The NYT marked the 10th anniversary of the East Asian financial crisis with a piece assessing the current economic situation among the five most affected countries (Indonesia, Malaysia, Philippines, South Korea, and Thailand). The piece misses some key points. First, it notes that growth has slowed for the five countries from the pre-crisis levels and points out that their growth is now far behind the real speedsters, China, India, and Vietnam. While this is true, it is not necessarily surprising. South Korea's per capita GDP is more than $24,000 a year, putting it close to Portugal and Spain. It would be truly astonishing if a country at this level of development could sustain growth of 10 percent annually. (Its growth rates are still very impressive at close to 5 percent.) On the other hand, it would not be unreasonable to expect the poorer countries in this group, Indonesia ($3,900 per capita GDP) and Philippines ($5,000 per capita GDP) to attain Chinese or Indian growth rates. Second, the article misses one of the biggest enduring costs of the East Asian financial crisis: the massive reserve holdings that developing countries now view as necessary to ensure their financial security. South Korea now holds $240 billion in reserves (20 percent of GDP), Thailand holds $59.1 billion (29.9 percent of GDP), and Malaysia holds $82.3 billion (62.2 percent). Prior to the crisis, most countries' reserve holdings were less than 10 percent of their GDP. [CEPR first called attention to this issue back in 2001. More recently Dani Rodrick has also written on the topic.] Reserve holdings are an enormous waste of resources for developing countries. The real return on these reserves is close to zero (they are mostly held as short-term dollar and euro deposits). The opportunity cost of the reserves is in principle the return on capital in these countries, which is in the 10-20 percent range. The buildup of reserves serves two purposes. First, it is a source of security for these countries, assuring foreign investors that their central banks will be in a position to deal with any financial crisis. Second, the reserves are an outcome of a deliberate effort to depress the value of national currencies, in order to sustain strong exports. The East Asian crisis is a central part of both stories. It showed these countries that relying on the IMF to sustain stability was a bad strategy. They were determined to build up enough reserves so that it would never again be necessary to have an IMF "bailout." The insistence of the IMF that developing country debts be repaid (as opposed to requiring rich country creditors to take a hit on their bad loans) also set in place this pattern of development based on massive trade surpluses. It has created the perverse situation of poor countries lending capital to rich countries over the last decade. That is not a success of the international financial system. There is one final point missed in this piece. In 1997, the financial press was full of denunciations of the "crony capitalism" of these countries. This seemed rather perverse, since some of the countries (notbaly South Kore and Taiwan) has managed to grow from Sub-Saharan levels of poverty to Southern European levels of prosperity in four decades. Anyhow, the financial press boasted that the crisis was finally going to force these countries to reform. It then complained that South Korea, Malaysia, and Thailand were backsliding. Now that these countries are back on their feet, with systems that are not very different from their pre-1997 systems, we don't hear very much about "crony capitalism."
--Dean Baker
