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Satya J. Gabriel

October 1997



(excerpt from talk prepared for the Silk Road Conference, Xiamen, China)


The economic problems of many Asian countries are now well known: high current account deficits, excessive private sector debt, crony capitalism (which is clearly not just an Asian, or even "Third World," problem---even the U.S. has its "Old Boy Network"), oligopolistic industrial structures and closed markets, high levels of corruption, and undemocratic political systems. These are real problems requiring reform in the existing social formation---economic, political and cultural institutions are all in need of coordinated reform, greater accountability and transparency, and more flexibility. Thus, the question is not whether or not the crisis in Asia is grounded in real economic, political and cultural factors, but rather why did the crisis happen now, rather than five or ten or fifteen years ago. I believe the answer lies outside of Asia and in the geopolitics and economics of what might be called "Western capitalism."

Capitalism has not changed as dramatically as some social commentators would have us believe. Capitalism remains founded upon the deployment of capital for the purpose of generating profits from the productivity of workers, past and present. Capital is a social construct. It is the embodiment of past economic relationships within which claims to assets were acquired, recognized by law and/or social convention, and made transferable across time and space and between persons and institutions. From the contemporary periods of slavery and colonialism, global capital has been concentrated within the so-called Western nations, mostly the United States, Britain and Western Europe. This concentration of capital is reflected in the role of the U.S. dollar, in particular, as an international medium of exchange and store of value. All nations seeking access to the fruits of contemporary technological progress (so-called high technology), as well as many basic inputs (such as petroleum) must obtain access to capital in the specific form of hard currencies, the hardest of which is the U.S. dollar. The competition for hard currency-denominated capital is fierce and international in scope. Success at this competition means gaining access to the technological and raw material inputs required to be competitive in a global economy and to finance industrial transformation, a condition for sustained economic growth and improved living standards.

For most of the period since the end of World War II, geopolitics was dominated by the competition between the Soviet Union and other nations governed by communist parties and the United States and its NATO allies. International economic relationships were strongly influenced, even dominated, by the tensions and strategies generated within this bi-polar competition. Thus, in order to "contain communism," Japan (and the Federal Republic of Germany) was given preferential treatment by the U.S. government: special access to U.S. technology, markets, and, most importantly, capital. Firms in Taiwan, South Korea, and, particularly during and after the war in Viet Nam, Thailand profited from U.S. military spending and technology transfer policies, as well as relatively unfettered access to the U.S. market for their exports. Indonesia, Malaysia and Singapore similarly benefited from Cold War politics. During the Korean and Viet Nam war periods, billions of U.S. dollars (hard currency) were injected into many of these economies, particularly Japan and South Korea, as part of the U.S. military procurement strategy, but with clear economic motivation, as well. These funds provided Japanese, South Korean, Taiwanese, and other local area firms with guaranteed markets and much needed hard currency revenues. Thus, an important factor in the economic success of these so-called miracle economies (Aren't miracles supposed to be acts of God?) was the special international relationships generated by the Cold War.

Of course, politics and economics are not neatly separable social phenomena (despite the academic tendency towards compartmentalization) and the conflict between the so-called Eastern bloc (Cuba and China included) and the West was not simply about political differences, but was shaped, in part, by the closed nature of the so-called communist economies (economies that were, ironically, dominated by the same wage-labor capitalist relationship that prevailed in the West): the political leadership of these nations refused to open their economies to the penetration of Western capital and threatened to extend the space within which this exclusion was effective. Thus, the directing of capital to strategic allies was not only important for political reasons but also served the long-term economic interests of Western capitalists, who had a strong interest in defeating a system that was partly founded upon denying the free movement of capital across international borders. The irony, of course, is that the political and economic importance of defeating the Eastern bloc overrode the desire to open up the economies of strategic allies, such as Japan, South Korea, etc. It became acceptable for these strategic allies to simultaneously pursue an import-substitution path to industrialization by subsidizing domestic firms and restricting foreign penetration of (and thus competition within) domestic markets (these restrictions were/are often in the form of regulations rather than being tariff-based) and an export-oriented path of selling as much as possible (even if this included the strategic use of dumping) into the United States market. It was the ability to pursue this dual strategy (and to benefit from U.S. military ventures in the region) that allowed for the dramatic transformation of the so-called miracle economies of East Asia.

What has changed? Why did the Asian economies lose this economic development "sweet spot"? The collapse of communist party domination of Eastern Europe and the total collapse of the Soviet Union were the beginning of the end of the Cold-War model of economic development that had served East Asia so well. The opening up of Eastern European nations and even Russia to foreign capital marked the final blow to the Cold-War model. Suddenly, not only was the strategic rationale for special treatment of Japan, South Korea, Thailand, etc. lost, but a whole new set of social formations were now competing with East Asia for Western capital. The process of shifting capital from East Asia to the newly open economies of Eastern Europe and Russia was slow but continuous and decisive. As transnational firms and rentiers discovered that these "transitional" economies might, indeed, be serious about a more free-market form of capitalism, they began to compare opportunities in the Eastern bloc to opportunities in Asia. The deeper the opening of these transitional economies and the longer the time frame within which this process occurs, the lower the risk premium for investing there and the more favorably these economies appear vis-a-vis East Asia, even if temporarily. At the same time, and perhaps even more importantly, economic and political trends have improved the profit prospects for investment in the more mature economies of Europe and North America. Thus, more capital is "staying home" than might otherwise be the case. It is this overall shift in the flow of capital, like the gradual influx of water into the Titanic, that set East Asia on the course to the current economic crisis.

The overdetermined links between the Asian nations exacerbated the effects of the shift of global capital away from Asia: the weakest links in the old Cold War model, in particular Thailand, infected the other links in a chain reaction of growing force. The Southeast Asian nations are intimately linked together, but they are also competitors in the global marketplace, particularly for sales to the United States, Japan, and the European NATO countries where the much needed hard currency is to be found. To make matters worse, these Cold-War-fed economies, including South Korea, had become dependent upon access to easy hard currency capital and the ability to continually increase exports to the U.S., Japan, and the European NATO countries for further injections of hard currency.

The domestic economies had become addicted to these hard currency flows and the financial institutions of these nations had learned from experience that lending with relative impunity, including hard currency loans, was the optimal path to profit maximization. The combination of Cold War economic dynamics and the related ability of regional governments to subsidize both financial and industrial expansion (and to maintain protectionist policies) virtually guaranteed that this path to profit maximization would be a smooth one, albeit one with an overabundance of moral hazards along the way. This model could continue to work only so long as the hard currency fix was forthcoming.

The pressure on the capital account that resulted from intensifying global competition over capital and markets (particularly the U.S. and other NATO markets), coupled with the continued stagnation of the Japanese economy, eventually opened the flood gates in the form of a speculative attack on the Thai baht and then, in the aforementioned chain reaction, on the other regional currencies.

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Copyright © 1998, Satya Gabriel, Economics Department, Mount Holyoke College.