Wheels Within Wheels: Rethinking the Asian Crisis and the Asian Model

The East Asian economic crisis of 1997–1999 had its causes not mainly in the “East Asian model” nor even in departures from the model, but in international capital markets and the governments of the core economies, especially the United States and Japan. The post–Bretton Woods system, without any link between the dollar and gold, allowed the United States to finance persistent external deficits by creating US government bonds. These bonds raised the foreign reserves of the surplus countries, notably Japan and East Asia. The rise in reserves triggered credit booms that generated asset inflation and industrial overcapacity. The booms gave way to crisis. The East Asian variant differed from the earlier Japanese one by being fueled by very large capital inflows in the early to mid 1990s from recession-hit Japan and Europe, as well as from the United States. This perspective, which highlights causes outside of East Asia, suggests that emerging market economies will remain vulnerable to such crises in the absence of capital controls, a different system of international payments, and a more equal world income distribution. It also suggests unexpected directions for political science research. To its credit Korea has acknowledged its faults with remarkable candour. It has not tried to blame foreigners for its troubles, nor has it hid behind tariff barriers or currency controls. Instead, it has pledged to abandon the economic system that took it from poverty to prosperity in a generation. ( Economist 1999 ) The Korean economy is another kind of leftover Cold War artifact, good for an era of security threats and close bilateral relations with Washington but of questionable use in the global “world without borders” of the 1990s…. It is a highly leveraged, highly political, manifestly corrupt nexus between the state and big business…. It has always been intrinsically unstable and therefore vulnerable to exactly the sort of financial calamity that has now befallen it. ( Woo-Cumings 1997 )