Shared response to the market shocks?

The ‘creative destruction’ of Asia’s market crises has been painful for all. But is it producing some benefit with the growth of real regionalism? Will the rhetoric of the ‘Asian way’ give way to stronger voices for the region?

The World Today Published 1 January 1998 Updated 7 December 2018 6 minute READ

The currency and stock market crashes of recent months have made it difficult for many western analysts to disguise a certain satisfaction at the predicament of states like Thailand, Indonesia, Malaysia, South Korea and even Japan. Even the most saintly of us would find it hard to overlook their discomfort following the escalating hubris – reflected in the ‘Asian way’ and ‘Miracle’ clichés and in the words of leaders such as Malaysia’s Prime Minister, Dr Mahathir Mohamad – that accompanied East Asian growth throughout the 1990s.

Such interpretations, however, are superficial. Keen to capture the urgency of the severe economic crises that modified our assessment of Asian economic growth and adversely affect the states’ prospects, they ignore more positive trends which may be promoted by the recent shocks.

One of these trends is the continued development of an ‘East Asian’ as opposed to ‘Asia Pacific’ regional identity. This flies in the face of the conventional wisdom that in times of crisis the national urge to act independently comes to the fore. But, the desire for national decision making autonomy in the economic crisis, and the enhancement of collective regional understanding in the wake of it, are not incompatible. The shared experience that the crisis has produced amongst regional policy elites, may in the long run encourage policy harmonisation.

Home grown

Most East Asian political elites now accept that their current problems are unlike those of the mid 1970s and mid 1980s – both of which were largely externally driven – and from which Asian economies bounced back quickly.

Contrary to the initial arguments of the kind advanced by Dr Mahathir, the current crisis is recognised around the region – from Japan through Korea and the smaller economies such as those of Thailand, Indonesia and, by early December, even in Malaysia – as largely internally driven and much deeper than anything experienced previously.

Regional leaders have recognised that the market crises have arisen from a combination of property booms and other bad investments, and mismanagement, corruption and inefficiency in both public and private decision making.

More importantly, the wider reaches of the Southeast Asian middle classes hold their political and economic elites accountable for the mess. It is also accepted that adjustment will inevitably be painful and entail what is known in the region as ‘creative destruction’ in which some, indeed many, banks and business houses must be allowed to fail or be closed.

Regional elites would have come to this conclusion of their own accord – even without the hectoring of Western leaders, both in and outside the international financial institutions.

The real, and open, question is how far the regional leaders will be willing, or able, to grasp the nettle of economic adjustment. They will have to do so in an era of potential political instability as a new leadership generation take over in many countries. This will happen with or without the International Monetary Fund (IMF), but it is unlikely to happen unless there is a recognition of the ‘regional’ nature of the crisis.

Pacific rift

The rhetoric of the meeting of the Asia Pacific Economic Cooperation Forum (APEC) in Vancouver in November only superficially conceals a fundamental rift between the eastern and western edges of the Pacific. The recent turmoil has reinforced the view that the Asia Pacific is an artificial construct the importance of which may well have been affected by the downturn.

Dr Mahathir may have lost touch with reality in his tirade against the tyranny of the markets, but his view that the crisis confir m s the dangers of too much economic liberalisation for East Asia has hit a regional chord. What is clear is that the outburst was a cry in the wilderness: no one is in charge of the financial markets. This lack of order does not sit well with East Asian leaders.

Despite the name, there is no homogenous region in the Asia Pacific. There are no universal cultural, historical or religious traditions giving meaning to a settled region. There is no single unifying security interest.

Moreover, there is no institutional or legal strength comparable to the European Union. Many European analysts therefore belittle the cooperation that is emerging: if it does not look like the EU, act like the EU or squawk like the EU, it cannot be regionalism.

But there are more ways to identify regionalisation than through Euro-tinted lenses. Serious cooperation is being attempted in East Asia; some of it is bearing fruit. The end of the Cold Wa r, and the discipline it imposed on the allies of the two major protagonists, has meant that regional states have begun to explore different – more multilateral – approaches to their regional foreign policy. In so doing, the notion of ‘region’ has become more important.

Without overstating the case, it is necessary to think about the invention of region or, more modestly, a set of significant sources of regional dialogue in East Asia and the Pacific, producing multiple overlapping and inter-twined institutions. These are the basis of enhanced cooperation and nascent problem solving capability where none previously existed. This is a two fold process:

• informal regional economic integration is emerging de facto. This is market-led and the principal actors are networks of firms and corporations regionalising production in East Asia. Foreign direct investment from Japan, Korea and Taiwan predominates in Southeast Asia’s industrial development. At the same time the trading relationship still has a strong Asia-Pacific complexion; the United States remains the largest market for the majortrading states of East Asia.

• formal institutional cooperation is emerging de jure . This is a government led process with the principal actors drawn from public and private sector managers in the political, bureaucratic and research communities of regional states. Organisations such as the Pacific Economic Cooperation Council (PECC) and the Council for Security Cooperation in the Asia Pacific (CSCAP) provide intellectual support for inter-governmental bodies such as Asia Pacific Economic Cooperation Forum (APEC) in the economic area and the ASEAN Regional Forum (ARF) in security. There is no single voice of region; region is defined by membership and by issue.

There are three basic institutional voices:

• Southeast Asia, represented by the Association of Southeast Asian Nations (ASEAN);

• East Asia, increasingly seen in the discussions of those states identified as the East Asian Economic Caucus (EAEC) – ASEAN plus Japan, South Korea and the People’s Republic of China (PRC) – involved in the Asia Europe Meeting process (ASEM);

• Asia Pacific, centred on APEC, with added ‘western voices’ from the USA, Canada, Australia and New Zealand.

These groupings do have internal tensions but they can produce a range of policy positions in specific contexts. They might lack the formal ‘legalised’ structures of the EU – and all the better for that Asian leaders argue – but they can reflect regional voices on some matters. The development of the ASEAN Free Trade Area (AFTA ) , the APEC process and the growth of ASEM are examples.

Asian bonding

These exercises in social learning are more important than many outside observers assume. Despite differences over policy, the bonding process can see regional policy makers making common cause on a range of issues, even if there is not unanimous agreement on the common position.

For example, Asian states have been developing a shared view about US behaviour on labour standards. Asian policy makers’ attitudes about a specific issue can be less important than who is advancing it. Japanese politicians may feel ill at ease with the labour policies of some of their regional neighbours, but may be even less impressed at what is seen as intrusive American, and to a lesser extent European, pressure on these issues.

Similarly, some members of ASEAN are not comfortable with the admission of Burma (Myannmar), but they are unlikely to make common public cause on this issue with the Europeans against their regional partners.

These are exercises in regime enhancement and regime maintenance not sovereignty pooling. As a consequence, Asian unity against outside opinion is s i g n i fic a n t . The notion of an ‘Asian way’ may be primarily rhetorical, but when has rhetoric not been important in politics? It is gaining force when states of the region deal with other actors.

New identity

These patterns of development – the evolution of nodes of regional dialogue and the projection of Asian voices into the wider international arena – have both theoretical and policy implications.

At a theoretical level, the development of regional identities and trans-regional policy groups, with increasingly common interests over a range of areas, including economics and security, takes us beyond a realist – competing states – understanding of the foreign policy process.

In addition to the primacy of ‘interest’ we need also to pay attention to the way in which systemic interaction amongst policy elites within forums such as APEC, ASEAN and the EAEC states may generate collective responses to international issues. This interaction is slowly producing new understandings of identity amongst policy elites.

Realist policy analysts will dismiss such theoretical argument. Surely, they will say, recent events – financial crises, stock market shake-outs, environmental disasters, ongoing security problems on the Korean Peninsula and in the South China Sea, and the prospects of instability and dislocation likely to arise from first generation political transition in many countries – confir m the continued relevance of balance of power analysis.

Maybe, but such analysis of East Asia fails to acknowledge the regionalisation of these factors and the growing desire to solve or, importantly for my argument, attempt to solve, problems collectively at the regional level. Nowhere is this better illustrated than in East Asia’s political economy in late 1997. An era of dramatic downturn that is obviously global in scope and policy response, is nevertheless very much regional too.

Consider the sources of funding for the financial adjustment package prepared to stem the haemorrhage of the Thai economy. The principal donors (Japan $US4b, Korea $US2b, Australia $US1b and, the PRC $US1b) were all from the region. Their motives may have been mixed, but this is less important than their desire to be involved. In their own ways, all states were attempting to consolidate regional positions in both an economic (de facto) and political (de jure) fashion.

Pacific polarisation

Consider also the other side of that rescue package – the regional resentment generated by the lack of American support. This led to serious calls to set up an Asian fund that might provide emergency help regionally and avoid what many leaders see as the humiliation of the IMF telling them how to readjust to new circumstance. The initiative was always a long shot, but it gained initial Japanese backing and even led to talk of a permanent fund.

More importantly, the proposal had interesting consequences. It galvanised Washington and the IMF – for our purposes the two are indistinguishable – into strongly reasserting their position that adjustment funds not under the control of the IMF might not be ‘properly used’. Their desire to control funding has prevailed for the time being. But, in so doing, the seeds may have been sown for polarisation of the Asian and Caucasian members of APEC.

Subsequent arguments about the role the IMF should play in the other rescues in the region – especially Indonesia and South Korea (with the largest ever set of standby loans at $US57b) – appear to have been resolved in favour of the Fund taking the lead.

Despite the humiliating implications for regional policy makers of calling in the IMF – especially for Korea, so recently admitted to the Organisation for Economic Cooperation and Development (OECD) – the dominant role for the organisation was decided at a meeting in Manila and endorsed a week later at the November APEC Summit.

Any idea of a special regional assistance programme was scotched by the US, as were Dr Mahathir’s attempts to tighten currency regulation. In effect APEC endorsed model macro-economic policy reform – with all the accompanying implications of painful restructuring for most countries.

Less liberal

IMF style solutions to reform may represent rational economic theory, but they also threaten regional patterns of political and economic power. Policy elites may take and implement their liberal adjustment medicine, but in looking to the future, APEC’s liberal agenda is likely to resonate less well with regional decision makers.

Asian leaders are developing a dialogue that may lead to a new form of cooperative regional surveillance. With the rescue packages for Thailand and Indonesia, the IMF medicine has been accompanied by growing regional bilateral support. ASEAN finance ministers meeting in Manila in December, also agreed that member states would engage in the mutual surveillance of each others economies.

Such agreement, unthinkable prior to the crisis, demonstrates a desire to enhance regional policy making while contributing to each others reform processes. This is a significant recognition of East Asianess and the crisis has been aspur to it.

Darker side

More generally, the economic meltdown is seen as the darker side of globalisation, and not just in Malaysia. Praising the planned reforms of Thailand’s financial system – including only allowing 2 of the 56 financial houses that had been suspended from trading over the last six or so months to re-open – the Bangkok Post has noted that ‘the juggernaut of globalisation’ must not become a vehicle of a ‘global monoculture.’

An enhanced regional response to this juggernaut is not impossible. Putative regional economic groupings – like the East Asia Economic Caucus – may in the long term prove more conducive to the interests of regional policy elites. Unlike APEC, EAEC is unambiguously ‘regional’.

The tension between the IMF and the Asian view of managing the regional economic order is in a delicate balance. Despite the recent battering for the ‘Asian Way’, its greater permissiveness toward state intervention has not yet run its course.

We can expect multi-level regionalism in Asia to develop; at the very least, East Asia will be at the core of this. The Asia Pacific , as defined by membership of APEC, will form the outer shell. Broad economic philosophies will underpin both the inner core and outer shell – especially a commitment to freer and open trade and the multilateral trading system.

The economic crisis will produce more open markets. But there will be a different regional spin towards global issues that will reflect Asian cultural and economic experiences. This will enhance Asian policy responses to the major global economic questions of our time. A sense of economic ‘region’ is present in Asia and can be expected to grow.