Academic journal article Contemporary Southeast Asia

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

Academic journal article Contemporary Southeast Asia

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

Article excerpt

Financial globalization in the 1990s effectively dismantled the Asian developmental state and forced East Asia to search for a new political economy model. The paradigm shift in world economic development from state-driven planning to market-driven management has taken place since the late 1980s in Northeast Asia, spreading to Southeast Asia in the 1990s. The access to global capital markets by Asian corporations, both parastatal and private, has effectively reduced their dependency on the state for financial resources. In fact, the Asian developmental state and financial globalization are incompatible and often in conflict. By externalizing financial forbearance, Asian corporations and the global market have forced the 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 the Asian developmental state in the 1990s and forced Asia to search for a new political economy model. The paradigm shift in world economic development from state-driven planning to market-driven management has taken place since the late 1980s in Northeast Asia, and by the mid-1990s a similar process had spread southwards to the ASEAN region. The Asian state was slow in restructuring its private sector economy to forestall the 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 the era of globalization, these practices often clash with the fast integrating world economy where money flows in and out at the whim and fancy of investors. [2]

By the early 1990s, the politics of the developmental state began to produce cleavages. As the economy grew and advanced further, a more complex division of labour emerged. In Japan and Korea, the stock market and chaebol collapses of the late 1980s and early 1990s signalled the worn-out nature of the developmental state model. The nexus of "the state leads, the market follows" broke down. When the regional crisis occurred in 1997-98, the market -- corporations, banks, individual investors, and chaebol -- remained unable to quickly detach themselves from the domineering state to ward off the ensuing mayhem. In Japan, the financial sector loathed to embrace deep restructuring, and in Korea and the rest of Asia, no business elites thought that the state would not come to their assistance when in crisis. These lapses compounded the Asian crisis further.

By the early 1990s, as the changing of the gear in the developmental process from the state-centric to the global capital market-dependent mode intensified, Northeast and Southeast Asia needed to revisit their political economy models, first arrived at in the 1960s and 1970s. What had changed was the advent of globalization, the emergence of new financial institutions and innovative investment practices, and an evergrowing number of countries willing to accept foreign money from anywhere. Consequently, the state sped up the liberalization and deregulation of the domestic markets, as the pressure to sustain high growth rates increased throughout the region, where the legitimacy of quasi-democratic regimes impinged on their "economic achievements", and the ability of regimes to remain in power depended on the allegiance of the people. [3]

The Asian Developmental State Revisited

Chalmers Johnson in the United States and Fernando Henrique Cardoso in Brazil were among the earliest pioneers of the concept of the "developmental state". Since the concept of the Asian developmental state and how it has become outdated constitute the core of this article, it is necessary to define the concept in both historical and functional terms. …

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