It’s well-known that what mainly caused the Asian economic crisis was its decreasing competitiveness on export, but some disagreements still exist with respect to the specific factors that led to such a decreasing competitiveness. From our views of point, it was just the continuous variety pattern of world economy in the 1990s, esp. the global integration and the great strides of the New-industrial Revolution that contributed to restraining and challenging Asian economy both in terms of demand and supply. While Asian countries were not able to adopt immediately those amazing new varieties in world economy through structural adjustment, the overall crisis unavoidably burst out.

1.1 The supply restraint on Asian economy

In the 1970s and 1980s, the pattern of regional specialization in Asian economy was described as a "flying geese-like pattern" represented by Japan, which was brought about by some Japanese economists like AKACHIMA, KUSHI KOJIMA, to explain theoretically Asian development in which East-Asia centered and to depict a chain reaction in international productive and specialized structures resulting from the industry transfer among nations.1 Asian, under such a "flying geese-like pattern", took a special shape called "vertical specialization system" and created fantastic economic performances by way of mutually complementary trade.

Since the beginning of the 1990s, however, Asia’s advantage in competitiveness had been decreasing and growth rate declined. The reason can be concluded as follows:

(1)With rapid growth of economy in East-Asia, not only per capita income but labor cost all increased to a new level, which implied some changes had happened in factor endowments and the comparative advantage of each country, leading Asia’s economic specialization (i.e. what Michael Borrus said "to invest in similar industries"2) to a horizontal trend, thus the preceding regional specialization in which vertical pattern played a leading role got substituted by a new pattern characterized by complicated network .Then the mutually complementary trade within the area was substituted by a competitive one, which was also responsible for the comparative shrinkage of their export market and the shock to the employment and growth;

(2)Another factor affecting Asian competitiveness on export, except rapid increase of labor cost, was the tremendous shock of world economic integration. The global integration, rooted in the institutional convergence all over the world and prompted by such factors as the global arbitrage in MNC_S and hedge funds, the revolution of information and technology, directly absorbed a large amount of low-labor cost countries to enter the international specialization and market systems, including transitional economic nations like former Soviet Union and middle-east Europe countries, and many low-income countries in South-Asia and Africa, which took a further step to lower prices of labor-intensive manufactures within a wide range and shocked export as well as growth of South-East Asia nations though their extremely cheap labor prices;

(3) The fixed exchange rate pegged in dollar should be treated as a major element for supply restraint on East-Asia countries. As is known to all, the competitiveness in world markets of labor-intensive or low technology-intensive manufactures depend mainly on their price advantages but not on non-price factors such as monopoly of quality, knowledge and technology, so the variation of exchange rate do have striking effects on international competitiveness of such products whereas the fixed exchange rate, adopted by South-east countries in order to attract foreign capital as well as to reduce risks of exchange rate in terms of investment and trade, forbade those nations from protecting their competitive advantages by devaluation. From the early 1995 when dollar appreciated again with respect to other currencies, it was inevitable for East-Asia countries to decline their international competitiveness since the currencies in those countries were all overvalued.

1.2 The demand restraint on Asian economy

As most developing countries and regions implementing export-oriented strategy focused their attention on developed countries led by U.S. and located their competition at labor-intensive products after the 1970s, the high growth rate achieved by East-Asia since the 1980s were benefit to a large extent from the long-run prosperity in U.S. The change in long-term cycle of world economy and the arrival of network economic era, however, altered the leading products in world market from manufactures to informational and high-technological products and hindered the further implementation of the former strategy. Then the terms of trade deteriorated in traditional manufacturing and exports from East-Asia countries were damaged after 1990 heavily because of the slump import of industrial countries (ere da).

Table 1 the change in demand for Asian export products

(annual average change)

Source: WTO "Annual Report 1997"

1.3.The changes in pattern of international specialization and the fall in competitiveness of Asia’s export

The pattern of international specialization had two features before the 1990s: firstly, the specialization presented a horizontal pattern among those developed countries such as U.S., Japan and Europe; secondly, the pattern looked like vertical in the geographical areas those developed countries locating.

However, the said pattern had sharply changed since the 1990s. The U.S., achieving a brilliant breakthrough in the field of compute software, esp. network technology, became a leader of a new-round of economic growth relying on its matchless technological advantage, and left Japan far behind as well as West Europe. Finally the transition of international specialization from horizontal pattern to vertical pattern (flying geese-like pattern) took place (Table2).

( in billion dollars)

Source: IMF, Direction of Trade Statistics, June 1998.

On the other hand, the international specialization in the said geographical areas, esp. within Asia, showed a horizontal trend since the gap between Japan and South-East-Asia countries narrowed and the latter became Japan’s powerful opponents.

Based on the above-mentioned analysis, we can concluded that while the international competitiveness of the whole Asian economy led by Japan had a dropping trend resulting from new varieties in pattern of international specialization since the 1990s (Table3), the competition within Asia constantly exacerbated at the same time, bringing about a competitive devaluation of currencies in those areas and the currency crisis followed as well as financial crisis.

Table3 The ranks of international competitiveness of "Four dragons" during 1995-1997

Source: The Yearbook of World Economy 1997

1.4 The end of Asian myth---From the fundamental crisis to the overall crisis

1.4.1. The origin of Asian crisis

We can learn from above that the origin of Asian crisis should be attributed to the unfavorable changes in various kinds of factors which determine economic foundations, that is, with the increasing per capita income and the radical transformation happened in structure of world economy, a delayed-adjustment against out-dated economic structures, which led to the falling international competitiveness, was the major fault for the currency and financial crisis, even the overall crisis together with external shocks of global economic(esp. financial) integration.

1.4.2. The transmitting mechanism of the crisis

The transmitting mechanism of the Asian crisis can be described as follows: The depression of real economy led to an unfavorable expectation of investors, and a large amount of capital outflow which originally inflow to make up for the nations’ deficits in the Current Account; then a mobility crisis took place and thus bad debts in monetary sectors exposed along with the tremendous capital outflowing; being lack of the same assistance by a regional fund as EMS, Asian countries can’t resist shocks of huge capital flight, and the currency crisis, the financial crisis, even the overall crisis eventually broke out. Therefore, the Asian crisis was deep-rooted in nothing but its economic foundation.

1.4.3. The exceptionality of Asian economic crisis

Compared with various kinds of crisis in the past, the Asian crisis really had some exceptionality, that is, Asian countries suffered from an unprecedented "bulb shock" and the international "hot money" played an accelerating role on such a "bulb shock" despite the fact that the crisis rooted in its economic foundations. We can find similar examples in the Great Crisis in 1929-1933, the debt crisis in Latin America in the 1980s and Mexico financial crisis in the 1990s, but in this Asian crisis, the "bulb shock" started by international "hot money" became a direct fuse of the crisis, which reflected that in nowadays, when international financial assets swelled sharply and the economic and financial integration throughout the world developed rapidly, negative roles of huge amount of international capital flowing on its economic growth of each country are also enhanced with great speed, so it is extremely important for those countries that have serious problems in economic foundation to tighten controls on their international capital flowing. Asia, however, just had neglected of such a major point because of its long-term dependence on external market and foreign finance, resulting in an unavoidable crisis together with the constant deterioration of economic foundations and the fierce attack of global capital "typhoon".

2.1.1. The objective utility function of crisis countries

With the view of specific conditions in South-East-Asia countries, it’s necessary to give priority to recovering confidences of investors and solving shortage of working capital as well as keeping a health growth, the aim of which is the successful accomplishment of structure adjustment by keeping a certain degree of increment on the basis of maintaining stock to compensate the switching cost of the adjustment and achieving a steady transition while no excessive recession happens during the course of economic structural adjustment .

2.1.2. The basic policies

Based on the above function, the crisis countries should take efforts on: adopting expansively financial and monetary policies, abandoning fixed exchange rate system in order to reconstruct competitiveness on their export by floating exchange rate system and reintegrating, reducing or remitting debts as well as implementing a certain degree of capital control to protect domestic capital and financial markets, all of which are aimed at increasingly improving balance of payment, raising supply of foreign exchange and at providing sufficient cash flow to support the structural adjustment.

2.1.3. The effect of the policies

Undoubtedly, the said steady program of incremental adjustment is an optimum choice for all in that incremental capital is of benefit both to the economic structural adjustment as well as to the recovery of economic foundations in crisis countries. Moreover, it can avoid further economic deterioration in crisis countries caused by inflation.

2.2.1. The subjective utility function of IMF

IMF firstly measured Asian crisis with some traditional signals used in the 1980s crisis in Latin America and deemed that the Asian crisis rooted in its unsteady macroeconomic policies and its fragile financial markets. So the Fund, absorbing more from Sachs’ theory of "financial panic", mainly aimed at such macroeconomic indexes as steady exchange rate and balance of payment.

2.2.2. The basic policies

The program of IMF can be divided into two stages: before Dec.24, 1997, the fund insisted on thorough reform, that is, on implementing tight policies including keeping financial surplus, raising interest rate as well as controlling money growth, with which the market made sure that Asian economy really had some serious problems. Along with panic air dispersing all over the market and the aggravation of crisis as well as the slump of GDP of Asian countries, such a program got sternly criticized. Consequently, IMF abandoned requirement for financial surplus and turned to adopt policies after Dec, 24 as followed: permitting crisis countries to keep a specified financial deficit, delaying repayment of debts, focusing on the long-run financial reconstruction and so on.

2.2.3. The effect of the policies

Based on the above analysis, it’s obviously self-contradictory of the program of IMF because the aim of it focused on short-term balance of payment while it implemented such an aim by means of long-term adjustment. Some people had tried to support such a program with the fact of the rapid recovery in Thailand and Korea soon after they accepted the program of IMF, but such a performance achieved at great cost of economic turbulence and dramatic recession in a short-run period. Furthermore, it’s still doubtful whether the rapid economic recovery of Thailand and Korea was a result from helps of IMF or from the greater capability in adjustment of themselves.

2.3. Two kinds of utility functions: the comparative analysis with the political economics on the recovery of Asian crisis

2.3.1. The analysis on the difference between previous programs of survival of crisis: cash flow is a key to structural adjustment.

Which survival program has effect on Asian crisis? In order to answer this question, we should trace back for some help. 20^th century had witnessed twice of effective economic crisis before Asia crisis, that is, the great crisis in 1929-1933 and the oil crisis in the 1970s, from their survival programs and the results of which we can draw a conclusion: incremental adjustment is the medicine suit to the case.

After 1929’ crisis breaking out, most people attribute it to the excessive speculations in stock market, but the fact was that the rise of stock prices had been consistent with the economic growth at that time. The reason why the situation changed so sharply connected with tight policies of the Fed to control the over-swelling stock market, which hit heavily on other sectors in the national economy. The government of U.S.A. and the Fed, moreover, continued the tight program for surviving crisis, and finally led to the great economic recession. The mistakes of such a program had a lot of negative effects: firstly, in terms of financial policy, the government acclaimed to raise taxes in 1932, resulting in a serious insufficient effective demand; secondly, in terms of financial policy, though the nominal interest rate seemed low, the real interest rate were extremely high because of the tighten currency, which restrained investment heavily by expansive capital costs; thirdly, in terms of banking system, the Fed made a same mistake to take for granted that the recession could supersede those fragile banks automatically. However, if the Fed had adopted a more positive policy to strengthen their solvency, the loss of the great recession would have reduced to a limited range.3

In the oil crisis in the 1970s, on the contrary, U.S.A. stuck to expand its budget to increase national and social welfare expenditures as well as to carry out "the Bill of accelerated depreciation" in order to avoid another great recession, which benefited enterprises from saving $39billion taxation in ten years. At the same time IMF established a system to make the trade surplus of oil-export countries flow back in order to help other countries to compensate their trade deficits related to oil.4 Although such anti-crisis policies consisting of deficit finance with inflation led to a stagflation, it promoted the structural adjustment and economic recovery and no great recession happened again because of the sufficient cash flow. "Thailand and Asia, need steady, even expansive financial and monetary policies to restrain the declining trend of foreign capital rather than tight policies such as reducing budget, tightening finance as well as closing those banks in difficulty".5

2.3.2. The creditor sovereignty: IMF is not Santa Claus

Since there has been a less turbulent program for surviving crisis, why IMF still persisted in such tight policies? We can find a clue from "what is IMF" written by Sachs:6 IMF nominally were set up as a voluntary unit of 186 member nations, but in fact the executive committee is just a tool for Treasury Department of U.S.A. to intervene less-developed countries, which wish sincerely to sign contracts as to urgent loan assistance with such an international community represented by IMF IMF, by means of its special status, acted willfully because any open views not consistent with that of itself seems like abnormal behavior. This concerns a question about "Creditor sovereignty ", that is, although the reconstruction program is voluntary but not compulsory literally, such a voluntariness looks obviously farfetched when some powers of the world warn a poor debtor if she didn't follow what IMF had ordered, she would lose all foreign assistance and foreign confidence. Confronted with the severe circumstance, the poor country chooses no way but compromise, despite the fact that though there have been a lot of countries borrowing money from IMF, few of them have got success according to the direction of it. While IMF provides funds everywhere to pave a way for its more and more domination on developing countries, it has formed a kind of financial supremacy.

2.3.3. The long-run policy of Asia’s recovery: the economic structural adjustment

It is known that Asian financial and economic crisis originated from its falling competitiveness on export, while the latter was led by the evolution of patterns of world economy and the deterioration in terms of demand and supply in Asian economy. Thus if Asian countries wish to recover their economy and back to the way to health economic growth, the economic structural adjustment is necessary and urgent for the thorough improvement their international competitiveness.

Though the program of IMF had considered such a long-term adjustment, in specific manipulation it was indeed shortsighted since it forced each crisis country to carry out tight economic policy with its status of creditor. The program couldn’t provide cash flow necessary to the economic growth and structural adjustment, but deteriorated Asian recession instead.

The improving situation in some Asian countries at present mainly connected with American reduction of tax, Yen’s appreciation and failures of the hedge fund in Asia, but many obstacles affecting economic recovery still exist and have not been solved at all, esp. the severe shortage of working capital necessary for the structural adjustment. As the enthusiasm of investors has been hurt by extremist policies of IMF, the volume of foreign capital has shrunk rapidly about 33.3% since July 1997. So it is very important for the successful structural adjustment to regain cash flow in those countries.

3. Rigidity in economic structure adjustment

Needless to say, it is not applicable for structure adjustment to be solely dependent on cash flow because cash flow, though a prerequisite for structure adjustment, is not a guarantee of the adjustment. Actually, before the outbreak of the crisis, many Asian economies with decreasing international competitiveness tried to make adjustments on economic structure, which turned out to be fruitless due to the inhibition of the following factors.

3.1. Rigidity in political institutions: obstruction from interest groups

A prime prerequisite for government policies to yield effects, no matter an industrial policy or a public policy, is the independence of the government bureaucratic agency to interest groups. A government bureaucratic agency controlled or driven by a strong interest group may make policy with huge side effects. For example, Asian economies generally preferred fixed exchange rate regime in view of their export-oriented strategies. With the over-valuation of the exchange rate, however, interest groups representative of the import substitution sectors or non-trade sectors will tend to be against the policies in exchange rate depreciation. For another example, from a historical point of view, Philippine’s policy-making process is generally subject to the controls of strong interest groups. Policies made under the influence of these groups are generally advantageous to the securing and strengthening of these interest groups’ prerogatives, but harmful to the state welfare. This was clearly demonstrated in Philippine after the "People Power" Revolution in 1986. Aquino once promised in the election to carry out land reforms, but failed to stick to her promise after the election due to the influence of interest groups. Her reforms, like attempts of land reforms in Philippine in the past, became fruitless. Thus, independence of bureaucratic agencies to interest groups is a prime prerequisite for policy effectiveness. Unfortunately, however, in many Asian economies, governments were actually greatly influenced by interest groups, which resulted in rigidity in structure adjustment.

3.2. Bottleneck in technology upgrading: insufficient accumulation in human capital

Apart from the inhibition of the political institutions, insufficient accumulation in human capital in Asian economies is an important factor leading to the rigidity in their structure adjustment.

World Bank pointed out in The East Asian Miracle that, excellent performance in fundamental education in East Asian economies is their major contribution to their own high-speed economic growth. It is noted from the statistics that in East Asian economies, the proportion of fundamental education funding in total fiscal expenditure is higher than that of the education funding at any other level education, while the proportion of the higher education funding in total public expenditure is always much lower. (See table 4)7

Table 4: Education Budget Allocation in 1985

The reason for which the World Bank supported the above-mentioned public policy of Asian economies is its belief that as far as education is concerned, many positive externalities are from fundamental education, while higher education is of advantages mostly to university graduates expecting high income. Our point, however, is, regarding the economic structure adjustment in Asian economies, governments should shift their position with an emphasis in fundamental education to that with an emphasis in higher education. In another word, it is wise to carry out structure adjustment in human capital investment in view of a structure adjustment in real economy. Our point can be demonstrated by a comparative analysis on different contributions to economic growth of different level accumulations in human capital.

One of the most direct results of the above-mentioned public education policy in Asian economies, though praised by the World Bank, is that, in the construction of the education pyramid, accumulation in the peak of the pyramid is apparently much stagnated than that in the base of the pyramid. (See table 5)8 Insufficient accumulation in human capital resulted in an obstacle to technology upgrading and a slowdown in Asian economies’ economic structure adjustment.

Table 5 School enrollment (1993)

a:Males enrolled, as a percentage of the school-age cohort; female rates are generally lower

It is noted from the table 5 that the numbers of scientists and technicians in R&D per 1000 persons in Asian economies are generally small.9 This shows no more clearly that Asian economies are encountered with human capital shortage in economic structure adjustment and bottleneck in technology catch-up.

3.3. Obstacle to stock adjustment: regional structure analysis on infrastructure construction

First, there is an aggregate amount imbalance in Asian economies’ infrastructure construction. Though the proportion of infrastructure investment in GDP in this region rose from 3.6% in 70’s to 4.6% in 80’s and 5%-5.5% in 1993, these rates are much lower than those of the Latin American economies whose per capita GDP are relatively smaller.

Second, there is also a regional structure imbalance in infrastructure construction in Asian economies. (See table 6)10 For example, the shortage of agricultural irrigation facilities and the damage to existing facilities are quite common in Philippine. Sixty-one percent of the crops in Philippine are in need of irrigation. However, a stringent budget in Marcos government and a rash industrialization policy in Aquino and Ramos governments all led to a sharp decrease in agriculture irrigation investment, from 800 million pesos in 1980 to 200 million pesos in 1992. As a result, Philippine is not able to build any new irrigation project and the remaining facilities became useless due to the shortage of maintenance for a long time. Thus, aggregate amount imbalance and regional structure imbalance in infrastructure construction in Asian economies has been a major bottleneck in the removal of their internal imbalance and the realization of their industry upgrading.

Table 6 Percentage of rural and urban Population with an access to electrical power

Then, by what means does this imbalance slowdown Asian economies’ economic structure adjustment? Applying Myrdal’s dynamic structure analysis method,11 we are not difficult to find that, this imbalance makes it impossible for Asian economies with a " geographical dual economy" to yield the so-called "expanding effects". In another word, it is not easy for industries losing international comparative advantages in developed and high- cost regions to transfer themselves to underdeveloped or less-developed regions to maintain their international competitiveness. For the same reason, developed regions also have difficulties in structure adjustment and upgrading and in finding a new position in the international system of labor division.

4. Some policy recommendations

Regarding the above-mentioned problems in structure adjustment rigidity, this article points out that, to be successful in the structure adjustment, it is necessary for Asian economies, while maintaining the expanding monetary and fiscal policy, to have a relatively thorough reform on their domestic political institutions and economic policies.

The first step is to reform the out-dated political institutions and to change the gentle, arbitrary political institutions or those liable to the controls of interest groups into democratic political institutions with a tendency to social rationality. Guy Sorman (an economist of France) once said, democracy is not a prerequisite for, but a result of the economic development.12 According to this proposition, it is the right time for Asian economies, while in their development, to have a thorough reform on their traditional political institutions. Otherwise, they have to face continuous external shocks due to the incompatibility of the political institutions relative to the economic development.

Based upon the first step, the second step is to make a fundamental change on government functions, abandon the out-dated industrial policies and make an emphasis on human capital investment and social infrastructure construction. Industrial policies may be beneficiary to certain countries under development but definitely harmful to a matured or to-be-matured economy since the policies may lead to distortions in the economy or emergence of interest groups discouraging economic structure adjustment.

Third, as far as human capital investment is concerned, Asian economies should gradually upgrade their education pyramid following the path from fundamental education to middle level education, from middle level education to higher education, and from higher education to R&D.

Since effective human capital accumulation costs a lot of time, policies of additional human capital investment can hardly yield effects in short term. As a result, adopting active human resource policy and absorbing excellent brains abroad back to home would like to be a makeshift satisfying the urgent demand for high-level human capital. As far as this is concerned, experience from China (including China’s Taiwan) in absorbing international students abroad back to home may be of great value to other countries.

Forth, in view of Asia economies’ structure adjustment, enhancing infrastructure construction is of high importance as to remove obstacles to the industry upgrading and deployment within regions.

Reviewing the period of economic structure adjustment and international competitiveness promotion in USA, in 80’s US government made a huge additional public investment in education, research and development, as well as infrastructure construction, such as information highway. Entering the 90’s, US investment in computers and other related information processing equipment reached US$206 billion, an increase of 12.5% from 1995, 1.6 fold of the investment in other industrial equipment. Today, US investment in information technology industry has reached 35.7% of her total investment in the fixed assets. In recent years, US economy witnesses her sustained growth, which is apparently a result of the rapid growth in the information industry. And it is needless to say that information highway and other infrastructure construction plays a major role in the competitiveness promotion of US information industry. Thus, it should be a basic policy target for Asian economies to commit to what they announced on APEC Treasurer Meeting in Philippine in April 1997: To enhance infrastructure investment and to create opportunities for private sector expansion and sustained economic growth".

Above all, the key to the sustained economic growth is the continuous economic structure adjustment that calls for flexible political institutions and compatible structure adjustment in human capital and infrastructure construction. We have strong reasons to believe that, by learning lessons from this economic crisis, Asian economies are capable to react promptly to above-mentioned problems, to have a smooth economic structure adjustment and to expect a period of sustained economic growth.

5.1 An Entire Economic Recovery!?

More than two years after the onset of what has been the most devastating financial crisis since the Depression, there are signs of economic recovery in East Asia (Figure 1). Export has been the main factor for stimulating economic recovery. With the substantial devaluation of currencies, there has been a rise in net exports in EA5 (Korea, Thailand, Malaysia, Indonesia and Philippines) since the third quarter of 1998 (Figure 2), which produced huge trade surplus that led to sizable reserve accumulations (Figure 3), contributing to confidence in currencies in the region, allowing a loosening of monetary policy (Figure 4). The region has enjoyed more stable exchange rates since early 1998, and interest rates have fallen to pre-crisis levels (Figure 5).

As the countries recover from the crisis, some point to the stabilization of the exchange rate as evidence that the crisis is over. From the perspective of international investors, that may well be the case, but that should not be the perspective for the countries in the region. As we have discussed above, the root cause of the crisis lies in the major weakness in East Asian countries’ economic structure, which led to the decline in their inherent international competitiveness. Along with shortages in the region’s financial and corporate sectors, these countries are vulnerable to shifts in market sentiment and external events. Despite the region’s superficial quick recovery, those serious structural problems still remain existent, which need a long time to solve. Does we really believe that the deep fundamental problems in the Korean financial crisis were resolved in the space of a year and a half (issues like corruption, the influence of the Chaebol, a fundamentally unsound financial system and the decline in its competitiveness)? If true, it bodes well for countries around the world: reforms can be instituted almost overnight, bringing a country from a state of abysmal institutions to a viable state of strength. But the criticisms were vastly overstated. While the reforms were movements in the right directions, the source of recovery lies elsewhere. We must recognize that to a large extent is Korea’s strong recovery due to the fact that it has maintained a low exchange rate, preventing an appreciation of the currency by buying huge amounts of foreign exchange which it has added its reserve.13

Therefore it is still too early to say that Asian economy has recovered entirely, though its growth rate is higher than estimated. As is said in the World Bank’s latest annual report "Global Economic Prospects and the Developing Countries 2000", the recovery from the financial crisis is fragile and uneven. The present adjustment in East Asia is only some kind of gross adjustment, not structural adjustment; the present recovery is only technical bottom-bouncing, not the entire reviving of economic fundamentals.

5.2Technical bottom-bouncing

Why could Asian economy bounce back at the end of the year 1998? Krugman explicated it by "the accelerator principle", that is to say, when economic fundamentals deteriorate, there will be a strong initial shock, then a partial recovery follows.14 This principle applies in most economic recessions and explains why there exists certain auto bouncing even in the worst recession. For example, USA’s economic growth rate was beyond 8% in 1934 after four years’ serious recession; Mexico’s growth rate was beyond 3% in 1984 after the first year of debt-crisis terror. Of course they had more difficulty afterwards: USA’s economy did not entirely recover from the Depression until the year 1941; Mexico did not recuperate from the debt crisis until the year 1990. The accelerator principle, a puzzling phenomenon in the economic recession, is mainly caused by the stock effect. When the consumer demand declines (its speed is usually slower than expected), goods will pile up mountain high on shelves or in warehouses, which makes enterprises anxious. To sell out these surplus stocks, enterprises will cut down production on a large scale, lay off workers and reduce purchase from suppliers, all of which will further depress consumer demand. Thus things move in circles. At this time, the economic recession is self-intensifying. Little by little, the volume of stock will be reduced to a normal level, and production will gain some recovery from the lowest level, even if the reason of economic recession has not changed yet.

The story that happened to Asia today is partly due to the function of the traditional principle of stock accelerator; at the same time is also due to the function of some unorthodox causes. In other words, sooner or later, even if there are still some problems in economic fundamentals, it can be expected that Asian economy would bounce to some degree. In general speaking, however, the whole region, especially the Korean economy that has recovered remarkably in 1999, benefits much from the special effect of a series of financial events. Owing to its loss in Russia in 1998, Hedge Funds had to sell assets and US dollars for buying yens to repay debts, which caused the appreciation of Japanese currency. Accompanied with other factors, the exchange rate of the currency yen was pushed to JPY110:USD1 at the beginning of 1999. The appreciation of Japanese currency pushed the exchange rates of other Asian countries, relieving their burden of debts in US dollars and the worry about the currency devaluation in Hong Kong and the Mainland. All these have helped the rebuilding of market confidence. The strong yen is favorable to the strengthening of Korean export competitiveness.

5.3How long must East Asia wait to recover?

WEO carried a study in 1998 that attempted to estimated costs of lost output for banking and currency crises by comparing GDP growth after a crisis with trend GDP growth for a group of more than 50 countries during 1975-97.15 The study indicated that the cumulative loss in output per episode for banking and currency crises averaged some 14-15 percent of GDP. Average recovery was shorter in emerging market economies (2.6 years) than in industrial countries (5.8 years) though the cumulative output loss was larger, on average, for emerging market economies (18.8 percentage points) than for industrial countries (17.6 percentage points).. However, the lost GDP for the Asian financial crisis since its outburst in July 1997 has already gone beyond those for the financial crises during the past twenty years. So the economic recovery in East Asia cannot accomplish at one stroke, and we should not be too optimistic on it.

Firstly, from the angle of the entire economy, industrial production and GDP growth returned to a positive level this year after their sharp decline last year, but the present recovery of GDP was attributed much to the export pull, and the domestic demand remains weak (Figure 6). The bouncing discussed above still depends on external surroundings to a considerable degree, while Asia’s immunity ability from the exterior remains quite limited. Therefore if external surroundings change, Asian economy will change too. Moreover, as we have learned above, what the present Asian economic structure can adapt to is an increasingly smaller market of traditional manufactured goods. It is a big challenge for Asian countries and regions to coordinate their short-term pressure for recovery and long-run requirement for strategic shift. I will argue that there still exists a great distance for the present Asian economic structure to catch up with the trends of economic globalization and the development of modern information technology, and that the adjustment of Asian economic structure has not initiated to meet the challenge of Internet & Information Age.

Secondly, corporate and financial sectors remain in severe distress, with high levels of non-performing loans and bankruptcies, without a vigorous corporate and financial restructuring. The value of non-performing loans range from approximately 30% of GDP in Korea and Malaysia to 60% for Thailand, well above the experience of most earlier crises. More than a quarter of all listed companies in Korea, Malaysia and Thailand (and nearly two thirds in Indonesia ) are unable to service their debts. Moreover, non-performing loans continue to rise as deep problems are further revealed. For example, by the end of this September, the value of Korean financial institutions’ bad loans was 57900 billion in Korean currency, 5500 billion less than the second quarter. But because Chenye, a state-run company, purchased 8400 billion in the third quarter, the value of bad loans is rising in fact by 2900 billions. It is said that with the reorganization of Daewoo Group and the initiation of loan classification standard, the value of non-performing loans may continue to increase.

This situation will continue to act as a brake on investment until financial claims are resolved. The fiscal costs of the crisis are huge. For example, in Indonesia the estimated cost of re-capitalizing its banking system could amount to half the country's GDP. If corporate and financial restructuring do not get a vigorous push, the return to a sustainable growth path will likely take longer, and the cost of the crisis may increase. Asian economies will remain quite vulnerable to new internal and external shocks. Government support for restructuring the banking system is critical to guard repaying systems, restore credit availability and reduce fiscal costs. When solving those problems, finance and economy will inevitably fluctuate. Therefore Asian economy still needs much adjustment and the degree of adjustment may be high.

5.4The Journey Ahead

In the past two years, Asian countries shifted their macroeconomic policies from strict tight policies to expansionary fiscal and monetary policies so as to encounter economic recession. They also pushed the reorganization of corporate and financial sectors. These measures have made positive effects: the economic recession was controlled and there have been signs of recovery.

But there is still a long journey ahead for Asia’s recovery. The East Asia Miracle was real, and that it was based on a set of sound fundamentals. At the same time, the crisis has exposed certain weaknesses in these economies. But even if the crisis had not occurred, economic circumstances today are markedly different from what they were two decades ago—and these changed circumstances would necessitate changed economic policies, underscoring the need to manage the opportunities - and risks - of a globalized economy. In the long run, Asia must reorient itself and make fundamental adjustments on its development strategy so as to revive really.

But Asia should have confidence. It is appropriate that we begin to go beyond the crisis, to think of strategies that will lead to a restoration of growth. "Improvements in the external environment, favorable policy trends in emerging markets, and increasing confidence among both domestic and, to a lesser extent, foreign investors should help spur growth in developing countries over the next two years," says Uri Dadush, Director of the World Bank's Development Prospects Group. If Asia seriously draw lessons from the crisis and adjust its development strategy, it can not only rebuild "the Asian miracle", but also create a new "Asian Century" in the next millenium.

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Endnotes:

1. "The development of international specialization in East-Asia and the pattern of new industrial development: from the "the pattern of ‘flying geese-like pattern ’to ‘the bipyramid pattern’ ", Wangbin,1998.

2. "The Asia after the crisis: prospect and the policy implication", Michael Boris, 1998.

3. "The New Version of America Economic History", Gerald, The Business Publishing House.

4. "Present America Economy", YanJun Hong. Shidai Publishing House.

5. Charoon Santikul & Khantong , 1997.

6. "IMF and the financial crisis in Asia", Jeffrey. Sachs, Journal of Reform ,1998.3.

7. UNDP 1990; UNESCO 1989.

8. World Bank 1997; UNDP 1997.

9. Linda Low, Human Resource Development in the Asia-Pacific, Asian-Pacific economic literature P27-39.

10. Munasinghe (1987) The East Asian Miracle, World Bank 1993.

11. Tan Congtai, 1989, , Shanghai People’s Press P378-383.

12. Guy Sorman,1987, New theory of national wealth.

13. “Back to Basics?Policies and Strategies for Enhanced Growth and Equity in Post-Crisis Asia”?Joseph Stiglitz?July29?1999

14. Paul Krugman , The Return of Depression Economics, Published by Agreement with W.W. Norton & Company , Inc.

15. “East Asia?The Road to Recovery”,p141?The World Bank?1998.9