Tales to get bankers blushing

Reform and Recovery in East Asia - The Japanese Economy - An Economic History of Malaysia, c.1800-1990
October 19, 2001

One effect of the crisis that afflicted a number of economies in East and Southeast Asia in late 1997 and 1998 was that many western economists began to take the region as a whole more seriously. To most outside observers, it was obvious that this region had been characterised by rapid economic growth for several decades, and that growth was certain to continue. Apart from a small band of academic specialists working in universities scattered across western Europe, North America and Australia, few outsiders appreciated the huge diversity of the region, or the vulnerability of even the most apparently successful among these economies.

David Flath's book on Japan is aimed specifically at the student market. It is designed to provide a broad-based introduction to the historical evolution of the Japanese economy, and to contemporary macro-economic and micro-economic policy issues. The author skilfully blends an analysis of these policy issues with an exposition of the relevant economic tools. For example the chapter on industrial policy begins with a discussion of Marshallian and pecuniary externalities, and examines recent thinking on international oligopolies and technology pol-icy, before looking at the historical evolution of industrial policy in Japan. Similarly, the chapters on saving, macro-economics, international finance and international trade all place the Japanese experience in the relevant analytical framework. Although the author claims that the book is not written for specialists in economics, the students who will get most out of Flath's rigorous analytical approach are those who already have a good grounding in intermediate economic theory and in international economics.

Reform and Recovery in East Asia , edited by Peter Drysdale, is more contemporary in focus and examines the process of economic recovery throughout the western Pacific region. It is based on a conference held at the Australian National University in Canberra in September 1999, and many of the contributing authors are associated with that university. Most of the chapters discuss post-crisis developments in individual countries. There is also an overview of the East Asian region after the crisis by Ross Garnaut, and the final three chapters examine the problems of managing capital flows in East Asia (Dominic Wilson), the need for improved institutions (Masahiro Kawai) and reform of the international financial system (David Nellor).

As Garnaut points out, one of the important consequences of the crisis was that the case for certain types of controls on capital flows gained greater legitimacy. Countries such as China and Vietnam that had maintained tight controls on capital movements were unscathed by the crisis while those such as Thailand, Indonesia and Malaysia that had removed most capital controls by the early 1990s all experienced massive capital flight.

Several of the country chapters, especially those by Hadi Soesastro and Ross McLeod on Indonesia, leave the reader in little doubt that while the process of economic recovery has begun everywhere in Asia, the lessons of the crisis of 1997-98 for public-policy reform have not yet been fully grasped by politicians. Indeed, it is far from clear that the new government that came to power in late 1999 in Indonesia has a serious commitment to public-policy reform, even if it has greater democratic legitimacy than that of Suharto. Perhaps Indonesians and Thais can take heart from the admirably candid chapter by Akiyoshi Horiuchi on the Japanese banking crisis of the 1990s and the issues of governance that it has raised. Japan has reached its present status as an industrial giant on the back of a financial system largely insulated from foreign and domestic competition, riddled with inefficiencies and (as became increasingly clear during the 1990s) an array of corrupt practices that would make even Thai and Indonesian bankers blush.

It is perhaps a pity that neither Horiuchi, nor any of the other writers in this volume, tease out the lessons of the Japanese experience for the developing economies of Asia. Is the real lesson of the Japanese experience that an "efficient" banking system is neither a necessary nor a sufficient condition for rapid industrial growth and that the whole process of financial deregulation is best left until an economy has already achieved industrial maturity? Most of the authors in this volume would oppose such a view, and argue that the cost of the closed and inefficient Japanese financial system was considerable, albeit masked by the extraordinary performance of other sectors of the economy. They could also argue that whatever the Japanese were allowed to get away with until the 1980s, the developing economies of Asia and elsewhere will now have to play by World Trade Organisation rules that emphasise financial openness to a much greater extent than the old General Agreement on Tariffs and Trade system did.

The third book under review takes a rather different approach to the study of economic development in a small but successful Asian economy. John Drabble has been studying Malaysian economic development for many years, and his latest book is a summation of his work and is the first economic history of Malaysia that links the dramatic transformation of the economy during the British colonial era with the even more dramatic changes that occurred after 1963. In recent years there has been a tendency to regard Malaysia as a "lucky country", where economic success has been achieved with relative ease on the back of abundant natural resources, a small population and substantial inward flows of foreign investment. While Drabble does not under estimate the importance of these factors, and also the relatively favourable colonial legacy, he makes it clear just how important public policy has been in the "Malaysian miracle" of the past four decades.

In what is essentially a work of synthesis, Drabble does not come up with any dramatic new insights into the workings of either the colonial or the post-colonial economy. His analysis of colonial economic policies is balanced and judicious, emphasising the rapid economic growth that occurred as a result of the expansion of the export economy and the retarded economic and educational development of the Malay majority. He gives a thoughtful analysis of the achievements of the "New Economic Policy", imposed after serious race riots erupted in 1969, and reaches the conclusion that the benefits in terms of accelerated integration of the Malay majority into the modern economy outweighed the costs in terms of greatly increased political patronage.

Like many other analysts, Drabble is sceptical of the results of the "Look east" policy of Mahathir bin Mohamad, although he also shares the concern of some Malaysian economists that the success of export-oriented industrialisation is based on a very narrow range of products facing uncertain world markets. His treatment of the crisis of 1997-98 is consigned to a brief postscript.

No careful reader of the books by Drabble and Flath could fail to be impressed by the long shadow cast by history on contemporary economic developments in both Japan and Malaysia. But neither author is an historical determinist. At many junctures during the 20th century, policy-makers in many parts of Asia have been confronted with genuine choices. Many of the contributors to the Drysdale volume stress that the crises in South Korea, Thailand, Malaysia and Indonesia could have been avoided had different policies been pursued. If we want to understand why the pace of economic development has differed so much in different parts of Asia over the past century, we have to understand why some policies support rapid economic growth in some countries at some times and retard it in others. In addition, we have to understand why governments persist with policies even when all the evidence indicates that they are not achieving their intended objectives.

Anne Booth is professor of economics with reference to Asia, School of Oriental and African Studies, University of London.

Reform and Recovery in East Asia

Editor - Peter Drysdale
ISBN - 0 415 24095 4 and 24096 4
Publisher - Routledge
Price - £65.00 and £18.99
Pages - 363

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