(February 1998)

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Extracts Executive Summary
Stabilizing the Situation - the IMF may be unable to resolve the problem given and the cultural obstacles to a solution (Detail of  Section 7)
Asia's Future Economic Status - Can the 'Asian' economic model survive - and what alternatives exist? (Detail of Section 8)
Understanding the Cultural Revolution - A 'cultural revolution' would be needed for many East Asian economies to succeed under Western financial rules (being Attachment K)
Executive Summary



The Asian financial crisis is a complex issue, which is important for Queensland. This paper focuses on the associated uncertainties and opportunities - primarily on the basis of published information available up to 18 January 1998.


Declining competitiveness led to reduced investment in various countries in Asia, followed by falling currency values, and large losses on foreign currency debts for businesses, and their bankers. Shortages of foreign currencies required IMF intervention in Thailand, Indonesia and South Korea, to rescue their financial systems. The financial crisis has dislocated economic activity, compounded the unresolved problem of massive bad debts in the Japanese financial system, and threatened to affect other countries (eg Malaysia, China). Indonesia verges on total economic collapse and revolution.

There are many different explanations of the crisis: including specific financial and economic events; preconditions to those events (such as: fixed exchange rates, large capital inflows, unwise investments, competitive devaluations, and Japan's failure to resolve its financial system losses); poor policy responses once the crisis commenced; institutional weaknesses in affected countries; defects in the international financial system; and conspiracies. The causes are complex, and intimately connected with the way in which business and government have operated in parts of Asia.


The crisis was unpredictable because: it arose from an unprecedented combination of financial and economic events; financial considerations redefine the economic 'fundamentals' in a crisis; political considerations were also a factor; and the nature of economic and business arrangements in Asia could only be understood by 'Asia literate' analysts. Consequences are unpredictable also because of: their dependence on the responses of affected communities; and the time lags involved.

As future developments are uncertain: a decentralised response - particularly through markets - is highly desirable; and contingency plans need to be developed. Some major uncertainties are discussed in Sections 4 - 8.


Forecasts suggest that the crisis will take 1-2 years, or perhaps more, to resolve. Analysts disagree about whether fundamental changes are required for recovery.

The most affected countries are suffering: banking failures; business closures; high unemployment; high interest rates; high inflation; significantly reduced growth rates (with recession for some); and political instability. Major industrial changes could occur.

Asian countries not directly involved in the financial crisis are affected by: lost regional markets; financial losses; and fierce competition for export markets.

Recovery by the most affected countries faces very severe challenges due to: damaged banking systems; many insolvent firms; inadequate external demand to drive recovery; social and political instability; and the need for profoundly difficult changes. Recovery could take many years, and despite devaluation, strong exports may not be maintained in the meantime.

Comparisons with other crises suggest that Asia's problems will be harder to fix.


The crisis is increasingly seen to be global. This would not have been so, had the effects been confined to SE Asia, or remained as a market (rather than an economic) event. However it has not been confined and is a major event because Asia accounted for 50% of global growth in the 1990s.

The USA (the world's largest economy) will be little affected by the crisis in terms of exports, but has some financial vulnerability - because of its: highly valued share market; large current account deficits; and accumulated debts. The forced sale by Asia of US assets is a concern (eg this could lead to problems in financing deficits which could drive up interest rates, and crash the US share market).

Current estimates of the impact on Europe are slight, but steadily increasing.

Global growth is forecast to slow only slightly due to the effects of the crisis, but deflation (reflecting falling prices) is a matter of real concern. Deflation can be as economically destructive as high inflation (eg by discouraging the investment needed to drive growth). However it is hoped that Reserve Banks can cooperate to avoid this risk.

Protectionism (which could reduce global production rapidly) could emerge due to the greater pressure on US current account deficits, which are already high.


Australia was unaffected by the 1990s slowdown in Japan, its biggest market, because exports grew rapidly elsewhere in Asia - especially to SE Asia and Korea (the regions now most affected by the financial crisis).

Estimated impacts from trade dislocation from the current crisis were slight when the Asian crisis was confined to SE Asia, but increased as North Asia became affected.

There is a difference of opinion between analysts who forecast little impact on Australia, and those who forecast serious economic dislocation.

In many Queensland traded sectors (eg commodities and tourism), there are potential adverse trade consequences - but these are likely to be ameliorated because of: devaluation of the $A; contracts written in $US; diversion to other markets; limited impact on staple products; selling intermediate products for production in Asia for which demand should remain; and global integration of commodity markets (so Asian demand is not the determinant). However in many areas, those involved in practice foresee difficulty.

Australia's growth rate is expected to be maintained (due to domestic demand), so current account deficits will escalate (given weak exports, high imports and the effect of devaluation on foreign debts) - and require large capital inflows. If investment were to be weak, then Australia could experience a balance of payments crisis. Australia's major problem resulting from the crisis could be that prices (and thus corporate profitability) could be eroded, which could adversely impact on traditional investment. This could be offset by a number of new types of investment - eg because in Australia return on capital is accepted as an important commercial goal, and Australia has more reliable governance and commercial law from the viewpoint of investors than exists in parts of East Asia.

The Asian crisis will, if its impact in Asia is as deep and long lasting as expected, change the structure of favoured economic activity in Queensland (eg requiring adjustment in a number of regions emphasising tourism and some commodities and manufactures).

7. STABILIZING THE SITUATION  (Detailed version)

There is a risk that the Asian crisis may not be stabilised by IMF intervention. This appears to be the case in Indonesia, in particular, and to a lesser extent elsewhere. There is also some risk that the crisis could spread - almost certainly to Malaysia; and

  • possibly to various countries outside East Asia (eg Russia and Brazil); and perhaps to
  • China (given its internal problems, and dependence on external trade and investment)
  • Japan - whose financial system appeared in danger due to unresolved losses.

Difficulties for the IMF lie in: uncertainty about appropriate policies (eg is fiscal contraction constructive); and limited funds. The IMF admits that it (initially) worsened the situation in Indonesia. The IMF is also effectively asking for a 'cultural revolution', by promoting Western style financial management. For example, the latter emphasizes return on capital and is inconsistent with building the power of ethnic communities which has been the main economic goal in Asia.

However alternative solutions are being developed including: an Asian alternative to the IMF; fall-back positions for the IMF; and a G7 meeting to discuss changes to the global financial system.

If the crisis is not resolved, security issues could take on renewed importance for Australia.


East Asia has dominated global growth for several years by the application of the 'Japanese' economic model in various ways. This was expected to continue. Now there is disagreement amongst analysts about whether the 'Asian miracle' can continue.

Japan showed in the 1980s that its approach, which had previously been effective in accelerating economic learning, was not effective when applied to the management of financial (as compared with human) resources. The Asian crisis reflects an extension throughout Asia of the defects (from a financial viewpoint) in the Japanese model. This characteristic is deeply rooted in problem solving methods - which are geared to dealing with 'real' things (eg people), but not with abstracts (such as ideas or finance).

There are many characteristics in the systems for government and business in many countries in Asia, which make it difficult to adopt Western approaches to financial management. Furthermore, trying to adopt those methods might erode the major basis on which the competitiveness and rapid growth of East Asia has been based (ie the collaboration of elites). In the worst case, the outcome of adopting the IMF's prescriptions could be large negative growth, ie like that in Russia after its economy was liberalized without the institutional capabilities for effective commercial activity.

There is no clear alternative economic model for affected countries. Perhaps the economic model preferred by the offshore Chinese (which is more decentralized and so reduces the need to solve abstract problems) may be increasingly adopted in future. The offshore Chinese may have emerged relatively unaffected from the crisis, and so increase their influence in the region. This model would be resisted by all other traditional ethnic elites.


The situation is too complex for central planning of solutions. However several steps which might help include:

  • establishing an Asia Commission to identify options within Queensland's capabilities to support recovery in the most affected countries; and for identification of opportunities;
  • being prepared for economic change, and not inhibiting initiative;
  • maintaining investor confidence by making rapid real productivity gains;
  • planning for contingencies such as: a long period of stagnation in Asia; rapid negative growth in parts of Asia; the emergence of financial crises in China or Japan; or a balance of payments crisis in Australia; and
  • strengthening the institutional capability relied upon to provide intelligence and analysis.