ASEAN Beyond the Regional Crisis: Challenges and Initiatives

3. Competitiveness and Sustainable Growth in ASEAN

Competitiveness and Sustainable Growth in ASEAN 29© 2001 Institute of Southeast Asian Studies, Singapore 29 Overview More than a year after the outbreak of the Asian financial crisis, there still does not seem to be a consensus on the proximate causes and hence what measures ought to be taken to avert its recurrence. Despite the numerous papers (scholarly as well as popular), conferences, publications, and official meetings that have proliferated since the start of the crisis, there is no convergence on its explanation — its unpredicted occurrence, its severity, and its wide spread across Asia and the rest of the world. At one extreme is a school of thought that the crisis was caused by fundamental weaknesses in the economies of the affected countries, manifested by macroeconomic imbalances, excessive borrowings, overvalued currencies, and poor investments, among other things (Moreno, et al. 1998; Glick 1998). At the other extreme is an argument that the crisis was triggered by speculators and their panic behaviour by withdrawing from the emerging markets in fear of losses (Moreno et al. 1998; Montes 1998). Between these two extremes are various shades of explanation. There is the notion of a lack of governance in both public and private transactions, especially in terms of close relationships between financial institutions and regulators.1 There is the notion that 3 Competitiveness and Sustainable Growth in ASEAN FLORIAN A. ALBURO ISEAS DOCUMENT DELIVERY SERVICE. No reproduction without permission of the publisher: Institute of Southeast Asian Studies, 30 Heng Mui Keng Terrace, SINGAPORE 119614. FAX: (65)7756259; TEL: (65) 8702447; E-MAIL: publish@iseas.edu.sg 30 Florian A. Alburo© 2001 Institute of Southeast Asian Studies, Singapore corruption weakened the system of investment decision-making in the emerging markets. There is the notion that “Asian values” had dictated the manner of financial exchanges. There is the notion that the crisis was essentially a bubble crisis (Nomura 1999). While the truth may lie somewhere between these two extremes, they have different policy implications. If the crisis was caused by fundamental weaknesses in the economy, the crisis-hit countries should carry out reforms to improve the foundation for sustainable development. On the other hand, if the crisis was caused by the sudden loss of confidence among short-term investors and speculators not directly related to country fundamentals, then the essential task is not really reforms, nor would they be necessary. Restoring confidence where the basic fundamentals are “correct” may require other measures that would bring back investors.2 Without a clear explanation for the crisis in the affected countries, it would be difficult to prescribe policy options. There have been many attempts to assess the impact of certain factors in the evolution of the Asian crisis but events remain fluid and although there is a definite “bottoming out” and a return to the growth experiences of the past, their sustainability remains to be seen. What seems evident, however, is the finding that weaknesses in the financial systems in Asia were stronger explanations for the crisis than basic fundamental flaws in the economy (McKinnon and Pill 1998). The unusually large flows of short-term capital in these countries exposed them to inevitable reversals when investors panicked, eventually draining reserves and squeezing liquidity. Moreover, one particular reason for the spread of the crisis from Thailand in July 1997 to the other Southeast and East Asian countries was the high degree of financial and trade integration among them (Glick and Rose 1998). The vulnerability of the financial sector to external shocks was not a product of economic fundamentals but of micro aspects of the sector, such as less-thanarms -length transactions and poor risk management, which led to unusual credit booms. Indeed, there is an argument that none of these explanations suffice since the Asian crisis was a bubble crisis, which had its beginnings well before the explosion in Thailand, and ran across most of Southeast and East Asia (Ichimura et al. 1997). In the more formal theoretical models of foreign exchange crisis, second-generation and third-generation models emphasize the importance of the governments’ conflicting objectives and interaction Competitiveness and Sustainable Growth in ASEAN 31© 2001 Institute of Southeast Asian Studies, Singapore between the banking sector and the balance of payments. In this sense, the second-generation models show that domestic policy failures do not necessarily precede a crisis to enable governments to make decisions to alter its exchange rate policy. A domestic banking crisis...