The strategic implications of Asia's economic crisis

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The strategic implications of Asia'seconomic crisisP. Dibb , D. Hale & P. PrincePublished online: 07 Dec 2010.

To cite this article: P. Dibb , D. Hale & P. Prince (1998) The strategic implications of Asia'seconomic crisis, Survival: Global Politics and Strategy, 40:2, 5-26

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Asia’s Economic Crisis��

The economic crisis in Asia is a defining event of the post-Cold Warinternational order. Not since the 1930s has the world witnessed such amassive economic dislocation. As in the inter-war period, today’s concern iswhether the political and social upheavals generated by Asia’s financial crisiswill lead to international tension and conflict.

Much will depend on whether Asia’s economic problems can be resolvedover the next 2–3 years or whether a much longer period of structuraladjustment is necessary. What is worrying is that, even with the application ofsound financial policies, the political and social consequences of this crisis willnot be overcome quickly. The changes needed to Asia’s financial institutionsand business practices are so fundamental that any ‘quick fix’ is unlikely.

Confidence in the Asian economic miracle has been severely shaken. Seriousdoubts have been raised in the region about the benefits of globalisation andeconomic interdependence. Anti-Western, anti-International Monetary Fund(IMF) sentiments are being expressed, directed not least at the US. Outside theregion, confidence in Asia as an investment market has been undermined. Forglobal investors, the political and social stability of Indonesia, Malaysia, thePhilippines, South Korea and Thailand has now become a major variable.

The Asian economic crisis has happened quickly and with little warning. Itis too early to be definitive about its longer-term implications, but it is alsowrong to dismiss it as a short-term, solely economic episode. Indeed, most ofthe economic analysis, focusing almost exclusively on the details of theeconomic medicine to be taken, is inadequate. The failure of critical economicanalysis demonstrates that business in Asia cannot exist – or be analysed – in apolitical, social – or strategic – vacuum.

The strategic consequences of the crisis could be far-reaching, including ashift in the regional balance of power that favours China, a weakened andpreoccupied Association of South-east Asian Nations (ASEAN), and a possiblebreakdown in political order in Indonesia. The economic downturn alters acentral factor in Asia-Pacific stability: the under-pinning of regional cohesion

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by economic growth. In this sense, the crisis marks the start of the second phaseof the post-Cold War regional strategic order. The new phase will be moreuncertain and changeable than the previous period, from 1989–97. It will alsorequire greater flexibility in international financial institutions, such as the IMF.

��For strategic analysts, the details of Asia’s financial collapse are of lessimportance than the prospect of an end – for whatever reason – to the economicstability that has underpinned Asia-Pacific security for the last 50 years.

Nevertheless, it is important to understand why the crisis has occurred, and,in particular, whether individual nations have the ability to halt their economicdownturn. There is considerable reason to doubt, for example, the capacity ofthe current Indonesian regime to make the necessary structural reforms –especially under the IMF’s conditions – to halt its slide into economic and socialchaos. There should also be doubts about Japan’s willingness to make thedomestic and international policy changes which would help the region torecover within a reasonable timescale. The prospects of China side-stepping thefactors which caused the financial disease in other parts of Asia are anothercrucial factor in the strategic outlook of the region as a whole.

What is notable about the current crisis is its political nature, not only in termsof its effects, but also its causes. Actions and statements by political leaders haveplayed a key role in exacerbating and deepening the regional downturn.

Another notable feature is the speed with which the crisis spread acrossSouth-east Asia. This characteristic of the crisis is deeply worrying for allregional governments, but especially for those regimes which depend for theirlegitimacy on economic growth rather than democratic approval. WhileThailand was the first to be struck by the financial crisis, it at least could resortto the ‘safety valve’ of an orderly change in government to assuage populardiscontent.1

After the Thai baht collapsed dramatically following its float on 2 July 1997,the Philippines was forced to float the peso on 11 July, Malaysia allowed theringgit to depreciate later the same month rather than raise interest rates, andIndonesia – despite a number of attempts to resist market pressures – allowed therupiah to float on 14 August. By mid-October, the Indonesian and Thai currencieshad declined some 30% against the US dollar, while the currencies of Malaysiaand the Philippines had fallen by some 20%. Equity prices in these countries fellby similar amounts. Thailand and Indonesia requested support from the IMF inAugust and October respectively. In November, the crisis spread to North Asia,where South Korea was unable to defend the won, and also had to turn to theIMF for support. Currencies continued to tumble in South-east Asia, mostnotably in Indonesia, where the rupiah fell so dramatically in January 1998 thattotal economic collapse seemed imminent. While this fate was averted, at leasttemporarily, the scale of the crisis in Indonesia was underlined by the refusal ofinternational financial houses to provide further letters of credit, given theinability of most Indonesian businesses to repay foreign-currency loans.

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Particularly worrying for the region’s longer-term prospects were signs inNovember 1997 that the crisis had affected Japan’s faltering economic recovery.With its close links to South-east Asian and South Korean markets, Japan’sbanking sector appeared particularly vulnerable. The closure of a majorJapanese bank on 14 November and the failure of its fourth largest brokeragefirm on 24 November contributed to growing anxiety about the state of Japan’sfinancial system.

There were three main causes of the Asian economic crisis:

� Excessive Foreign Investment. One key factor was the excessive level offoreign – especially short-term – investment. As of June 1997, there were $370billion of international bank loans to Asia as a whole, of which $242bn had amaturity of less than one year. The rapid, export-oriented growth of theASEAN economies over the last 10–15 years had made them highly attractiveto investors from Japan and Europe, where low returns in the 1990s led to anoversupply of capital and an over-confidence about the risks of investing indeveloping markets. In Thailand, for example, short term foreign investmentaccounted for a staggering 7–10% of gross domestic product (GDP) by the mid-1990s (compared with longer-term foreign investment of only 1% of GDP).2

Such high levels of short-term investment – mainly in the form of internationalbank lending – were difficult for the poorly developed financial systems ofSouth-east Asia to absorb. The ready availability of foreign money not onlycreated high short-term foreign debt; it also produced overvalued property andstock markets, large current-account deficits and a steady reduction in externalcompetitiveness due to overvalued currencies.

Once markets began to assess these factors collectively, pressure on regionalcurrencies became inevitable. As IMF Managing Director Michel Camdessuspointed out a few days after the Thai crisis began:

Risks arise when these factors come together. When large current account deficitsfinanced by ample inflows suddenly seem too high, when banking fragilities aresuddenly perceived as vulnerabilities, market sentiment can turn.3

When investor sentiment towards Thailand changed for the worse, thecontagion spread quickly across South-east Asia, because of the broadly similarstructural problems faced by Indonesia, Malaysia and the Philippines – notleast the mountain of short-term private debt. The Thai devaluation causedinvestors to focus on the large current-account deficits and dollar liabilities ofother ASEAN countries; hence all the currencies in the region were sold off.

In South Korea, the prevailing ideology promoted growth of industrialoutput irrespective of corporate profitability. Korean banks allocated capital onthe basis of government industrial policy, not commercial criteria. Moreover,government policy encouraged a high level of collaboration between bankersand industrialists. Such a system was able to sustain much higher levels of debtthan would be possible in the West because banks were viewed as partners in abusiness enterprise, not just creditors.

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After the deregulation of South Korea’s financial system, foreign bankscontinued the practice of heavy lending to government-favoured Koreanconglomerates, despite lacking the fraternal business relationship with localenterprises which Korean banks had developed. By the end of 1997, Seoul’sprivate debt amounted to 135–140% of GDP. Around $153bn came fromforeign lenders, with two-thirds being short-term loans with a maturity of lessthan one year.4 The great mystery of the Korean crisis is why Western banksmade such large loans to South Korean enterprises, despite the country’stradition of financing output growth without regard to profitability.

The failure of Western credit agencies and bankers to understand thecultural differences between Korean and Anglo-Saxon perceptions of debtshows how careless the global financial community has become in allocatingcapital to developing countries. One of the IMF’s problems seems to be itsfailure to appreciate fully how financial markets function in an era whenprivate capital flows to developing countries are now worth nearly $300bn perannum, compared to less than $50bn before the Cold War ended. Develop-ments in computer and communications technology have greatly reduced thecost of global capital mobility and the financial community has becomeobsessed with basing its investment decisions on statistical analysis of financialdata at the expense of other factors which influence credit quality, such ashistory, politics, sociology and culture.5

Already under pressure from depreciation of the ASEAN currencies, theKorean won was hit hard when Taiwan devalued its currency in mid-October.The falling won made it harder for South Korea to roll over its huge externaldebt. The reluctance of Korean authorities to raise interest rates and theirapparent use of official reserves to meet commercial debts added to downwardpressure on their currency and further undermined confidence in the Koreaneconomy.6

The extraordinary level of short-term foreign investment made a sudden,dramatic collapse from the withdrawal of investment possible. And the sea ofcash available to regional financial institutions and governments exacerbatedendemic problems of cronyism and corruption – most notably in Indonesia, butalso in Malaysia, South Korea and Thailand.

Closely linked to the oversupply of short-term foreign credit was theinsistence on keeping exchange rates tied to the US dollar. As the differencegrew between the actual value of Asian currencies and their pegged rates, theeffect was similar to a catapult being stretched further and further back. Whengovernments were finally forced to release their currencies, the sudden plungein currency values was dramatic.

� Inadequate Financial Supervision. A second factor in the crisis was inadequatefinancial management and supervision. Limited experience in risk manage-ment and commercial-banking controls led to what the IMF described as‘imprudent lending’ on a large scale, and hence over-exposure to bad debts. InSouth Korea, for example, the chaebols (large corporate conglomerates) wereheavily dependent on debt as opposed to equity finance. South Korean

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financial institutions supplied or at least guaranteed much of this corporatedebt. By the end of 1996, non-performing loans equalled some 70% of Koreanbanks’ equity. When the chaebols went bankrupt in record numbers in 1997,South Korea’s banks were severely weakened.7 Indonesia, the Philippines andThailand experienced a similar deterioration in the quality of the loanportfolios in their banking sectors. After massive currency depreciations madeit impossible for local companies to repay their foreign loans, the bankingsystems in a number of Asian countries came under serious threat.

Inadequate financial supervision is closely linked to the more general issueof the rule of law. It is no coincidence that the nation which has suffered themost in the current crisis – Indonesia – has the least developed, and leastindependent, system of commercial law. In contrast, the ability of Singapore,for example, to largely weather the financial storm battering its neighbours hasmuch to do with its respected and transparent commercial legal system, as wellas its high-quality bank regulation.

� Politics. A third – and continuing – factor in the crisis is the conflict betweeneconomic and political imperatives. A political reluctance to make structuralreforms in the Asian economies has compounded the problem of oversupply ofoverseas capital and poorly supervised lending practices, and is a key reasonfor the continuation of the crisis today in countries such as Indonesia.

Some of the structural deficiencies of the Asian economies were evidentwell before the financial crisis began in mid-1997. Prudent observers forecastcontinued high levels of economic growth for South-east Asia only if thesestructural weaknesses were addressed. The IMF warned of ‘disruptive changesin investor sentiment’ if governments failed to tackle problems such asoverheating, unsustainable current-account deficits and high-risk lendingpractices.8

However, what most economic forecasters failed to understand – let alonearticulate – before the crisis broke was the inability of Asian governments toundertake such reforms without the pressure of an economic disaster forcingthem to do so. As the IMF said, after the event:

… when economic conditions remain generally good and when private foreigncapital is flowing in at a record pace and on very attractive terms, it is easy to believethat the good times will continue and that the resolution of external imbalances andunderlying structural deficiencies in the economic and financial systems can safelybe deferred to a more politically convenient time.9

According to Camdessus, the IMF had been in continuous dialogue with theThai authorities for 18 months prior to floating the baht. But, he said:

… after so many years of outstanding macroeconomic performance, it was difficult,if not impossible, for the authorities in Thailand – and other countries – to recognise[that] serious underlying deficiencies could jeopardise their track record. What wehad here was an unprecedented ‘denial syndrome’, which very quickly spread andwhich contributed to the delay in taking convincing policy action until, at last, thecrisis broke.10

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This is an important statement, for it demonstrates a flaw in the IMF’sanalysis of the Asian crisis and hence also in the remedial measures it hasdemanded of Indonesia, South Korea and Thailand – a failure to allow for thepolitical realities confronting the governing regimes in these countries.

Undoubtedly there were many who were lulled into a false sense of securityby the record growth levels in Asia in the 1980s and 1990s. But to say thatcountries such as Thailand were suffering from ‘denial syndrome’ is to belittlethe able economists responsible for the dramatic growth and vast improvementin standards of living in East Asia over the last three decades. Asian economicadvisers were as capable as anyone else of recognising the structuraldeficiencies created by the very economic success of their nations. The problemwas more one of ‘denial’ by the political leaders, who face political and socialconstraints that have been underestimated by the IMF.

The failure of Asian governments to take corrective action before thefinancial disaster occurred involved more than a simple denial of economicrealities. For an insecure democratic government – such as Thailand’simmediately before the crisis – the introduction of rational fiscal measures tocontrol the economy, slowing growth, provoking short-term price rises andhigher unemployment, and restricting opportunities for political favouritism,was not a realistic political option. For an authoritarian regime such asSuharto’s Indonesia, already by mid-1997 under considerable pressure fromgrowing political uncertainty, widening economic disparities and long-standing racial and religious tensions – and thus more and more dependent forits survival on continued high levels of economic growth – such contractionarymeasures were even less realistic. As one of our studies warned in June 1997:

Even without the threat posed by forthcoming political developments, Indonesiawill face a major challenge maintaining the competitiveness of its economy … someadditional strong measures are required, including further deregulation of theeconomy, a reduction of remaining monopolies, an attack on corruption, andimprovement of the skill base of the labour force. Taking the economic reform process tothis extent, however, would run counter to the endemic system of political patronageinherent in the Suharto regime [emphasis added].11

The charge of denial from IMF chief Camdessus is arguably more accurateregarding the second half of 1997, when a swift policy response was required tohalt the financial slide in South-east Asia. Examples of this ‘denial’ include ThaiPrime Minister Chavalit Yongchaiyudh’s foot-dragging on IMF reforms inSeptember–October 1997 and Malaysian Prime Minister Mahathir Mohamed’svirulent attacks on foreign speculators around the same time. Indeed, whatconcrete action Malaysia took in the early weeks after its currency began totumble was mainly focused on curbing speculators rather than any real attemptto tackle fundamental structural issues.12 Such actions by political leaders inindividual Asian countries undermined investor confidence in the ability ofSouth-east Asia as a whole to implement necessary reforms.

But the evasion of hard economic realities is only half the issue. Certainly,Suharto has done serious damage through his persistent equivocation on

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implementing the $43bn IMF-led reform package. He was reluctant to closemajor infrastructure projects (most of which later had to be ‘re-cancelled’following IMF protests) after the IMF package had been agreed in October1997; he put forward an unrealistic 1998–99 budget (based on an exchange rateof 4,000 rupiah to the dollar when the currency had already reached 7,500);hinted that his new Vice-President would be Research and TechnologyMinister B. J. Habibie – renowned for extravagant, capital-intensive, high-technology projects; and proposed in February 1998 a currency board to pegthe rupiah to the dollar at a fixed rate (requiring a rigorous system in whichmoney in circulation matches money held in reserve, and an abrogation ofmonetary policy by the government to the currency board).

But there are political and social realities, as well as economic ones, thatSuharto must face and which the IMF should better appreciate. Under Suharto,who has ruled since 1967, Indonesia’s poverty rate has been dramaticallyreduced from 80% to 20%; and the country as a whole has been transformedfrom an unstable archipelago, which caused considerable strategic anxiety to itsneighbours, into the central pillar of ASEAN, one of the world’s mostsuccessful regional groupings.

Now all of these achievements are not simply under threat; many havealready been ripped away. Indonesia today is in a state of complete financialparalysis. It will probably experience a real GDP contraction of 10–20% thisyear. Annual per-capita income has already been reduced from $1,200 beforethe crisis to $300; stock-market capitalisation is down from $118bn to $17bn;only 22 of Indonesia’s 286 publicly listed companies are now consideredsolvent; and only four firms are left with a market capitalisation of $500m ormore, compared with 49 before the crisis.13

�� The IMF should play a major role in helping Indonesia to recover from thecurrent crisis. But it must do so in a way that recognises the significance ofnational stability in key East Asian countries such as Indonesia for Asia-Pacificstability as a whole. The IMF must not take steps that could plunge Indonesiainto a decade of political and social turmoil.

The IMF has made two major mistakes in Indonesia. First, it seems not to haverecognised that the key financial issue facing the country is its huge private debtof some $65bn (resulting from the 1990s lending boom). In October 1997, the IMFrequired Indonesia to implement a number of desirable micro-economic reforms.But the rupiah lost nearly half its value in the days after the programme wasannounced because there was no attempt to reschedule the private sector’s dollarliabilities. The IMF left it to the private market-place to resolve Indonesia’s debtproblem through solutions which will inevitably lead to widespread bank-ruptcies, sharply higher unemployment and increasing ethnic conflict.

The IMF’s second mistake was its heavy handed demand in November 1997for the closure of 16 insolvent Indonesian banks. As the IMF itself hasacknowledged, this move caused an unnecessary banking panic and sharplyincreased the capital flight out of the country.14

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Both moves ran contrary to the IMF’s own aim in Indonesia, which is to haltthe currency turmoil in the region through a large rescue package which wouldengender confidence in international markets.15

Undoubtedly the IMF’s task in Indonesia would be easier if it could dealwith a functioning democracy, as in Thailand and South Korea. Changes ofgovernment in these two countries in November 1997 assisted implementationof key IMF reforms. Moreover, some of the political pressures facing PresidentSuharto, not least the financial position of his family and business associates,are not factors for which the IMF can make any allowance.

But the IMF must make some concession to the overriding issue confrontingthe Suharto regime – how to maintain social, religious and political stability ina nation of such vast ethnic and geographic diversity. According to Camdessus,Asia’s economic crisis is ‘a blessing in disguise’ because countries likeIndonesia will emerge stronger from the reforms that the crisis forces them toimplement.16 Such statements rightly leave the IMF itself open to charges ofdenial – a denial of the serious social, political and strategic consequences ofthe crisis. What the IMF should do is to provide assistance that more fullymatches the gravity of the crisis now confronting Indonesia, and whichencourages gradual changes towards transparency and accountability, whileimproving and not destroying governance in the country. And the IMF mustconfront the fact that its rescue programme for Indonesia, so far at least, hasdone nothing to halt the slide in investor confidence.

An example of the type of flexibility the IMF needs to show in Indonesia isits agreement to allow Thailand to run a 1997–98 budget deficit, instead of itsprevious insistence on a surplus equivalent to 1% of GDP (in return for a$17.5bn rescue package). This IMF concession recognises that the originalspending cuts demanded from the Thai government ‘would worsen analready serious recession and heighten the danger of social unrest’.17 Despitethe graver social and political crisis in Indonesia, and the much more seriousimplications for regional stability, the Fund has been reluctant to make anysimilar concessions for the Suharto regime. In particular, the IMF should notinsist that Jakarta dismantle its monopoly over distribution of basic foodcommodities, or that it remove the national fuel subsidy. These two measuresplay a major role in keeping the price of daily essentials within reach of themajority of Indonesians. At a more general level, the IMF should focus on thekey problem of how to stabilise the rupiah at a higher rate. A rescheduling ofIndonesia’s private debt – as in South Korea – is an essential measure in thisregard.

In South Korea, with its large volume of short-term dollar debt, the originalIMF programme might also have been more credible had it included some formof debt moratorium. But the Fund’s failures in Korea are less likely to haveterminal effects. Under US pressure and with the support of President-electKim Dae Jung, international banks rescheduled the Korean debt in early 1998,helping stabilise the won and encouraging a stock-market rally. The Koreansystem, with its fraternal relationship between government and business, may

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have contributed to the country’s financial crisis – but it also holds the potentialfor a quicker recovery. President Kim Dae Jung has given the Koreanconglomerates a blunt message about the need for change. As US TreasurySecretary Robert Rubin said in January 1998, ‘Korea’s reforms, launched withthe IMF’s backing, are having a real impact in promoting the kinds ofadjustments that are needed to restore confidence and stability’.18 Even so, KimDae Jung’s top economic adviser, You Jong Keun, has warned that it is too soonto say that South Korea has turned the corner, arguing that the country facesrising unemployment and bankruptcies.19

There will be those who see the Asian crisis in terms of proof of the West’ssuperiority in governance and economic policies. In truth, of course, Asia’seconomic downturn proves none of this. The simple fact is that Asianeconomies – with the exception of Japan – are at an earlier stage of develop-ment than those of advanced Western nations. Just as consistent high growthrates in Asia were mistakenly seen by some in the region as the triumph of‘Asian values’, rather than merely the successful implementation of largelyimported industrialisation, so too would it be a mistake to see the currentdownturn in regional economies as some kind of broad failure of Asianvalues.20 Instead, it is a straightforward demonstration of East Asia’s need formore advanced financial institutions to enable a solid move to the next phase ofeconomic development.

�� Asia’s political stability and the cohesion of its societies have been underpinnedby the region’s spectacular economic growth. Beginning with Japan in the1950s, Asia’s ‘economic miracle’ resulted not only in rapidly rising standards ofliving and the emergence of a vibrant middle class, but also served to suppressserious racial tensions in such multi-racial societies as Malaysia and Indonesia.Semi-authoritarian leaders have been able to stay in power for decades bybasing their political legitimacy on their economic record.

China, after emerging 20 years ago from more than three decades ofdomestic turbulence and poor economic performance, has given priority toeconomic development and market forces. Vietnam has also emerged from thestrait-jacket of central planning and opened its market to limited freeenterprise.

By mid-1997, the whole of Asia – with the exception of Cambodia, Laos,Myanmar and North Korea – had become a showplace for economic success,political stability and, generally, social cohesion. Table 1 illustrates theimpressive economic growth that has underpinned Asia’s strategic stability.For Asia as a whole, over the last decade GDP has grown by over 50% and per-capita GDP has risen by about one-third. If Japan’s slow growth is excluded,the figures are more impressive: GDP grew by 120% and per-capita GDPdoubled. This colossal economic growth inspired cultural confidence in Asianminds – what Singaporean official Kishore Mahbubani calls the ‘Asianrenaissance’.21

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��Real GDP Growth in Asia, 1987–1997

(constant 1995 $bn) 1987 1992 1997a % Increase, 1987–1997ASEAN 5b 332.1 487.2 702.2 111.4China 342.9 505.3 857.4 150.0Japan 4,037.2 4,962.0 5,315.4 31.7South Korea 244.9 364.1 513.2 109.6Taiwan 153.4 216.7 291.8 90.2Vietnam 11.5 15.6 23.8 107.0Asia 5,122.0 6,550.9 7,703.8 50.4

��Real GDP Per Capita in Asia, 1987–1997

(constant 1995 $) 1987 1992 1997a % Increase, 1987–1997ASEAN 5b 1,100.0 1,480.9 1,955.4 77.8China 310.5 426.9 688.1 121.6Japan 33,067.1 39,913.1 42,519.3 28.6South Korea 5,885.1 8,338.7 11,221.0 90.7Taiwan 7,797.0 10,441.0 14,164.5 81.7Vietnam 184.7 225.4 307.9 66.7Asia 3,100.5 3,699.4 4,108.9 32.5

Source: Defence Economic Trends in the Asia-Pacific 1997 (Canberra: Defence Intelligence Organisa-tion, 1997), Tables 23 and 28.Notes: a estimate. b The Association’s five founding members – Indonesia, Malaysia, Philippines,Singapore and Thailand.

But Asia’s economic confidence has now been undermined. The crisis willhave profound effects on the political and social cohesion of key Asian states.Table 2 gives some idea of the magnitude of Asia’s economic contraction:between 1996 and early 1998, Indonesia’s economy shrank in dollar terms byalmost four-fifths, Thailand’s by nearly half, South Korea’s by close to half,Malaysia’s by almost one-quarter and the Philippines by one-fifth.

��Asia’s Shrinking GDP

(constant 1995 $bn) 1996 1998 % Change 1996–1998 1998 PPPa

China 839 1,063 26.7 4,730Hong Kong 154 188 22.1 190Indonesia 226 51 –77.4 1,020Malaysia 92 71 –22.8 240Philippines 84 68 –19.1 240Singapore 94 92 –2.2 90South Korea 485 272 –43.9 660Taiwan 272 269 –1.1 450Thailand 186 97 –47.9 530Asia 2,432 2,172 –10.7 8,150

Source: The Economist, 7 February 1998, p. 74.Note: a Purchasing-power parity. 1998 data is based on exchange rates at 4 February 1998.

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These would be catastrophic outcomes for any economy, but they areparticularly damaging to one-party regimes that have built their reputation noton democracy or human rights but almost entirely on delivering economicgrowth year after year, decade after decade. As The Economist correctly pointsout, however, these numbers are somewhat deceptive – suggesting, as they do,that for the countries involved their incomes in dollar terms are no higher thantheir level in the late 1970s.22 On this measure, the economic gains of a wholegeneration have been wiped out by the financial crisis, as Malaysia’s PrimeMinister Mahathir has suggested. But converting a country’s local-currencyGDP into dollars at market exchange rates does not accurately measure thevolume of goods and services produced or the true value of locally producedinputs.

A better measure is purchasing-power parity, some estimates for which arealso included in Table 2. Even using these figures, there is no doubt that thebad news for Asia’s leaders is that, except possibly for China, the era of higheconomic growth is over, at least for the next few years. The situation iscomplicated by the fact that, except in Hong Kong and Singapore, there are noformal legal processes for bankruptcy: insolvent banks and private companiescontinue to trade even though they are technically bankrupt and have madetheir workforces redundant.

The fundamental tenet of Asian political leadership is now at risk: thepromise to deliver unending economic growth and material benefits to thepeople. This golden prize had already become tarnished in Japan when theproperty bubble burst in 1990.23 But, until the 1997 crisis, unending growthremained an article of faith in South Korea and it is still the general expectationtoday in China. In South-east Asia, the crisis poses a major challenge to the so-called ‘ASEAN model’, under which security is conceived of in economic andpolitical, rather than conventional military, terms. The central feature of thismodel is the concept of ‘national resilience’, pioneered by Indonesia:

This ideal condition would be achieved by creating a stable domestic political orderthat would encourage fruitful economic development. In turn, this economic growthwould reinforce the underlying political order.24

Thus the collapse of economic prosperity in Asia will threaten the basis forpolitical stability across the region.

High interest rates, rapidly rising prices and soaring unemployment are apotent mixture: in Indonesia alone, unemployment is forecast to increase in1998 from about 4m to perhaps as high as 14m or more. Already, there arewidespread demonstrations against rising prices, which in many cases havemore than doubled. Violence against Chinese-owned shops, businesses andinstitutions is mounting. In Thailand and Malaysia, there is growing angerabout the continuing presence of foreign guest workers; in South Korea, tradeunions are threatening widespread strike action over unemployment. Thesereactions have occurred even before many of the IMF-sponsored reforms inthese countries have been implemented.

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Given these developments, the question is whether the crisis will propelAsia back towards political suppression. In Indonesia, the violence and socialdisruption has been directed, so far, largely against the ethnic Chinese ratherthan Suharto’s government. There is no large, well-organised alternative forcechallenging the regime for political power – unlike the last days of the Sukarnoera, when communists and the military vied for supremacy. Thus the prospectsfor the wholesale overthrow of the ‘New Order’ regime are slim in the shortterm. This is not to discount the prospect of a military coup, however, shouldeconomic conditions continue to deteriorate sharply, or should a widelydisliked figure – such as the new Vice-President, B. J. Habibie – succeedSuharto.

Prospects for an emerging civil society in Indonesia after Suharto leavesoffice have now been put back by 5–10 years: the Indonesian Armed Forces(ABRI) are increasingly anxious about the potential for a popular uprisingbecause of the widespread riots caused by the country’s rapidly deterioratingeconomic circumstances. Rather than facilitating the emergence of democracy,the spread of market capitalism in Indonesia is seen by ABRI as having causedthe current political crisis. In particular, there is now widespread and bitterhostility within ABRI to US and IMF-style capitalism, as well as towards theethnic Chinese business community and its perceived lack of loyalty to theNew Order regime.

Will these kinds of sentiments arise in other Asian countries? Perhaps not inthe extreme form that can be seen in Indonesia’s military-dominated regime.But anti-Western and anti-capitalist views are also being expressed elsewherein the region. And, as Amitav Acharya has observed, the state of civil–militaryrelations remains a crucial factor in regime stability.25 The recent decline in themilitary’s influence in the Philippines, South Korea and Thailand should not beviewed as an irreversible phenomenon – particularly if the current economiccrisis is prolonged and seriously disrupts their societies. The spectre of popularrevolt may tempt military forces to intervene. And the economic and politicalcrisis in Indonesia is already raising anxieties in Australia, Malaysia andSingapore about its potential to spread to neighbouring states – for instance,through an exodus (voluntary or otherwise) of ethnic Chinese.

Throughout the region, the status and well-being of the middle class hasbeen eroded, seriously so in Indonesia, South Korea and Thailand. Rapideconomic growth has kept the middle class from being too restive politically:indeed, because of the demonstrable economic gains they have made undertheir current political systems, they have had a vested interest in politicalstability and regime continuity.26 They have not had any major interest inactively campaigning for democracy. But confidence in long-establishedpolitical leaders has now been shaken. Thus the basis for a challenge to regimelegitimacy has been laid.

Nayan Chanda argues that another era of prosperity is possible in Asia, butonly if the crisis-stricken countries learn the lessons of how their economieswent wrong:

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What the region needs to put in place is a political system that places value onaccountability and transparency, that controls corruption and sets up anadministrative and regulatory system that is suited to the age of globalisation.27

The implementation of such policies in those Asian nations hit by thecurrent crisis could lead to a relatively quick turn-around in their circum-stances. With the possible exception of South Korea, however, fundamental (asdistinct from cosmetic) change to financial and banking institutions andbusiness practices is distant. Transparency – in financial, political or securitymatters – is not an Asian tradition.28 We are not confident that real progress willbe made in this area or that the IMF should insist on it as a short-term goal.

Failure to change the most obvious of the region’s opaque and corruptbusiness practices will, though, only prolong Asia’s economic agony. In thepost-Cold War era, there are plenty of other attractive investments in NorthAmerica and Western Europe, as well as in some parts of Eastern Europe, LatinAmerica and Russia. Asia has become so used to being the centre of worldeconomic attention that this will be a bitter reality for it to face.

These investment effects will be exacerbated by the uneven impact of thecrisis in the region: Singapore has been relatively little affected (which will stirup Malaysian resentment) and the Philippines and Malaysia are in better shapethan Indonesia or Thailand. Thus ASEAN solidarity will be tested. And inSouth Korea any serious and widespread social upheavals will have seriousconsequences not only for regime stability, as that country seeks to build asense of democracy, but also for relations with the North, as well as with Japan– which is seen in Seoul as an unhelpful neighbour economically.

Vietnam and China will scrutinise closely the impact of the Asian economiccrisis on regime stability in other parts of the region. It remains to be seenwhether the reaction in Hanoi and Beijing will be to tighten political control.But there is no doubt that anxiety in Asia as a whole is now likely to refocus (asit did in the days of communist insurgencies) much more on domestic politicaland social issues than on key external issues, such as the future of US militarycommitment to the region and regional-security cooperation.

There has been a general expectation in the West that the spread ofcapitalism in Asia would lead to democracy, even though the majority ofgovernments in the region are what Robert Scalapino terms ‘soft-authoritarian’.The uneven, yet promising, move to greater political freedom and participationin much of Asia may now be at risk. Social cohesion and domestic disciplinehave moved to the top of the agenda for the region’s leaders.

��The economic collapse in Asia has important strategic implications. It willincrease uncertainty in the region’s security outlook and challenge regionalcohesion. It will also alter the regional balance of power, affect domesticstability and undermine the view that growing economic interdependence willprevent international conflict in Asia. The comfortable prediction of a Pacifictwenty-first century – based on the ASEAN model of consensus and

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cooperation – is now largely discredited.29 And the limitations of regionalinstitutions, such as the Asia-Pacific Economic Cooperation (APEC) forum andthe ASEAN Regional Forum (ARF), have been starkly demonstrated by theinability of the region to work together on this crisis.

Recent events invite reconsideration of the major theoretical models thathave been applied to the emerging regional-security structure in Asia: thebalance-of-power model; the institutional-cooperation model; and the idea of aregional-security ‘complex’. Within the region itself, the latter has enjoyedincreasing popularity as the appropriate (non-Western) solution to the region’ssecurity problems.30 There is a risk now that regional-security cooperation willfalter.

The relationship between economic development and security hastraditionally played a large part in regional-security deliberations, especially inSouth-east Asia. In North-east Asia, too, there has been a perception thatChina’s preoccupation with economic modernisation has deflected it from agreater military build-up. Moreover, as Gerald Segal notes, radical economicreforms are not only transforming the Chinese economy, they are also startingto affect its political system.31 For detached observers, it remains debatablewhether increasing economic interdependence with the rest of Asia, and withthe world trading and investment community, will make China a cooperativeand peaceful great power and act as a restraint on its use of force. This belief,however, is widely held in ASEAN (and it has been reinforced by China’sbehaviour in the current crisis).

Japan’s policy of becoming an economic but not military superpower hasalso been a fundamental element in the generally peaceful Asia-Pacific securityenvironment of the last 50 years. And the economic prosperity of both SouthKorea and Taiwan has enabled them to assert their sovereignty and to developdemocratic institutions.

Thus economic development has been a pivotal force for stability in Asia. Isthe region about to enter a period of turmoil because of the traumatic impact ofthe economic crisis? It is important not to exaggerate this issue: there is still astrong sense in the region that economic growth will return, sooner rather thanlater. And as long as sound economic policies are implemented with firmbacking by political leaders, growth should indeed reassert itself. As alreadynoted, however, there is a tendency in some countries to believe that the crisisamounts to a short-term economic problem only, and that there is no need tochange fundamentally ‘the Asian Way’ of government or business. If thisattitude does not change, the crisis will last longer.

Regional-security arrangements are not well organised to handle aprolonged socio-economic shock. There is no overarching regional-security oreconomic organisation where political and security issues raised by such amajor economic crisis can be resolved. Neither the ARF nor APEC is wellenough established or has the confidence of their large membership – which ineach case extends well beyond Asia – to formulate common policies on suchmatters. The ARF is only at the earliest stages of discussing military confidence-

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building measures (CBMs) and preventive diplomacy.32 APEC, where leadersdiscuss economic issues, has not yet been able to develop any securitymechanisms. Thus Asia seems likely to stumble along without a well-definedpath of security cooperation – or even financial cooperation – at a time of deepeconomic and political crisis.

With increasing strategic uncertainty, traditional allies should – at least intheory – look to each other for greater support. The US–Japanese alliance andWashington’s other alliances with South Korea, the Philippines, Taiwan andThailand may assume greater importance, as could the Five Power DefenceArrangements among Australia, Malaysia, New Zealand, Singapore and theUK, as well as Australia’s security arrangement with Indonesia. But, inpractice, the economic crisis seems more likely to increase rather than removestrains in security agreements and alliances. Such tensions are already evidentbetween the US and the governments of Japan, South Korea and Thailand. Andif popular demonstrations in Indonesia are suppressed bloodily by ABRI, thenAustralia’s 1995 Agreement on Maintaining Security with Jakarta could comeunder pressure.

In terms of its effect on ASEAN, the economic crisis may well make theAssociation more distracted, inward-looking and less cohesive. Long-standingrivalries within ASEAN may re-surface and the substantial economicweaknesses now revealed within the Association’s states will make thegrouping as a whole more susceptible to penetration by external powers –especially China.

This raises the issue of how the crisis might affect the distribution of powerin Asia. The economic turmoil in the region assists China’s ambitions to becomethe leading regional power.33 Assuming that China manages not to be directlythreatened by economic instability in other parts of Asia, then its status andinfluence in the region will grow. Already, there is a perception that by notdevaluing the yuan and proclaiming that it will refrain from doing so as itscontribution to regional security, China is providing leadership in a way thatJapan has failed to do.

As Vice-Premier Li Lanqing declared at the Davos World Economic Forumin February 1998:

The competitiveness of our exports will come under pressure from the drasticdepreciation of Southeast Asian currencies. However, China will not and need notresort to Renmimbi devaluation to stimulate its exports .... This is not only in ourown interest but also a contribution to the recovery of stability and confidence onthe Asian currency markets.34

Li also pledged a large increase in infrastructure spending to stimulategrowth and compensate for weaker exports.35

If, however, China itself is sucked into the maelstrom, the regional crisis willworsen considerably. China’s bad loans may be proportionately twice asserious as South Korea’s financial problems.36 A series of competitivedevaluations in order to sustain market shares would spell disaster for Asia.

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Economically and politically, the Asian economic crisis presents a greaterchallenge to Beijing than the Soviet Union’s collapse: the success of the region’sstate-directed capitalism was seen as proof that China could have marketreforms and yet operate safely with strong central control. But the Chinesemodel of development has the same characteristics that has undone most of theregion: rampant corruption and cronyism; state direction of investment inspectacular projects; a feeble banking system; and – in China’s case – a hugestate-owned enterprise sector in urgent need of modernisation. If the economiccrisis spreads to China, it will fundamentally weaken the region for aprolonged period.

The current crisis will have a greater effect on Japan’s position and status inthe region than on any other key player. Japan’s weak and vacillating approachto the Asian economic crisis, plus the revelation in January 1998 that poorperforming loans in Japan exceed $600bn, as well as Tokyo’s inability to pull itsown economy out of stagnation, have disappointed those in the regionexpecting an Asian financial solution to the crisis.37

While simplistic, there is a view in South-east Asia that Japan has exploitedthe region’s cheap labour and natural resources to make itself rich over the lastthree decades. There is resentment, too, at the perceived superior attitude ofJapan towards other Asian nations. And Japan’s continuing refusal to apologisefully for its role in the Second World War still rankles.

In this context, a failure by Japan properly to assist an Asian economicrecovery would seriously harm its standing and influence in the region. Inearly 1998, the region was still waiting for a major Japanese recovery package.As Australia’s shadow Treasurer and former Foreign Minister, Gareth Evans,said, ‘the decision of Japan … not to give a major budgetary tax stimulation toits own economy [to assist an export led recovery in the region] is desperatelydisappointing’.38

The implications of the Asian crisis for Washington’s role and influence inthe region are ambiguous. The US successfully used its influence over the IMFto promote significant economic reforms in South Korea which willsubstantially open trade and investment markets in that country, not least toUS corporations. There is a real risk, however, that Koreans will come to resentthe widespread foreign takeovers that will occur as a result of this new policy.In Thailand, the Clinton administration’s refusal to participate in the August1997 IMF bail-out package has caused some lasting harm to bilateral relations.In Indonesia, US pressure to ensure compliance with IMF conditions –including direct lobbying on a number of occasions from President Bill Clintonto President Suharto – has had minimal impact, serving merely to associateWashington in Jakarta’s eyes with anti-Indonesian forces seeking to imposeinappropriate economic and social policies on the country. It is notable that, incontrast to Korea, there has been no US-led push for international banks toreschedule Indonesia’s vast private debt.

Within the region there are other prospective shifts in the power balance.South Korea’s economy is now considerably weakened relative to that of its

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arch long-term rival in North-east Asia, Japan. It also now looks less capable ofhandling a potential reunification of the Peninsula: North Korea probablyperceives that it has an opportunity to put its own dismal economic house inorder. South Korea will also find it more difficult to finance its large defencebudget (which exceeds $15bn a year) and maintain the military balance withNorth Korea. Seoul’s ambitious plans to develop a force structure that wouldenable it to project power well beyond the Peninsula will now have to bedeferred.

In South-east Asia there are three areas of concern. The most important isthe prospect of political and social disintegration in Indonesia, the world’sfourth most populous country. Indonesia’s role as the natural leader of ASEANmust now be in doubt. A major upsurge in anti-Chinese violence – one of themost likely characteristics of large scale instability in Indonesia – would haveserious implications, not least for neighbouring Singapore, Malaysia andAustralia. Above all, it would affect Indonesia’s relations with China –including the risk that Beijing might seek to apply some sort of political (oreven military) pressure against Indonesia.39 China will probably be careful notto risk its relations with other ASEAN members by raising their fears about itssupport for ethnic Chinese communities.

On mainland South-east Asia, Thailand’s economic collapse will undermineits ambition to be the predominant power vis-à-vis Vietnam and its hopes offostering the Thai economic and political model in neighbouring Cambodiaand Myanmar. Indeed, Thailand’s financial failure might well serve as awarning to its neighbours against too much penetration by internationaleconomic forces. China, Myanmar and Vietnam will be reinforced in their viewof the need for firm central political control backed by ruthless military force.

In early February 1998, senior Singapore Cabinet Minister George Yeodescribed Australia’s response to the crisis thus far as ‘correct but tentative’.According to Yeo:

It is the reaction of someone on the margin, not an important player, not a crucialpartner … if you stay on the sidelines then there is no bonding and you stay outpermanently.40

Canberra seems to have taken this message to heart. In February Australiaannounced it would lobby the IMF to seek a relaxation of its strict reformprogramme for Indonesia.41 This type of practical diplomatic support forIndonesia will enhance Australia’s standing in the region, although it seems tohave irritated Washington. It amounts to a recognition of the extent to whichAustralia’s vital national interests are bound up with the fate of Indonesia andits other Asian neighbours. Just as the Asian crisis as a whole is a defining eventfor the Asia-Pacific in general, so this action by Prime Minister John Howard’sConservative government might also prove to be a defining moment inAustralia’s relations with Asia.

Whatever its other effects, Asia’s economic crisis will at least put the lie toHuntington’s assertion that economic growth in Asia is by its very nature

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destabilising and a threat to global order. As the crisis shows, an economicallyweak Asia should cause far greater strategic anxiety.42

At the global level, Asia – which accounts for one-third of world economicactivity – suddenly seems radically diminished. There will be less anxietyabout the global balance of power favouring Asia and about the impendingdominance of the Asian economic model.43 But gloating will not be in order.For the West, and particularly for the US alliance system, a greater concern is torestore key Western friends and allies – Indonesia, Japan, South Korea andThailand – to economic health as soon as possible. Leaving the resolution ofthis crisis to market forces will not contain the growing instability and turmoilin a region which contains half the world’s population and through which 40%of the world’s maritime traffic passes. The future course of political and socialevents in the region will determine whether the West’s friends and alliesprosper and regain stability, or whether extreme nationalist and repressiveelements gain the upper hand.

None of the above suggests an immediate risk of international conflict as aresult of the Asian economic crisis. Much will depend on the reaction of themajor players to the present crisis. And exactly how the regional power balancewill alter remains to be seen. Will China resist the temptation of a competitivedevaluation? Can the forces of moderation in Beijing restrain chauvinisticmilitarist elements if there is mass anti-Chinese violence in Indonesia? CanWashington control the increasingly vocal isolationists who rate financialassistance for Asia very low on the domestic political agenda? If the regionalcrisis hits a new low as IMF measures really start to bite, to what extent will thegovernments and people of South-east Asia and Korea blame the US and theWest in general?

What will become much clearer as the crisis continues to unfold is therelevance as well as the complexity of the inter-relationship between economicsand security.44 The Asian economic crisis has demonstrated the need foreconomic developments to be integrated much more effectively into securitypolicies and analysis. For politicians in the region, the impact of globalisationand economic interdependence, which were previously accepted unquestion-ingly as beneficial, will come under close challenge and review.45

Changes to the regional and sub-regional balances of power, as well as tothe relative status, influence and military capabilities of individual countries,will also require new analysis. Where specific countries in Asia are weakenedmaterially and others perceive themselves as materially stronger, peace may bethreatened.46 There are historic links between economic deterioration, tradewars and military conflict.47 Avoiding such an outcome in Asia will be crucialto the continuing security of the region in the twenty-first century.

�!�� What should be done to avoid a security crisis? The challenge is that Asia’seconomic problems straddle the role of the region’s relatively weak multilateralinstitutions – APEC and the ARF. A further problem is that the major players

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are pulling in different directions. Those regional countries that are most introuble (except Indonesia) seem to accept IMF discipline, so far. But if theeconomic crisis deepens, it is doubtful that the Fund will be able to assert itseconomic reform measures in the face of political and social turmoil.

The major powers show little sign of being able to coordinate their policies:Japan has been unhelpful; the US seems to be focusing more on the trade,investment and political (democracy) benefits it can wring out of the region’swoes than on furthering stability. China, so far at least, has shown moreleadership by its refusal to devalue its currency and by acknowledging theseriousness of the economic crisis to the region’s stability. But China does nothave the economic clout and influence of the US.

What is needed now is to bring all these players together, perhaps under theauspices of APEC, to devise a new solution to the problems of the regionaleconomic order. Since the end of the Cold War, two forces have collided: therapidly increasing power of global capital movements and the divergent speedof over 200 nation-states (especially in Asia) moving towards some form ofmarket economy.48 The Asian crisis resulted from an inefficient allocation ofcapital and mispricing of risk by the global capital markets, as well as from theinadequacies of Asian capitalism.

While it is easy to criticise many aspects of IMF policy towards Asia, theregion’s economic crisis has demonstrated more clearly than any other why theinternational financial system needs a lender of last resort to provide liquidityduring periods of crisis. But the decline in the cost of global capital mobility,the vast growth in the West of retirement savings funds, and the emergence ofhighly leveraged speculative trading institutions suggest a need to reform theinternational financial system.

At the same time, there would have been less need for IMF intervention ifthe countries of Asia had already developed more effective forms of financialsupervision. The IMF’s intervention was necessary to resolve the contradictionsresulting from the interaction of a highly sophisticated global financial systemwith the far less developed domestic financial systems of Asia.

The tragedy of Asia today is that bankers and investors failed to understandthe magnitude of the cultural gap between the global financial order and thelocal one. The current financial trauma in Asia is a crisis of globalisation, notonly of Asia’s financial excesses.

The Asian economic crisis should be a catalyst for reform within the IMF,which needs to concentrate more on the key fiscal and monetary-policy adjust-ments that are needed to correct an external deficit, rather than far-reachingstructural economic changes.49 Indeed, the IMF’s latest reform package forIndonesia in April 1998 seems to have moved in this direction. There also needsto be reform to the global financial system which recognises that large newcapital flows and the greatly reduced cost of capital mobility can generateeconomic and political shocks that are simply unacceptable.

The failure of the region’s multilateral institutions – APEC, the ARF,ASEAN – to play any kind of leading role in addressing the crisis, shows that

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regional stability – economic and strategic – still depends heavily on thepolicies and initiatives of major individual players. The US retains a key role inthis respect: the crisis has clearly demonstrated its continuing economic andstrategic dominance in world affairs. The patent strategic significance for theUS of an economic crisis on the Korean Peninsula has prompted timelyremedial action for North Asia. In contrast, the inability of the US system as awhole to fully comprehend the strategic significance of economic and socialcollapse in Indonesia has seriously delayed a solution to the South-east Asianside of the crisis.

The US has also been determined to use the IMF as the primary agency formanaging the crisis. It rejected Japanese proposals for a regional monetary fundand used the IMF to impose numerous micro-economic policy changes in Koreaand Indonesia which satisfied America’s own trade and investment agenda. Butas the US Congress has so far refused to provide new capital for the IMF, it isunclear if the US approach will be sustainable in the future. If the US is unable tomaintain IMF supremacy, the odds would increase of new regional groupsemerging to play a greater part. In such a scenario, Japan might attempt onceagain to play a regional leadership role (although, given its current economicweakness, this is unlikely) or the US itself might attempt to use APEC as anagency for promoting new forms of regional monetary cooperation. The USlaunched an initiative during 1997 for more central bank discussions withAustralia, China, Hong Kong and Singapore, but this group did not play anyrole during the East Asian crisis. If the IMF’s role fades because of politicalproblems in Washington, there will inevitably be more discussion aboutregional alternatives centering on the US, Japan and China working together.

��1 The possibility of a return to themilitary option in Thailand, shouldcivilian leadership fail to turn theeconomy around, cannot be ruled out.Nevertheless, the change in leadershipfrom Chavalit Yongchaiyudh to PrimeMinister Chuan Leekpai in November1997 considerably increased theconfidence of international markets inThailand’s ability to address itseconomic problems. In contrast, thistype of confidence-building measurethrough an orderly change ingovernment is impossible in Indonesiaunder the New Order regime, Malaysiaunder the National Front or Singapore

under the People’s Action Party (PAP).2 IMF, World Economic Outlook InterimAssessment (Washington DC: IMFPublications, December 1997), Chapter 2.3 Address by Michel Camdessus, IMFManaging Director, ‘Global CapitalFlows: Raising the Returns andReducing the Risks’, the World AffairsCouncil of Los Angeles, CA, 17 July1997.4 Nayan Chanda, ‘Rebuilding Asia’, FarEastern Economic Review, 12 February1998, p. 48.5 David Hale, ‘How Did ThailandBecome the Creditanstalt of 1997’, TheGlobal Economic Observer, Zurich

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Research, 23 December 1997, p. 1.6 IMF, World Economic Outlook, p. 40.7 Ibid., Chapter 2.8 Ibid., p. 40.9 Ibid., p. 40.10 Address by Michel Camdessus, ‘TheAsian Crisis and the InternationalResponse’, Institute of AdvancedBusiness Studies, University of Navarra,Barcelona, 28 November 1997.11 Paul Dibb and Associates, Indonesia –The Way Ahead (Canberra: Privatelypublished, June 1997), p. 12.12 According to the IMF, ‘speculatorsappeared to have played a relativelylimited role in the crises. Perhaps theydetermined the timing of the eruption ofcrisis in some countries, but investorswho profited did so primarily bycorrectly perceiving unsustainable andinconsistent economic policies, financialsector fragilities, and overvaluedproperty and stock markets’. See IMF,World Economic Outlook, p. 41.13 John McBeth, ‘Ground Zero’, FarEastern Economic Review, 22 January1998, p. 17.14 Peter Passell, ‘IMF: Caught in Middleof Asia Blame Game’, International HeraldTribune, 16 January 1998, p. 16.15 Ibid., 13 November 1997.16 Nayan Chanda, ‘Overview’, Asia 1998Yearbook (Hong Kong: Far EasternEconomic Review, 1998), p. 10.17 The Weekend Australian, 14–15 February1998, p. 29.18 United States Information Agency,‘Statement by Treasury Secretary RobertE. Rubin on Korean Reforms’,Washington DC, 20 January 1998.19 The Australian, 25 February 1998, p. 6.20 The Asian economic crisis is not a signof the end of economic growth ‘butrather a recurring – if difficult to predict– pattern of financial instability thatoften accompanies rapid economicgrowth. In the longer-term, growth willcontinue because most of Asia hasadopted capitalism at the organising

basis of economic life and becomedeeply integrated into the globaleconomy’. See Steven Radelet andJeffrey Sachs, ‘Asia’s Reemergence’,Foreign Affairs, vol. 76, no. 6, November–December 1997, p. 45.21 Kishore Mahbubani, ‘An Asia-PacificConsensus’, Foreign Affairs, vol. 76, no. 5,September–October 1997, p. 155.22 The Economist, 7 February 1998, p. 74.23 Murray Sayle, ‘Cracking Up: What’sGoing Wrong with Japan’, SydneyMorning Herald, 7 February 1998, pp. 1, 6and 7 of the Spectrum section.24 Michael Leifer, The ASEAN RegionalForum, Adelphi Paper 302 (London:Oxford University Press for the IISS,1996), pp. 14–15.25 Amitav Acharya, A New Regional Orderin South-East Asia: ASEAN in the Post-Cold War Era, Adelphi Paper 279(London: Brassey’s for the IISS, 1993),p. 22.26 Ibid., p. 26.27 Chanda, ‘Rebuilding Asia’, p. 49.28 Gordon Brown, UK Chancellor of theExchequer, has proposed thatinternational financial institutions such asthe IMF also need to improve theirtransparency – for example, bypublishing its views on how countriesare performing. See The Economist, 21February 1998, p. 84.29 Singapore’s leaders are the most publicproponents of this opinion. See, forexample, Kishore Mahbubani, ‘The Westand the Rest’, The National Interest,Summer 1992, pp. 3–12; Mahbubani,‘The United States: Go East, YoungMan’, Washington Quarterly, Spring 1994,pp. 5–23; Mahbubani, ‘The PacificImpulse’, Survival, vol. 37, no. 1, Spring1995, pp. 105–20; and Mahbubani, ‘AnAsia-Pacific Consensus’, pp. 149–58.30 Khoo How San, ‘Paradigms and theStudy of ASEAN Regional Security’,unpublished doctoral thesis, Strategicand Defence Studies Centre, ANU,Canberra, 1998.

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31 Gerald Segal, China Changes Shape:Regionalism and Foreign Policy, AdelphiPaper 287 (London: Brassey’s for theIISS, 1994), p. 54.32 Leifer, The ASEAN Regional Forum, pp.31–44.33 A point made by The Economist, 14February 1998, p. 31.34 Li Lanqing, ‘China’s Economy inSteady Progress’, World EconomicForum, Davos, 1 February 1998, pp. 3–4.35 Ibid., p. 236 The Economist, 14 February 1998, p. 29.37 Ibid., p. 18.38 The Canberra Times, 23 February 1998,p. 2.39 China has only a very limitedcapability to sustain military power(such as a naval task force) at a distancefrom the mainland.40 The Australian, 5 February 1998, p. 11.41 The Weekend Australian, 21–22February 1998, p. 1.42 Samuel P. Huntington, The Clash ofCivilizations and the Remaking of WorldOrder, (Washington: Simon andSchuster, 1996), pp. 103–109, 218–38.43 But Steven Radelet and Jeffrey Sachsargue that an ascendant Asia willaccount for 55–60% of world income by2025. See Radelet and Sachs, ‘Asia’s

Reemergence’, p. 46.44 See Stuart Harris and Andrew Mack(eds), Asia-Pacific Security: The Economics– Politics Nexus (Sydney: Allen & Unwin,1997); Stuart Harris, ‘The EconomicAspects of Pacific Security’, in Asia’sInternational Role in the Post-Cold War Era,Adelphi Paper 275 (London: Brassey’sfor the IISS, 1993), pp. 14–30; and RobertB. Zoellick, ‘Economics and Security inthe Changing Asia-Pacific’, Survival, vol.39, no. 4, Winter 1997–98, pp. 29–51.45 The idea that, unlike security trade-offs, the global economic game ispositive sum will also be challenged. SeeFred Bergsten, ‘The Primacy ofEconomics’, Foreign Policy, Summer1992, pp. 3–24.46 Susan Strange, ‘Supernationals and theState’, in John Hall (ed.), States in History(Oxford: Blackwell, 1986), pp. 289–305.47 Stuart Harris, ‘The Economic Aspectsof Pacific Security’, p. 27.48 See David D. Hale, ‘The IMF After theAsia Crisis’, address to the AnnualMeeting of the Bretton WoodsCommittee, Washington DC, 13February 1998.49 See Martin Feldstein, ‘Refocusing theIMF’, Foreign Affairs, vol. 77, no. 2,March–April 1998, pp. 20–33.

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The strategic implications of Asia's economic crisis