The East Asian Crisis in Retrospect

Shankar Acharya

ndrew Shengs From Asian to Global Financial Crisis is a fascinating book, though at times somewhat uneven and repetitive. The bottom line is that it is a must read for anyone interested in the nature and causes of nancial crises in Asia (and elsewhere) and the lessons to be learnt on how public policy can limit their probability of occurrence. The title is somewhat misleading. This is really a treatise on the east Asian nancial/ economic crisis of 1997-98 and its aftermath. That aftermath, of course, includes the global nancial and economic crisis of 2007-09, from which we are still struggling to emerge (with time bombs still exploding as in southern Europe). But threequarters of Shengs book (the rst 12 chapters) is rmly focused on the Asian crisis and only the last four chapters deal with the more recent global crisis. Indeed, as Sheng notes in his Introduction (p 4), In the summer of 2007 even as I was putting nishing touches to the book, I was reminded eerily of the summer of 1996. Things looked too good to be true. Fastmoving events after that impelled him towards extending the scope of his book to include the evolving global crisis, at least up to the end of 2008. From the hindsight vantage point of late 2010, Shengs treatment of the global crisis appears a little incomplete and undigested, especially in comparison to the many tomes that have been published since. But this should in no way detract from his truly masterful account of the east Asian nancial crisis that swept through the region in 1997-98 and inicted enormous damage in so many hitherto fast-growing countries. It is worth recalling the extra ordinary declines in per capita GDP that occurred in 1998 in the worst-hit countries of Indonesia (14.4%), Thailand (11.6%), Malaysia (9.5%) and South Korea (7.5%). These were staggering shocks to the economic and social fabric of these n ations. They caused massive increases in

book review
From Asian to Global Financial Crisis: An Asian Regulators View of Unfettered Finance in the 1990s and 2000s by Andrew Sheng; Cambridge University Press; South Asia edition, 2010; pp 479, Rs 495 (paperback).

unemployment and poverty, toppled governments and put a huge question mark on the much-touted East Asian Miracle of the previous three decades. Before giving a avour of Shengs insightful analysis of the east Asian crisis a few words are in order on his almost unique qualications to write this book. Sheng (of Chinese origin) grew up in North Borneo, a state of Malaysia, went to England in 1965 and earned a rst degree in the University of Bristol and then trained as a chartered accountant with Arthur Anderson & Co in London before returning to Kuala Lumpur in 1972 to begin a career with the Malaysian central bank, the Bank Negara Malaysia (BNM). He rose to be chief economist at BNM by 1981 and literally grew up learning about monetary policy and nancial institutions through regular meetings with fellow Directors of Research from the ASEAN central banks (p 76). He then became a bank regulator, cutting my teeth in the rst serious nancial crisis in Malaysia the failure in 1986 of 24 deposit-taking cooperatives that led to bank runs in some nance companies and banks. In 1989 Sheng took a sabbatical and joined the World Banks nancial policy division, where he worked closely with reputed nancial development specialists such as Millard Long, Jerry Caprio, Ross Levine, Dimitri Vittas and Asli Demirguc-Kunt and wrote a book, Bank Restructuring in the 1980s. In 1993, he was appointed as the deputy head of the Hong Kong Monetary Authority (HKMA) and in October 1998 became Chairman of Hong Kongs Securities and Futures Commission.

These last two assignments gave him a ringside, policymaking view of the east Asian nancial crisis. Combined with his earlier training as an economist, an accountant, a bank regulator and a serious researcher, Sheng is perhaps uniquely qualied to write this absorbing account of the crisis from an Asian perspective. Among the very few such books by Asians, this is undoubtedly the most analytical, well-documented and convincing in its grasp of context and detail. Some of what Sheng writes on the causes of the crisis is well known: such as the massive current account decits of the aficted east Asian economies prior to the crisis, the heavy reliance on borrowed bank loans (often short-term) to nance these decits, the major asset bubbles in stocks and real estate in several countries as capital inows poured into these fastgrowing economies right up through the early months of 1997 and the tendency to nurture soft pegs to the US dollar.

New Light on East Asian Crisis

In other areas he sheds important new light on the crisis. This is especially true of his illuminating analysis of the role of Japan in the east Asian crisis. By 1985 Japan was the second largest economy in the world and many in the west were fearful of Japan surging to the top spot. Then came the famous (or infamous) Plaza Accord of September 1985, which led to a sharp appreciation of the yen from around 240Y/$ to 120Y/$ in a couple of years. The ensuing decade of a strong yen (endaka) had enormous consequences for both Japan and east Asia. In response to the deationary impact of the strong yen, the Japanese central bank sharply reduced policy interest rates and thus fed a massive domestic asset price boom, which later collapsed, with long-lasting damage to Japans economy. At the same time Japan took a policy decision to move production to cheaper sources in east Asia. Japanese direct investment poured into these countries and built a supply chain geared to Japan. For example, Thailand became the Detroit of Asia as Japanese car rms outsourced much of production there to maintain international competitiveness in western

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markets. Aside from direct investment, east Asian economies also became an important destination (directly or via US markets) for the famous yen carry trade, which entailed investors borrowing at low rates in yen and earning higher yields in US dollars or Thai baht. As Sheng observes: Thus, whilst the decade of endaka from 1985 to 1995 spelled trouble for the Japanese domestic economy, it signalled a boom period for the rest of Asia (p 53; in common with other east Asians, the author often tends to equate Asia with east Asia). The postPlaza Japanese asset bubble began to deate after 1989. But the high capital ows from Japan to east Asia continued unabated and contributed to the new asset bubbles in east Asian countries. In the wake of the deating Japanese asset bubble, Japanese banks were increasingly confronted with non-performing loans and, after 1995, began to withdraw funds from their east Asian destinations to shore up their domestic capital adequacy. Sheng estimates that between June 1997 and 1999 Japanese banks withdrew $51 billion from the Crisis-5 east Asian economies, amounting to almost 6% of their GDP. Even more was withdrawn from Hong Kong and Singapore. Hence a slump in Japan with a fragile banking system and a bloated (East) Asian economy with a bubble in asset prices that was funded by foreign short-term bank loans, created the right conditions for the dam to break in July 1997 (p 65).

Capital Account
In a separate Chapter 5, Sheng provides a cogent critique of the unhelpful role of the Washington Consensus and the Inter national Monetary Fund (IMF) during the east Asian crisis. On the former, he notes caustically, that even in the September 1997 Annual Meeting of the IMF and World Bank in Hong Kong (at which Sheng and I were both present in our respective ofcial capacities) the big debate was whether there should be further liberalisation of the capital account globally (p 111). This was three months into the east Asian crisis! As for Washington itself, all Asians took careful note of the US refusal to bilaterally aid east Asian countries in the manner it had helped Mexico in 1994. The IMFs role during the crisis left much to be desired. The IMFs

own Independent Evaluation Ofce (IEO), set up in 2001, published a critical review in 2003 in which it faulted the IMF for failing to understand the gravity of the banking crises in these countries, misjudging the extent of domestic ownership of the corrective programmes, underestimating the strength of vested interests in opposing reforms and inadequately discharging its role as condential advisor in the period immediately preceding the onset of the crisis. As Sheng and others have noted, the stance adopted by the IMF and western nations in the east Asian crisis had been very different from the policy responses of these countries in the global crisis, in which the US and European nations have at the epicentre. These policies have included intervention in markets, blanket deposit guarantees, expansionary scal and monetary policies and propping up insolvent banks and other nancial institutions. Quite clearly, what was sauce for the goose was not deemed suitable for the gander! In the middle part of his book, Chapters 6-10, Sheng provides ve excellent country essays on Thailand, South Korea, Malaysia, Indonesia and Hong Kong and their experiences, predicaments and policies during the east Asian crisis. Each chapter is a gem, written by someone who was in the thick of the action and knows the region and its players intimately. They are easily the best country-wise accounts of the crisis I have read. These are followed by a chapter on the rise of China and its role during the crisis. Shengs account is generally laudatory, especially of Chinas decision not to devalue the renminbi during the crisis. He acknowledges that many analysts have pointed out that Chinas large devaluation of its currency in 1994 was an important trigger to the east Asian crisis, leading to a substantial slowdown of exports by other east Asian countries in 1995-96 and a consequential aggravation of widening trade and current account decits. Shengs response, that the 1994 action was much more an unication of a dual exchange rate than a real devaluation, is not wholly convincing. As to why China was itself insulated from the crisis, Sheng is more in tune with mainstream views which attribute this to a lack of capital account convertibility and prudent external

nancial policies. (Similar reasons, plus controlled exchange rate exibility, insulated India from the brunt of the crisis.)

Global Crisis
Turning to the global nancial crisis of 2007-09, Sheng emphasises the obvious but crucial difference is that the Asian crisis was at the periphery of the global nancial and economic world, while the current crisis is at its centre. East Asian countries could recover fairly swiftly from the nadir of their crisis because the Organisation for Economic Cooperation and Development world was in good shape and growing strongly. In the more recent crisis, recovery remains uneven and uncertain because the principal locomotives of the world economy have been damaged. Like others, Sheng draws some links bet ween the east Asian crisis and the global crisis. For example, after the pain of the earlier crisis (and sometimes inappropriate IMF programmes) Asian countries ( including India) have drawn the precautionary lesson of building up large foreign exchange reserves. That has been taken to an extreme by China with its $2.6 trillion of reserves, reecting the accumulation of exceptionally large current and capital a ccount surpluses over a good many years. The reinvestment of these reserves in US treasuries contributed to the loose scal and monetary policies of the US in the rst half of the current decade, which, in turn, stoked the unsustainable boom in property and equity prices. There were, of course other important factors at work, including the wave of nancial deregulation in the US (such as the repeal of the Glass-Steagall Act in 1999 that had segregated commercial banking from the securities business since the Great Depression), the explosive development of nancial derivatives and securitisation and the evolution of a large, unregulated

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shadow banking sector comprised of hedge funds, special investment vehicles and other entities. All of these led to unprecedented levels of leverage in the nancial system and the spread of risks through opaque and little understood nancial instruments. As Sheng notes, from 2001 to 2007 global GDP increased by 76%, global bonds, equities and bank assets grew by 53%, while outstanding contracts of global over-the-counter (OTC) derivatives market rose by 537%. In other words, the derivatives book rose 10.1 times faster than traditional nancial assets and 7.1 times faster than real economic activity (pp 8-9). The vast majority of market participants (and regulators) did not know the extent of risk and leverage in the new world of rampant nancial engineering. For example, Sheng notes that at the end of 2007, the ve US investment banks had total assets

of $4.3 trillion, but only equity of $200.3 billion or a leverage of 21.3 times. However, together they had notional off-balance liabilities of $17.8 trillion, implying further leverage of 88.8 times (p 339). It was a house of cards doomed to collapse, which it did in September 2008. Shengs account of the global crisis is strong on the role of unfettered nancial engineering and imprudent nancial d eregulation. It is somewhat weak on the causal part played by the macroeconomic problems of global imbalances in trade and capital ows and misaligned exchange rates, which had worried macroeconomists for many years and which undoubtedly played an important part in the build-up to the crisis. Indeed, even with the uneven economic recovery that has occurred since late 2009, the imbalances problem (and the associated currency wars) has resurfaced and threatens to undermine a sustained

recovery. Sheng also does not do justice to the story of how and why sub-prime mortgages (which lay at the base of many nancial derivatives pyramids) proliferated throughout the US in early years of the decade. But it would be unrealistic and unfair to expect one book to tell all the complex and interwoven stories that make up the global nancial and economic crisis. In any case, as noted earlier, Shengs account of the recent crisis is almost an afterthought to his central preoccupation, the east Asian nancial crisis. That is a tale Andrew Sheng tells exceptionally well and makes this volume indispensable reading for anyone seriously interested in the future of Asia.
Shankar Acharya (acharya.shankar@gmail.com) is honorary professor at ICRIER. The views expressed here are personal.

Pluralities of Voices
Charu Gupta

ebels, Wives, Saints by Tanika Sarkar, born out of perhaps the toughest phase of her life, personally and politically, is also her most impressive till date. In many ways a contin uum of her earlier landmark work Hindu Wife, Hindu Nation, it nonetheless offers a much wider range and covers diverse a renas, marking her as not only a leading feminist historian of gender histories, but also of social history in its wider sense. If Hindu Wife imparted new meanings and visions to the Hindu wife and the Hindu nation by revealing how women were embedded in the production of community and nation and how there was a shift in middle class Hindu intelligentsia from l iberal reformism to cultural revivalism, in Rebels, Wives, Saints, Sarkar develops a deeper analysis, as she intensely weaves together divergent themes, events, happenings, groups, people, ranging from gender, caste, novels, tribals, popular l iterature and theatre, to produce a messy picture and a spectacle of colours. The book is a collection of essays and unlike a monograph, there is

Rebels, Wives, Saints: Designing Selves and Nations in Colonial Times by Tanika Sarkar (Ranikhet: Permanent Black), 2009; pp 347, Rs 695.

no central group or event or theme here. In that sense, it d ees singular narratives and signposts.

Internal Pluralities
Rebels, Wives, Saints deals with divergences and penetrations of plural histories. Some troupes of it are a further delineation of Tanikas earlier arguments. Her introduction is short, crisp and theoretically i nformed, talking in some depth of her key concerns and pushing them further. For Tanika, power in the colonial context is not absolute and hegemonic, but uid, d y namic and situational. She again shows in different ways how the agency of the colonisers and the west has sometimes been overemphasised, and how indigenous voices have often provided the starting points and the counter-canon in her works. It was they, according to Tanika, who often foregrounded the terms of

v arious debates, who crafted themselves repeatedly in ingenious ways, and who revealed a degree of cultural and intellectual autonomy. Hence, the words Designing Selves in the title. Challenging all binaries and absolutes, she emphatically a sserts through her introduction and her various essays the lack of internal coherences within the voices of the colonisers and the colonised, while also refuting any expressions of a past golden age. Instead, she prefers to explore the dialectic and d ialogic possibilities and limitations in i ndigenous discourses. At times, however, the book is almost celebratory in expressing the selfawareness of the Indians about their own culture as well as about the colonial powers. However, the very logic of internal pluralities and contradictions within their voices signies at times an unconscious expression of certain i dioms, which carried within them a mbiguous meanings. Sarkar states that each theme discussed in these essays is internally pluralised (p 4). More importantly, she argues that she cannot write about caste, class, gender or nation. Rather, she can only write about men, women and children, living and creating various kinds of relationships of production, families, state and nation; of human beings creating these through texts, performances, faith and politics (p 5).

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