East Asia, so recently plunged into its post--Cold War economic and political crisis, is emerging from its lost years, as some of us think of the late 1990s, more swiftly and determinedly than anyone would have imagined a little more than a year ago. It's nor merely the growth statistics--gross domestic product (GDP) in Asian economies other than Japan's is currently forecast to expand by 7 percent this year. More than this, it's the desire throughout the region to discover a new direction--a new social and political ethos. One sees this not only at the top but at ground level, too, and throughout the middle classes and the commercial elites. South Korea is a particular standout. Progress in solving its problems is steady, gradual, and at times a little messy--the ideal way forward in a young democracy. The old "hermit kingdom," so long preoccupied only with itself, is also thinking in terms of regional influence in a way that would have been impossible to anticipate prior to the turn of the millenium.
This raises fundamental questions. How clearly did we see the crisis that began with a run on the Thai baht in July 1997? How well did we understand the underlying forces at work? How dependent were we upon a set of assumptions that remain, even now, inapplicable on the ground? To rake but two examples, many of us still entertain the idea that "crony capitalism" lay at the core of the Asian crisis. Many still accept the notion that among Asia's most urgent tasks is to deregulate, this in a region that suffers from underregulation, bad regulation, inconsistent regulation, or all three--but not, by and large, from overregulation. And last in line but first in importance, if we failed to grasp the nature of the crisis, how well will we see what the region's recovery from it is made of?
With these questions as a point of departure, let me describe three things far too briefly: what was supposed to be happening in Asia during the 1990s, what actually happened, and what is happening now, as Asia seeks a new footing for itself--which is to say, nothing less than a new way forward.
I remember well in the 1980s, when I was a correspondent in Hong Kong, the extraordinary speed with which fund managers began pouring portfolio money into East Asian markets. Some of these markets were active before this moment--Singapore, or Kuala Lumpur; most had been in operation for many years. But you could have walked into the Manila or Bangkok exchanges and heard a pin drop on any given day in the early years of the decade.
Suddenly the young guys with yellow suspenders arrived. There was something giddy in their "discovery" of these markets. The crash of October 1987 was nothing more than a blip, so insistent were the flows of capital. Net inflows to all emerging markets peaked in 1995 at $225 billion. In Asia and elsewhere, the main problem was liquidity. There simply wasn't enough stock to buy and trade; the markets weren't deep enough. "It's like drinking water from a fire hose," a Thai banking friend told me at the time--a memorable image, I find, because that is precisely what it looked like.
The consequence of all this money pouring in seemed quite clear at the time. These funds were to finance the Asian middle class of tomorrow. Equity investment was radically to enhance capital formation--there would be new plants and expansions, newly minted entrepreneurs everywhere one looked--and provide employment, wages, rice cookers, color televisions, and cars, along with the demand for these things that would drive tomorrow's markets.
To move into our second line of inquiry, this is not what actually happened. What actually happened was that the fire hose got the better of the region. Southeast Asia did not need short-term funds of such magnitude and was not ready to absorb them. Since these funds were superfluous to the real economies of the region, they went into dicey property developments and speculation--investments driven by excess liquidity. There are half-built monuments to these commitments in every city in East Asia.
Yes, the middle class in East Asia expanded during the 1990s--no one could deny this. But in terms of leverage--bang for your buck, so to say--it was money badly spent in this respect. At the core, what we saw in East Asia during the 1990s was the disruption of a system that is fundamentally different from ours. As opposed to the equity culture of the United States, East Asians raise capital through what we call relationship banking--alliance capitalism, as some exponents call it, which became familiarly known as crony capitalism after 1997.
It is easy to see the logic of relationship banking in an environment that boasts the highest savings rates in the world. Banks are the natural intermediaries between depositors and borrowers. Stable, familiar ties between lending institutions and corporate borrowers allow for the efficient recycling of funds and the support of correspondingly high levels of debt, which is a feature of the system. It's an alternative way at the question of capital formation. And the results in terms of rapid economic expansion hardly need be noted: it worked for decades, as any set of statistics covering the 1960s, 1970s, and 1980s will attest. The weaknesses of this system are equally evident to us now: It is easily given to corruption--which we knew but didn't like talking about until 1997. And, more important, it is...