Edited by K. S. Jomo. London and New York: Zed Books Ltd, 2001. Pp. x1ii + 321.
The title of the book has its origin in the idea that the East Asian crisis of 1997-98 temporarily "darkened" the otherwise bright prospects of the East Asian economies in general and Malaysia in particular. The analysis of the Malaysian crisis is attempted by revisiting the traditional Keynesian theories. It suggests that the general misunderstanding of the nature of the Malaysian crisis stems from three major sources: the neoclassical view of attempting to see the crisis as a theory of business cycle; the role of multilateral institutions in recommending standard monetarist responses of fiscal contraction, which in fact exacerbated the recessionary tendencies (through higher interest rates to prevent inflation and stricter prudential norms which reduced liquidity); and the role of the political economy factors in the Malaysian economic system, which had a significant beating on exacerbating the crisis.
The book is divided into nine chapters, each highlighting different aspects of the crisis.
Chapter 1, "From Currency Crisis to Recession", offers a quick overview of the origins of the crisis which had the effect of turning the Malaysian economy from an "`economic `miracle' into a `debacle' in 1998" (p. 2). The author suggests that the broad macroeconomic fundamentals of Malaysia, barring the current account deficit which invariable in view of the poor domestic savings-investment gap, were "sound". He also rejects the popular notions about the East Asian crisis as stemming from lack of transparency leading to moral hazard and problems of "crony capitalism". He suggests that the Malaysian Government's initial IMF-type policy response turned what was to his mind a currency crisis into a full-blown crisis of the "real economy". The conventional International Monetary Fund (IMF) response to a crisis was to require expenditure reducing policies (that is, tighter fiscal and monetary policies), which unfortunately exacerbated the recessionary tendencies already being experienced in the region. The key difference between Malaysia and the three worst affected countries of the Asian crisis (that is, Thailand, South Korea, and Indonesia) lay in the fact that the crisis in Malaysia was rooted more in the capital markets rather than the banking system. Malaysia already had in place a relatively superior prudential regulatory system and it did not experience the sharp increases in short-term unhedged borrowing as did the other three crisis-hit economies. Malaysia was affected because of the crisis of confidence that generally led to a sharp portfolio capital outflow (see also Athukorala 2000 and Bird and Rajan 2000). However, despite the author's assertion regarding the prudential soundness of the Malaysian banking system, it must be borne in mind that the crisis did cause the asset price collapse and a number of commercial banks in Malaysia were adversely affected, which contributed to the exacerbation of the crisis if not the initial crisis per se.
The second chapter contends that while it was true that the so-called first-order macroeconomic fundamentals of Malaysia were relatively sound, the cause for concern came from the deeper fundamentals which were much weaker. These so-called second-order fundamentals included potential for future growth, industrialization, and economic welfare gains, all of which were weak, according to the author. It is these weak economic fundamentals and "ill conceived liberalization" that accentuated the financial crisis in Malaysia says the author. Thus, the crisis in Malaysia was one "waiting to happen" because of increasing competition from China and India, short-term domestic debt-driven investment, deceleration in foreign direct investment (FDI), failure to keep up technologically, and cronyism. All of these gradually gnawed away at the economic fundamentals and contributed to the eventual crisis. …