The Financial Crisis of 1997–98 and the End of the Asian Developmental State

Abstract

Financial globalization in 1990s effectively dismantled Asian state and forced East Asia to search for a new political economy model. The paradigm shift in world development from state-driven planning to market-driven management has taken place since late 1980s in Northeast Asia, spreading to Southeast Asia in 1990s. The access to global capital markets by Asian corporations, both parastatal and private, has effectively reduced their dependency on state for financial resources. In fact, Asian state and financial globalization are incompatible and often in conflict. By externalizing financial forbearance, Asian corporations and global market have forced state to change. Thus, important political changes have taken place in Northeast Asia and are now also occurring in Southeast Asia. Financial Implosion The contention of this article is that financial globalization effectively dismantled Asian state in 1990s and forced Asia to search for a new political economy model. The paradigm shift in world development from state-driven planning to market-driven management has taken place since late 1980s in Northeast Asia, and by mid-1990s a similar process had spread southwards to ASEAN region. The Asian state was slow in restructuring its private sector economy to forestall oncoming crisis. The state-driven development model spawned a set of paradigmatic practices, such as clientelism, cronyism, cartels and monopolies, official and unofficial favouritism shown to a select number of business firms, and state patronage to certain ethnic groups. [1] In era of globalization, these practices often clash with fast integrating world economy where money flows in and out at whim and fancy of investors. [2] By early 1990s, politics of state began to produce cleavages. As economy grew and advanced further, a more complex division of labour emerged. In Japan and Korea, stock market and chaebol collapses of late 1980s and early 1990s signalled worn-out nature of state model. The nexus of the state leads, market follows broke down. When regional crisis occurred in 1997-98, market -- corporations, banks, individual investors, and chaebol -- remained unable to quickly detach themselves from domineering state to ward off ensuing mayhem. In Japan, financial sector loathed to embrace deep restructuring, and in Korea and rest of Asia, no business elites thought that state would not come to their assistance when in crisis. These lapses compounded Asian crisis further. By early 1990s, as changing of gear in process from state-centric to global capital market-dependent mode intensified, Northeast and Southeast Asia needed to revisit their political economy models, first arrived at in 1960s and 1970s. What had changed was advent of globalization, emergence of new financial institutions and innovative investment practices, and an evergrowing number of countries willing to accept foreign money from anywhere. Consequently, state sped up liberalization and deregulation of domestic markets, as pressure to sustain high growth rates increased throughout region, where legitimacy of quasi-democratic regimes impinged on their economic achievements, and ability of regimes to remain in power depended on allegiance of people. [3] The Asian Developmental State Revisited Chalmers Johnson in United States and Fernando Henrique Cardoso in Brazil were among earliest pioneers of concept of developmental state. Since concept of Asian state and how it has become outdated constitute core of this article, it is necessary to define concept in both historical and functional terms. …