The East Asian Development Model – Economic Growth, Institutional Failure and the Aftermath of the Crisis

Citation

Lewis, A. (2001), "The East Asian Development Model – Economic Growth, Institutional Failure and the Aftermath of the Crisis", European Business Review, Vol. 13 No. 4, pp. 255-256. https://doi.org/10.1108/ebr.2001.13.4.255.1

The title of this edited volume probably seems out of place in a journal titled European Business Review yet the European multinational corporations and investors were profoundly affected by the most recent Asian crisis. Given the importance of the region from a geopolitical as well as economic perspective, this volume serves as a contribution to further our understanding of the dynamics of the region.

Since many countries are involved in the discussion, the editor grouped the contributions into three sections. The first section, composing four papers, presents an overview of the Asian economic crisis from a macro perspective. The second section addresses the variants of the East Asian development model from a country‐specific perspective in eight chapters. The last section provides a micro perspective of the strategic response of Asian firms.

Chapter two traces the cause of the crash and the consequences. The origin of the crash started in Thailand due to micro and macro economic problems. Some of the micro problems include defaults by finance companies, real estate firms and other concerns. From a macro perspective, Thailand was experiencing balance of payments deficit coupled with significant decline in exports. Given that the Thai currency, the baht, was pegged to a basket of major currencies, domestic interest rates were high in order to defend the value of the baht. The Bank of Thailand was reported to have spent about $10 billion to defend the baht’s peg in May 1997.

The institutional basis of the Asian economic crisis is examined in chapter three. Instead of the usual examination of the political‐economic institutional interaction with market processes, a rather unique perspective of political culture and the resultant institutional arrangements is presented. The institutional infrastructure defines the context and incentives within which economic decisions are made. It is therefore not surprising that perverse incentives resulted in suboptimal decisions being made. Several examples were cited to support the central thesis of the importance of an institutional infrastructure. The author goes on to discuss the role of governments in economic development. It was noted that many of the Asian cultures utilize methodical deliberation to reach a voluntary or enforced consensus that inevitably supports the authoritarian style of government. The popular notion that the East Asian economies were victims of the free trade/market principle because they went too far in liberalizing their economies was refuted. An alternative explanation suggests that governments adopted policies that provided guarantees of loans to hand picked firms/enterprises that exceeded market rationality. This led to significant numbers of distorted investments because the government guarantees distorted incentives thereby encouraging projects based on technocratic and/or political considerations instead of commercial viability and profitability.

A discussion of political foundations of economic management related to the Asian crisis is presented in chapter four. Based on earlier studies designed to test the extent to which political stability, policy consensus and social freedom affect economic growth the author conducted an analysis of the East Asian economies. The findings suggest that those countries that were able to maintain high growth rates in the period prior to the collapse had stable political regimes and likewise pursued economic policies that enjoyed broadbased support. The degree to which a country maintains this political‐economic environment determines the extent of the damage suffered as a result of the crisis and likewise the speed of recovery. Accordingly one would expect a faster recovery in South Korea as compared to Indonesia.

Chapter five presents an examination of the crisis through a comparative analysis of three perspectives, provided by international organizations, contributions by finance experts and mechanics of the global financial system.

Researchers and practitioners in the field will find the eight chapters in section two quite valuable due to the careful treatment of country‐specific issues. Thailand has been much less government involvement and economic growth policy when compared with the other Asian nations. It was argued that, of the rapidly developing Asian nations, Thailand is the one exception without a strong Confucian tradition or an Islamic basis to create an environment for a strong but benevolent government to establish security and provide guidance. Singapore and Malaysia can be observed at the other end of the scale.

The chapters in the last section on the strategic responses of Asian firms in the aftermath of the crisis complete the overall intent of this volume.

Perhaps the institutional models presented in the volume could be applied to the western economies as the rapid rate of growth of recent years declines possibly leading to similar experiences faced by the Asian economies.