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NO. 19 — May 15, 1998

 

Feature Article

ASIA'S FINANCIAL CRISIS: LINKED TO ITS ECONOMIC MIRACLE? by Arthur J. Alexander

Summary

The now-desperate financial straits of East Asian economies contrast sharply with their recent miraculous growth. An obvious question is whether the economic problems hammering Thailand, Indonesia, South Korea and Malaysia — not to mention Japan — are related to policies associated with their rapid development. Alternatively, are the region's banking crises merely the most recent examples of a fairly common post-1980 worldwide occurrence?

The accumulating research on economic development indicates that several preconditions are needed for accelerated growth: relatively high educational levels, equitable income distribution and competent state bureaucracies. East Asia's former high flyers met these requirements. Research shows as well that a stable macroeconomy — one that encourages private investors to make long-term decisions without the distractions of inflation and volatile market conditions — is associated with fast growth. This setting also characterized the economies now in crisis. Steep investment rates supported by high domestic savings seem to follow from these conditions.

The same countries also are renowned for government intervention in the banking industry and the credit market, undertaken mainly to mobilize savings and direct money toward favored investment projects. Development studies do not indicate that such intervention, if held to a modest scale, impedes growth.

Financial activities directed to goals other than strict profitability do, however, set the stage for future troubles. Moral hazard generated by government guarantees is the primary cause of today's crises in East Asia. Bank depositors and creditors were lax in assessing the riskiness of bank loans and the safety of their own financial situations. Bank owners and managers, therefore, had few constraints preventing the extension of questionable loans. If loans were not repaid, the government would rescue lenders and depositors. If they panned out, bank owners would reap the profits. Weak lending supervision — plus the liberalization of financial regulations accompanied by the rapid increase in international capital flows (much of it short term) — transformed situations of moral hazard and likely bank failure into financial crises.

All the direct causes of today's financial crises in East Asia were observed earlier elsewhere. However, state-manipulated financial systems, long a key development philosophy of the currently problem-plagued economies, are a deeper source of their troubles.

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Weekly Review

KATO, KAN TAKE THEIR POLITICAL AGENDAS TO WASHINGTON by Barbara Wanner

Leaders from the ruling Liberal Democratic Party and the Democratic Party of Japan, the largest opposition party, descended on Washington during the late April/early May "Golden Week" evidently intent on scoring political points with the folks back home as much as with the U.S. government officials, members of Congress and other influentials they met. Despite the hoopla generated by the public appearances of LDP Secretary General Koichi Kato, the ruling party's second-in-command, and DPJ chief Naoto Kan, widely regarded as the most popular politician in Japan, both men appeared to fall short of attaining their goals.

 

G-7 FINANCE CONFAB HINTS AT SUMMIT ISSUES by Douglas Ostrom

The finance ministers of the Group of Seven industrial nations met in London May 8 and 9 to prepare for this year's May 15-17 summit in Birmingham, England. The group identified two related concerns that are likely to be among those paramount at the meeting of prime ministers and presidents: the state of Japan's economy and the lessons learned from the currency and banking crises engulfing much of East Asia.

 

ANTIGOVERNMENT PROTESTS ROCK INDONESIA; IMF PACT BRINGS AID FROM JAPAN, UNITED STATES by Eric Altbach

Worsening political unrest in Indonesia is overshadowing the renewal of foreign assistance following the latest agreement between Jakarta and the International Monetary Fund. Despite the release of $1 billion in IMF funds, plus more than $2 billion in aid from Tokyo and $1 billion from Washington, financial markets have reacted with alarm to the prospect of instability. Protests calling for an end to President Suharto's 32-year rule have spread from provincial cities to the nation's capital. With demonstrations growing in both size and frequency, some observers question whether the Indonesian leader can retain his grip on power.

 

TOKYO LOOSENS LEASH ON FOREIGN LAWYERS by Jon Choy

The Diet May 7 approved amendments to the legal regime governing foreign lawyers operating in Japan. The bill will broaden their powers, ease the legal experience required to qualify for work in Japan and widen the scope of joint practice between domestic and foreign lawyers. Although everyone agrees that the changes are a step forward for foreign attorneys working in Japan, many significant restrictions will remain. Some observers predict that corporate Japan's increasing need for legal services will create demand for further reforms.

 

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