Cornell Studies in Political Economy. Ithaca, NY: Cornelll University Press, 2015. viii, 267 pp. (Figures, tables.) US$29.95, paper. ISBN 978-0-8014-7971-7.
Many books have been written about the global financial crisis (GFC) of 2008 and 2009, but most have focused on its origin in the US, propagation to Europe, and debates in these countries on policy responses. This multi-author volume deserves attention as an important addition to the sparse literature on the GFC’s impact on the rest of the world (the “global periphery”), the East Asian countries in this case. It examines the remarkable resilience of the East Asian countries to the GFC against the backdrop of the experiences during the Asian Financial crisis (AFC) of 1997 and 1998, and the policy challenge of reshaping development strategies in the post-GFC era.
The introductory chapter by Pempel and Tsuenekawa and chapter 1 by Pempel provide the context for the rest of the volume. The state of the debate and unifying concepts are discussed in the introductory chapter, followed by a synthesis of the patterns of economic growth in the East Asian countries in the lead-up to the two crises, policy responses to the crises, and recovery. Chapter 1 presents a broad picture of the differences between the two crises in terms of the state of economic vulnerability and resilience of the East Asian countries in the context of globalization of finance and the long-term relations between business and government. Taken together, the two chapters make a compelling case for paying attention to the divergent political conditions that give rise to crises and the political changes that crises may catalyse, going beyond the narrow confines of pure economic analysis, for broadening our understanding of the causes and policy responses to crises. However, I am hesitant to agree with the authors that differences between the AFC and the GFC “run afoul” of the conclusion advanced by Reinhart and Rogoff (This time is different: Eight centuries of financial folly, Princeton University Press, 2009) that the sources of vulnerability to finance crises are strikingly similar across countries, regardless of the nature of the political regime. This critique seems to reflect their failure to distinguish between indicators of vulnerability and of general economic performance. In fact, the country case studies in this volume are supportive of the Reinhart-Rogoff inference.
The rest of the book is divided into two parts, dealing with the comparative performances of selected East Asian countries in the two crises and the drivers of sustained economic success of the countries in the region in the post-GFC era.
The four chapters in part 1 are by far the best in the book. Chatib Basri (chapter 3) discusses in an illuminating way Indonesia’s response to the two crises, with an emphasis on the role of policy reforms implemented in response to the AFC and political regime shift in successfully managing the GFC. The key message of the chapter is that Indonesia came out of the GFC so much better compared to the AFC, owing to a combination of good policies and a measure of “good luck.” The term “good luck” is, however, used here to refer to some structural features of the economy (rather than “good fortune”), in particular the lesser degree of integration with the global economy, and export concentration in primary products (which resulted in an export boom on the back of increased demand from China). These structural features of course played a role in cushioning the economy from the GFC. However, we should not ignore the widely acknowledged facts that the lesser degree of global economic integration and failure to diversify into manufacturing exports are also a part of the explanation of Indonesia’s relatively poor economic performance record in the regional context.
In chapter 3, Yun-ha Chu provides a fascinating analysis of how a set of well-entrenched institutional arrangements (including a strong and independent central bank), and a long-standing policy orientation characterized by a cautious approach to global financial integration played a pivotal role in Taiwan’s resilience to both crises. The most important message of the chapter is that, unless capital controls are appropriately embedded as a legitimate tool of public policy, financial globalization will continue to remain a major source of countries’ vulnerability to financial crisis.
Yasunobu Okabe (chapter 5) examines path dependence in vulnerability to financial crises through an innovative comparative case study of financial-sector reforms in Thailand and South Korea in the aftermath of the AFC and the contrasting experiences of the two countries in the context of the GFC. The financial-sector reforms of the two countries in the aftermath of the AFC were strikingly similar, but unlike Thailand, Korea was on the verge of another capital flight crisis in 2008 (which was avoided through a quick injection of US capital). This was because of the longstanding pro-industry policy stance of the Korean government of providing the Korean business conglomerates (chaebol) with access to finance under concessionary terms from state-controlled banks that compromised the independence of the Central Bank. Barry Naughton (chapter 5) provides a penetrating analysis of the impact of the two crises on institutional and policy evaluation in China.
The chapters in part 3 are substantial contributions on specific aspects of the experiences of East Asia economies, but overall their contribution falls well short of the objective stated in the introductory chapter: addressing the issue of whether “East Asia’s successful weathering of the GFC … suggest[s] that East Asia is poised for a ‘second Asian Miracle’ analogous to that touted by the World Bank in 1993” (3). Much of chapter 6 by Thomas Pepinsky is a synthesis of the causes and impact of the two crises, which largely overlap with chapter 1. The discussion in the chapter on long-term growth prospects is limited to only one paragraph. Richard Doner (chapter 7) examines the growth patterns of Vietnam, Thailand, and Malaysia in the context of the recent policy debate on the “middle income trap,” followed by a discussion on possible adverse effects on long-term economic growth of relying solely on macroeconomic measures to manage crises. However, the case he makes for using crises as an opportunity for implementing the structural adjustment reforms needed for escaping the so-called middle-income trap ignores the issue of the political palatability of such broad-based reforms in a crisis context (as discussed in chapter 3). Chapter 8 by Keiichi Tsunekawa, on the stagnation of the Japanese economy, makes interesting reading in its own right, but it is not well integrated within the overall structure of the book.
In summary, this is a book with many strengths that outweigh its weaknesses. It certainly belongs on the reading list for anyone interested in Asian development, financial crises, or the debate on reforming the international financial architecture.
Prema-chandra Athukorala
Australian National University, Canberra, Australia
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