This year marks the 10th anniversary of the East Asia crisis, which began in Thailand on July 2, 1997, spread to Indonesia in October and to South Korea in December. Eventually, it became a global financial crisis, embroiling Russia and Latin American countries, such as Brazil, and unleashing forces that played out over the ensuing years: Argentina in 2001 may be counted among its victims.
There were many other innocent victims, including countries that had not even engaged in the international capital flows that were at the root of the crisis. Laos was among the worst-affected countries.
Though every crisis eventually ends, no one knew at the time how broad, deep, and long the ensuing recessions and depressions would be. It was the worst global crisis since the Great Depression.
As the World Bank's chief economist and senior vice president, I was in the middle of the conflagration and the debates about its causes and the appropriate policy responses.
This summer and fall, I revisited many of the affected countries, including Malaysia, Laos, Thailand and Indonesia. It is heartwarming to see their recovery. These countries are now growing at 5 percent or 6 percent or more -- not quite as fast as in the days of the East Asia miracle, but far more rapidly than many thought possible.
Many countries changed their policies, but in directions markedly different from the reforms that the IMF had urged. The poor were among those who bore the biggest burden, as wages plummeted and unemployment soared.
As countries emerged, many placed a new emphasis on "harmony" in an effort to redress the growing divide between rich and poor, urban and rural. They gave greater weight to investments in people, launching innovative initiatives to bring health care and access to finance to more of their citizens, and creating social funds to help develop local communities.
Looking back at the crisis a decade later, we can see more clearly how wrong the diagnosis, prescription and prognosis of the IMF and US Treasury were. The fundamental problem was premature capital market liberalization.
It is therefore ironic to see the US Treasury secretary once again pushing for capital market liberalization in India -- one of the two major developing countries (along with China) to emerge unscathed from the 1997 crisis.
It is no accident that these countries that had not fully liberalized their capital markets have done so well. Research by the IMF has confirmed what every serious study had shown: Capital market liberalization brings instability, but not necessarily growth. (India and China have, by the same token, been the fastest-growing economies.)
Of course, Wall Street -- whose interests the US Treasury represents -- profits from capital market liberalization: They make money as capital flows in, as it flows out, and in the restructuring that occurs in the resulting havoc.
In South Korea, the IMF urged the sale of the country's banks to US investors, despite the fact that South Koreans had managed their own economy impressively for four decades, with higher growth, more stability and without the systemic scandals that have marked US financial markets.
In some cases, US firms bought the banks, held on to them until South Korea recovered, and then resold them, reaping billions in capital gains.
In its rush to have Westerners buy the banks, the IMF forgot one detail: to ensure that South Korea could recapture at least a fraction of those gains through taxation. Whether US investors had greater expertise in banking in emerging markets may be debatable; that they had greater expertise in tax avoidance is not.
The contrast between the IMF/US Treasury advice to East Asia and what has happened in the current subprime debacle is glaring. East Asian countries were told to raise their interest rates, causing a rash of defaults. In the current crisis, the US Federal Reserve and the European Central Bank cut interest rates.
Similarly, the countries caught up in the East Asia crisis were lectured on the need for greater transparency and better regulation. But lack of transparency played a central role in this past summer's credit crunch; toxic mortgages were sliced and diced, spread around the world and hidden away as collateral, so no one could be sure who was holding what. And there is now a chorus of caution about new regulations, which supposedly might hamper financial markets.
Finally, despite all the warnings about moral hazard, Western banks have been partly bailed out of their bad investments.
Following the 1997 crisis, there was a consensus that fundamental reform of the global financial architecture was needed. But, while the current system may lead to unnecessary instability and impose huge costs on developing countries, it serves some interests well. It is not surprising, then, that 10 years later, there has been no fundamental reform. Nor, therefore, is it surprising that the world is once again facing a period of global financial instability, with uncertain outcomes for the world's economies.
Joseph Stiglitz is a Nobel laureate in economics, professor of economics at Columbia University and was chairman of the Council of Economic Advisers to former US president Bill Clinton and chief economist and senior vice president at the World Bank. Copyright: Project Syndicate
As strategic tensions escalate across the vast Indo-Pacific region, Taiwan has emerged as more than a potential flashpoint. It is the fulcrum upon which the credibility of the evolving American-led strategy of integrated deterrence now rests. How the US and regional powers like Japan respond to Taiwan’s defense, and how credible the deterrent against Chinese aggression proves to be, will profoundly shape the Indo-Pacific security architecture for years to come. A successful defense of Taiwan through strengthened deterrence in the Indo-Pacific would enhance the credibility of the US-led alliance system and underpin America’s global preeminence, while a failure of integrated deterrence would
It is being said every second day: The ongoing recall campaign in Taiwan — where citizens are trying to collect enough signatures to trigger re-elections for a number of Chinese Nationalist Party (KMT) legislators — is orchestrated by the Democratic Progressive Party (DPP), or even President William Lai (賴清德) himself. The KMT makes the claim, and foreign media and analysts repeat it. However, they never show any proof — because there is not any. It is alarming how easily academics, journalists and experts toss around claims that amount to accusing a democratic government of conspiracy — without a shred of evidence. These
Taiwan is confronting escalating threats from its behemoth neighbor. Last month, the Chinese People’s Liberation Army conducted live-fire drills in the East China Sea, practicing blockades and precision strikes on simulated targets, while its escalating cyberattacks targeting government, financial and telecommunication systems threaten to disrupt Taiwan’s digital infrastructure. The mounting geopolitical pressure underscores Taiwan’s need to strengthen its defense capabilities to deter possible aggression and improve civilian preparedness. The consequences of inadequate preparation have been made all too clear by the tragic situation in Ukraine. Taiwan can build on its successful COVID-19 response, marked by effective planning and execution, to enhance
Since taking office, US President Donald Trump has upheld the core goals of “making America safer, stronger, and more prosperous,” fully implementing an “America first” policy. Countries have responded cautiously to the fresh style and rapid pace of the new Trump administration. The US has prioritized reindustrialization, building a stronger US role in the Indo-Pacific, and countering China’s malicious influence. This has created a high degree of alignment between the interests of Taiwan and the US in security, economics, technology and other spheres. Taiwan must properly understand the Trump administration’s intentions and coordinate, connect and correspond with US strategic goals.
RSS