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policies: Mahathir said he did it, the IMF said they did it. The truth is the natural resilience of economies did it (Paul Krugman, August 25, 1999).1 In the aftermath of East Asia’s spectacular economic collapse in mid-1997 even the most optimistic predictions gave at least a decade before Asia could fully recover.2 Yet, in early 2000, an IMF study triumphantly noted that “the financial crises that erupted in Asia beginning in mid-1997 are now behind us and the economies are recovering strongly” (IMF 2000a). Indeed, the economic recovery between the second quarter of
, the fall of the won resulted in further competitive devaluation throughout 3 The Asian financial crisis Table 1.2 Indonesia Korea Malaysia Philippines Singapore Thailand China Hong Kong (SAR) Taiwan Japan USA Changes in real GDP (%) 1996 1997 1998 8.0 6.8 8.6 5.8 7.6 5.5 9.6 4.5 5.7 5.0 3.7 4.5 5.0 7.5 5.2 8.4 −1.3 8.8 5.3 6.8 1.6 4.5 −13.7 −5.8 −7.5 −0.5 0.4 −10.0 7.8 −5.1 4.8 −2.5 4.3 Source: World Bank (2000). East Asia. Faced with such mounting problems, the Korean government initially approached Japan for financial aid, but the request was turned down
quickly took on a life of its own. Soon thereafter, Paul Krugman would argue that crony capitalism lay at the root of Indonesia’s, indeed, East Asia’s, financial woes. Krugman’s emphasis on crony capitalism, while not without merit, is too simplistic. After all korupsi, kolusi dan nepotisme (corruption, collusion and nepotism), has long been pervasive in Indonesia. It was hardly an obstacle when Indonesia notched up impressive economic growth-rates for some three decades prior to the crisis. Back then, crony capitalism was politely referred to as the “government
currency and a widening of current-account imbalances. As the Asian crisis vividly illustrated, a pegged rate can encourage excessive foreign-currency borrowing, as the perceived exchange-rate risk is deceptively small. As was noted earlier, the US dollar pegs resulted in massive competitive losses in many East Asian countries after 1995, when the dollar began to appreciate against other major currencies. The choice of the US dollar as the anchor for a pegged exchange-rate regime could be appropriate for a small open economy when at least the following conditions are
’ (Habermas, 1987). A strongly embedded capitalist economy may involve more negotiation and collaboration than a minimally embedded one, but the former is not immune to market forces. When a system crisis strikes – like that experienced recently in East Asia – the local forms of embedding may provide some resistance, but they also form some of the conduits along which market pressures – such as those that follow from a collapse of the currency – flow. Sometimes the pressures can sweep the networks away. Furthermore, stable forms of embedding, including networks and
shipbuilder, the third largest producer of semiconductors, the fourth largest electronics manufacturer, the fifth largest automobile maker, the sixth largest steel producer, and the seventh largest textile producer, Korea’s aspiration was hardly an empty threat.4 180 Korea: crisis, reform and recovery When the financial crisis unexpectedly hit Southeast Asia following the devaluation of the Thai baht on July 2, 1997, it was widely believed that the contagion would not spread to Korea. Not only was the Korean economy the second largest in East Asia, with a gross domestic