the model advocated by the Washington

Consensus, which was characterized by wide-scale privatization,

deregulation, and financial liberalization, together with minimal

government participation in giving finance and goods the freedom to

move across borders. Of course, Hewison and Robison (2006) havepointed out that the Asian miracle economies were never completely

drawn to the Washington Consensus model; rather, these economies

were more strategic when introducing reforms while preserving the

overall character of their respective approaches to growth. But Jomo

(1998, 2003) has emphasized that aggressive financial liberalization in

the region by the 1990s, coupled with no reforms in — or, in some cases,

the weakening of — governance structures and regulatory capacities to

manage international flows, eventually generated structural vulnera-bilities that then aggravated the existing institutional weak points of the

Asian approach.

In time, the introduction of reforms created mismatches between

the domestic and external sectors, widening opportunities to exploit

the situation and circumventing existing regulations while finding

ways to undermine regulations. Policymaking and implementation

were eventually captured by elites; in other contexts, elite capture

was allowed or tolerated by governments. The resulting inferior

industrial policies discouraged further capital accumulation and indus-

trial deepening as well as technological adaptation, thereby removing

Starting the Recollection 3



some of the fundamentals for long-term economic expansion. In the

end, the economies were vulnerable to speculation and crises. Theywere robust to the extent that international flows fueled the economic

expansion, albeit driven by unproductive activities, and for as long

as export-oriented strategies remained viable for rapid economic

growth. When the Asian Crisis occurred, capital was quick to rush

out of the region, making the adjustment process in each economy

very difficult and, indeed, quite painful. The Asian Crisis was thus

intense and caused wide-scale damages. Yet, domestic players werenot unaware of the brewing domestic problems within the region and

each economy; and they did want reforms to deal with the vulnera-

bilities. However, both domestic and international players were more

determined to consolidate their control over capital and trade flows

even as they pushed governments to relax regulations and controls,

hence making the crisis inevitable.

The economic fundamentals and welfare were upset as the AsianCrisis spread across the region and got worse. Days after the Asian

Crisis erupted in Thailand, the Philippine peso was devalued when

its central bank realized that it could not fight the situation with only

very limited international reserves. Malaysia next took the ringgit

off its peg. The Indonesian rupiah was hit next and also went off its

peg. By the end of August 1997, the four economies had adopted

flexible exchange rates. As the Asian Crisis gained momentum,Indonesia announced some revisions in its spending plans for the

year, which actually did not happen: the budget announced in January

1998 indicated that Indonesia was not determined to pursue reforms.

By late 1997, Thailand, the Philippines, and Indonesia had signed on

rescue packages or standby arrangements with the IMF, World Bank,

and the Asian Development Bank (ADB).3

3 Thailand and Indonesia signed on a US$17.2 billion rescue package in Augustand US$23 billion in October, respectively, while the Philippines had a standbypackage.

4 Chapter One



The unexpected turn of events was the devaluation of the

Taiwanese dollar in October 1997, which sparked serious concern that

the Asian Crisis was already spreading outside Southeast Asia.

Thereafter, speculative attacks on the Hong Kong dollar ensued. The

sell-offs in the Hong Kong stock market reverberated in the stock

markets of Japan, Europe, and the United States. The collapse of

Yamaichi Securities Co. Ltd., the fourth largest brokerage in Japan,

deepened the herd behavior. South Korea followed, with the devalu-

ation of the won in November 1997. By the end of the year, it hadbeen forced into a flexible exchange rate. Of course, bankruptcies had

earlier hit the chaebols: Hanbo Steel in January and then the most

publicized closure of Kia Motors in June. By the end of 1997, South

Korea had signed on an IMF rescue package of US$57 billion. Other

actions followed in due course, like an ADB emergency assistance

package of US$3.5 billion and US$4 billion for Indonesia and South

Korea, respectively. The United States and 12 other advanced econo-mies pledged US$10 billion assistance to South Korea if additional

funds would be needed to stabilize its economy. Speculations of

President Suharto having a stroke in 1998 renewed fears in Indonesia,

thereby sending the rupiah to plunge further. The fall of the rupiah

ignited another herd behavior in other stock markets and currencies

in the region. As if problems in the region were not serious enough,

Southeast Asian sovereign debts were downgraded to junk bondstatus by Moody’s Investors Service. Another round of panic thus hit

the region.

Singapore devalued its dollar in January 1998. By then, the Asian

Crisis had already affected other economies in Asia, like India and

Pakistan, and was extending to the Pacific Rim as Australia and New

Zealand were hit, too. When Indonesia removed food, fuel and

electricity subsidies in April 1998, social unrest and violence eruptedacross the country. Panic escalated and riots overwhelmed Jakarta,

plunging the Indonesian rupiah to its historic low. President Suharto

was forced to resign by May of that year.




Just when everyone thought that the Asian Crisis was confined

only to Asia, the Russian stock market crashed in June 1998. Mean-while, Asia had to cope with the worst of the Asian Crisis as rescue

and bailout packages were long-drawn. When these arrived, they

provided some assurances for regaining economic stability.

Complicating the ongoing troubles in Asia was the announcement

in mid-1998 that Japan was in an economic recession. In fact, earlier

in January, Japan released what could be the bleakest assessment of

its economy in more than twenty years. It was a frustrating — albeit

not an unexpected — development because the region looked to Japan

for economic intervention.

The yen plunged in June, which subsequently triggered attacks

on other currencies in the region. And as though a fire was being

reignited, renewed attacks ensued starting with the Hong Kong

dollar. Speculations that China would devalue the renminbi did nothelp ease anxieties. Then Russia defaulted on its domestic debts,

declared a moratorium against its foreign creditors, and devalued

the ruble.

The next wave of the Asian Crisis in September 1998 hit the Latin

American markets. Brazil’s stock market plunged first. As stock

markets across Latin America reacted to the Brazilian and Russian

debacles, sell-offs in the stock markets occurred, with investors rush-ing out of Latin America. The tragedies in Japan, Russia and Brazil

rattled Wall Street, where like in other markets sell-offs continued

briskly as sentiments became bleak, with no hope that the Asian Crisis

would slow down anytime soon.

Only in September 1998, when a hedge fund company called Long-

Term Capital Management (LTCM) was found on the brink of financial

collapse, did the Asian Crisis become a serious threat to the United

States. It became apparent that if LTCM collapsed with its exposure

of at least US$1 trillion, the United States financial system would fail

and set off a global economic meltdown. To avert the Asian Crisis

6 Chapter One



from sparking in the United States, the Federal Reserve Bank of New

York coordinated a private bailout of US$3.5 billion for LTCM.

Other actions followed in late 1998 to deflate the crises and regain

stability: the Federal Reserve cut interest rates three times between

September and December 1998 to help ease speculations, and the

European central banks followed by cutting their interest rates in

October. Meanwhile, back in Asia, Malaysia introduced capital con-

trols in September to insulate the economy from further attacks,

reasoning that controls were needed for the country to pursue counter-

cyclical measures and bounce back to good economic health. But it

should be noted that the political conflicts between Prime Minister

Mahathir bin Mohamad and Deputy Prime Minister Anwar Ibrahim,

as well as the repeated denouncements by the Prime Minister of cur-

rency traders and financial speculators (including George Soros), did

not help stabilize the economy. Fortunately, by late 1998, the financial

markets had responded positively to the actions of the Federal Reserve,European central banks, and the various rescue operations. The fol-

lowing Miyazawa Plan of a US$30 billion assistance package would

contribute to further stabilize the situation. Eventually, the Asian

currencies and stock markets rebounded with strong recoveries; and,

by the start of 1999, there was a realization that the Asian Crisis had

finally subsided.

The poor international response as the Asian Crisis was unfolding

indicated clearly that there was limited appreciation of what was

going on. The mishandling by the IMF in dealing with the crisis-

affected economies did not improve the situation. Even the United

States did not appreciate what the Asian Crisis meant. It actually

took a neutral stance when the Asian Crisis erupted in Thailand in

July 1997, thinking perhaps that Thailand was not a significant

economic and strategic partner. Besides, Thailand or the Asian regionin general was halfway across the globe from the United States or

Europe that the latter regions would not be adversely affected by a

small economic shock. There was little appreciation then that global




financial integration would serve as a conduit for amplifying a minor

tremor in one place into a tsunami that would devastate anothercountry located elsewhere. Contractionary actions of the Asian

governments did not help regain stability either. With domestic

political turmoil and social disintegration in some economies, eco-

nomic recovery efforts were not only difficult to be had but also

painful when introduced. Uncertainties in the political leadership

complicated the policy responses and limited the options open to

governments.

A decade hence, the impact of the Asian Crisis remains recog-

nizable. At one level, the Asian Crisis ushered in much needed

reforms in the region that have led to desirable outcomes, such as

the strengthening of financial governance, introduction of social

insurance and related measures to mitigate the adverse effects of

economic adjustments, and so forth. At another level, however, the

Asian Crisis was a traumatic experience. Economic performance in

the post-crisis period is not as dynamic as that in the 1980s and early

1990s. Recent performances of crisis-affected economies have fallen

to rates considered as “pragmatic,” that is, at a pace that will not lead

to overcapacity and overproduction. Investors have become more

cautious after experiencing large losses and have become hesitant to

undertake investments without the guarantees they previously

enjoyed from governments.

The conspicuous rise in international reserves of crisis-affected

economies attests to the fear of reliving the painful experiences of

dried-up liquidity and the consequent economic contractions. Reserves

accumulation is evidently a precautionary stance against future crises.

While adequate international reserves are desirable, the direction

has become too defensive, downplaying possibilities of using some

of the funds for raising expenditures on public goods and services.

In most cases, the reserves have been recycled into equities and

securities or to finance the deficit spending in the industrialized region,

especially in the United States and Europe, thereby stimulating further

8 Chapter One



reserves accumulation in Asia. At the micro level, investors are more

concerned about shifting funds away from physical capital accumu-lation into short-term or liquid assets, not only because profitability

in the real economy has significantly fallen with reduced economic

growth but also because the preferred investments are those that

can be easily pulled out from the region in the event of a crisis or an

unfavorable development.

There are other emerging threats like high oil prices and rising

commodities and food prices (albeit they have stabilized recently),

overheating of the Chinese and Indian economies, or even a hard

landing in the United States because of a homemade financial crisis

that has rippled across the globe. A serious economic shock will

certainly disrupt Asia once again, especially because intra- and inter-

regional economic integration has tightened since 1997.

Since the Asian Crisis has reconfigured the region into a quali-tatively different form compared to that in pre-1997, there are other

issues that the region must confront today, the most important of

which are regional economic integration and the manner by which to

proceed with it with an Asian character. As this integration progresses,

economic difficulties and challenges are inevitably extended across

the region. How to safeguard the economy from and respond to future

crises are important considerations that must be addressed by both

government and the private sector, bearing in mind that future crisesto hit the region will take different forms, ignite through other means,

or trace new channels to hit the economy. Without a doubt, future

crises to hit the region will be more violent and virulent than the Asian

Crisis.

Unless the Asian economies have solid economic and political

foundations, or Asian governments are sufficiently equipped to deal

with problems generated by, say, regional economic integration, or

the fluctuations and magnitudes of capital and trade flows are

managed well, or a sound international financial system is in place to

allow international cooperation for the effective regulation of cross-




border flows to secure economic growth, and so forth, economies

will continue to be interrupted and disrupted from realizing long-term economic expansion because of crises.

This book raises three issues that have been underplayed in the

retrospection of the Asian Crisis. The first concerns the economic

performance of Indonesia, Malaysia, the Philippines, South Korea,

and Thailand in the post-crisis period, which has been inferior

compared to their pre-crisis experience. In the two decades prior to

1997, the average GDP per capita growth rate of the four miracle

economies was 5.6 percent; in the decade prior to 1997, the average

was even higher, at 6.9 percent. After the Asian Crisis, however,

their growth rates were just about half the previous rates (or an

average of 3.7 percent with and 3.9 percent without the Philippines).

As such, this study presents another analysis of the economic con-

sequences of the Asian Crisis.

The second issue brought up in this book is that the crisis-affected

economies have yet to recoup their losses produced by the Asian

Crisis. There remains a lot to be done to achieve full economic recov-

ery, or at least regain the standings prior to 1997. For Indonesia,

Malaysia, and Thailand, the results suggest that the costs of the Asian

Crisis have risen continuously in the following decade, albeit at

different rates, while those for the Philippines and South Korea have

shown some cost recoveries. Based on a cost accounting exercise(Chapter 3), Indonesia needs to recoup a total social cost of US$94.8

billion; Malaysia, US$39.1 billion; the Philippines, US$6.7 billion; South

Korea, US$52.3 billion; and Thailand, US$95.1 billion. These amounts

are indeed large by any measure.

Stronger economic performance is clearly needed to reclaim the

losses. If performance mellows down to supposedly “pragmatic”

levels, it will surely be difficult to recoup the losses. Downgrading

the economic growth targets in the economic plans to conform to the

projections announced by international institutions and rating agencies

is unwarranted, given the sufficient capacities available for robust

10 Chapter One



economic expansion. Such aversion to rapid growth is symptomatic

of callousness to the unsatisfactory performance of the region.

The above points suggest that dynamic performance is very much

needed; otherwise, the burden of the lost opportunities will persist,

which will, in turn, engender social instability in the long term. In

the case of the Philippines, the challenge is tougher because, unless

extraordinary economic growth rates are realized, it will, yet again,

be left behind when the other four crisis-affected economies regain

growth accelerations. For the country, at least, there is greater urgency

to realize dynamic performance.

Whether or not these crisis-affected economies will be able to

recoup their losses is an important issue that needs to be grappled

with if the Asian region is to demonstrate that it can cope with the

problems that come with, say, regional economic integration and

globalization. At the same time, how well the economies recover is abenchmark for assessing the overall health of the international financial

system to promote and support economic expansion.

Lastly, it is important to stress that unless policies in the crisis-

affected economies move in a positive direction — that is, reviving

strategies that have proven effective in getting robust economic

expansion going, and then employing new ones to meet current chal-

lenges — future economic progress will likely be limited and punctu-ated by crises. Full economic recovery from past crisis will be difficult,

and the adverse consequences from it will linger. Complacency with

a seemingly stable economic environment will be misplaced as long

as massive and volatile capital and trade flows continue to characterize

the international financial system, and most economies remain ill

equipped to deal with the challenges produced by these flows. So if

the international financial system is the culprit in creating and

propagating crises in the international economy, it is reasonable to

demand changes not only in the nature of policies but also in the fun-

damental structure of the system if only to address the threats and

thereby obtain stability and sustain economic expansion.




Decisive actions are needed from governments so that they can

accomplish their economic and political goals. Accordingly, togetherwith dynamic performance and sound government interventions to

produce the needed structural transformation, complementary actions

for international cooperation and policy coordination toward capital

and trade flows management are equally important. Other concerns

like environmental sustainability, including climate change, must not

be forgotten. The effectiveness of policies will largely depend on

political willingness and the courage to proceed with rather unpopularmeasures, especially in the eyes of the private sector, as well as the

skillfulness of government in forging cooperative arrangements that

draw out timely actions directed toward obtaining desirable outcomes

that will benefit everyone in the end.

12 Chapter One



ow a crisis impacts the long-term economic performance of

an economy remains a highly debated topic. At one level,

analysts argue that an economy can bounce back from a crisis with

robust economic expansion, just like a strong spring bouncing back

after it is pushed down. Accordingly, the stronger the crisis (push),

the stronger will be the economic recovery (bounce). What remains

an issue then is how quickly the economy will recover after it is hitby a crisis. In a way, a crisis is a mechanism — a wakeup call — which

forces government to take serious adjustments and reforms that will

ensure sound fundamentals and support long-term economic growth.

If a crisis is short and transitory, economic performance will

exhibit a V-shape pattern (figure 2.1), which means no serious con-

sequences on the economy. While losses are incurred due to the crisis,

these will be recouped rather quickly when the economy bounces back

H

How to Frame Crises

2

13





may be sufficient to push the economy into economic recovery mode;

in figure 2.2, a series of adjustments may be needed. In any case, thecrisis may be considered as non-consequential on the overall

constitution of the economy if compared with the overall direction

of subsequent economic expansion. In the end, the economy will be

thrust to stronger performances. A crisis, in this view, is thus an

anomaly to long-term growth.

Fig. 2.2. Extended but transitory impact of crisis

At another level, analysts contend that an economy may face

difficulties in recovering from a crisis. One possible reason is that the

economic and political apparatuses are not designed to respond to a

shock or may have been damaged by a shock, becoming useless and

even contributing to subsequent difficulties in economic recovery.

Another reason could be that the apparatuses needed for a recovery

How to Frame Crises 15

0

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to take place are not available because government did not consider

them as necessary to be erected or they were removed with deregu-

lation and financial liberalization. Here, the economy is caught flat-

footed when the crisis hits. Studies have also found that even if the

right apparatuses are available, repeated shocks could progressively

undermine them until they break. Of course, repeated crises push an

economy to a lower growth trajectory, causing the resiliency of the

economy to degenerate in due course.

The description suggests that an economy is damaged from a

crisis because either it does not have the right spring to bounce back

or it only had a weak spring that was permanently distorted after it

was pushed down by a shock. The spring could have decayed over

time because of poor maintenance, misuse or even no use. That is,

the restorative capacity could have been seriously damaged, rendering

the economy unable to recover from a crisis.

If a shock has a non-transitory or permanent negative impact on

the economy, an L-shape pattern of economic performance could occur

(figure 2.3). In this case, serious problems need to be addressed to

return to the earlier growth trajectory. It is a mistake to assume here

that a crisis ultimately has no consequence on the economy, that the

impact would come to pass after a given time. With permanent

impacts, the resulting growth trajectory would likely be lower whencompared with what would have been if the crisis had not occurred,

and so a one-shot adjustment would be insufficient to regain the

losses.

Thus, if shocks have permanent impacts, the economy would

necessarily be pushed to derailment and it would be misguided to

treat a crisis as an anomaly. Serious adjustments would be needed.

The expectations from government would be more demanding.

16 Chapter Two



Fig 2.3. Permanent (negative) impact of crisis

There are also cases in which a shock pushes the economy

to a positive direction, forming a reverse L-shape pattern instead

(figure 2.4). There will be non-transitory effects, too, but positive

consequences on the economy. The shocks may be due to the dis-covery of an important natural resource (say, oil deposits that can be

commercially exploited), which in due course will relieve the eco-

nomy from its foreign exchange constraints as well as provide funds

for expenditures on public goods and services, allowing government

to build the economic and political foundations for long-term econo-

mic growth.

How that natural resource will be exploited, how the earnings

will be utilized toward capital accumulation, and so forth, are

empirical issues and dependent on domestic circumstances like culture,

politics, and other factors. In some cases, earnings are squandered

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or misappropriated to fuel conspicuous consumption or are appro-

priated by elites for their own benefit, and so forth. In due course, aso-called “Dutch disease” will manifest and push the economy into

economic stagnation or crisis. Because the economic foundation will

be destroyed when the problem manifests, a shock will likely be

magnified and the consequences in terms of losses enlarged. In the

end, the economy will be pushed to an L-shape pattern of economic

performance.

Fig. 2.4. Permanent (positive) impact of crisis

Still, a shock may take the form of large capital inflows because

of the reorganization of the international production system due to

economic integration and globalization. Parallel to that development,

large labor migration for employment will lead to high remittance

inflows, creating the same effect of relieving foreign exchange

0

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2 0 0 7

18 Chapter Two



constraints and providing funds for vital expenditures. The inflows

of capital may be caused by a shift in investment locations promptedby, say, abundant human capital in developing economies, thereby

matching capital with labor to sustain cheap production. In the same

manner, capital may shift from places where the population is aging

to places where it is relatively young and productive, with the latter

enabling large opportunities for capital to realize higher returns on

investments. Or, the inflows of capital may be caused by speculative

activities as investors seek quick profit opportunities that becomeavailable with deregulation and financial liberalization. If these

episodes are not exploited in a positive way, that is, ensuring adequate

public goods and services, technology, research and development,

human capital build-up, and so forth, to effectively capture the

potential benefits of new capital, economic bottlenecks will emerge,

creating vulnerabilities, and the economy will risk a crisis in the long

run.

If the international production system is being reorganized with

the relocation of operations in the developing economies while the

markets of commodities remain in the advanced economies, there

might be a mismatch in the commodities markets. Recall that the

commodities supply gluts in the past resulted in economic recessions.

Another mismatch could be due to policies in response to domestic

and international challenges. The changes introduced by governmentmight not be appropriate to remove vulnerabilities or to insulate an

economy from the current threats. But if policymakers do not seize

the opportunities to steer the economy away from potential problems

as they become known, introduce changes to block potential crises,

or make adjustments to deal with new vulnerabilities, the economy

might be caught in a trap of institutional and policy rigidity. Failure

to allow dynamic adjustments in institutions and policies might push

the economy into crisis.




en years after the 1997 Asian Crisis, the economic recovery

of the crisis-affected economies is being revisited to assess

the economic performance in the region and to begin a search for

alternatives to the Asian model of economic growth. The World

Bank (2007) highlighted the remarkable recoveries in the region,

although it said in its report that there remained tough challenges,

like how to push the recoveries further. The International Monetary

Fund (IMF) also came up with similar conclusions, but its report

stressed the unaddressed concerns that might limit the recoveries,

such as the apparent worsening of income inequalities since 1997

and the increasingly unstable capital flows since 2000 (for example,

Burton and Zanello [2007]). The Asian Development Bank (2007)

pointed out that a normal economic environment has returned in

the region, albeit there is a faint recognition that the crisis-affected

Recalling the 1997 Asian Crisis

3

T

20



economies have grown at lower-level trajectories. In these studies,

there is a perceptible tone that the losses in 1997 have already been

fully recovered, and therefore the Asian Crisis has had transitory

impacts on the crisis-affected economies. The United Nations Econo-

mic and Social Commission for Asia and the Pacific (2007) noted

a complete economic recovery in the region.

How big really was the damage inflicted by the Asian Crisis on

Indonesia, Malaysia, the Philippines, South Korea, and Thailand?

Earlier studies presented only preliminary estimates because it was

difficult then to filter out the dramatic changes in the late 1990s or

even in the early 2000s.1

Retrospective studies have come out in an attempt to inform future

policy actions, given the remaining vulnerabilities and emerging

challenges like regional economic integration and how to deal with

it the Asian way, and this book is no exception. Ten years hence,this study has the advantage of a longer history on which to base

a review.2 The complicating and conflicting factors that manifested

in the late 1990s or continued to be at play even in the early 2000s

have by now fully worked themselves out. Using the framework

discussed in Chapter 2, this book revisits the impact of the Asian

Crisis on the crisis-affected economies.

RE-ANALYZING THE 1997 ASIAN CRISIS

Data on gross domestic product (GDP) per capita (constant 2000

prices) were obtained from World Development Indicators and Asian

Development Outlook, covering the period 1987 to 2000. Data were

1 Knowles, Pernia, and Racelis (1999), Robison et al. (2000), and Chu and Hill(2001) are some earlier studies that explore the costs of the Asian Crisis.

2 For related arguments, see Craft (1999), Barro (2001), Cerra and Saxena (2003,2005), and Hutchison and Noy (2005).

Recalling the 1997 Asian Crisis 21



normalized to 1996.3 Figure 3.1 shows that Indonesia took eight

years (i.e., in 2004) to regain its 1996 GDP per capita. Malaysia

regained its 1996 GDP per capita in 2000. Both the Philippines and

South Korea bounced back quickly from their contractions in 1998,

exceeding their 1996 GDP per capita by 1999. Thailand regained its

1996 GDP per capita level after seven years, in 2003.

Fig. 3.1. GDP per capita, normalized to 1996

What is more interesting to note in figure 3.1, however, is that

between 1987 and 1996, Indonesia, Malaysia, South Korea, and

Thailand had a tight pattern of economic performance — especially in

3 The implication is that 1996 is a good benchmark for conducting an analysis ofeconomic performance. Appendix A discusses the procedures for computing thecosts. Appendix B presents the results of the cost accounting exercise.

22 Chapter Three

50

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1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

South Korea

Malaysia

Indonesia

Thailand

Philippines



the first half of the 1990s — as if they were increasingly chained to one

another. That of the Philippines is not in sync with the others and is

expected to be so because its economy was basically stagnant through-

out the 1980s and early 1990s.

As expected, the economic performance of Thailand diverged

from the group in 1997, when it experienced an economic growth

of 2.4 percent in GDP per capita. Notice in figure 3.1 that, starting

in 1998, the patterns of the other crisis-affected economies havebecome increasingly unbundled. Indonesia has moved the farthest,

relative to, say, South Korea, while Malaysia, the Philippines and

Thailand have bundled closer to Indonesia beginning 2003, as they

are “converging” to their natural groupings as Southeast Asian econ-

omies. These patterns are expected to continue in the coming years,

especially because the growth rates of the crisis-affected economies

have decelerated after 1997. And with the global economy slowingdown because of a financial crisis in the United States and the potential

problems in China and India, growth rates in the region will further

fall.

Rotational analysis is applied to transform the representation in

figure 3.1, particularly using the trends between 1987 and 1996 as

reference points, and to reveal a different interpretation of thesituation. Because the trend of the Philippines is distinct from the

others, the control information excludes it. The next step is to draw

a “rotated axis” (i.e., Line A), tracing a line that captures the cluster

of information of the four economies in 1987–1996, ensuring that it

crosses at 1996 = 100, and extending it to 2007. The drawn axis is

treated as the “horizontal axis” for the rotational analysis. Then a

“vertical axis” (i.e., Line B) is drawn at 1996 = 100, producing perpen-dicular angles, thus forming a new Cartesian plane with 1996 = 100

as the new “origin” of the axes.




It is clear in figure 3.2 that the crisis-affected economies have

all moved away from the “horizontal axis,” with the possible exception

of South Korea, which appears to have been moving parallel to, but

below, it. Both Indonesia and Thailand have moved the farthest

from the “horizontal axis” over time. Even in 2007, their trends

appeared to be still moving in the same direction. Malaysia and the

Philippines have also moved away from the “horizontal axis,” but

their trends after 2005 have converged at a higher level compared

to Indonesia and Thailand. Yet the falling trend of Malaysia has

become pronounced from 2001. For the Philippines, the trend seems

to have been on a constant decline since 1987. Using a longer data

series, it could be seen that the downward trend for the Philippines

actually started much earlier.

Fig. 3.2. GDP per capita, rotated at 1996

50

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1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

South Korea

Malaysia

Indonesia

Thailand

Philippines

Line A

Line B

24 Chapter Three



More importantly, figure 3.2 presents a counterfactual scenario

for the crisis-affected economies in the post-crisis period. Theconjecture is that the socioeconomic conditions between 1987 and

1996 might have continued into the late 1990s and early 2000s had

the deterioration of the economic and political apparatuses been

remedied and governments maintained effective management of their

economies, even allowing for a well-planned sequence of deregulation

and financial liberalization, which would have supported industriali-

zation and economic growth, and so forth.

Of course, the counterargument to the counterfactual is that the

crisis-affected economies would still experience a deceleration in

economic performance by the early or mid-2000s if they had sustained

the same rate of economic growth over such an extended period.4

Nonetheless, the deceleration would not be as dramatic as that in

the late 1990s, when the Asian Crisis hit their economies.

In the counterfactual, there would be adjustments in policies

that could have averted economic debacles like the Asian Crisis.

Such adjustments could propel the economies to higher growth trajec-

tories, producing a reverse L-shape pattern (like figure 2.4). With

4 During the early/mid-1980s, Indonesia, Malaysia, South Korea, and Thailandembarked on adjustments and reforms to produce dynamic performance in the

following decade. In the counterfactual, these economies could have taken similaractions in the 1990s that would allow dynamic performance until the 2000s.While this scenario might be difficult to defend for the Philippines, consideringits dismal economic performance in the 1980s and early 1990s, it must be pointedout that the policy mistakes and misguided economic agenda in the mid-1980scould have been avoided if the government had policy autonomy and capacityto institute sound adjustments and reforms. Moreover, the economic history ofthe Philippines points to the fact that the deterioration of governance andcapacities started much earlier, in the 1970s. It is still interesting to note that inthe 1950s and 1960s, the country had solid foundations that it provided capacitybuilding and training to Southeast Asian countries for them to embark on soundstructural transformation and economic expansion. The foundations in the 1950sand 1960s supported the economic performance of the 1970s. In the mid-1990s,the IMF and World Bank were optimistic that robust economic growth rates inthe region would continue for another five years or until the early 2000s.




figure 3.2, there is a straightforward conclusion about the economic

performance in the post-crisis period: while it could be argued thatthe crisis-affected economies have exceeded their 1996 GDP per capita

levels, it could not be easily argued that they have regained dynamic

performance that distinguished the region before 1997.

Unimpressive economic performance in the decade after the

Asian Crisis suggests that the crisis-affected economies have not

fully recouped the costs even by 2007. But how big have thesedamages been in the five economies?

Indonesia

As the Asian Crisis went into full speed, Indonesian GDP

per capita fell to US$777 in 1998 and further down to US$773

in 1999. The economy plunged to a -14.3 percent GDP per capita

growth in 1998 and continued to contract by 0.5 percent in 1999

(figure 3.3). Its GDP per capita in 1999 was 88 percent of the

1996 figure (US$878). The contraction means that foregone output

per capita was US$175 in 1998 and US$223 in 1999. As such,

opportunity costs per capita on those losses were US$184 and

US$233, respectively, while accumulated cost per capita was US$241

over those two years, falling within the range of 29–31 percent

of GDP per capita. The figures clearly suggest heavy burdenson the economic welfare of Indonesia. Five years after the Asian

Crisis, Indonesian GDP per capita remained below the 1996 level,

reaching an average income of US$844 in 2002. Foregone output

per capita in 2002 increased to US$280, while opportunity cost

per capita of the foregone output reached US$284. These constituted

at least 30 percent of GDP per capita. Accumulated cost per capita

in 2002 was US$321, accounting for close to 40 percent of GDP

per capita.

26 Chapter Three



Fig. 3.3. GDP per capita and counterfactual, Indonesia

The trend, as shown in figure 3.4, indicates that the costs conti-

nued to rise over time, meaning, heavy burdens on the Indonesian

people persisted. As figure 3.1 illustrates, it took Indonesia eight years

to increase its GDP per capita to a level comparable to that of 1996.

During this period, the country incurred losses. The implication,

as GDP per capita remained below the counterfactual scenario

(figure 3.3), was that the costs got bigger over time. Such gains from

the economic recovery were not large enough to offset the lost oppor-

tunities that resulted from the Asian Crisis and its fallout. As expected,

by 2004, foregone output per capita was bigger than the previous

years’ amounts. After eight years, opportunity cost per capita reached

US$310 and accumulated cost per capita reached US$355. These figures

were about 30 percent of GDP per capita in 2004, which means that the

burden on economic welfare remained the same.

0

500

1,000

1,500

2,000

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007




Fig. 3.4. Estimated costs per capita, Indonesia

The average income for 2007 would continue to exceed the 1996

figure, projected to be US$1,338. Indicators suggest that GDP per

capita growth could slow down, so the projected 2007 costs would

still be bigger amounts. However, there is a positive sign that the

trends would flatten out, suggesting that foregone output and

opportunity cost per capita figures would not exceed US$350. The

expectation of course is that GDP per capita growth would not slow

down in the coming years. What is alarming in figure 3.4 is that

accumulated cost per capita would continue to increase and is proj-

ected to reach US$418 in 2007. Even if the current economic growth

is maintained, accumulated cost of the losses would still be growing.Thus, it is only with accelerated GDP per capita growth — higher

than the projected rates for Indonesia — over a long period that

these costs could be significantly reduced and wiped out in time.

0

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Foregone Output Opportunity Cost Accumulated Cost

28 Chapter Three



At present, however, it is disappointing to note that because of

serious or unaddressed constraints to growth, Indonesia would be

unable to move to a higher gear of economic performance. Weakened

public investments, deteriorating delivery of basic services (including

the civil service and the legal system), and falling competitiveness

are some of the important issues that hinder Indonesia from regaining

the dynamic performance of the pre-crisis period. Significant progress

on these issues needs to be achieved.

Malaysia

Malaysian GDP per capita decreased from US$3,938 in 1997 to

US$3,560 in 1998 as GDP per capita growth dropped to -9.7 percent

(figure 3.5). Despite countercyclical policies in 1998 and unorthodox

measures to insulate the economy from further panic, average income

still fell. This decline resulted in a foregone output per capita ofUS$571 or an opportunity cost per capita of US$598 in 1998, which

was about 16 percent of GDP per capita. Economic growth rebounded

to 3.7 percent in 1999. It could thus be argued that, to some extent,

the capital controls helped lessen the losses in economic welfare.

As figure 3.5 shows, Malaysia recovered its pre-crisis level of GDP

per capita in 2000 and growth was sustained but its economic expansion

in the past two years was still not strong enough to recoup thelosses (figure 3.6).

By 2000, foregone output per capita was US$614, down from

US$646 in the preceding year. Opportunity cost per capita was US$650,

but accumulated cost per capita was US$719. Nonetheless, there were

encouraging trends in the economic recovery period (figure 3.6).

Unfortunately, the economic recession in 2001 reversed the gains of

the previous years, as the country sputtered to a 1.9 percent growthrate, resulting in the increase in foregone output per capita to US$891,

opportunity cost per capita to US$922, and accumulated cost per capita

to US$1,015.




Fig. 3.5. GDP per capita and counterfactual, Malaysia

What these trends clearly illustrate is the importance of sustaining

GDP per capita growth throughout the economic recovery period.

After 2001, the economic growth of Malaysia remained slower than

that during the immediate years of the recovery period or the pre-crisis trends. Figure 3.6 indicates that the costs continued to increase.

By 2006, foregone output per capita had reached US$1,130 and

opportunity cost per capita was US$1,193, accounting for about

25 percent of GDP per capita. Accumulated cost per capita as of 2006

stood at US$1,434, or at least 30 percent of GDP per capita. For 2007,

the figures would be larger: foregone output per capita of US$1,178,

opportunity cost per capita of US$1,225 and accumulated cost percapita of US$1,487.

0

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1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

30 Chapter Three



Fig. 3.6. Estimated costs per capita, Malaysia

By 2007, however, it is unclear if a flattening in the trends of

the costs is taking shape. The pattern appears cyclical — rising as

economic growth slows down then flattening out and rising again

as growth eases up once more. As Malaysia gains its momentum,a flattening in the costs per capita is expected. With sustained dynamic

performance, the cyclical pattern of the costs may be addressed

as the amounts are cut down. Nonetheless, the social costs will still

increase in the coming years before they decrease. As such, only

with GDP per capita growth accelerating faster than the projected

rate and at sustained levels can costs be cut down.

As the economic performance of the country is constrained by

the pace of global economic growth or at least the performance of

its major trade partners, it faces some stumbling blocks in returning

0

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1998 1999 2000 2001 2002 2003 2004 2005 2006 2007





to its pre-crisis growth trajectory. The exports sector remains crucial

in buoying the economy in the short and medium term, but it is vul-nerable to global conditions. Over the long term, however, Malaysia

must deal with the infrastructure requirements to keep the economy

in competitive shape and raise its exports sector on the industrial

ladder. There is a need to build up the workforce in terms of human

capital and productivity to complement the available physical

infrastructure.

Philippines

Figure 3.7 suggests that Philippine GDP per capita remained

relatively flat from 1987 to 1996, reflecting the impact of the boom-

and-bust economic performance that troubled the country much

earlier. But there appeared an economic turnaround from 1993: the

country re-entered the international capital markets, allowing the

economy access to external funds. For a long time, the Philippines

had not experienced dynamic performance that distinguished the

Asian miracle economies in the pre-crisis period. Regaining access

to the international capital markets was seen as an opportunity to

catch up with the rest of the region.

From figure 3.2 earlier, it is clear that economic welfare in the

Philippines had been on a constant decline. In fact, stretching theanalysis back to the 1970s reveals that the Philippines regained its

GDP per capita of 1982 only in 2002, at slightly above the US$1,000

mark. In a way, the impact of the Asian Crisis was only small because

the country was basically passed over by capital flows into the region

throughout the mid-1980s to mid-1990s. At the same time, the

Philippines had difficulty raising its volume of trade as its economy

progressively lost competitiveness and its industries lost strength.

Earlier crises in the period 1980 to 1995 brought larger damages

to the country. Another crisis in 1997 would not have produced

significant costs.

32 Chapter Three



Fig. 3.7. GDP per capita and counterfactual, Philippines

As figure 3.7 shows, GDP per capita fell by a relatively small

amount, from US$970 in 1997 to US$945 in 1998. The figure in 1998

was comparable to that in 1996, which was US$942. Foregone output

per capita in 1998 was US$51 and opportunity cost per capita wasUS$54, which were 5 percent of GDP per capita in 1998. The small

reduction in economic welfare in 1998 supports the contention that

the country had the least damage among the crisis-affected economies.

Stronger economic growth in 2000 meant more reductions in the costs

(figure 3.8) while a slowdown of growth in 2001 reversed the gains

of the previous years.

By 2002, foregone output per capita was US$89 and opportunitycost per capita was US$90, comprising approximately 9 percent of

GDP per capita. Accumulated cost per capita stood at US$100, which

0

500

1,000

1,500

2,000

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007




Fig. 3.8. Estimated costs per capita, Philippines

was 10 percent of GDP per capita. The costs were further cut down

as economic growth was sustained beginning 2002. By 2006, there

was a decrease in foregone output per capita, to US$55, and in

opportunity cost per capita, to US$58. These accounted for less

than 5 percent of GDP per capita and, more importantly, werecomparable to the 1998 figures. Accumulated cost per capita was

down to US$77, already 7 percent of GDP per capita in 2006. It

is clear in figure 3.8 that the country has started to recoup the

costs. Because of relatively mild growth, the reversal of the trends

is delayed.

The forecasts for 2007 suggest continued reductions in costs,

although not at significant levels. If the forecasts would hold, the

estimated figures for 2007 are encouraging: foregone output per

capita of US$53, opportunity cost per capita of US$55, and accumulated

0

250

500

750

1,000

1,250

1,500

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007


34 Chapter Three



cost per capita of US$78. As with the other crisis-affected economies,

the Philippines has to sustain its current direction of economic

expansion but still needs to achieve dynamic performance if it were

to fully recover from the Asian Crisis.

Even with these positive developments, there is a concern that

the country’s recent economic performance is becoming highly

consumption-driven and too dependent on foreign workers’ remit-

tances. Notwithstanding the contribution of remittances to buoyingthe economy from another balance of payments crisis (as was the

case in 2005), there is a budding “Dutch disease,” taking into account

the narrow and shallow performance suggested by recent economic

expansion (for example, Habito and Beja [2006]).

The country remains vulnerable to global economic performance

and to swings in domestic agriculture production. National elections

in 2007 turned out to be respectable, and progress of the remainingreforms agenda is expected to proceed at a pace like that in the

earlier years of the 14th Philippine Congress. What needs to be

stressed at this point is that figures 3.7 and 3.8 focus on the costs

inflicted by the Asian Crisis alone. For the Philippines to recoup

the lost opportunities from its crises between the 1980s and early

1990s and improve the economic welfare of Filipinos, it needs to

produce exceptional rates of GDP per capita growth. The prospectfor that to occur, however, is not good, given the weakened economy.

South Korea

South Korea acted vigorously but prudently introduced policy

adjustments that led to its quick economic rebound. In a way, it

smartly ignored prescriptions to restructure the economy drasticallyand proceeded instead on a course to regain its competitiveness.

After facing a dramatic economic collapse in 1998, South Korea

rebounded dramatically in 1999. Such a quick turnaround has been




regarded as a confirmation of the fundamental strength and sound

constitution of the South Korean economy (for example, Park and

Choi [2004]). Of course, among the crisis-affected economies, South

Korea has the most developed financial sector and most mature

economy. An IMF-orchestrated infusion of US$52 billion — at that

time the largest bailout package — must not be disregarded as a

factor in the rapid economic recovery.

Still, the Asian Crisis produced large costs in the country. In1998, Korean GDP per capita fell to US$9,307 from the 1997 level

of US$10,064 (figure 3.9). The figure was much lower when compared

with the GDP per capita in 1996, which was US$9,707. Its foregone

output per capita in 1998 was US$1,281 and opportunity cost per

capita was US$1,343, which were 14 percent of the 1998 GDP per

capita. As South Korea went into economic recovery mode, economic

growth jumped to 10 percent in 1999, and the country was ableto cut down the heavy burdens on economic welfare. Sustained

growth into 2002 cut the losses by half.

While there was a setback in 2001, South Korea rebounded in

2002, with reduced foregone output per capita of US$666, oppor-

tunity cost per capita of US$677, and accumulated cost per capita

of US$850. The amounts were between 6 and 7 percent of GDP

per capita. Indeed, economic recovery periods require strong economic

growth when recouping the lost opportunities. Since 2001, however,

South Korea has experienced a cyclical pattern of growth, perhaps

constrained by global economic performance or at least the perform-

ance of its major trade partners. The pattern further points to the

challenges that South Korea faces as it navigates reforms with com-

peting domestic interests. Figure 3.10 shows that the costs remained

relatively steady until 2006, with US$795 foregone output per capita,

US$834 opportunity cost per capita, and US$1,117 accumulated cost

per capita. Again, strong growth in the succeeding periods meant

continuous reductions in the burdens on economic welfare.

36 Chapter Three



Fig. 3.9. GDP per capita and counterfactual, South Korea

Given the forecasted economic growth of South Korea for 2007,

the trends from 2005 are expected to continue. Further reductions in

costs may be expected in 2007, with foregone output per capita of

US$717, opportunity cost per capita of US$745, and accumulated costper capita of US$1,074. Investments, consumption, monetary and fiscal

policies, and a stable won, among other factors, are anticipated to

contribute to raising confidence in the South Korean economy.5 While

steady progress has been achieved in reforming the economy, it is

still important to reignite the robust growth of the pre-crisis period

in order to recoup the losses. A slowdown in exports performance

0

5,000

10,000

15,000

20,000

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007


5 South Korea was hit by a consumer credit problem in 2003, which led to an

examination of its reform programs. There are indications that the country isaccumulating short-term debts, which could derail economic recovery if interestrates rise or debt servicing and repayment become problematic.



(especially electronics) will disappoint growth. Indeed, there are

indications that in the case of South Korea, full economic recovery

from the Asian Crisis is just around the corner.

Thailand

At the outset, the Asian Crisis was thought to inflict modest

costs on Thailand. Because the country followed the advice to close

several banks and standard prescriptions, like raising interest rates

and so forth, panic escalated. In the end, Thailand contracted. Its

GDP per capita growth shrank by 2.2 percent, stemming from the

reduction in average income from US$2,154 in 1996 to US$2,101 in

1997 (figure 3.11). As the Asian Crisis gained momentum and

extended to 1998, the serious impacts on Thailand became apparent.

0

250

500

750

1,000

1,250

1,500

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007


38 Chapter Three

Fig. 3.10. Estimated costs per capita, South Korea





capita of US$1,040. The accumulated cost exceeded 50 percent of

2001 GDP per capita. The figures for 2002 were even worse, eventhough Thailand regained its GDP per capita of 1996 that year.

Except perhaps in 2003, when some momentum in economic growth

was achieved, growth from 2002 to 2006 remained steady, at an

average of 4.6 percent.

However, the apparent slowdown in economic growth since 2005

suggests that the costs would increase, as figure 3.12 shows. By 2006,

foregone output per capita was US$1,040 and opportunity cost per

capita was US$1,089, both accounting for at least 40 percent of GDP

per capita. Accumulated cost per capita stood at US$1,345, which

was still above 50 percent of GDP per capita. Interesting to note is

how the pattern of cost recovery in Thailand since 2001 closely

resembles that of Malaysia. While a flattening in some of the trends

could be expected if Thailand maintains decent economic performance

in the coming years, the social costs would continue to increase withgrowth that is not as strong as it should be. Yet to date, the prospects

for Thailand are not as good as in the previous years. Growth is

expected to be at its worst in six years but would hopefully improve

after 2007.

The estimated costs for 2007 are foregone output per capita of

US$1,093, opportunity cost per capita of US$1,136, and accumulated

cost of US$1,444. The costs as shares of GDP per capita would not be

significantly different from those of the preceding years, which means

that the burden on economic welfare would continue to increase. As

already pointed out, only with exceptional economic growth sustained

over a long period could costs be significantly cut down.

However, problems remain to constrain economic performance

while developments inside and outside the country limit economicgrowth. The tsunami of December 2004, for instance, adversely

affected the tourism industry, which, in turn, affected growth.

Tourism expectedly went into a lull for most of 2005, but it has now

40 Chapter Three



recovered. The delayed economic recovery in tourism was attributed

to political unrest in the southern part of the country. While exportperformance is expected to be robust, they remain unstable as

competitiveness is lower and the global economy is unstable.

Nonetheless, large public infrastructure projects would contribute to

growth as in the past.


0

250

500

750

1,000

1,250

1,500

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007


Fig. 3.12. Estimated costs per capita, Thailand

Recent developments in Thailand have raised concerns about the

capacity of the economy to regain dynamic performance. For instance,

the coup d’état in September 2006 sparked fears of a return to the

pre-crisis period, wherein political conflicts were resolved through

military interventions. Compounding the situation was an economicfaux pas in December 2006 in which capital controls were introduced

but were quickly reversed when they did not work out as planned.

Political and economic uncertainties weaken business confidence in



Thailand and of course reduce investments, and so forth, which, in

turn, weaken prospects for economic growth. Credible elections in2007 are important in bringing the confidence back; and hopefully,

credible policies would be crafted to reignite the economic recovery

process.

However, recent developments in the country seem to emphasize

inward-looking strategies, self-reliance, and internal networks of the

wrong kind, typically disguised as efforts toward economic recovery

and the creation of a stronger economy to reverse the post-crisis

trend. It is disappointing that Thailand is losing steam and moving

to a lower gear of economic growth. Somehow, it is having a hard

time recovering.

COMPARATIVE ANALYSIS OF THE COSTS

That the costs inflicted by the Asian Crisis have yet to be

fully recouped as of 2007 is a point that differs from mainstream

discussions, even among retrospective studies. There is no doubt

that economic growth improved after 1997, but poorer economic

performance in the 2000s actually means that the cost reductions

have not been sustained, and so costs have mounted in the succeeding

periods (figures 3.13 to 3.15). Persistent gaps between the counter-

factual scenarios and actual GDP per capita, as shown by the figuresin the previous section, emphasize the long-lasting impact of the

Asian Crisis.

Among the crisis-affected economies, the Philippines and South

Korea have attained some successes in cutting down the costs. The

experience of the Philippines, in particular, is to be expected because

it did not actually face serious damages as the others. And so even

with relatively mild economic growth after the Asian Crisis, the

country has been able to recoup its costs. Again, the amounts covered

in studying the cost accounting exercise concern the impact of the

Asian Crisis only.

42 Chapter Three





economic recovery. Its strong rebound in 1999 was important because

it means that recouping the losses began immediately once the AsianCrisis subsided in 1998. Of course, recovery was made possible in

part by the US$57 billion capital infusion and another US$15 billion

standby facility put up by Asian Development Bank, the Organization

of Economic Cooperation and Development, and the United States.

Having relatively well-developed institutions was significant because

they made the jumpstarting process easier to materialize. Strong soli-

darity and patriotism helped counterbalance the imperatives of adjust-ments. So the core of Korean society was not undermined even with

the strong conditionalities imposed by the IMF. Of course, full

recovery was delayed, as growth sputtered in 2001 and then fluctuated

throughout the succeeding periods until 2006.

Fig. 3.14. Share of opportunity cost to GDP per capita

0

25

50

75

100

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Philippines South Korea Malaysia Indonesia Thailand

44 Chapter Three



For 2007, the two countries will face total social costs of US$7

billion (7 percent of GDP) and US$53 billion (8 percent of GDP),respectively. Although the amount for South Korea appears large

in absolute terms, its relative size to GDP is actually small and, in

fact, comparable to that of the Philippines. Based on the relative sizes,

their economies can internalize the costs as long as they are able

to maintain solid economic expansion. What is interesting to note

is that, after ten years, the Philippines is still unable to make a

significant reduction in its costs from the Asian Crisis. Perhaps, thisis suggestive of fundamental weaknesses in its economy. All other

things the same, the trends as of 2007 indicate that both countries

are in the right direction.

Fig. 3.15. Share of accumulated cost to GDP per capita

A more interesting observation in figures 3.13 to 3.15 concerns

the costs of the Asian Crisis to Indonesia, Malaysia, and Thailand.

The first item to point out is that decent economic growth was not


0

25

50

75

100

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Philippines South Korea Malaysia Indonesia Thailand





somewhat stabilized. All things the same, therefore, robust economic

growth in the coming years would lead to reductions in the costs.

Rapid economic growth is crucial for full economic recovery to

happen in all five economies. Indications that the costs will stabilize

in 2007 assume that growth will remain steady even with the emerging

threats to the region coming from its major trading partners, parti-

cularly the United States, the European Union, Japan, and even China.

Figures 3.13 to 3.15 stress that the crisis-affected economies have

endured the trauma of the Asian Crisis, albeit with different extents

of suffering; with new shock, recovery will be further delayed and

costs extended.

Again, the conclusion from the results is quite straightforward:

dynamic performance is crucial in the post-crisis period to compensate

for the lost opportunities. If subsequent shocks further reduce

economic performance, the upsets need to be compensated as wellwith robust economic growth. Social safety nets are necessary to

cushion the impact on economic welfare. Needless to say, protection

is more difficult during a crisis because both the availability and the

capacity to mobilize funds are limited.

In the post-crisis period, if economic growth targets are mellowed

to supposedly tolerable levels, it will definitely be difficult to recoup

the lost opportunities. Stabilizing the crisis is important; but once theeconomy is on track to an economic expansion, appropriate policies

also need to be introduced to realize growth accelerations. A lot is

expected therefore from the government during and after the crisis,

including in terms of how to prevent future shocks from inflicting

serious harm on the economy. The next chapter outlines some policy

imperatives.




he weakened economic performance in the post-crisis period

and the incurred losses from the 1997 Asian Crisis must not

make governments brood over the past. This retrospective analysis

is a challenge to them. What policies have to be adopted in the here

and now? While it is recognized that past performance cannot govern

present policies, the losses due to a crisis still represent opportunity

costs for wrong, delayed or misguided actions. The challenge to the

Asian governments for progressive actions is great because the costs

confronting their economies remain significant.

The premise of this chapter is that it is undesirable for crisis-

affected economies to relive the painful experiences of the Asian Crisis

and the difficulties that arose from its fallout. There is an urgent

need for decisive actions to reverse the situation. What policies are

therefore needed to regain dynamic performance and prevent future

T

Looking Back to Move Ahead

4

48



crises in the region? Below are five policy issues for consideration,

in the hope of salvaging the past standing of the crisis-affectedeconomies.

ECONOMIC GROWTH

A foremost consideration is economic growth in the post-crisis

period. Policies need to be such that they do not compromise growth,

including the variability of the growth, over the long term. In otherwords, policies must be such that they maintain the stability of

growth. This objective is important because incomes need to expand

to enable people to have greater command over goods and services

and realize improvements in economic welfare. Growth must create

jobs to enable people to acquire incomes and, in turn, contribute

to growth.

Gross domestic product (GDP) per capita growth can be enhanced

if nominal economic growth increases or population growth stabilizes,

if not decreases. Accordingly, complementary social programs that

provide for basic needs and social insurance have to be in place not

only to stabilize population growth but also to contribute to the

formation of a productive labor force, a setup needed to bring people

to participate more in the economy. Public goods and services have

to be provided and, in fact, demanded by people from their gov-ernments. This function does not necessarily mean, however, that

governments will provide all what is required for growth and

capabilities formation to take place, but the essentials need to be

available to engender growth and capabilities formation. As such,

governments have to play the role of enabling agents, allowing civil

society and private sector to be their productive partners in this

endeavor.

Some analyses have suggested that current levels of investments

in the crisis-affected economies are already satisfactory, especially

after their elevated levels prior to the Asian Crisis (for example, ADB

Looking Back to Move Ahead 49



50 Chapter Four

[2007]). The contention of analysts is that investments were speculative,

creating financial bubbles and economic vulnerabilities. Accordingly,

the Asian Crisis was seen as inevitable as a way to trim down these

excesses. In a way, the current levels reflect the appropriate invest-

ments for the region.

It is important to stress that previous flows were facilitated by

ignoring the long-term implications of weakened regulations on

international flows (for example, Jomo [1998]). Today, investmentsneed to be facilitated to boost economic growth to reach previous

heights, although the manner of facilitation requires sound manage-

ment of international flows to encourage capital deepening and avoid

unnecessary indebtedness. Investments also have to be facilitated to

broaden industrial capacities and enhance competitiveness. Unfor-

tunately, the crisis-affected economies are unable to reach their

previous heights of economic expansion because investments have

fallen to levels that are not enough to stimulate robust growth. And

because the pace of growth has not picked up, there are, in turn,

lesser investments.

Economic growth has to be above the projected normal levels

for the crisis-affected economies. In the two decades prior to 1997,

the average GDP per capita growth rate of the group — but excluding

the Philippines — was 5.6 percent; in the decade prior to 1997, thiswas 6.9 percent. After the Asian Crisis, the average growth rate

fell to just about half. Full economic recovery could only be realized

if economic performance is raised back to pre-1997 rates and sustained.

Depending on the population growth rate of the country, GDP

per capita growth rate needs to be at least 6 percent (or a nominal

annual economic growth target of above 7 percent) today. This target

is only to recoup the costs from the Asian Crisis, and so going beyondcost recovery requires faster growth rates. Downgrading growth

targets is unwarranted, given the sufficient capacities available for

robust economic expansion. It is unfortunate that governments in



the region are easily swayed with ratings and are too careful to sti-

mulate their economies for fear of some inflation or larger budget

deficits.

Economic growth itself produces structural changes. In the end,

growth facilitates transition to the superior structures. These changes

need to be managed well by governments in order to avert destabi-

lizing forces from frustrating the economic transformation. Otherwise,

latent social conflicts could materialize, undermining economicperformance. For this reason, democratic environments that allow

for meaningful social participation in deciding, say, the direction

of the economy and an effective bureaucracy are very important

to the whole process. Recall the chaos in Indonesia when its bureauc-

racy and social fabric collapsed in 1998.

At the same time, it is important to emphasize that economic

growth strategies of the past are not to be replicated nor sustained

today. Indeed, past growths were achieved at the cost of the

environment (for example, Bello [1982], Bello, Cunningham, and Li

[1998], and Barry and Eckersly [2005]). The destruction of habitats

and biodiversity as human activities expand, solid waste accumulation

and mismanagement of wastes, urban blight due to congestion,

resource pollution and toxic contamination, and global warming,

to highlight some, are important issues that have to be integrated

in economic plans. These are not to be taken as token issues, included

as appendages or after-thoughts in economic planning. Economic

strategies must include, for instance, the preservation of ecological

carrying capacities to absorb the stresses imposed on the ecosystems

as economies expand. There are available strategies allowing a balance

between economic expansions and sustainable environments. Gov-

ernments simply need to do more and think harder so that presentgenerations do not bestow a damaged environment on future

generations.




52 Chapter Four

OPPORTUNISM AND HESITATION

The misdiagnosis of the Asian Crisis — from its causes to its

impacts, both immediate and subsequent — and the overloading of

rescue packages with policy conditionalities have contributed to the

escalation of the crisis and the costs (for example, Jomo [1998]). Even

mainstream evaluations have come to the same conclusion (for

example, Radelet and Sachs [1998], Lane et al. [1999], and IMF [2003]).

To some extent, the interventions in the crisis-affected economieswere opportunistic in character, driven by the longing to introduce

reforms that earlier were difficult to bring in or were parried away

by governments.

As Hewison and Robison (2006) have pointed out, these econo-

mies never completely adopted the Washington Consensus model of

growth but were more strategic in introducing reforms while

preserving the overall character of their respective approaches toeconomic growth. And the Asian Crisis provided the opportunity to

push for the complete adoption of the Washington Consensus model.

When the interventions succeeded, the results were short of the

desired outcomes. So, in due course, adjustments were modified when

operationalized to fit the domestic circumstances and save the

economy from devastation, as what happened in South Korea. Else-

where, government took a radical break and instituted policy thatwas abhorred by the mainstream, such as capital controls in Malaysia.

Of course, as long as the miracle economies story worked well,

such yearning to introduce changes in the region was allowed to

pass. The Asian Crisis resuscitated that engagement and, as noted in

Chapter 1, the crisis-affected economies were quickly branded as

principals of crony capitalism, corruption, large inefficiencies, and so

forth, as if overnight these economies became basket cases from being

showcases earlier. Indonesia is the best illustration of this shift in

perception (for example, Pincus and Ramli [1998]). External interven-

tions forcing structural changes in the crisis-affected economies while



their economic environment went increasingly volatile and uncertain

in the end undermined the effectiveness of policy interventions andthereby became part of the problem.

The initial hesitation of international institutions like the Inter-

national Monetary Fund (IMF) and governments like the United States

to provide support in a crisis situation was understandable because,

in part, there was no appreciation for the severity of the problem in

Asia. The way the Mexican Crisis of 1994 was handled by the IMFcontributed to the hesitation, as the rescue and bailout operations in

1994 were found to have benefited international finance — especially

American financiers — much more than the crisis-affected economies,

especially Mexico. The United States did not see any serious con-

sequences of the Asian Crisis — Thailand was far removed from the

United States in terms of economic relations and the Asian Crisis, in

general, was not considered a relevant strategic issue (for example,

Yergin and Stanislaw [2002] and Blustein [2003]; see also Blustein

[2006]).

Concerns about moral hazard were valid, too. After all, intense

capital flows to the region occurred because governments encouraged

them with various forms of guarantees and loose or weak regulations.

Unrestrained debt accumulation (mainly, short-term) and dangerous

exposures to risks brewed economic disaster. In a way, the AsianCrisis was thought to be a necessary episode to cut off the extra fat

in these economies. It was also thought that moral hazard was present

everywhere in the developing world no matter the nature of the

crisis that occurs. Of course, in the past, well-intended rescue efforts

ended up bailing out the private investors and creditors themselves,

with the domestic residents often footing the bill in terms of higher

taxes, reduced public goods and services, and so forth.

The extended reluctance of the international community and

governments to render assistance to Asia, even as the crisis was

deepening and hitting other economies outside the region, is difficult




54 Chapter Four

to understand. In the end, this caused the Asian Crisis to escalate the

way it did. Precisely because of the inaction or delayed actions, the

Asian Crisis produced an outcome that was largely preventable.

When actions came, they targeted the structural problems of the crisis-

affected economies rather than first establishing economic stability,

and so the interventions added to the problem.

However, the failure of governments to address the moral hazard

problem does not expunge the case that an international lender-of-last-resort is, on balance, very important in regaining confidence and

reestablishing economic stability during crises or in putting up

alternatives, say, an Asian Monetary Fund that may be more effective

in addressing pressing concerns in the region.

The crisis-affected economies could have been steered away from

experiencing the debilitating impacts of a full-blown crisis if meas-

ures were introduced in a timely fashion and in appropriate ways.Concerns about moral hazard could have been dealt with effectively

if at the outset guidelines on lender-creditor duties and responsibili-

ties were clear. On this latter issue, the concerns could have been

addressed well if the creditors and investors actually shared in the

responsibility for the prudent management of international flows

and were not simply interested in profits and securing their capital.

One way to achieve the proposal of shared responsibility among

governments and private sector is to ensure the formulation of sound

lending policies, to have some involvement in the disbursement of

funds or some related arrangements that allow for collective determi-

nation. For instance, if the external borrowings were misused or proof

is not presented to demonstrate that the funds were actually used to

improve the social conditions of domestic residents, or it could not

be traced where the borrowed funds went, the burden of proof todemonstrate that the money was indeed not diverted into private

pockets would be upon the lenders. If lenders pretended not to see



that the borrowed funds were misused and benefited elites, or did

not act to redress the situation, the progressive position would bethat creditors are accountable for the misallocation of funds. Similarly,

if investors are involved in fueling speculation, the burden is on them

to show that their activities are not creating vulnerabilities on the

economy. Of course, governments need to guarantee fair play,

transparency, and predictable procedures to encourage the expansion

of productive economic activities.

INTERNATIONAL FLOWS OF CAPITAL AND TRADE

An important dimension to the understanding of the Asian Crisis

is how financial liberalization brought about lax regulations and weak,

even weakened, capacities to manage international flows. The conse-

quent rapid increase and volatility of capital flows were driven by

speculative and unproductive activities and not intended to deepenindustrial capacity. These developments underpinned the Asian Crisis;

and, in some contexts, mindless financial liberalization was a culprit

of the Asian Crisis (for example, Jomo [1998, 2003]).

Pundits of financial liberalization point to the benefits of having

access to capital and how capital mobility provides the disciplining

mechanism for domestic policy. Financial liberalization also means

that governments engage the reality of policy trilemma with openeconomies contexts, that is, the incompatibility of simultaneously

achieving the goals of capital mobility, fixed exchange rates, and

having autonomous policies (for example, Fleming [1962] and Mundell

[1962]); or the difficulty in balancing effectively the goals of the state,

democratic politics, and full economic integration (for example,

Summers [1999] and Rodrik [2002]).1

1 It needs to be noted that there are opposing arguments to the policy trilemma(for example, Rose [1996], Calvo and Reinhart [2001, 2002], and Bordo andFlandreau [2003]).




56 Chapter Four

However, such an interpretation is weak on closer inspection

because the presumption, for instance, is that capital mobilityimplies that the unfettered flows are always welfare-improving.

As another example, there is a presumption that economic integration

implies sacrificing political participation. Because the experience

in Asia (and elsewhere) shows that large costs were produced

from crises generated by unregulated capital, the burden of proof

is on advocates of unrestrained capital movements to demonstrate

that the purported gains of unrestrained flows not only materializebut, more importantly, accrue to domestic residents. Or else,

there is a basis for policy intervention to manage capital so that

it not only supports but also complements production and contri-

butes to economic expansion.

Lucas (1990), and subsequently Tornell and Velasco (1992), Beja

(2006), Alfaro, Ozcan, and Volosovych (2008), and Forbes (2008),

among others, had actually queried why capital was flowing out of

developing economies, where capital is most needed because of

scarcity, and moving into advanced economies, where capital is plenty.

If capital flows from these economies in the form of, say, capital

flight or even legitimate capital outflows, and if capital surges create

fragilities and increased risks in the domestic economy, as well as

reduced effectiveness of policies, there is indeed a valid case for

intervention.

Crotty and Epstein (1996, 1999) and Epstein, Grabel, and Jomo

(2003) note that capital flow management is warranted in such

circumstances. What needs to be emphasized, though, is that the

objective of the intervention is not to revert to economic repression,

which has been found unsuccessful in engendering robust economic

growth. Rather, intervention is intended to regain control of policies

and the direction of domestic development, thereby enabling coun-

tries to retain (not only attract) capital in their economies and use the

inflows to fuel economic expansion.



For example, capital management techniques may be used to

direct capital flows into the productive sectors, which will, in theprocess, bring about real industrialization and raise the economy

to higher levels of production. They may also be deployed to affect

the volume and composition of capital formation in order to insulate

the economy from short-term or speculative flows that disrupt

the creation of hospitable domestic conditions needed for rapid

economic expansion. Indeed, privatization, deregulation, financial

liberalization, and globalization, together with the processes attachedto them, require sound institutions for governance, effective

mechanisms for administrative controls, and regulation for smooth

adjustments to occur. As long as the rules are clear and enforcement

is fair, capital management techniques will contribute to raising

economic welfares. It will thus be a tragedy if fear of capital regula-

tion results in a situation wherein capital stops flowing to Asia or

to developing economies in general.

The case of the Malaysian capital controls illustrates the necessity

of timely intervention during crisis, although it remains a topic in

policy debates whether or not the capital controls helped at all in

insulating the country in 1998. There is some agreement among

analysts like Jomo (2001a, 2007), Kaplan and Rodrik (2002), Johnson

and Mitton (2003), and Ching, Jomo, and Fay (2005) that if the capital

controls were not introduced in 1998, the situation might have led

Malaysia to suffer greatly from the capital outflows and speculationand from social unrest in the country, albeit there might be other

reasons for the introduction of capital controls.

Another needed policy intervention takes the form of trade

management techniques to complement the capital management

techniques mentioned earlier (for example, Stiglitz [2002, 2006] and

Stiglitz and Charlton [2005]). Beyond the issues associated with trade

access and facilitation, trade coordination among Asian economies

is very important in averting the domestic disintegration and social

dislocations that accompany free-market international trade regimes.




58 Chapter Four

In general, the crisis-affected economies have had, on balance,

strong emphasis on export-oriented economic growth. Yet, in eachof these economies, it could be observed that there was no clear

program on how to push industries to higher levels of production

and deepen industrialization (for example, Jomo [1997, 2001b, 2003]),

with perhaps South Korea as an exception. Their strategies mainly

focused on capturing the export markets in the major industrial

economies, and there was little attention to developing their econo-

mies as outlets of their own production to balance the economicexpansion and serve as a cushion against external shocks.

Crowding out effects have manifested in the global exports market

(especially in electronics), thus putting the sustainability of the old

strategies to doubt. As pointed out by Krugman (1994), intensive

production can definitely produce robust economic growth despite

structural inefficiencies or defects in the domestic economy, but it

cannot go on forever. Ultimately, these constraints become imposingenough to put a stop to economic expansion. Accordingly, the crisis-

affected economies have to build up their domestic capacity to

generate the alternative demand plus the infrastructure to raise

productivity and advance their economies through the exploitation

of scale economies and complementarities in productive infrastructure.

Crucial to this endeavor, however, is the execution of real income

and wealth distribution to empower the productive sector of the

economy to contribute significantly to economic expansion.

Hence, trade management techniques may be used to administer

production, facilitate industrial deepening, and propel the economy

to higher levels of industrialization. As such, sound industrial policies

and planning are crucial. They need to be flexible also to allow for

adjustments as circumstances change. Still, trade management

techniques have to be implemented in a way that allows for steady

progressions from low to higher levels of industrialization. Policies

need to adjust to encourage constant upgrading of production on

the industrial ladder while gradually reducing reliance on imported



inputs and capital goods and embarking on technological adaptations,

as well as introducing innovations, deliberately enhancing interna-tional competitiveness, and so on.

It also needs to be pointed out that part of industrial policy is

a competitive exchange rate, which is important for the efficient

allocation of resources to support industrial production as well as

for industrialization itself. Of course, economies need to strategize

when entering into trade arrangements so that they will facilitate

rather than limit trade flow. But export-oriented economic growthneed not be incompatible with domestic-oriented development (for

example, Palley [2002], Felipe [2003], and Felipe and Lim [2003]).

The bottom line is that economies need to be strategic in their policy

interventions, compete in the global market, and prevail in the

competition to secure domestic economic welfare but, ultimately,

global economic welfare, too.

As with the case of capital, the burden of proof is to demonstratethat the purported gains of free trade do not only materialize and

exceed the costs but, more importantly, accrue to domestic residents.

If the modes of interventions and the conditions of trade facilitation

are clear, trade management techniques will contribute to raising

economic welfares. Thus, it will be a tragedy if the uneasiness with

strategic interventions results in a situation wherein economies end

up closing their borders to trade or introducing protectionist policiesto limit trade, as this will adversely affect their own economic

performance, as well as that of the global economy, and limit economic

progress.

THE ROLE OF GOVERNMENTS

The way reforms had been executed in the past typically created

opportunities that undermined the economies in the end. Of course,

in the initial phase of reforms, governments overlooked this issue

because their economies experienced robust economic growth. It was

thought that growth compensated for the institutional constraints.




60 Chapter Four

As this arrangement continued, however, governments found it

increasingly difficult to direct, say, investments into productiveendeavors that supported industrialization, enlarged aggregate

outputs, and created more jobs. Capital flows became increasingly

short term or went into speculative and nonproductive activities,

which then generated financial and asset bubbles that encouraged

further risky investments and eventually produced the Asian Crisis.

In the end, governments thought that the best way to address the

situation was for them to step back progressively from active econo-mic management.

It needs to be stressed that while economic indicators suggested

that robust economic expansion would be sustained into the medium

term, the increasingly large capital flows generated complacency,

raised risks, and enlarged the imbalances that made the Asian Crisis

inevitable. Some of the capital inflows ended up as unrecorded

transactions, as large volumes could not be absorbed by the economy,and they, too, became difficult to control (for example, Beja [2006]).

Of course, capital inflows would not contribute to industrial deepen-

ing and economic growth if they are not preceded by reforms that

produce enhanced demand for investments (for example, Obstfeld

and Taylor [2005] and Prasad, Rajan, and Subramanian [2007]). Mean-

while, governments backed up the situation with all sorts of

guarantees, consequently creating perverse incentives that actuallyencouraged risky, unproductive, and unrecorded activities as well

as the revolving of capital out of the economy. Governments con-

cluded that by withdrawing from active economic management, they

were in the right direction: the less they intervened, the more correct

the policies were, and the volumes of capital flows validated their

actions. Thus, it could be seen in all the crisis-affected economies

that deregulation and financial liberalization became almost complete

by the mid-1990s. Or, in the case of South Korea, the complete opening

of its economy was made a requirement for its admission to the

Organization of Economic Cooperation and Development (OECD)

in 1995.



There is therefore a need to rethink the direction of policies if

governments of the crisis-affected economies want to remain relevant,to rethink the significance of active economic management and the

crucial role of a sound execution of reforms. Unsuccessful govern-

ments face larger pressures to remove themselves from further partici-

pation in the economy. In turn, they become weaker, more ineffective,

or worse, they become failures. The weakened governments find it

hard to stabilize their economies or secure the basic needs of their

peoples. The weakening governments, on the other hand, find itincreasingly difficult to maintain the same level of effectiveness they

once enjoyed. They fail if economic recovery does not occur. Govern-

ments that allow external forces to undermine their autonomy and

capacity find that they degenerate quickly.

Governments that casually wait for the market or events to unfold

and produce for them the needed stabilities and securities are also

bound to fail. Those afraid to take serious measures in the interest oftheir economies fail as well. In the end, years of economic progress

are wiped out overnight, and governments become part of the prob-

lem, rather than solving the problem.

It also needs to be stressed that when governments weaken or

fail, they violate the fundamental economic rights and liberties of

their people to enjoy a decent, meaningful, and substantive existence.

They are therefore responsible for the injustices and miseriesexperienced by their people.

As the Asian Crisis and its fallout illustrate, governments of the

crisis-affected economies had difficulty in guaranteeing the securities

of their people and societies precisely because they no longer had

the autonomy and capacity to address the problem. The collapse of

Indonesia in 1998 was perhaps the extreme form of fallout during

the Asian Crisis, but in other economies, like the Philippines and

Thailand, people were pushed into poverty overnight. Frustration

and despair made people commit suicide in South Korea. The conse-

quences of child malnutrition, withdrawal of students from schools,




62 Chapter Four

unemployment and defeat, and so forth, would have to be reversed

by governments.

Issues that continue to trouble developing economies in general,

including unsustainable current account deficits, unhealthy fiscal

positions and limited fiscal space, spiraling prices, uncompetitive

foreign exchange rates, unattractive interest rates, and unfavorable

environments for investments, need to be addressed by governments.

And these issues remain challenges to the crisis-affected economies

today as they try to find the right mix of policies to achieve robust

economic expansion in the post-crisis period and in an environment

that was considerably changed because of the Asian Crisis and the

emerging challenges from outside the region.

Together with the expectations from governments mentioned

above, sound macro-organizational fundamentals, like the insti-

tutional capacity to negotiate internal and external challenges toreforms and to economic growth itself, and the effective implementa-

tion of programs, to list some, are crucial. Where privatization, de-

regulation, and financial liberalization have been introduced, it is

imperative that governments introduce compensating measures to

catch up with changing contexts and thereby remain effective, ease

adaptation or adjustment, and secure and stabilize economies.

Strong governments mean effective governance, in which govern-ments are at the center of economic management. They see the

challenges and act on them in a timely manner to avoid any economic

derailment, and they are effective when responding to the challenges.

Strong governments are able to negotiate ingeniously the external

demands imposed by globalization. They facilitate cooperative

relations with the private sector and civil society without compro-

mising competition, enabling broad-based actions and plans that focus

on long-term goals rather than on immediate political gains. They

also pace the progress of reforms such that adequate regulatory

institutions and supervisory mechanisms are put in place as reforms

work themselves out. They establish clear rules for capital and trade



management with the domestic economy in mind. In short, these

are governments that maintain their autonomy and continuouslyimprove capacity to meet changing conditions, and they succeed in

steering their economies to higher growth trajectories and, in the

end, raise the economic welfare of their people.

To some extent, it is important to challenge governments, espe-

cially those of the crisis-affected economies, to take decisive actions

to stabilize and secure their economies. Government interventions

are not only expected but need to be demanded. Strong governments

have to consider legitimate social concerns, such as aspirations for

balanced and healthy economies, peaceful societies, clean environ-

ments, and so forth. They have to rethink how reforms had been

done in the past, the costs of misguided policies and wrong imple-

mentation, the consequences of lost autonomies and capacities, and

so forth. It is likewise important to rethink proactive engagements

that lead to the identification of legitimate alternatives. To date,however, governments of the crisis-affected economies appear to

remain stunned from the Asian Crisis that they have yet to move

from the sidelines and step into the center of economic progress.

INTERNATIONAL COOPERATION

The above points are some of the institutional underpinnings thatcreate a strong domestic economy necessary to stabilize and sustain

economic performance. Understanding their importance and opera-

tion is crucial to knowing how the underlying structure explains a

particular kind of performance. Yet that understanding is also needed

to know how to bring about change in the structure, and thus sustain

or change that performance.

One role of the international community is to contribute to creating

the underpinnings that produce a strong external economy which

does not compromise the domestic economy. Efforts that enhance

the transparency of international flows, mechanisms that monitor




64 Chapter Four

the regional dimensions of vulnerabilities, associations that allow

for collaboration, and so forth, are in the right direction towardmeaningful international economic cooperation.

International cooperation needs to be sincere. As the Asian Crisis

pushed economies to collapse, the difficulties were blamed to crony

capitalism, to corruption and wide-scale inefficiencies, and to struc-

tural defects, not to mention wayward external borrowings and

unsound investments. But there was little attention to stabilizing the

economies in the initial phase of the crisis. Issues about faulty politics

and other institutional concerns might be relevant to long-term

structural reforms, but they were not urgent as the crisis unfolded

in 1997.

As pointed out earlier in Chapter 1, even in the weeks before

the Asian Crisis erupted in Thailand, the crisis-affected economies

were hailed for their successes in producing virtuous economic

expansion that brought about rapid poverty reductions, stable prices,

and provision of basic goods and services to all, and it was said

that developing economies ought to follow their lead. Of course,

the Philippines did not perform as well as the Asian tiger economies,

but it did well beginning in 1992 or compared to its economic

performance in the 1980s. The sudden turnaround in attitude of the

international community — that pointed to the same factors that

produced robust performance as the causes of the crisis — could beunderstood as a result of expediency, forcing reforms in the crisis-

affected economies as a precondition for bailout and rescue. Inter-

national assistance was therefore opportunistic.

International cooperation needs to be real and respectful of the

uniqueness of contexts and differences in backgrounds. Governments

that pledge assistance have to be truthful to their promise. Those

that extend assistance need to lay bare their intentions. In either

case, governments have to undertake efforts to get the best under-

standing of the situation before considering and planning what actions

to take.



Governments cannot be indifferent to the consequences of a crisis.

Therefore, the primary consideration in a crisis is how to stabilize

the situation; only after stability has been achieved can structural

changes be taken up for consideration. Actions toward structural

reforms need to be genuine reforms that deal with the root causes of

problems and not palliatives that give merely temporary solutions

only to be undone with another but more powerful crisis. The

avoidance of similar crises is a fundamental measure of a successful

cooperation.

The Asian Crisis clearly illustrated how a shock in one country

could snowball into a serious crisis in the region and elsewhere if

no solid international cooperation to address the problem happens

right away. Since Thailand was a minor trading partner, the crisis

was not seen as significant enough to affect the United States, and

so it was downplayed by inaction (for example, Yergin and Stanislaw

[2002] and Blustein [2003]). This attitude from the United States

contrasts that toward Mexico, where a similar crisis occurred in the

1990s. A massive bailout and rescue package was timely orchestrated

and averted an economic disaster in the Americas. The rest of the

OECD was also lukewarm to Asia in 1997.

In Indonesia, the IMF initially advised that a standby facility

was not needed, arguing that the economy had sound fundamentalsand could withstand the ripples coming from Thailand (for example,

Kenward [2003]). When things turned out to be different, the IMF

took the opportunity to introduce reforms far removed from stabi-

lization. Malaysia initially thought that following IMF prescriptions

was the right way to shield its economy. Eventually, however, it

saw problems with the IMF approach and decided to embark on

unorthodox policies, which were denounced by the international

community as dangerous and foolish.

The situation in Malaysia turned out to be better than in Indonesia,

Thailand, and South Korea, partly due to the unorthodox policies.




66 Chapter Four

Interestingly, the sentiments changed, favoring the application of

capital controls to shield economies from further external assaults.Governments need to be given the policy space to determine how to

address their predicaments while the international community helps

them out to engage the problem successfully.

Governments faced with a crisis need to be truthful and forthright

concerning their problem. Recall that days before the Asian Crisis

erupted, Thailand denied that there was an escalating problem. It

pledged to defend its currency to the hilt because it had the resources

to do so and to parry away speculation against its currency. In the

end, the declaration was empty. Similarly, South Korea went through

a denial stage. Days before its currency collapsed, South Korea

declared that its reserves were enough to insulate the economy from

the ripples coming from Southeast Asia. In reality, though, its reserves

were quickly depleted in only a matter of days.

Meanwhile, Indonesia made meaningless declarations to adjust

its budget and expenditure programs, albeit pronounced under duress.

Somehow, the Philippines had the good sense that it would not

succeed the onslaught because it did not have enough reserves in the

first place, and so it rapidly sought standby facility from the IMF.

Governments need to be sincere in presenting the extent of their

problems. While this action could be humbling for some governments,

it is an important step toward cooperation and reaching the appropri-ate solutions.

The international community needs to work toward redesigning

the global “rules of the game,” that is, management of international

flows, mechanisms for international engagement to reduce global

uncertainties, creation of a stable international economy, and securing

of international polity. It has to place on governments the respon-

sibility for regulating activities within their economies so thatunregulated operations do not create unacceptable or unfavorable

outcomes that will threaten the integrity of the global economy. It

needs to coordinate policies so that international flows, for example,



do not again cause havoc elsewhere. In fact, the increased trade among

economies — even intra-regional trade — means that the global pro-duction setup is largely interconnected and this situation, too, has

important implications for domestic economic performance. An export

slump, for example, may translate into reduced performance and

produce a crisis.

Likewise necessary are serious actions to curb, if not reverse,

illicit or unrecorded international flows that undermine developing

economies. Such transactions continue to pull resources into haven

locations in the OECD that, in a way, benefit from the deprivation

of developing economies, which in turn lose the needed funds for

economic development. The recipients of these illicit or unrecorded

flows need to take steps to redress the situation, starting with their

policies that attract or induce such flows into their economies in the

first place. In addition, rigorous monitoring of international flows

and information sharing among governments are very importanttoward clamping down the illicit or unrecorded flows.

Finally, the international community has to forge quick solutions

to rehabilitate the crisis-affected economies and avert the crisis

from transforming into a virulent kind like the Asian Crisis. Timeliness

is crucial. With quick responses, lost opportunities are minimized

and rehabilitation is easier and less expensive. Of course, the

effectiveness of international cooperation and planned actions willlargely depend on the political willingness and courage of govern-

ments to forge collective responses, to move sometimes with

unpopular measures, and the skillfulness of the leadership in

sustaining cooperative arrangements which lead to coordinated

economic expansion that is not only agreeable to everyone but

also capable of obtaining desirable outcomes that will benefit all

in the end.




Conclusion

5

he study presented a review of the economic performance of

Indonesia, Malaysia, the Philippines, South Korea, and Thailand

in the decade following the 1997 Asian Crisis. It showed that the

crisis-affected economies have been performing unsatisfactorily rela-

tive to their previous decade’s performance. Moreover, the Asian

Crisis inflicted serious costs on these economies which have yet to be

fully recovered. Full economic recovery, however, requires robusteconomic growth which can be sustained in the long term, in order

to compensate for the lost opportunities in 1997. This growth may

perhaps be at least 6 percent of gross domestic product (GDP) per

capita growth each year. If growth mellows down to supposedly

pragmatic rates, these economies will still face difficulties in recouping

their losses. Downgrading growth targets in economic plans to con-

form to the projections announced by international institutions andrating agencies is unwarranted, given the sufficient capacities available

T

68



for robust economic expansion. Such aversion to rapid growth is

symptomatic of callousness to the unsatisfactory circumstances in theregion, as well as withdrawal from active economic management.

The study presented results to concretize the consequences of

the Asian Crisis. By the mid-2000s, the crisis-affected economies had

exceeded their 1996 GDP per capita but had done so only after some

years of significant lost opportunities. The cost accounting exercise

projected a total social cost for Indonesia of US$94.8 billion (41 percent

of GDP) by 2007, which translates into a per capita social burdenof US$418. Malaysia would still be burdened with US$39.1 billion

(31 percent of GDP) or, in per capita terms, US$1,487. In the Philip-

pines, the total social cost would be US$6.7 billion (7 percent of GDP),

or a per capita social cost of US$78. South Korea would have to deal

with US$52.3 billion (8 percent of GDP), or a per capita social cost

of US$1,074. Thailand would be overloaded with US$95.1 billion

(55 percent of GDP), or a per capita social cost of US$1,444. Theseare nontrivial figures that these economies have faced and endured.

Put another way, the economic gains from the long hard work in

the past were quickly erased in one to two years. Thus, from an

economic justice point-of-view, these amounts provide a basis why

it is imperative for economies to avoid another crisis.

Lastly, the study stressed the need for decisive policy actions

from governments of the crisis-affected economies and from theinternational community to realize robust economic performance and

recoup the costs. These actions need to ensure economic stabilities

and preserve political securities. While reforms were already intro-

duced in the post-crisis period, challenges remain and new issues

have come up, like how to raise economic growth to levels that charac-

terized the Asian miracle economies prior to 1997, to address the

regulatory and supervisory constraints that remain the weak points

of an open economy, and to allow for meaningful changes in the

international financial architecture in order to secure the external

economy and make it support the domestic economy, to name a few.

It is important to put in the missing instruments for the present context

Conclusion 69



while maintaining the useful components of the past arrangements.

Accordingly, together with dynamic growth and sound governmentinterventions toward a positive structural transformation, comple-

mentary actions of capital and trade management techniques, the

corresponding international cooperation and policy coordination, and

improvements in the global “rules of the game” are needed to strike

a balance between the domestic and external objectives and generate

broad-based economic outcomes that are beneficial to everyone.

70 Chapter Five





72 Postscript

the two that warrant consideration. Five items are discussed below

to highlight their similarities and differences.

Wreckage After the Storm

One element that the Global Crisis and the Asian Crisis share

is their deep and wide-ranging negative impacts in the crisis-affected

economies. Both pushed the world to the brink of another depression.

Yet before the crises wreaked havoc, there was elation about the

prospect of unstoppable economic growth. There was a view that

the last crisis was too far back in history and could be considered

irrelevant to the current circumstances. Analysts also thought that

the advanced and developing economies had already decoupled from

each other, there was resiliency to external shocks, and there was

space to proceed with the current mode of policies, so it was possible

to ignore the consequences of global imbalances. The situation was

hopeful, especially for the developing economies — at last, economicdevelopment was possible despite the continued dominance of the

advanced economies in international capital and trade flows.

When the crises broke out, however, the notion of decoupled

economies was quickly quashed. Economies were, in fact, more tightly

connected to each other because of economic integration and

globalization. Because of their interconnection, external shocks —

both good and bad — turned out to be more forceful than beforein impacting economies. Negative shocks were magnified because

capital and trade flows overreacted by quickly retreating from crisis

areas and, nevertheless, consolidating in advanced economies, where

financiers and investors felt relatively safer than in developing

economies. Flows became conservative or even hesitant to go outside

advanced economies. Economic growth prognoses became grimmer

as economies continued to contract. On balance, the impact of the

negative shocks was asymmetric for both crises, that is, the advanced

economies did better in sheltering their societies from harm than

the developing economies simply because the former had the resources

to do so.



As explained in the book, Asia was salvaged from its crisis in

the late 1990s only after the advanced economies had put theiracts together with the reduction of interest rates, deployment of

sizeable rescue packages, and reversal of the pro-cyclical prescrip-

tions like those imposed by the International Monetary Fund (IMF).

There was concerted effort from the advanced economies because

the Asian Crisis was already threatening their economies. However,

the challenge is greater in the case of the Global Crisis. If the

experience of Japan during the 1990s is any indication of what theadvanced economies would have to endure in the process of

adjustment during and after a crisis, the advanced economies need

to put their acts together quickly and embark on unprecedented

measures in order to stabilize their economies and (yet again) avert

a depression that would pull everyone down as the world shrinks

to find its balance.

The book pointed out that the Asian Crisis radically alteredgrowth trajectories in the region. The crisis-affected economies have

yet to recover their losses today, more than a decade past the crisis.

In fact, they are still burdened with large costs that seem too difficult

to undo because of the limitations imposed by subdued economic

growth rates and external pressures. That the Global Crisis will

change the growth trajectories of advanced economies and those

affected by it is no longer an issue. In fact, an L-shaped growth trajec-tory has been conceded to be the scenario for the United States once

the bottom of the Global Crisis is reached. The other advanced econo-

mies will experience the same pattern, albeit of differing magnitudes,

given the variations in contexts. Meanwhile, economic contractions

are proceeding unabated.

As this book goes to print, the Global Crisis is not near the bottom

of the contraction. Indeed, there has been no easing up in the descentof key indicators. Thus far, no one has a clear idea how deep the

plunge will be before a turnaround occurs. What is disturbing is that

the Global Crisis will push many economies into serious difficulties

Postscript 73



74 Postscript

and burden them with huge losses despite having no direct involve-

ment in the production of the crisis. It is also saddening, if not ironic,that developing economies will actually suffer more from the Global

Crisis even if they are at the sidelines of the global economy.

Deregulate and Liberate

Deregulation and financial liberalization are common features of

both the Asian Crisis and Global Crisis; they are the preconditionsfor the problem. Basically, financial systems were opened in response

to demands for greater competition and freedom of capital and trade

to cross borders, but the rules and institutions to manage competition

and international flows were not established in or even removed

from the process of deregulation and financial liberalization. In fact,

the way regulations were removed precluded the introduction of

new regulations to discipline international flows when it was found

necessary by governments to do so.

It is important to understand the context of deregulation and

financial liberalization. Right-wing economics and politics moved to

remove market regulations; they extolled the virtues of free markets

and despised any form of government intervention, which was

identified as the cause of economic problems. It was believed that

markets always worked well because they are self-rational, self-

regulating, and therefore self-reproducing. Indeed, the mere exis-

tence of markets is itself self-legitimizing of their virtuosity and the

possibilities they provide to the economies. If markets were not

carrying out their role as understood, they would be easily replaced

through competition — it was thought that competition was enough

to discipline the market. Government intervention simply arrested

progress, which was believed to be possible only with unregulated

markets.

Indeed, there was the assurance that society should not worry

about market operations because, on their own, markets evolved



smoothly; they were preprogrammed to reach equilibrium no matter

what. All that was needed was to unleash the market. And with

economies performing well as the regulations were progressively

being removed, governments were emboldened to embark on more

aggressive deregulation and financial liberalization. Markets insisted

to be free, to do whatever they desired, and to go wherever they

wished, and so governments had no choice, so to speak, but to de-

regulate and liberalize their economies to accommodate the demand.

In the case of the Asian Crisis, massive capital and financial inflows

ensued in the decade prior to 1997. Because the domestic productive

capacities did not expand as fast as the pace of the inflows, more funds

went increasingly into speculative and unproductive activities. Thus,

by the early 1990s, the prices of stocks and assets such as real estate

had accelerated. With the weakened regulatory institutions in the

region, capital flight proceeded without restraint, as if governments

were indulgent to the revolving nature of the international flows. The

inflows also contributed to an expansion of consumption as currencies

appreciated and cheapened imports, in turn, undermining industrial

strength. Easy money enabled governments to pursue easy credit, too.

In the end, flows of funds reinforced the consumption binges and

unproductive expansion in the region.

The Asian Crisis unveiled the weaknesses in the Asian region.Rapid economic growth in the decade before 1997 was therefore only

possible because capital continued to flow to the region. With the

crisis erupting in 1997, the flows stopped then reversed. In the end,

the region did not have enough funds to keep up with the outflows

as capital rushed to safety.

The debacle in 1997 radically changed the perception about Asian

economies. As the book pointed out, the region was quickly rebuffedfor its cronyism, corruption, inefficiencies, and structural rigidities,

supposedly the causes of its collapse. Interestingly, these elements

were present all along even in Asian economies labeled as miracle

Postscript 75



76 Postscript

economies. There was, however, belated recognition that the main

problem was liquidity: funds were not enough to restart financialsystems and governments were inutile to stop the bleeding of their

economies.

Not surprisingly, the Global Crisis shares the same trends with

the Asian Crisis. In the United States, where the Global Crisis erupted,

the separation of commercial banking and investment activities

mandated by the Glass-Steagall Act of 1933 was abolished with the

passage of the Gramm-Leach-Bliley Financial Modernization Act of

1999, which effectively opened the United States financial system

to free-for-all competition among commercial banking, investment,

securities, and insurance entities. Of course, there were earlier pieces

of legislation that weakened the Glass-Steagall Act of 1933. The

rapid advances in computing power, information processing, and

financial know-how actually contributed to accelerating the process

of removing regulations even as they facilitated the rapid expansionand sophistication of financial markets.

As financial activities progressed, more activities occurred outside

regulatory control; nobody knew how much transactions occurred

in the so-called shadow financial system. Besides, the removal of

regulatory power pushed out authorities from intervening in the

financial markets. The aggressiveness of finance led to the creation

of highly sophisticated and very complex financial instruments thatdid not have secondary markets; no one could resell the instruments

when they went bad even at discount prices. Worse, a lot of the

financial instruments were not backed by real values.

In other words, changes were increasingly focused on the

secondary problems of financial markets, that is, on market operations

through the use of prices. Increasingly, the primary problems of

financial markets were downplayed, that is, the requisite structures

and institutions for market development were set aside as irrelevant

to a deregulated and financially liberalized economy. It was enough

to assume that deregulation and liberalization generated the demand



for sound structures and institutions. Again, the view was that markets

cleared and the economy stabilized with them, and internationalflows were enough to discipline both the market and government.

Observe how the Global Crisis was caused by the wobbling of

the United States financial system, which, in turn, has threatened

the collapse of the global financial system. The Global Crisis showed

once again that unregulated financial markets are not durable and

do not promise long-term benefits even in the most advanced

economy. Put in another way, the most sophisticated financial sys-

tem is fragile. In economies with less advanced financial systems,

there is an embedded wisdom toward a precautionary approach to

deregulation and financial liberalization.

This time, however, the United States was caught in a gridlock-

cum-vacuum because the financial system was rapidly sucked out

of liquidity even as it was infused with huge funds. The United Statesproblem burrowed deep into the financial system in complex ways.

Because of the linkages, a stalling United States financial sector stalls

the United States real sector. Owing to the international linkages

between the real and financial sectors, the United States problem

has extended to the world. In short, the nature of the problem is

worse than that in 1997 because of the greater scope.

Recall that the Asian Crisis put to doubt the notion that marketscould operate well by themselves. There were efforts to reign on

markets through government regulations in the wake of the Asian

Crisis. After a while, though, as the world recovered and, in due

course, regained its pace of economic expansion during the 2000s, the

attitudes changed and government intervention was again seen to be

unnecessary. Interestingly, the Global Crisis revived the convictions

declared due to the Asian Crisis, namely, to redefine the international

economic architecture and to institute sound regulation for managing

international capital and trade flows.

Postscript 77



78 Postscript

The Global Crisis is once again a reminder to return to the

structures and institutions in order to soften market operations, tothe fundamentals of production, and to balanced economic growth,

including the interactions of various factors, which are needed for

dynamic performance and improved economic welfare. Part of this

recollection is to recall how to re-embed finance in the economy and,

again, make it support production, contribute to growth, and help

improve economic welfare.

People who believe in regulation should be tasked to run the

regulatory agencies and given ample room by government to execute

regulations. It is meaningless to have financial regulatory agencies

or an integrated financial regulatory body when the people placed

there do not believe in regulation or think that any regulation is bad

or see that the removal of regulations is their mandate.

Re-regulation is in no way a suggestion or an approval to embarkon authoritarianism or antidemocratic measures. It is not even close

to such view. Rather, it is a challenge to the position that unregu-

lated markets are the best way to organize economic activities. There

is a need to reconsider the essential roles of government in a market

economy and find a balance between planning and market, to return

to the fundamental purpose of economic management. The funda-

mental principle that underpins re-regulation is the promotion of ashared society where economic progress does not create extremes of

wealth and poverty, a shared society which provides access and cre-

ates opportunities for everyone to overcome adversities and chal-

lenges through hard work and dedication, tempered with the mutual

responsibility to ensure that the economy continues to be robust in

the long term.

Success Breeds Failure

It is natural that success raises confidence. That continued success

will breed contempt of failure is equally natural. There will always



be a belief in the permanence of success and the emergence of a new

stage of advancement. Thus, a period of exuberance always precedesa crash.

Another interesting parallel between the Asian and Global Crises

is that they are both results of economic successes that lasted for

some time. The successful period was thought to be the consequence

of policies that stressed limited strategies or government action,

setting markets free with the removal of regulations.

In Asia, the success of the export-oriented growth strategy

masked the ersatz nature of economic progress. Asia was thought to

be coherent in constitution, relative to the other developing regions.

Indeed, two-and-a-half decades of continuous economic expansion

among roughly contiguous economies was unprecedented, even a

miracle, because such a scenario was statistically improbable.1 In fact,

Asia was thought to be the economic model that the developing world

should emulate and aspire for.

In a way, the Asian economies were Janus-faced economies. The

region had macroeconomic discipline and maintained balance. It had

adequate physical infrastructure and provided basic social services

like public education and health. Governments were embedded in

that they coordinated investment activities, supported the rising

industries, and encouraged reinvestment of capital for further

production. More importantly, the region became an aggressiveexporter to the advanced economies.

Behind the competitiveness of its open economies, however, Asia

had uncompetitive domestic sectors. There were aspects overlooked,

too, like increasing inequalities and environmental destruction.

Domestic adjustments were not pushed because economic growth

masked the problems. Rapid growth was thought to assuage demands

for redistribution and environmental sustainability.

1 The probability that another Asian miracle reoccurred elsewhere is 1 in 60,000(Jomo 2001c).

Postscript 79



80 Postscript

By the 2000s, the Asian economies had geared back to growth

momentum. The export-oriented growth strategy was functioningagain. New drivers of economic growth emerged, like China and

India, to supersede earlier drivers like Japan and South Korea. Because

of the painful experience with the Asian Crisis, Asian economies

accumulated international reserves as precautionary resources against

illiquidity or another crisis.

This huge pool of Asian liquidity had to take some form and

was placed somewhere in the interim that it was not utilized by theeconomies. Thus, there emerged the international liquidity glut that

characterized the 2000s.

The United States was willing to take in Asian and other econo-

mies’ international reserves because it needed to finance its trade

and fiscal deficits. The United States no longer produced most of

the goods it consumed, and so it imported a lot from the world,

especially from China. It also did not want to be worried about basic

services for its workers and so it opened its doors to immigrants,

albeit offering the latter relatively lower wages and lesser social

security than American workers.

United States authorities encouraged the situation by reducing

interest rates and keeping them low for a while despite key indicators

pointing to the need for a reversal of policy. The sustained capital

inflows, of course, provided easy money that, in turn, supported

consumption binges and the rapid expansion of the United States

financial markets. With tougher competition, financial standards were

lowered and thus emerged the sub-prime mortgage bubble in the

2000s.

The capital flows to the United States left little resources to

developing economies. China, for instance, has the largest inter-

national reserves today, but a large part of its funds is locked in

United States treasuries and other fixed instruments. China and other

developing economies are effectively providing foreign aid to the



United States. This unhealthy pattern, together with the fleeting

nature of flows because of deregulation and financial liberalization,has not only limited economic development but also created and

enhanced the existing vulnerabilities of developing economies.

The United States enabled other economies to flourish because,

as the global consumer-of-last-resort, it gobbled up goods from the

world. Again, global imbalances have supported United States con-

sumption since the 2000s. Needless to say, the current international

economic architecture requires one or two global consumer-of-last-

resort economies to enable global economic growth. Now that the

United States is unable to perform its role, the world is devastated.

Still, the Global Crisis impacts the developing economies in signifi-

cant ways despite being at the margins of global economics.

Of Debts and Bubbles

There are two essences of the Asian Crisis and Global Crisis. The

first is debt. Both crises originated in borrowings. They are different

only in terms of the nature of indebtedness and its development. For

the Asian Crisis, there was a mismatch of maturities and liquidity,

that is, the Asian economies borrowed funds in international cur-

rencies but lent out in local currencies; they borrowed in short term

but lent in long term. When the crisis struck, economies found it

difficult to meet debt obligations and respond to the massiveinternational outflows.

The Global Crisis, in contrast, originated in the securitization of

debts. Securitization is basically the creation of hybrid financial

instruments by (re)combining existing instruments and (re)selling

them like conventional financial instruments to, say, investment banks,

hedge funds, insurance companies, and so forth. The most recognized

of these instruments because of the Global Crisis is the collateralizeddebt obligation. The securitization process was thought to be safe,

clean, and transparent. Again, competition guaranteed that it would

proceed just fine and bring benefits to the economy in the long term.

Postscript 81



82 Postscript

Recall that in the conventional approach, banks extended loans

to households and businesses. If borrowers defaulted on the loans,banks suffered. Thus, there were strong incentives for banks to ensure

that good loans were made and the borrowers paid.

In the United States, things markedly changed in the 1990s. Banks

shifted to the so-called originate-and-distribute system in making

loans. In the new approach, banks still issued loans as before, but

then they had other financial institutions or, on their own if they had

enough capitalization, packaged the loans into hybrid instruments.

Notice that the issuer of loans need not be the holder of loans. In

contrast to the conventional approach, there was no strong incentive

to make good loans in the new approach.

With no strong regulations or monitors because of deregulation

and financial liberalization, the transactions continued like ordinary

business, expanded, accelerated, and then went out of hand. Therewas a perverse incentive to create more hybrid instruments, sell them

off, get bigger fees and bonuses, and then redo the process all over.

Why should market players worry about defaults when they got

their big fees and bonuses already? Besides, government allowed, if

not encouraged, the expansion of such transactions.

Rating agencies contributed to the securitization process, too. The

business of rating agencies is exactly that: to rate securities and relatedfinancial instruments. Their business is fundamentally linked to selling

and underwriting financial products. Put simply, those who sold the

hybrid instruments got rating agencies to rate their products. The

perverse incentive was to give very high ratings to earn more and

not be concerned about the integrity or truthfulness of hybrid

instruments like collateralized debt obligations.

As competition in the financial market intensified, more loanswere extended to people who did not have the capacity to pay

loans, or the so-called sub-prime borrowers. Because United States



housing mortgages were basically non-recourse debts, there was a

big problem right from the start.

It is easy to understand why loans need collateral. In the case

of the United States sub-prime lending, the collateral was (still) the

house. But loans were non-recourse debts, which means, in case of

default, recovery of the loan is limited to the mortgaged property.

The rest of the borrower’s properties (if there are any) are not covered

by the mortgage. In short, it is possible for the borrower to return

the mortgage to the bank because of inability to pay and then walk

away. Indeed, since the housing bubble burst in 2007, people had

been walking away when they defaulted. There was therefore a per-

verse incentive on the part of the borrower to not make good on

the loan.

Besides, insurance against defaults was available to the bank,

which is called credit-default swaps or insurance derivatives. Simplyput, the bank could purchase insurance on a loan that was given in

the sub-prime market to cover losses in case that loan went bad.

Again, there was perverse incentive to not make good loans.

What was overlooked during the securitization episode was that

the transactions evolved into hybrid instruments that remained

outside regulatory controls. In short, nobody recognized the profound

changes in the financial system; in the end, nobody knew the amountof toxic materials created during the securitization episode. Moreover,

the hybrid instruments did not have secondary markets. In short,

nobody could resell their toxic materials if people did not want to

hold them anymore, even at discount prices. What made things worse

is that these instruments were actually not backed by real value;

thus, it was difficult to stabilize the situation when the crisis broke

out in the financial system. And because the regulatory infrastructure

was decimated throughout the 1990s, it was difficult to intervene

in the financial system. In short, securitization set the course toward

catastrophe. After the bubble burst, a financial gridlock-cum-vacuum

emerged.

Postscript 83





As the events unfolded in 2008, bailout was extended to giant

finance players like Bear Stearns, Lehman Brothers, Merrill Lynch,Morgan Stanley, Goldman Sachs, and Citigroup; insurers like Fannie

Mae, Freddie Mac, and American International Group; regional banks

like Washington Mutual; and auto companies like General Motors,

Ford, and Chrysler.

The United States financial sector needs to bail itself out because

the alternative scenario of a United States financial collapse is worse

in terms of its impact on its economy and the world, as well as on

global security. The alternative scenario of reliving another depression

is unacceptable to the United States and the world.

The amounts for the United States bailout are large in any

yardstick. But United States authorities can carry it out because

their economy does not have a currency constraint problem, unlike

most other economies. Put another way, United States authoritiescan provide the liquidity needed to have a successful bailout and

save the financial system by simply allowing the release of money.

But the fundamental issue is whether United States authorities

realize that a bailout would necessarily help those who profited and

took advantage of the situation that brought the United States

financial system to the brink of collapse or that the bailout would

necessarily help those who were complacent in building the UnitedStates productive sector. A related important issue is whether United

States authorities have the seriousness to fight the good cause and

take up actions in good faith to avert the greater costs because, in the

event of a financial collapse, there would be no “soft landing” for

everyone. An equally important issue is whether United States

authorities would run after those who placed the financial system in

the United States at the brink of collapse, or for other economies, to

break down.

Because of the financial mess, those who have placed their money

in, say, pension funds for a good objective will not be able to look

Postscript 85



86 Postscript

forward to a secure retirement. Many people will lose incomes, jobs,

and houses as the financial mess spreads through the United Stateseconomy. Since it is not well understood how the money will be

recovered, bailout will create a huge hole in the financial system even

if it saves the financial markets. As those who have profited from

irresponsible actions are not going to take any burden, bailout will

strengthen the view that the United States has become a society that

protects the wealthy and powerful and gives token care to the poor

and powerless. The bailout will penalize the taxpayers for a long time,even as United States authorities purge the toxic financial products.

No doubt, the United States financial mess requires a quick and

solid resolution because, even in the interim of the Global Crisis, the

costs have become too large to be fathomed. After that, there would

be serious re-regulation to discipline capital, resuscitate the financial

regulatory structures and pull the financial system out from its setup

that encourages financial casinos and, more importantly, make financeonce again serve the people rather than the reverse. There would

also be serious actions against those who took irresponsible and

arrogant transactions without the actual capital to back them up.

Like the Asian Crisis, the Global Crisis originated in a bubble.

Bubbles do not usually have any effect beyond the domestic sector.

The Asian Crisis evolved into a more virulent crisis because the

advanced economies and international organizations like the IMFwere disinclined to provide assistance to extinguish the problem as

it hit other regions. The opportunistic nature of the intervention did

not help ease the problem in Asia because the economic contraction

led to a general doubt on the integrity of developing economies in

general. Economic integration and globalization also facilitated the

transmission of the problem.

The Global Crisis, however, is different from the Asian Crisisbecause the United States bubble has burrowed quite deeply into the

United States financial system. Securitization has transformed the

bubble in complex and intractable ways. Owing to the domestic



linkages, a stalling United States financial sector stalls its real

productive sector.

Consider the following transmission. The collapse of the housing

industry affects the sectors that are directly connected to housing,

like construction and materials, furnishing, and utilities, and even-

tually the workers and incomes in these associated sectors as well.

Of course, it does not necessarily mean that if the housing industry

collapses it will automatically affect the other real sectors, say,

automobile, airline, shipping, and so forth.

There may be secondary effects of a housing industry collapse.

For instance, as the furnishing industry is adversely affected, people

lose their jobs and income. Thus, there may be fewer people who

want to travel, thereby affecting the airline industry in due course.

The same goes for industries linked to airlines, and so forth. In short,

a problem like housing collapse may lead to secondary problems thatcan immobilize the whole real sector of the economy. Of course, the

speed of transmission and extent of the effect greatly depend on the

health of the economy.

The housing sector and the other industries are linked to the

financial system. It is possible for a housing company to put up its

own lending company, providing people who bought houses with

access to some form of financing. Similarly, a conglomerate may putup its own bank to establish some form of direct payment facility for

its clients. These linkages make the financial system function like the

circulatory system of the economy. Thus, a problem in the financial

system affects the whole body. Indeed, Alan Greenspan (2007) says

that, as of 2006, the daily volume of payments in the United States

financial system was around US$5 trillion.

Unlike the real sectors of the economy, the financial system hasdirect linkages to all parts of the economy. In the case of the United

States financial crisis, companies lent to each other but turned a blind

eye on the unusual situation: no one actually had enough money to

Postscript 87



88 Postscript

pay all the obligations. It was generally thought that nothing unusual

was happening because, again, competition was extensive. Then thebubble burst, the “house of cards” built with housing mortgages fell

apart, and a major heart attack to the financial system occurred,

incapacitating the United States. As the repercussions in the real sector

manifested, the financial sector found that it did not have enough

money to support the untangling of debts.

The linkages within the United States also serve as the conduit

for extending the United States mess to the global economy. With

the retreat of capital to the advanced economies for security, the real

sector of developing economies would suffer as economic contractions

ensue following reduced capital and trade flows. This way, the Global

Crisis is like the Asian Crisis because in the latter, capital fled the

region to seek safer places, especially the United States.

The Global Crisis is similar to the Asian Crisis because of thelinkages across the financial and real sectors. The problem in the

United States hit the European and Asian financial systems as they

were unable to recover their exposures. As their financial system

stalled, their real sectors were compromised in the end. Because

economies are now rather tightly linked to each other, the slowdown

resulted in secondary effects on other economies as well. Thus, as

advanced and developing economies slowed down, the world fell

into economic trouble.

During the Asian Crisis, capital pulled out from the region and

shifted to the advanced economies to start another bubble, so the

amount of capital in the end remained intact or, at least, capital was

able to recover the losses from the Asian Crisis rather quickly. In

fact, the same general process could be observed with the Mexican

Crisis in 1994, Brazilian and Russian Crises in 1998, Turkish Crisis in2000–2001, and Argentine Crisis in 2001–2002. Even the United States

dot-com bubble in 2001 came from the same cycle of boom and bust.



But this time, the Global Crisis hit capital in its core. Capital was

vacuous because it did not have (enough) value to support or backup its expansion with securitization. Thus, when the bubble erupted

in 2007, asset evaporation ensued. Large write-offs and write-downs

have continued since 2008, creating a downward spiral of valuation

and sentiments. The effect is that capital would now have much diffi-

culty reconstituting or restoring itself in the post-crisis period. This

time, bubbles would not be quick to emerge. Besides, the amount of

capital would not be enough to start another bubble, at least duringthe mediate post-crisis period. The failure of another bubble would

therefore be problematic for reviving global economic growth.

Of course, there would be subsequent problems, especially in

developing economies, where capital is already scarce. In fact, some

of them already had difficulties repaying their debts before the Global

Crisis. Poor ones would face a much tougher problem in meeting their

debt obligations. If debt problems emerge, certainly, there would beanother layer of complications to the Global Crisis.

Nobody Saw “It” Coming

The Global Crisis emerged in the heart of the world. It did not

occur in some developing economy with faulty financial institutions

or broken politics, but in the United States, the richest, arguably the

most democratic, country with the most advanced financial systemin the world. While serious crises occurred in advanced economies

in the past, like the 1980s United States savings and loans debacle,

the 1990s Scandinavian banking crises, or the 1990s European

Monetary System breakdown, none of them actually threatened the

world. Perhaps this is because there is something odd with the

present-day variety of United States capitalism, or the Global Crisis

came out in the United States that it was not expected.

Contrary to popular perception, the Global Crisis was actually

foreseen by a number of analysts. The economist Jomo K. S., along

with the United Nations, warned about an impending global crisis.

Postscript 89



90 Postscript

Nobel Laureate Joseph Stiglitz and economists like Robert Shiller

and Nouriel Roubini noticed the alarming trends even before 2007.2

There are other analysts who raised the alarms, of course. The United

States Federal Bureau of Investigation warned, in 2004, of problematic

and unhealthy financial practices linked to securitization (for example,

Black [2009]). Warren Buffet warned of the dangers of derivatives,

as early as 2002, calling them “financial weapons of mass destruction”

(for example, Berskshire Hathaway [2002]). What is incomprehensible

is that precautionary measures were not adopted despite these earlywarnings, including in the United States. It seems that the world

was content to dismiss these analysts as doomsayers (for example,

Greenspan [1998, 2007]), or, as in the case of Asia in the 1990s, authori-

ties did not want to let go of the vision that global economic perform-

ance was heading to a higher level of advancement. Perhaps, authori-

ties and their analysts operated within a setup that predisposed them

to take self-serving analyses which rule out the possibility of a brewing

problem. If their analyses succeed in identifying the problem, thesetup is such that it precludes them from taking actions because doing

so risks the loss of confidence and produces panic.

Of course, there is the matter that the Global Crisis, like earlier

crises, is a systemic problem inherent in capitalism. That is, while

no economic system is free of crises, it is argued that only capitalism

is genetically structured to fall periodically into crises. But people

find it difficult to accept that capitalism is fundamentally flawed.

As such, it is better to forget about the flaws. It is relaxing to believe

in the infallibility of capitalism and to dismiss dissenters as doom-

sayers. The onslaught against alternative proposals has been successful

because the notions that the capitalist system will eventually sort

itself out if crises occur, and that competition will temper it, dominate

2 Recall that Joseph Stiglitz and Nouriel Roubini were among the first to presenta provocative analysis of the causes of the 1997 Asian Crisis. Robert Shillerhas been credited for predicting the housing bubble collapse, while Roubini,for predicting how the US financial system would break down as a result ofthe bubble bursting. See Shiller (2006) and Roubini (2008).



policy and analysis. The situation is unfortunate because the collapse

of capitalism today is an occasion to engage in a serious fundamentalanalysis of the capitalist system.

AFFIRMING A DECLARATION OF INTERDEPENDENCE

After analyzing the impacts of the Asian Crisis, the book pro-

ceeded to discuss some policy directions to revive economic growth

and prevent the occurrence of a crisis of the same kind.A reviewof those policies is useful in light of the Global Crisis. Chapter 4 laid

out five considerations for the post-Asian Crisis period, namely:

reviving growth, eliminating opportunism and hesitation, manag-

ing the international flows of capital and trade, enhancing the role

of government, and forging international cooperation. Are they also

applicable to the Global Crisis?

Economic Growth

The first policy challenge in the wake of the Asian Crisis was

reigniting economic growth in the region. The same applies to the

economies adversely affected by the Global Crisis. As in the Asian

Crisis, sustaining growth over the long term across the world will,

in fact, be the bigger challenge in the post-Global Crisis period. Recall

that, as discussed in this book, after the Asian Crisis, growth trajec-

tories of the crisis-affected economies did not return to their previouspath. This pattern need not reoccur if outputs, incomes, and jobs

expand in the post-crisis period.

In the interim, the world is seeing the advanced economies on

a downward spiral. The contractions have adverse impacts on the

economic performance of developing economies that, in turn, can

aggravate the conditions of the poor who comprise more than half

of the world’s population.3 The collective decline of economies will

Postscript 91

3 This statistics is based on the US$2.50 daily benchmark to be classified asinternational poor. With the US$10 threshold, however, 80 percent of the worldis poor.



92 Postscript

be problematic because global economic welfare will fall, too. With

the bottom of the Global Crisis not yet in sight as this book goesto press, there are serious concerns about the depth of the dive and,

accordingly, the magnitude of the damages. As stressed in this book,

recovering these costs will be a huge challenge to economies in the

post-crisis period.

It is imperative therefore to prevent the Global Crisis from

escalating into global collapse. The scenario of a depression must

not be allowed to happen. As such, stimulus programs are needed

to pull economies out of the crisis. Put simply, aggressive spending

is needed to improve the outlook in the succeeding years. The

purpose is not only to realize an improvement today but also to

reinvigorate the economy for the future. To have profound effects,

the stimulus programs need to emphasize complementarities, exploit

scale economies, and minimize duplication so that there will be

generalized expansion across sectors and economies.

Stimulus spending is crucial during a crisis because it is quick

to stimulate economic growth. But it needs to be timely so that

spending will actually contribute to the expansion of production,

generation of jobs, and increase in incomes. Enlarged income, in turn,

creates successive expansions that materialize into a larger gain than

the initial outlay.

Stimulus spending needs to be coordinated so that demand will

be spread out across economic sectors. The challenge is more difficult

in the case of the Global Crisis because the spending also needs to

be coordinated across economies to see improvements in global

economic performance (see discussion below). At the same time, it

is important that stimulus spending is sustained in the medium term

to avoid an economic relapse.

Depending on the domestic capacity, a meaningful stimulus

spending needs to be between 2 and 5 percent of gross domestic

product (GDP) over a four- to five-year period, with gradual reduc-



tions midway into the program.4 A conservative determination is

to first obtain the total contraction as a share of GDP at the bottomof the crisis, then divide the figure by four or five years to get the

size of a stimulus program for each year.5 For example, if the total

contraction reaches, say, 10 percent of GDP at the end of the crisis

(using the procedure used in Chapter 3), then stimulus spending needs

to be in the range of 2 to 2.5 percent each year. Recall that this approach

could bring an economy back to its pre-crisis trend. To recoup the

costs, however, stimulus spending needs to exceed the calculatedlow-end amount.

Of course, downgrading economic growth targets is inevitable

during crises; but it is precisely because of this that stimulus spending

has to be introduced quickly and to be as decisive as possible in

order to reverse the distressed scenario swiftly. In the ideal scenario,

reduction in spending is done once the economy is back on track

to its original growth trajectory. At this stage, it is important toinstitute counter-cyclical spending. Thus, there is a need to set up

a mechanism that will enable interventions to manage growth

fluctuations via spending. Because of the Asian Crisis experience,

there is consciousness that improving the economic performance of

crisis-affected economies is a priority concern before going into the

structural changes.

Opportunism and Hesitation

A major mistake during the Asian Crisis was the misdiagnosis

of the crisis and, because of that, the wrong prescriptions. The Asian

Crisis was thought to be a current account problem, forcing the

4

Two percent of the total output is a generic IMF prescription for stimulusprograms.

5 Obviously, the calculation assumes perfect foresight to determine the bottomof a crisis. In the absence of perfect information, historical analysis will be useful(for example, Reinhart and Rogoff [2008, 2009]).

Postscript 93



94 Postscript

crisis-affected economies to execute current account measures. In

actuality, the Asian Crisis was more of a capital account crisis whichaffected the current account, since economies suffered from

liquidity as capital flows ran out.

Recall that the Asian Crisis was attributed to cronyism, corruption,

and so forth, so the prescriptions focused on structural changes

and other reforms that were not directly related to the liquidity

problem faced by the crisis-affected economies. Of course, entrenched

interests were upset. Elites did not support the reforms, resultingin the mere token acceptance of the prescriptions handed by the

IMF and others. In the end, there was default on the reforms. If

the liquidity problem were addressed head on (i.e., with access

to funds to stabilize the situation), a bitter crisis could have been

avoided. There were other mistakes, of course. But, again, the Asian

Crisis escalated the way it did because of the incorrect analysis

and prescriptions.

In a way, the Global Crisis started out as the result of incorrect

analysis and prescriptions. As mentioned earlier, warnings in as

early as 2004 pointed to unhealthy financial market practices. Warn-

ings in 2006 referred to an impending crisis in the United States

housing sector. It is unlikely that the United States Federal Reserve

did not see the unhealthy trends. Recall, for instance, how the United

States stock market adjusted in December 1996 after then FederalReserve Chairman Alan Greenspan marginally commented in a

speech that the 1990s stock market boom exhibited “irrational

exuberance.” In due course, the dot-com bubble burst.

In other words, if United States authorities wanted to act to deal

with a potential problem, they did so with binding threats of

intervention and regulation. The fact of the matter is that the United

States Federal Reserve refused to intervene in the 2000s. To theFederal Reserve, the brewing problem was merely froth in the

financial system that would just disappear when competition fixed

the exuberance. Accordingly, the Federal Reserve did not acknowl-



edge a housing bubble problem. It even went on to relax its monetary

policy and maintained loose policy for too long. It also supportedthe removal of the remaining safeguards against speculative activities.

In a way, the Federal Reserve acquiesced to the financial markets.

Market players, in turn, were emboldened to engage in more

speculative activities. There were also implicit promises that gov-

ernment would lend a hand in the event that help was needed,

strengthening the notion that market players were too big to fail. In

short, not only were structures and institutions weakened with

deregulation and financial liberalization; the incentives were unsound

as well, and the environment encouraged speculation.

Moral hazard was part of the problem. On one level, there was

hesitation to say that there was a problem in the financial system

despite the deregulation and financial liberalization. If the Federal

Reserve made such declaration, panic, and thus a crisis, would break

out. If it did not do anything, however, a crisis would still occur. In

these alternative scenarios, the latter was easier to pursue.

The above argument avoids the issue of the roles of financial

regulators, which are, necessarily, to ensure the soundness of the

financial system and make it resilient against shocks, ascertain the

veracity of financial products sold in the economy or elsewhere, check

market players if they engage in financial casinos or prey on peopleor fool everyone else to consume financial products that would be

unsafe for the economy in the end, avoid situations which would

bind the government to bail out those who acted irresponsibly,

impose the burden on those who acted carelessly, and, more impor-

tantly, discipline capital so that it supports the economy. In addition,

there must be effective regulation and capacity to discipline market

players. Apparently, when the situation was ripe for a financial crash,

the Federal Reserve did not and could not act to extinguish a crisis.

The bailout and rescue activities comprised the first phase of the

effort to resuscitate the financial system, and the stimulus programs

Postscript 95



96 Postscript

are the next steps. Institutional reforms are, without a doubt, desper-

ately needed to address the source of the problem, but they are to bedone in the appropriate fashion and timing.

An important lesson from the Asian Crisis is that fundamental

reforms should be introduced once the crisis-affected economies are

on a steady course to economic recovery, which in itself is important

to sustain the reforms. Some measures could be urgent, like strength-

ening the rule of law and apprehending the culprits, which signal the

seriousness of government, and conveying the message that things

would not go back to the way things were before the crisis. Safety

nets are needed to minimize the adverse impact of the crisis on the

poor and the vulnerable. In such cases, actions need to be creatively

introduced by the authorities to convey the correct message that

government defends public interest not private interests.

It is apparent when reviewing past major crises, like the GreatDepression of the 1930s, that urgent measures were done without

delay and reforms were introduced in due course.6 The Federal

Deposit Insurance Corporation, the Securities and Exchange Com-

mission, and other agencies, as well as social security, wage and labor

standards, and so forth, were introduced by the mid-1930s. An

alphabet soup of regulatory agencies was prepared between the

1930s and the 1960s.

Together with regulatory reforms, the United States government

raised taxes on the elites. Naturally, such measures were objec-

tionable. In the end, however, the policy transformed the United

States society. In particular, taxes on the elites and, subsequently

income taxes as well, produced the great compression in wealth and

inequality, creating the middle-income American society that attracted

many people to the United States (for example, Piketty and Saez [2003]

6 There were also policy mistakes. In 1937, the Roosevelt administration decidedto balance the budget. The result was a recession. Realizing the mistake, theRoosevelt administration changed direction and embarked on a stimulusprogram to revive economic growth.



and Krugman [2007]; for advanced economies’ experience, see Piketty

and Saez [2006]). Regulatory agencies produced a managed economy.Eventually, there were parallel growths in wages, profits, and accu-

mulation which sustained expansions in production, consumption,

and economic welfare. Thus, the United States experienced the longest

expansion in the post-World War II period ending in the 1970s.

At the broader level, reforms are needed to repair the capitalist

systems that were damaged by unbridled deregulation and financial

liberalization. Equally crucial are measures to take care of the

frightening challenges to society caused by mindless capitalist expan-

sions, namely, climate change and environmental destruction. Reforms

are likewise necessary to shift attitudes from focusing on corporate

profitability to emphasizing public safety and security.

Measures that penalize those that funnel resources into useless

and destructive activities have to be enacted in the post-Global Crisis

period. Those who engage in speculation need to be liable for their

mistakes. In the meantime, governments must institute caps on

irresponsible and callous actions that seem insensitive to the Global

Crisis. Reforms that encourage and reward productive activities,

initiative, and good business need to be enacted, too. At the same

time, reforms like redistribution and income and wealth taxation

have to be revisited.

Lastly, research and development needs to be stressed in order

for societies to devise context-specific measures, strengthen regulatory

institutions, and improve bureaucracies. This is also necessary in

finding alternative routes to economic progress so that rapid economic

growth will not compromise environmental sustainability and the

global economy. In areas where agriculture plays a key role in terms

of employment and income, there needs to be greater attention to,

say, enhancing agricultural and technical services to improve farmingand harvesting techniques, as well as exploring viable off-farm live-

lihood programs, especially during the growing season. Obviously,

free public education and health services and employment must be

Postscript 97



98 Postscript

guaranteed to anyone who wishes to attend school, needs medical

care, and wants work. Skills improvement and training, together withtechnological research and advancement, are key components of an

invigorated capitalist system. Their availability — both the quantities

and qualities — will bring about sustained growth. They are all needed

in the post-Global Crisis period in order to recoup quickly the lost

opportunities.

Managing International Flows of Capital and Trade

The challenges learned from the Asian Crisis with regard to

capital and trade flows are even more relevant to the Global Crisis.

Deregulation and financial liberalization without the corresponding

regulatory reforms to strengthen institutions and respond to the new

conditions, together, were the preconditions for the Asian Crisis. In

the end, with the virulence of the crisis, massive capital flowed out

from the region while trade contracted, eliminating the source of

funds for debt financing and pushing economies to a very difficult

and painful experience.

By 2000, capital had started to flow back to developing econo-

mies. More funds returned to Asia. However, globally, these flows

remained predominantly within the advanced economies. A fraction

of global flows actually went to the developing economies, albeit toa dozen of high-performing developing economies. The other areas,

like Sub-Saharan Africa, received very little capital flows and did

not have access to capital to support economic growth.

With the crises in the late 1990s and earlier 2000s, capital was

reluctant to flow to the developing economies without guarantees or

privileges, like tax breaks or safe passage if it wanted to take the

exit. Meanwhile, unrecorded flows intensified as capital flowed inbecause there were few regulations in place. Any adverse develop-

ment amplified the rush to the exit. At the same time, capital could



circumvent the remaining regulations because the infrastructure was

weak for the administration of the remaining regulations.

Moreover, capital flows became more short term in character.

The composition of flows also turned out to be increasingly liabilities

rather than assets and green-field investments. The consequence was

that capital did not take root in the domestic economy, nor did it

contribute to enhancing productive economic activities. In short, capital

was only after profits then quickly left to search for other profitable

opportunities.

As Asia started to stabilize, efforts toward further deregulation

and financial liberalization were revived. The view changed from

deregulation and financial liberalization as preconditions for the Asian

Crisis to being indispensable measures in the post-crisis period to

pull the region to higher growth trajectories. Indeed, the latter view

was the argument in the early 1990s as Asia had enjoyed uninterrupted

expansion since the 1980s. With governments instituting financial

measures and other reforms like capital adequacy and accounting

standards, confidence was raised that even if deregulation and finan-

cial liberalization were pursued the old way, the safeguards intro-

duced were already sufficient to forestall another crisis. Of course,

governments were cautious with embracing capital flows but more

amenable to the removal of regulations.

Even today, capital flow management (as explained in Chapter 4)

remains weak. In regard to the capacity to control capital flows, such

as directing capital into the productive sectors, affecting the compo-

sition of the flows from short-term to long-term capital, or preserving

capital in the economy, developing economies in general remain weak.

Malaysia removed its capital controls in 1999 and, thus far, there is

no comparable capital management setup in place there. Not sur-

prisingly, when capital controls were removed in 1999, Malaysiaexperienced a massive outflow of capital. As the world gathered eco-

nomic momentum in the early 2000s, capital management techniques

became more difficult to introduce in developing economies; capital

Postscript 99



100 Postscript

became stronger and launched a strike against an economy that con-

templates regulating capital flows, causing problems to the economy.

There also remain problems in trade flows management. Global

trade continues to be predominantly within advanced economies.

The developing economies, on the other hand, take part in a small

portion of global trade, albeit high-performing economies like those

in Asia are able to participate more than other economies. Trade

access and facilitation and coordination continue to be difficult

challenges to overcome despite the solid conviction of the advanced

and developing economies that greater trade is good for economic

performance and the international community.

Of course, an associated problem concerns the composition of

trade flows from the advanced and developing economies. What

remains consistent is that developing economies trade mainly in

primary or low- to medium-technology goods, which are easily

absorbed by the advanced economies. There have been improvements,

but these are seen only in the high-performing developing economies.

In general, though, developing economies cannot easily absorb the

flows in high-value manufactures or high-technology goods, which

differentiates the trade in the advanced economies. The latter’s goods

are more expensive relative to those of the developing economies,

which therefore creates an imbalance in trade financing.

The asymmetry of global trade flows happens partly because

investments into the developing economies do not often allow transfer

of technology or even permit adaptation to help ignite the drive for

the formation of domestic industries. Trade flows management has

focused on the protection of intellectual property rights and the

standardization of production that little attention is given to how to

utilize existing technologies to create industrial diversity across

economies. Developing economies are thus forced to specialize indiminishing returns intensive production that fails to not only bring

in large returns because the prices of their goods decline with greater

production but also generate large employment opportunities for



workers. Participation in global trade turns out to be limited and

potential for economic growth is constrained.

Trade management techniques that result in solid industrialization

and trade deepening are important in transforming the developing

economies. Each economy needs the policy space to be able to design

industrial policies that account for local characteristics and conditions.

The setup may include industrial protection coupled with the appro-

priate incentives for competition and the weaning of industries from

protection as industrialization takes root. For instance, protection

may be linked to utilizing local resources and labor or attaining bigger

shares of the global markets, and so forth. Since industrial deepening

is a long-term endeavor, adequate domestic capacity is crucial to

succeed in this complex engagement. As with the capital manage-

ment techniques, trade management techniques require the integrity

of policy space to have the control to set a course of development

that is appropriate for the economy.

There are reemerging challenges that the Global Crisis brought

to the surface. The first concerns the reversal of capital flows as the

Global Crisis intensified. Because economic contraction continues and

the turning point of the advanced economies is not yet in sight, capital

flees the developing economies to seek safety in the advanced

economies. Meanwhile, developing economies face more difficulties

in getting financing to meet present obligations because capital flows

have significantly slowed down, if not stopped, the cost of financing

has markedly increased, or investments are already withdrawing

from the rest of the world and are consolidating in the advanced

economies. Rating agencies also downgrade the investment appraisal

of developing economies. These changes actually began in 2007 but

have worsened since 2008.

With the intensifying capital outflows, developing economies are

facing grave difficulties in sustaining their economic performance

because of trade flows contraction. With the Global Crisis escalating

Postscript 101





Obviously, capital and trade flows management in developing

economies needs to address both resource direction and supervision

of risk to avoid crises. In advanced economies, on the other hand,

the task is more on regulation to take control of risk rather than

direct resources, since their financial markets are more developed

than elsewhere. What needs to be stressed is that capital and trade

flows management entails separate but complementary policies. In

this regard, governments have even more important roles to play

today in balancing strategies with respect to both domestic objectivesand international cooperation because, if mismanaged, either one

can be deleterious to economic growth.

The Role of Government

There is no need to rehearse here what was said in Chapter 4

about the role of government. The arguments remain the same. Infact, one of the encouraging developments because of the Global

Crisis is a marked shift from market fundamentalism that had charac-

terized economic management since the 1970s toward more active

government participation. Governments need to be steadfast in their

task to protect their societies. They are once again reminded that

they could actually lessen the frequency and severity of crises if they

fortify their economies with solid institutions, inoculate themselves

with reasonable regulations and vigorous supervision, and, at the

same time, institute changes to respond to changing conditions.

There is no doubt that markets could be efficient if they are effi-

ciently regulated as well. There is also no question that more compe-

tition is possible with more rules (for example, Helleiner [1994], Vogel

[1996], and Yeung [1998]).

Of course, governments need to build capacity so that they areable to fairly govern and quickly move to deal with threats to

economic growth and institutional integrity at the initial stages rather

than after a crisis erupts. That is, they need to assume a precautionary

Postscript 103



104 Postscript

rather than reactionary stance in economic management. They also

need to enhance their bureaucracies in order to have a base on whichto launch a strategic course for stable economic performance. They

likewise need to be able to achieve a balance of competing demands

coming from beneficiaries and learn when to withdraw support

because it is no longer needed, unleash competition at the right time

and amount, or return intervention when needed. While the role

of government is contingent on the prevailing trends that are likewise

changing, governments cannot, under any circumstance, forego theirregulatory responsibilities over their economies. Needless to say,

regulatory capture and corruption emasculate governments from

doing their job.

Principled leadership is of the essence during crises. What the

Global Crisis revealed is that corporate interests have captured the

government and transformed the economy to fit their interests. For

instance, as the Global Crisis evolved, the United States did not throw

its weight to discipline capital. In fact, as pointed out in the first

section of this postscript, the United States government progressively

removed regulations to respond to the demands of capital. It was

a long process of transformation, but eventually, government was

dominated by capital when elites entered government to run it. In

the end, public interest was tossed out and capital defined change

as it pleased. Capital was therefore not deployed to support theeconomy; rather, the economy was made to serve capital. The United

States government, for example, embarked on massive bailout and

rescue operations to save the bankers (not the banking system), as

they were unable to reign on capital.

With the Global Crisis, governments resolved to salvage their

position, strengthen their capacity, and embed once again in the

economy, so that they would regain their positions as key agents of

transformation. It is worth noting that, in the history of the advanced

economies, their governments creatively intervened in the economy





106 Postscript

International Cooperation

The construction of an environment that could engender global

economic expansion of all economies while enhancing economic wel-

fare within individual economies remains a very important objective

of international cooperation. This end was emphasized in the late

1990s, as the Asian Crisis caused havoc in the region and threatened

the advanced economies. There was a consensus that undertaking

structural reforms in the international economic architecture wasneeded to stop the recurrence of crises, a position that was aggres-

sively pushed by the advanced economies, particularly the United

States.

The existing setup was dominated by the Group of Seven as the

global steering committee for economic cooperation. The conclusion

was that the structure forged in the 1940s was no longer adequate

for the twenty-first century. It could no longer avoid the recurrenceof crises, and much less stop a crisis in one area from spilling over

to another. It sustained unequal economic relations,7 and so it facili-

tated the creation of economic imbalances that were not easy to solve.

With deregulation and financial liberalization proceeding to open

economies, capital and trade carried on without a meaningful manage-

ment of cross-border flows and consideration of their impacts. There

were policy responses within individual economies as each grappledwith the flows, especially when they became volatile and massive

to adversely impact economic growth; but at the international level,

no one actually cared if capital or trade flows from one area had

adverse effects elsewhere.

Since the Asian Crisis, various schemes have been established,

such as the Chiang Mai Initiative for some bilateral currency swap

7 The Group of Seven consisted of Canada, France, Germany, Italy, Japan, theUnited Kingdom, and the United States. With Russia, the grouping becomes theGroup of Eight. The European Union is part of the grouping, but it can neitherhost nor chair the Group.



arrangements to respond to short-term requirements if economies in

the region face difficulties with liquidity (i.e., to avoid reliving theexperience of the late 1990s); and the Basel II, which deals with the

international standards for banking regulation, such as capitali-

zation requirements. However, nothing significant has happened

since the issue of international economic architecture reform was

raised in 1999. Instead, there appears to be a desertion from the

conviction to change what was already considered an obsolete setup.

Once the Asian Crisis — and the subsequent crises, like Brazil andRussia in 1998, Turkey in 2000–2001, and Argentina in 2001–2002 —

was contained, the issue of reform was moved into the backstage

and, in the end, evaporated from the discussions. Talks about the

international architecture became passé, even misplaced with the

supposed recoveries.

Rather than grapple with the difficult task of how to execute

reforms in the international economic architecture, the debate wasrefocused on the reasons for the quick turnaround of the economies

affected by the Asian Crisis. It was pointed out in Chapter 3 that

these economies were considered to have already recovered because

they were deemed robust. The difficulty in the late 1990s was merely

an anomaly to their overall growth trajectories. Further debates on

what to do in the post-crisis period needed to focus only on how

to sustain the progress of the crisis-affected economies, as if the crisisdid not alter growth trajectories. Of course, the advanced economies

rode with the trend because they were not willing to give up the

existing setup. There was no need to continue with the proposal,

as the Asian Crisis no longer threatened the advanced economies.

The reawakening today of discussions to change the international

economic architecture suggests that previous efforts were not an

intention to change the setup but were merely token responses tothe clamor for reform. But notice, too, that there is again down-

playing in the present discussions with the rhetoric that crisis-affected

economies are already showing signs of imminent turnaround and

Postscript 107



108 Postscript

economic recovery is therefore forthcoming. Let the setup be and

it would reconstitute itself in due course. What is apparent in thedebates is that, as before, attention is being moved to a stance on

how to muddle-through with the present setup with the least reforms

in the international architecture.

The silver lining, so to speak, with the Global Crisis is that the

economic performance of the advanced crisis-affected economies is

expected to exhibit an L-shape growth pattern similar to that of the

Asian crisis-affected economies (see figure 3.2). Such is the case today

because the Global Crisis destroyed a lot of capital. In other words,

the amount of capital would no longer be intact when the bottom

of the Global Crisis is reached. As explained earlier, this disappearance

of capital is attributed to vacuous investments (i.e., not backed up

by real values) and the write-offs and write-downs that led to a

downward spiral of valuation, making it difficult for capital to rekindle

an economic expansion. With the slump and the phobia towardunleashing capital, global economic performance would be moribund

for some time. Ironically, and sadly enough, the situation would be

a valuable opportunity to push once more the long-postponed reforms

in the international economic architecture because, with the Global

Crisis, the advanced economies would want changes in the setup

as this time they got seriously hurt.

Accordingly, the recent development that supplants the Group

of Seven with the Group of Twenty (G20) as the alternative global

steering committee for economic cooperation is an encouraging step

because the latter provides a valuable opening for greater participation

of developing economies in the international economic architecture

reforms.8 Regardless of the issues about membership, legitimacy,

representation, and so forth, that the G20 has to address, the main

8 The G20 is composed of Argentina, Australia, Brazil, Canada, China, France,Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, SouthAfrica, South Korea, Turkey, the United Kingdom and the United States.



problem that the globe faces today is how to reignite economic

growth.9 As suggested above, changes have to be made in theinternational architecture once the crisis-affected economies stabilize

and growth is revived. That is why, in the interim, stimulus spending

is of high priority in the G20, including forging international coopera-

tion in global spending in order to distribute effective demand across

all economies. Desperate moves, like wayward currency devaluations

and similar actions, need to be avoided by cooperating economies

because they not only undermine collective action but also generateprotectionist responses from the affected economies, ultimately de-

stabilizing global spending and prolonging global economic recovery.

This is also why the success of the G20 is crucial to the realization

of international architecture reform in the medium term. For these

reasons, the G20 needs to define the short- to long-term goals and

convey to the world how the outcome of reforms and interventions

will look like and, ultimately, what will be the benefits to each

economy.

The G20 needs to take decisive steps and not justify inadequate

actions with explanations that global economic performance was

reinvigorated because the Global Crisis was contained. It has to focus

on four emerging broad themes in order to solve the Global Crisis

and carry out reforms to transform the international economic

architecture into something that would finally make the global eco-nomy a better environment for all.

The first item that the G20 needs to be concerned about is the

institution of changes in the conditions that make crises recurring

9 Relevant issues include: Why not merge the Group of Twenty-Four (G24) andGroup of Seven to form an encompassing grouping in terms of, say, representationand balance of power; or why the disparity in the memberships of the G20 andG24 that comprise the International Monetary and Financial Committee of theIMF? The G24 is composed of Algeria, Argentina, Belgium, Brazil, Canada, China,Egypt, France, Gabon, Germany, India, Indonesia, Italy, Japan, Netherlands,Russia, Saudi Arabia, South Africa, South Korea, Spain, Sweden, Switzerland,United Arab Emirates, the United Kingdom, and the United States.

Postscript 109



110 Postscript

problems. It basically means that changes in the international economic

architecture have to provide a framework for policies adopted by

individual economies. The global imbalances, which partly under-

pinned the Global Crisis, are now straightforward to be unhealthy

states for long-term economic growth, and need to be avoided in

the future. For this change to materialize, appropriate regulations

at the macro (i.e., capital and trade flows management) and micro

levels (i.e., prudential regulatory controls and supervision of the

domestic financial system) must be pursued.

With economic integration and globalization, the task is more

difficult because economies need to forge cooperation by making

each one commit to cooperation over the long term. Added to this,

the regulations need to operate within the domain of capital and

trade at various levels. That is, if the concern is about cross-border

flows, then the domain of regulation needs to be supranational; or

if the concern is securitization, the domain is more domestic manage-

ment of capital. Obviously, the core of the problem is that economies

do not want to give up on their sovereignty. Again, as long as the

“rules of the game” are made clear and enforcement is fair and

transparent, global cooperation will benefit all economies in terms

of stable economic growth and collective improvements in economic

welfare. In the end, economies need to experience the gains of

cooperation so that each one commits rather than opts out.

The second item for the G20 covers two things. One is crisis

management. Clearly, no capitalist economy is immune from crises.

Thus, if a crisis happens, there must be sufficient international liquidity

to extinguish the problem at the quickest time and in the least costly

way. Decisive action is necessary; otherwise, the costs would mount

and, as shown in the Asian Crisis, economic recovery would be

extended. The IMF needs to be strengthened with additional financial

stock that is ready for deployment. Of course, there might be

objections to the IMF taking a bigger role in crisis management,

but it is the only international institution designed for that purpose.



As the G20 proceeds to define the changes in the international

economic architecture, it has to look into the role of the IMF, theWorld Bank, and the Bank for International Settlements (BIS), and

see how they could be put together in an overarching organization

that constitutes a supranational regulatory agency (see discussion

below). In the meantime, modifications have to be made in the way

the IMF approaches crisis management because, in the past (and

specifically during the Asian Crisis), it became part of rather than

the solution to a crisis.

The other item in the second theme is the possibility of having

debt standstill and orderly debt workouts, especially for developing

economies. All past major crises, including the Global Crisis, were

about indebtedness. Developed economies do not have problems

with debt rollovers because they hold reserve currencies and could

embark on debt workouts. Developing economies, on the other hand,

do not enjoy such command over creditors. If they go on unwelcomedebt standstill, for instance, they face the risk of capital sudden

stop and flight, which worsens their problem. What might have

been a manageable fiscal difficulty could turn into a major liquidity

problem and then a crisis. Debts of developing economies need to

be reviewed, too, because corruption or dodgy activities could have

funneled the borrowed funds into private pockets, in which case

debt standstill or workouts might be constructive to finance develop-mental targets like the Millennium Development Goals. Or, at least,

the G20 must define a mechanism that alleviates the burden of debt

financing during crises.

Third, the G20 needs to deal with issues about development

financing. Access to finance remains a major challenge to developing

economies despite international agreements supporting development

financing. The circumstance is especially serious with regard to thepoor economies. Because they are poor, they are considered risky

areas from the point of view of capital, do not get access to capital,

and, in turn, realize only limited economic growth, which further

Postscript 111



112 Postscript

restricts their access to capital, thereby aggravating economic per-

formance. Because they are poor, their industrial capacity is limitedand does not allow for diversified exports. The problem can be

addressed if the international economic architecture is changed in

a way that it is not only open but extends considerable support

that will pull out the poor economies from their difficulties. During

crises, when the sources of capital dry up and trade shrinks, the

international architecture needs to guarantee financing to developing

economies so that they will not be derailed with economic shocks.Access to capital is also crucial in the post-crisis period to facilitate

recouping of costs.

Finally, the G20 needs to work toward a global social contract

between advanced and developing economies. For the advanced

economies, there has to be stronger commitment and action that

support the aspirations of developing economies for real progress

and transformation. Moreover, advanced economies need to besteadfast in efforts to shape a global environment that is conducive

to global economic growth and able to pull everyone up the economic

ladder. Global imbalances therefore need to be avoided. If adjust-

ments are necessary in the advanced economies, they must be done

in such a way that they would benefit both advanced and developing

economies. If relief from indebtedness is needed, developed

economies must be ready to cancel debts especially if it could notbe demonstrated that the funds were used as intended or were

misused or cornered by a privileged few or diverted into private

accounts or money havens. Accordingly, prudence calls for the

advanced economies to initiate appropriate action to correct such

unacceptable situation and, if established, the burden needs to be

imposed on those involved in the offense.

For developing economies, they must work hard to develop theirown economies. Sound policies are important; as such, expanding

and enhancing their policy space will be crucial to success. At the

same time, developing economies need to be confident that, as they



pursue reforms, they will not be exposed to volatile and massive

flows of capital or unfavorable trade flows from advanced economies.At the same time, they need to have access to financing during the

transformation process to sustain economic progress but, at the same

time, avoid the accumulation of illegitimate or odious debts. Those

that take part in such activities are accountable for the unfavorable

outcomes and must not impose the burden on their societies nor have

the legitimacy to seek redress for their problems. Indeed, prudence

requires that appropriate actions be first taken in the economy tocorrect an unacceptable situation. Obviously, as development takes

shape, developing economies need to face up to tougher competition

and thus engage the developed economies in a less privileged playing

field. Accordingly, developing economies need to be ready for this

inevitability.

Finally, international cooperation has to move to the next stage

of international control and commitment to global economic manage-ment with the creation of a supranational agency like a World Financial

Organization (WFO) — a necessary response to bring that which is

outside the system into something that is part of the system (for

example, Eatwell and Taylor [2002] and Griffith-Jones and Ocampo

[2003]).10 The WFO will be a body with surveillance powers over

banking supervision and settlements-related issues akin to the BIS,

securities matters like the International Organization of SecuritiesCommission, insurance activities as in the International Association

of Insurance Supervisors, and stabilization, payments, and related

transactions similar to the IMF.11 The World Bank, with strengthened

linkup with regional development banks, may be brought into the

10 The classic argument for a supranational agency to control capital flows is inKeynes (1980). Recent discussions on the Keynes Plan include Iwamoto (1997),

Thirlwall (1998), Harcourt and Turnell (2003), and Constabile (2007). See Beja(2008) for a parallel discussion on the need for a supranational arrangement tocontrol trade flows.

Postscript 113

11 There needs to be parallel supranational organizations for other cross-borderflows like trade and labor and transboundary issues such as climate change and



114 Postscript

WFO setup to focus on global developmental goals. Furthermore,

there is a need for a financial audit agency to meet evaluation andassessment requirements, a financial products safety agency to look

into the substance of capital flows, and an international credit

regulatory agency to cover ratings practices, and so forth, to complete

the supervisory functions of the WFO. Thus, the G20 may have to

look into bringing together existing institutions into one structure

with a single framework for the international economic architecture

but with each branch focusing on specific operations and servicesthat are relevant to accomplishing global economic objectives. Notice

that comprehensiveness is essential in setting up a WFO.

As a supranational organization, the WFO needs to pursue at

least two important tasks. One is to build shared management of

cross-border risks. The purpose is straightforward: policy mismanage-

ment in one location may spill over to another as a crisis, which in

the process may evolve into a bigger problem that affects a largerarea. Because of economic integration and globalization, the trans-

mission of risks is faster and more profound. To have effective risk

management, the WFO may impose binding regulations covering

facets of on-shore and off-shore as well as on-balance and off-balance

sheets transactions. Consultations with member economies on how

to proceed with regulations are crucial. At the same time, the WFO

needs to provide guidelines for the management of currencies and

interest and inflation rates, which are relevant to capital flows.Additionally, the WFO has to function as the global lender-of-last-

environmental sustainability. For trade, there is already the World TradeOrganization, but it needs major adjustments in its operations to function as asupranational regulatory agency for trade flows management. In the case oflabor, there is no supranational agency as yet. The International LaborOrganization may evolve into a World Labor Organization focusing on tradeflows, among other things. Similarly, there is no supranational organization forclimate change and environmental sustainability. A supranational body may becalled World Environmental Organization. These are necessities to meet thechallenges of economic integration and globalization. Certainly, a lot needs tobe done in terms of research and dialogue to come up with functioning supra-national organizations.



resort and be able to mediate problems in regard to debt standstill

and workouts. A sizeable capital base is thus needed for the WFOto embark on emergency operations and provide guarantees to

creditors as debt problems are being managed.

For such activities to succeed, however, the WFO needs to provide

the overall direction for member economies, say, what the desirable

global economic expansion and advance look like. Such a vision will

bring everyone in solidarity with global targets. At the operations

level, though, it is crucial that the WFO has solid technical capacityto embark on sound global regulation and supervision, given that

capital will necessarily find a means to stay ahead or avoid controls.

It is important that the WFO possesses institutional integrity so that

its interventions will be effective. It is also important that the WFO

not only works to respond promptly to challenges like global im-

balances and crises but also remains fully engaged with other global

players like large transnational companies.

The second task of the WFO is to engender collective action in

the management of domestic risks, which may arise from various

sources like information asymmetries, market imperfections, and

elite capture of regulations. At this level, however, the WFO needs

to assume the indispensable supporting role to its member econo-

mies because domestic regulation still remains the responsibility of

governments. Accordingly, technical assistance to governments in allaspects of domestic regulation is crucial not only for capacity building

but also for parallel international regulation over capital flows. In

short, there needs to be a relatively tight correspondence between

domestic and international capital flows management. Of course, the

big hurdle is with the developing economies that are at various levels

of development, both in terms of the state of their economies in

general and financial systems in particular. What is important, though,

is that all economies contribute to global regulation and supervisionand are willing to allow intervention in solidarity with the global goal

of mutual economic growth and enlargement of economic welfare.

Postscript 115



116 Postscript

Needless to say, the implementation of domestic regulations remains

within each economy.

The formula for success is the WFO’s building a track record in

the effective management of capital flows, a rather difficult item to

fulfill, since there is no comparable organization existing to date,

with the possible exception of the IMF and BIS. Of course, the IMF

and the World Bank have been attacked for disastrous interventions.

The BIS, on the other hand, does not enjoy an extensive clout, unlike

the IMF or the World Bank. If the G20 proceeds with creating theWFO, it is highly important that the WFO is embedded in the global

economy at the outset, that is, unaffected by the demands of capital

or captured by the interests of a small group of economies. It is also

necessary that the WFO is able to demonstrate, at the beginning,

that it can ingenuously navigate the competing demands, maintain

legitimacy, and take fair and transparent actions to safeguard global

economic balance. There will be no debilitating concerns about theeffectiveness of interventions during volatile conditions or in the

post-Global Crisis period if the WFO can demonstrate success during

normal conditions. If the G20 instead pursues small-scale versions of

the WFO, like a regional organization approach, the expectations will

be the same. Certainly, with multiple regional organizations, there

will be challenges with regard to coordinating regional actions. In

any case, global- or regional-cum-domestic coordination of policies

can lead to sound global economic growth and tangible improvementsin global and domestic economic welfare that are long overdue. As

long as economies come to an agreement on the basic principles of

cooperation, their articulation into codes and procedures, including

their interpretation and application, and the modes of participation

at the global or regional level — again, the “rules of the game” —

the WFO may be a major step toward the construction of a global

economy that succeeds in balancing increases in incomes, wages,

profits, and economic welfare and a healthy environment for all.



Appendices

APPENDIX A

The first part of the calculations involves obtaining the counterfactual

economic performance. Similar calculations have been done in, for

example, Beja (2007), Fogel (2007), and Taylor and Rada (2007).1

Here, the regression model is yt

= a + ß time + n yt-1

+ et, where y is

gross domestic product (GDP) per capita and e is the residual. The

setup basically says that current GDP per capita is determined by a

time trend (as proxy for the general direction of economic progress),all past information embedded in past GDP per capita (so y

t-1proxies

for other factors that influence current performance, including yt-1

,

due to yt-[1+i]

), and the residual for the other factors affecting yt

and

not accounted in it. Another reduced model of the form yt

= a + ß

time + etis estimated as well.

1 Counterfactual analysis is a fairly common technique in the social sciences butnot so in economics. See Tetrock and Belkin (1996), Ferguson (2000), Lewis (2000),and Morgan and Winship (2007) for applications of counterfactuals in the socialsciences.

117



The two specifications obtain estimates of y, and their geometric

means are derived. This procedure ensures that the increase in theestimated y has zero as its lower-bound as time increases. It is an

approximation of the Inada conditions used in standard economic

growth theory.

Therefore, if a crisis has transitory impacts on an economy, the

differences between the actual GDP per capital, y, and the estimated

counterfactual, y-est

, are small. Subsequent values are expected to be

small as well. If the impacts are non-transitory, the reverse applies:

the differences between y and y-est

are large and are expected to be

long-lasting. Where no real economic recovery occurs, the subsequent

differences will be bigger over time because the effects of the gap

between y and y-est

accumulate. Of course, it is not discounted that

growth accelerations may occur in subsequent periods, resulting in

full economic recovery. In the interim, however, large differences

between the actual and estimated values will be observed. As such,y

-estrepresents the counterfactual economic performance.

Additional calculations are performed on y-est

to complete the

cost accounting exercise. Total direct cost is foregone output per

capita multiplied by the population at time t, where the foregone

output is (y-est,t

– yt). Total economic cost, ec, is “opportunity cost”

multiplied by the population in time t and valued using the US

three-month Treasury bill interest rates, r ; that is, [(1+r t)(y-est,t – yt)].Total “social” cost, sc, is accumulated cost per capita multiplied

by the population at time t , where the accumulated cost is

[(1+r )sct-1

+ (ect

– ect-1

)]. Note that ec and sc

are zero in period t-1,

and both are equal in period t. Note further that using r is a rudi-

mentary way of calculating costs.

Some relevant items are obviously not included in the calculations,

such as the cost of being unemployed or people going hungry because

the crisis pushed them into poverty, the long-term costs of mal-

nutrition to children, the consequences of being pulled out from

schools in terms of, say, human capital accumulation, the psychological

118 Appendices



Table 1. Total accounting costs (in US$ million)

Year Indonesia Malaysia Philippines South Korea Thailand

1998 35,159.4 12,528.2 3,717.7 59,288.1 37,231.2

22.5 16.0 5.4 13.8 32.9

1999 45,289.3 14,529.4 4,906.6 45,489.7 42,904.1

28.8 17.5 6.9 9.6 36.32000 49,095.4 14,125.1 4,253.1 33,469.8 47,872.3

29.8 15.6 5.6 6.5 38.6

2001 54,596.8 20,928.6 6,625.9 41,650.6 55,792.8

31.9 23.1 8.6 7.8 44.1

2002 59,212.8 24,192.9 6,967.8 31,705.8 59,566.9

33.1 25.6 8.7 5.6 44.7

2003 63,193.0 26,408.3 7,182.5 41,094.3 60,631.6

33.7 26.5 8.6 7.0 42.52004 66,463.8 26,767.1 5,993.3 40,588.2 62,302.8

33.8 25.1 6.7 6.6 41.2

costs of the crisis that resulted in suicides, and so forth. In short,

the estimated total “social” costs are clearly rough measures. Theyare thus better seen as low-end estimates. Obviously, if other costs

are included, both ec and sc will be much larger than the ones reported

here.

The cost accounting exercise does not look into the distribution

of the costs simply because of data constraints. Proxies may be used,

of course. One way to see how the costs may be distributed is to

utilize the sectoral composition of output as weights. Another is to

see the factor shares in output as weights. Or even the income

distribution in an economy may be used as weights. In any case,

the results will be only indicative of the distribution of costs. Further

adjustments through calibration of the calculations may be used to

approximate actual distribution of costs.

APPENDIX B

Appendices 119



Table 1 (cont.)


2005 68,504.3 28,800.8 5,350.9 43,421.5 66,155.7

33.0 25.6 5.7 6.8 41.8

2006 69,894.1 29,409.8 4,653.3 38,569.2 67,958.4

31.8 24.6 4.7 5.8 40.7

2007 71,658.8 30,958.6 4,560.2 34,937.5 72,003.1

30.9 24.5 4.4 5.0 41.5

Note: Numbers below aggregate figures represent shares of GDP. (Author’scalculation.)

Table 2. Total economic costs (in US$ million)


1998 36,853.8 13,131.9 3,896.8 62,145.3 39,025.5

23.6 16.8 5.7 14.4 34.4

1999 47,398.6 15,206.1 5,135.2 47,608.3 44,902.330.1 18.3 7.2 10.1 38.0

2000 51,962.2 14,949.9 4,501.4 35,424.2 50,667.7

31.5 16.6 6.0 6.9 40.9

2001 56,481.3 21,651.0 6,854.6 43,088.2 57,718.6

33.0 23.9 8.9 8.1 45.6

2002 60,167.6 24,583.0 7,080.2 32,217.0 60,527.4

33.6 26.0 8.8 5.7 45.4

2003 63,833.4 26,675.9 7,255.3 41,510.7 61,246.0

34.1 26.8 8.7 7.1 43.0

2004 67,376.5 27,134.7 6,075.6 41,145.6 63,158.5

34.2 25.4 6.8 6.7 41.7

2005 70,663.3 29,708.5 5,519.6 44,790.0 68,240.7

34.0 26.4 5.9 7.0 43.2

2006 73,194.3 30,798.4 4,873.1 40,390.3 71,167.2

33.3 25.7 5.0 6.0 42.6

2007 74,479.8 32,177.3 4,739.8 36,312.9 74,837.6

32.2 25.5 4.6 5.2 43.1

Note: Numbers below aggregate figures represent shares of GDP. (Author’s

calculation.)

120 Appendices



Table 3. Total social costs (in US$ million)


1998 36,853.8 13,131.9 3,896.8 62,145.3 39,678.3

23.6 16.8 5.7 14.4 35.0

1999 49,138.2 15,832.4 5,320.3 50,523.4 47,427.3

31.2 19.1 7.5 10.7 40.1

2000 56,632.0 16,535.9 5,007.1 41,338.6 56,011.9

34.3 18.3 6.6 8.1 45.2

2001 63,194.2 23,854.2 7,546.2 50,483.4 65,062.836.9 26.3 9.8 9.5 51.4

2002 68,003.2 27,223.6 7,909.0 40,471.7 68,995.7

38.0 28.8 9.9 7.1 51.8

2003 72,473.1 29,649.0 8,181.1 50,218.0 70,493.3

38.7 29.7 9.8 8.6 49.4

2004 77,142.2 30,578.3 7,132.6 50,588.3 73,460.3

39.2 28.6 8.0 8.2 48.5

2005 83,026.8 34,196.0 6,823.9 55,875.8 80,964.540.0 30.4 7.3 8.8 51.2

2006 89,700.4 37,011.5 6,528.2 54,174.8 87,853.9

40.8 30.9 6.7 8.1 52.6

2007 94,790.6 39,067.3 6,685.6 52,300.3 95,153.4

40.9 31.0 6.5 7.5 54.8

Note: Numbers below aggregate figures represent shares of GDP. (Author’s

calculation.)

Appendices 121



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Edsel L. Beja Jr. does research in the following themes: (1) anomalies

in cross-border flows of capital and finance, trade, and labor; and

(2) structural-cum-historical analyses of capitalist expansions and

crises. In 2008, he was declared Outstanding Young Scientist in

Economics by the National Academy of Science and Technology and

was awarded the Outstanding Scholarly Work in the Social Sciences by

Ateneo de Manila University. He holds a PhD from the Universityof Massachusetts Amherst.

About the Author

133



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