The Asian Currency Crisis and the Asian Historical Statistics Project

Takatoshi Ito


The Asian currency crisis, which started with the collapse of the Thai baht on July 2, 1997, reminded us how important the rest of Asia is to Japan, and conversely how important Japan is to the nest of Asia. With the outbreak of the crisis, economists from Japan and the West, led by specialists of international finance, began researching the Asian economies. The fact that the currency crisis increased the levels of interest in Asia among economists was one of the few positive effects amidst the flood of negative developments. It seems likely that the number of Japanese researchers and bureaucrats visiting Asia increased dramatically in 1997 as a consequence of the crisis. With a constant stream of conferences and research groups on the Asian currency crisis being sponsored in Asia, I too visited Bangkok (four times), Kuala Lumpur, Singapore, Jakarta, Seoul, and Beijing during the last six months.

Since the COE project started research on Asia before the Asian currency crisis broke out, it might be tempting to see the project as prescient. However, a closer examination shows that this might not have been the case.

The COE Project began under Institute Director Odaka with the objective of collecting and analyzing long-term Asian economic statistics. At the time, reverberations from the World Bank's report addressing the "Asian Miracle" (long-term high-speed growth-The East Asian Miracle: Economic Growth and Public Policy, 1993) were still strong. The COE Project was an attempt to explain the superior features of the "Asian development model." Now, it is no longer the "Asian miracle" but the "Asian crisis" that is attracting the attention of the world. But is it the case, as Western intelligentsia have become fond of asserting, that the Asian currency crisis negates the "miraculous" economic growth of Asia? In my opinion, this is not the case. The factors which fueled the "Asian miracle" were completely different from those which caused the "Asian currency crisis."

In surveying the various attempt by scholars to explain the "Asian miracle," we can discern that the following factors are often raised: high savings rate; well-educated and trained work-force; technology inputs from foreign direct investment; and export-led development. These factors triggered high investment rates, and helped realize growth through the advancement of the manufacturing sector. Following on Japan's heels, the Four Tigers (South Korea, Singapore, Hong Kong, Taiwan) and the ASEAN countries successfully industrialized, making the transition from light industry to heavy and chemical industries, electronics, and machinery manufacturing, a phenomenon labeled the "flying geese formation" (in a new, different sense of the term than as originally defined by Prof. Akamatsu Kaname of Hitotsubashi University). The factors propelling the "miracle" were all related to "real" economies. In other words, economic growth was explained through the productive factor included in the manufacturing function.

There are several theories regarding the causes of the Asian currency crisis. To my mind, the following three points constitute one common factor: first, Asian currencies were dollar-pegged (exchange rates fixed to the US dollar). With the fluctuations in the yen-dollar exchange rates, the real and effective exchange rates changed rapidly, generating such outcomes as the 1994 export explosion and the 1996 export decline. Second, the financial sector was fragile due to the number of bad loans. In the Thai case, just as was the case in Japan, the growth and collapse of the bubble generated real estate bubble prices. In the Indonesian case, politically-driven loans from government-operated banks increasingly turned into bad loans. Thirdly, the inflows of large short-term capital was important. In Thailand, two years before the crisis, the current accounts deficit reached around 8% of GDP. Short-term capital flowed in compensating for this deficit, and foreign currency reserves increased. Much of the increase was from short-term capital from the international banking system, and when the currency crisis began, this short-term capital fled from the country at a rapid pace. Similarly, in South Korea the refusal by international banks to renew short-term bank loans triggered a sudden loss of foreign currency reserves. The above three points all stemmed from problems in international and domestic financial markets.

Consequently, the "Asian miracle" of the real economy, and the "Asian currency crisis" which was triggered by an accumulation of problems in the financial markets, should be thought of as two essentially different issues. Of course, there are connections between the two: pegging the currencies to the dollar (although we should be careful not to overestimate its importance) did contribute to growth by attracting stable direct investments, and the currency crisis has had a significant negative impact on the actual economy. But since the crisis could have been prevented if fiscal policies had been flexible and careful, we can still conclude that there was little in the way of trade-offs between financial and real economies.

The fact that Japan, which had been flying at the head of the "flying geese formation," ran into financial difficulties, and other Asian nations also reached financial stalls, reflected the neglect of financial reforms in Asia (Japan clung to regulations for too long, and in Asia's case, made mistakes in sequencing regulatory reforms). The pattern over the past ten years for Japan and Asia has been that profits and products of the manufacturing industry, developed through much hard work, have been lost through ill-advised financial loans and investments.

In traditional growth theory, it was thought that poor countries, following the dynamic equilibrium path of the growth function, automatically recorded high growth rates and caught-up to advanced nations. In fact, one can distinguish between the Asian model (Japan of the 1950s-60s and Asia of the 1980s-90s, the catch-up style developmental market countries which obtained advanced nation status by achieving close to 10% growth rates), and the still stagnant nation-states in Africa. The problem of why some developing countries were able to climb onto the catch-up path and why others still cannot, is a natural extension of the research on the "Asian miracle." The World Bank's The East Asian Miracle diligently assembled the factors behind economic success, but the most important area, "industrial policy," was left unclear. Leaving aside whether or not growth was a result of policies, it remains the case that the gradual advancement in industrial structure has supported medium-term growth. Through further research in this area, studies of Japan and Asia can make a contribution to economic growth theory and development theory. In the past, there was a partition between economic growth theory, which analyzed quantitative expansion, and economic development theory, which pursued qualitative changes in the economic structure. However, Paul Romer's new economic growth theory attempts to address both development and growth through growth models. But this new model cannot explain the issue raised earlier, the differences between the countries which attained medium-term high growth and countries which have not. The most significant issue facing current research is explaining development processes accompanying changes in industrial structure. I hope our COE Industry Studies Group can contribute to this issue. The analysis of the economic growth and development accompanying industrialization is an area through which a significant contribution can be made by Hitotsubashi to Japanese economics, Japanese economics to international economics, and economics in general to the economic development of developing countries.

Finally, a brief personal note. The first time I visited Hong Kong, Singapore and Bangkok I was a high school student. I was a precocious high school student who had a keen interest in economic development and economic cooperation. However, in my undergraduate studies of economic growth theory, or my research on micro economic theory during my Ph.D., neither Asia nor data were present. But some thirty years after my high school days, my research interests have, after much detour, returned to Asia. I feel almost as if fate or destiny has placed me within the COE and the Asian currency crisis.

(Hitotsubashi University, Institute of Economic Research; Leader of Industry Studies Group, COE; and Special Advisor to the Minister of Finance, Thailand)