Asian Financial Crisis Financial, Structural and International Dimensions: Volume 1

This chapter asks whether the Asian crisis was a failure of Asian capitalism, or a failure of market capitalism. It begins with a stylized chronology of events that is broadly consistent with either hypothesis. It then re-tells the story, first through a ‘government failure’ lens, and next through a ‘market failure’ lens. The chapter concludes by reporting what theoretical and policy consensus has so far emerged within the economics profession, as well as the quandries that remain.

The financial crisis erupted when Thailand delinked its baht to the dollar on July 2, 1997. The contagion affected Malaysia, South Korea, Thailand and the Philippines subsequently. These countries slid into recession in 1998. The crisis also exposed the weaknesses that were inherent in their economies. The International Monetary Fund rushed to rescue them financially in exchange for reforms. Thanks to the reforms that were taking place, all countries except Indonesia pulled out of recession by 1999.

This chapter examines the trend towards regionalism upon stock market returns for a sample of Asian countries. We find that stock markets are becoming regionally integrated at a faster rate than globally. This finding reflects the growing co-operation between Asian countries. This study focuses upon Indonesia, Malaysia, the Philippines, South Korea, Taiwan and Thailand. These markets suffered severe contagion effects in relation to the Asian financial crisis that occurred during 1997. In addition, this study reports on the significant economic and political events that occurred in Asian economies from 1980. This study concludes that increases in liberalization coupled with stronger ‘regionalism’ in South East Asia contributed to the Asian financial crisis in 1997, in addition to the structural weaknesses in their financial systems. Policy setters may consider reducing the amount of intra-regional dependence in order to reduce the impact of financial crises and improve stability of the financial system.

This chapter examines the rationale behind the imposition of stock market controls in Hong Kong and evaluates the effectiveness of this market intervention policy by the Hong Kong regulators during the Asian currency crisis of 1997. The chapter finds that the Hong Kong authorities invoked such a controversial policy measure only when containing the crisis through traditional policy instruments such as informal agreements with banks was no longer feasible. From their viewpoint, the crisis bore no relationship to Hong Kong's economic fundamentals and was dictated instead by the ‘herd like’ behavior of foreign portfolio investors. They viewed stock market controls as necessary instruments to fend off dual speculative attacks on both the Hong Kong dollar and stock market. The chapter concludes that the imposition of stock market controls yielded positive results in that they stabilized the Hong Kong dollar and stock market, thereby improving economic growth prospects in Hong Kong.

The Korean enterprise group, known as chaebol, is unique for its corporate form consisting of a pyramid of subsidiary firms operated by a single line of family. This study investigates how the family of chaebol system has been able to exert its control over a wide range of businesses with its limited resources. It finds that the chaebol families, for the attainment of proper control, have maintained a certain amount of inside shareholding in various forms; share ownership by family itself, affiliate firms, non-profit organizations, and employees. At the same time, families of conglomerates have created intricate web of ownership network to grip the control in different styles; direct family control, indirect family control via a base company, indirect family control via non-profit institutions, and indirect family control via a combination of base company and outside institution.This study is conducted on the basis of support from The Asia Research Fund.

The Western scholars have always been puzzled by Asia's unique economic system and management practice, particularly by the dramatic swings of Asia's economic performance. To shed some light on this issue, this chapter focuses on two important questions: (1) what have been the causes of success and failure of the Asian firms in the recent past; and (2) what may be the solutions to enhance the competitive advantage of the Asian firms. As a longitudinal case study, this chapter argues that any narrow or static views are problematic; the best approach is to adopt a holistic, dynamic and paradoxical perspective. The case evidence suggests that Asia's economic systems and management practices have both weaknesses and strengths; paradoxically, its major strengths could also be its major weaknesses, contingent upon the transition of different stages of economic and social development in Asia. The real challenge for Asia is to find a way to correct its weaknesses while preserving its strengths.

While a large body of literature lays the blame of the 1997 Asian economic crisis on external factors, such as Japan's recession, speculative foreign investors, and non-stringent international bank credit, the body of literature examining the cultural factors is emerging. The purpose of this chapter is to examine the internal antecedents to the Asian crisis by focusing on region-specific cultural conditions leading to the crisis. Important cultural factors of collectivism, authoritarianism, and power-distance distance that led to precarious and risky financial practices are explored. This chapter proposes that investors and academics look beyond economic ‘hard’ data, and examine the values, traits, and customs of a society in order to evaluate the possibility of a financial collapse.