he Asian financial crisis highlighted a lack of cooperation among the East Asian countries, and brought to the surface the many fundamental problems in these countries' economies. To sustain economic stability and development -- as well as long-term regional peace and security -- East Asian countries must not only adopt better cooperative policies but learn to minimize the conflicts that impede cooperation. Otherwise, the potential occurrence of problems no less catastrophic than the Asian financial crisis will continue to haunt these countries, and competition between them may prevent them from reaching their desired standards of living and levels of economic development.
Insufficient cooperation
To varying degrees, every East Asian country suffered a blow from the Asian financial crisis. Perhaps too pre-occupied with efforts to preserve their own economies, these countries did not join forces in dealing with the crisis. If they had put long-term cooperative mechanisms in place and had been able to reach a consensus on crisis management measures, they would have been able to formulate timely joint policy.
Another reason for the lack of cooperation was a conflict in interests among East Asian countries. After the Asian financial crisis began, the IMF suggested a deflationary policy. From the standpoint of individual countries this was a good suggestion, for this policy reduces domestic expenditures -- including imports -- and improves international trade deficits. However, from the standpoint of the countries in the region collectively, an expansionary policy would have been more appropriate. A significant portion of each East Asian country's imports comes from other countries in the region. An increase in one country's imports increases incomes and decreases deficits in its neighbors. The collective trade deficit increase for the region is small, while the increase in collective revenues is high due to the multiplier effect.
Unfortunately, both the IMF and East Asian countries lacked comprehensive analysis and did not adopt a suitable policy.
The depreciation of regional currencies was at least in part due to a lack of regional cooperation. The primary exports of many East Asian countries overlap significantly. One country's currency depreciation should cause its exports to replace those of other countries in international markets. However, when all countries' currencies depreciate simultaneously, their collective exports do not necessarily increase. More simply put, a currency depreciation -- which can benefit a single country that acts alone -- is not necessarily beneficial if it happens simultaneously in a group of interdependent countries.
However, it is difficult for countries to resist the pressure to depreciate in the interest of the collective good. Once one country's currency depreciates, other countries, fearing lost competitiveness, feel pressured to follow. Of course, the experience of advanced countries tells us that it is not easy for countries to jointly stabilize their exchange rates. An international cooperative framework is needed.
Opposition from superpowers to cooperative proposals was a critical factor in the 1997 financial crisis. The US did not support Japan's proposal for an Asian Monetary Fund or for joint efforts in stabilizing the exchange rate. These proposals were probably incompatible with the US' goal of remaining the sole global economic superpower. Although Taiwan sustained the least injury in the crisis and was in a better position to assist other countries, it was frequently excluded from discussions on crisis management because of protests from China. If countries do not stand up to superpowers, it will be difficult to achieve meaningful cooperation.
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