Asia's Miracle:
In Need of a New Regional Strategy


Christopher Reynolds




Although Asia’s financial crisis of 1997-98 was related to global commercial and financial market forces,

the region’s economic miracle, and even the crisis itself, were more directly related to the success and failure

of regional growth strategies.


The thesis of this paper is that the Western economic approach to global commerce from the perspective of

free trade competition is misplaced in assessing Asian economics. The essential problem with Western

economics is that it is built on a  mechanistic-conflict equilibrium paradigm, or model, and assumes a context

of economic conflict in order to have meaning. In contrast, Asia’s growth is better served by consideration of an interaction-process paradigm. Here, the emphasis is on the development of cooperation, interrelations and even integration. As Asia has developed because of its interrelations and integration, so its commercial destiny will continue to be directed by regional business strategies and growth opportunities.



The East and South East Asian (Asia) financial crisis of 1997-98 exposed just how vulnerable Asia had become to global financial sentiment and foreign capital volatility. While much of Asia’s economic growth had resulted from foreign direct investment (FDI) over several decades, in the 1990s, international enthusiasm about Asian growth rates made for high foreign investments. At the same time, it created high foreign debt. Asia’s oversupply of foreign capital and rising costs of production due to pegged currencies to the US dollar, ultimately led to the bursting of the foreign investment bubble. Deutsche Bank has estimated that some $93bil. flowed into Indonesia, Malaysia, the Philippines and Thailand in 1996, but in 1997, $105bil. flowed out. This outflow was equivalent to 10% of these countries’ joint GDP. (Templeman 1998:22) The subsequent inability of banks to cope with debt repayments caused a loss of international confidence (Astbury 1998:13) and with insufficient foreign reserves to cover the public and commercial run on the banks, public confidence continued to decline and Asia’s economies slipped toward recession.


Put succinctly, Asia’s financial crisis was brought on by, first, a decline in foreign market demand for Asian products due to the escalating costs of production in Asia after 1995, leading to a contraction of economic growth, and then the rapid withdrawal of cash from the banking system in the shadow of falling currency values.



Capital Inflows for Thailand

            Billion baht


                                                Source: Bank of Thailand



Although Asia’s crisis was related to global commercial and financial market forces, the region’s economic miracle, and even the crisis itself, were more directly related to the success and failure of regional growth strategies. Led by Japanese business, Asian economies grew by industrialising their countries for export production to service foreign markets. Particularly after 1985 when production in Japan became extremely expensive due to the extensive rise in the value of the yen, Japanese investment extended across the rest of Asia in search of low cost production opportunities. Allied  with growing Overseas Chinese business, the Japanese business strategy of growth through exports came to dominate Asian economic activity.   


The thesis of this paper is that the Western economic approach to global commerce from the perspective of free trade competition is misplaced in assessing Asian economics. Further, that an appreciation of Asian growth as the spread of regional commercial integration provides a better understanding of both Asia’s economic miracle and Asia’s economic future. Anglo-American economic philosophy, in the form of classical and neo-classical approaches, has failed to adequately explain either the growth of Asian economies or the 1997-98 financial crisis. The fixation with laissez faire markets, free trade growth and comparative advantage analysis mean that Asia has been judged from the point of view of Anglo-American economic criteria and not judged on the basis of the success and failure of its own strategies.




Western Analysis


Once the crisis became obvious, global reasoning and offers of real and intellectual assistance were in short supply. International economists seemed to not understand the nature of the problem and, accordingly, tended to blame Asia for the problem. It was either the government’s fault or the bank’s, and both needed to be more transparent, so the common accusations suggested.


Economists, such as Paul Krugman and Nouriel Roubini, have pointed to the issue of  ‘total factor productivity’ and suggested that their mathematical formulas indicated that Asia’s growth was input driven and not based on real productivity. (Krugman 1998, Roubini 1998)  Along with others, they are right in believing that Asia’s growth has been capital driven and that Asia’s future lies in technology (economic-technology) development. But their analysis of Asia is reductionist and relies too much on mathematical formula to explain not static, but dynamic commercial activity. The dynamics of global commerce, as the Asian financial crisis itself exemplifies, are too volatile and unpredictable to be contained or explained by mathematical formula. Accordingly, their solutions are limp. Mathematical models are only self-validating in hindsight: economic growth doesn’t move by formulas. In the information era, every country will see technological growth but at different levels and in different directions and not always in a free market environment.


Asia, itself, is not generally convinced that Western understandings and Western medicine are what’s the best for Asia. While several countries have accepted IMF programs of economic austerity in order to gain extended loans, laissez-faire capitalism is not generally accepted across Asia as the most appropriate model for Asia’s economic growth. Hong Kong’s belief in non-interventionist policies were contravened in August, 1998 when the Hong Kong Monetary Authority bought $15bil. on the stock market in order to prop up the failing economy. Similarly, the Malaysian government in the same month announced the pegging of their Ringgit to the US dollar and the imposition of exchange controls. While, particularly Malaysia’s policies may have grave implications for its future dealings with Western economies, Asia’s history and process of economic growth for the past thirty years has continued to defy Western economic wisdom.



A Question of Epistemology.


The problem, however, is greater than simply one of mathematics. It is a mater of economic philosophy and approach. In order to appreciate the Asian point of view, the Anglo-American approach to economics has to be understood as different from the Asian approach or model.


A brief survey of Anglo-American economic thought begins with the recognition of the importance of mercantilism with its emphasis on maximising exports over imports in order to accumulate national wealth. Adam Smith, in 1776, advanced this notion to devise his theory of natural competition and laissez faire capitalism in order to extend the concept of wealth to national economic activity. To gain a prosperous economy meant allowing natural competition among merchants and to allow produce market efficiencies to develop. This economic philosophy applied equally well to both domestic and international trade. Smith proposed that merchants and countries should seek to identify their products in which they had an absolute advantage and trade with others with different goods to offer. Still the object was still to acquire national wealth.


David Ricardo, also a British economist, was to advance Smith’s philosophy by suggesting that countries should seek their comparative advantage against other trading nations and seek to move factors of production in order to gain the best possible production and trade result. The philosophical difference in the two theories is subtle: where one advances trade based on absolute productivity differences, the other suggests trade based on relative productivity differences. This comparative advantage approach, in particular, requires mathematical formula and endless calculations in order to assess national growth and development. Of course, there have been many advances on these basic theories, including the work of Heckscher and Ohlin and their theory of relative factor endowments, but these theories remain fundamental to Anglo-American economic thinking. Trade theory today continues to be advanced in various forms of neo-classical approaches advocating varying degrees of intervention in the market place.


Still, the essential problem, above all else, with these theories, particularly laissez-faire and comparative advantage capitalism, is their epistemological approach (the way the world is perceived, understood or known). These theories are based on a  mechanistic-conflict equilibrium paradigm, or model, and assume a context of economic conflict in order to have meaning. Classical and neo-classical theories have always been about ‘winning’ through conflict. Capitalism was never just about the management and accumulation of capital wealth, it has always been essentially about competition, conflict and economic conquest. The outcome of competition is, of course, achievement and success; concepts that are imbedded into Anglo-American economic theory and activity. Competition is also about individualism rather than co-operation or teamwork, and it is about survival of the fittest and ‘natural’ selection. All of these basic assumptions are inherent in the mechanistic paradigms of Anglo-American business activity.


Adam Smith asserted that economic equilibrium and natural growth and price stability was a product of competing economic forces. Like Darwin’s theory of evolution, this mechanistic, or conflict-equilibrium approach proposed that the competitive commercial struggle in business would ensure the survival of the fittest. For this natural process to occur naturally, government activity in the marketplace is to be limited. Indeed, it follows from this mechanistic model that government intervention in the marketplace could only be harmful.


Essentially, and just as problematic, this mechanistic economic theory as developed trade theory in the form of classical and neo-classical models, are really only economic parables – stories of ideal situations given certain conditions. Consequently, these models are difficult to interpret and utilise in the context of transitional and developing economies. First, these mechanistic trade approaches assume a nation-state devoted to competition and the accumulation of wealth. Second, the models assumes a stead-state of factors and variables in order to capture a photo of numerical events. Third, the steady-state snap shots are always retrospective and in making comparisons with other and past events, these theories becomes essentially deterministic in as much as the past is used to supposedly determine the future.


Fourth, and the most important limiting factor of the classical and neo-classical  models, is that they focus on production and develop a supply-side bias to understanding market behaviour. The emergence of marketing as a commanding economic force in the global marketplace not only means that consumer demand is the main determining factor in market behaviour but that as a variable, it is constantly changing as opposed to a steady state equilibrium.


Supply-side approaches and analysis, whatever their stripes, are inadequate tools for market evaluation assuming nation-state growth when in the global marketplace so many businesses function across domestic boundaries and even outside of them. In Asia’s case, a transitional region caught up in the progress towards global commerce, classical economic epistemology is an inadequate tool in explaining Asia’s growth and development.


In contrast to a mechanistic-conflict equilibrium paradigm, Asia’s growth is better served by consideration of an interaction-process paradigm. Here, the emphasis is on the development of relationships and on change as a quality of relationship. While Western business is, without a doubt, mechanistic in its approach to commerce, the growth of business across Asia appears to have occurred not through conflict and conquest, but through cooperation, interrelations and even integration, and this is evident in both business-to-business and government-to-business relationships. 


Accordingly, the interaction-process paradigm allows for consideration of the dynamics of the global market and international trade and gives understanding to business activity by way of an Asian business paradigm. From the perspective of an interaction paradigm it is possible to allow business to be a dominant economic force in its own right. The business-interaction paradigm allows a recognition of the main characteristics of Asian business growth patterns: First, the creation of businesses alliances that are themselves dynamic and responsive to business opportunities. Second, that businesses, rather than governments, seek to create and take advantage of new technology for their corporate gain. Third, that business will endeavour to find the path of greatest possible financial return with the least possible trouble and inefficiency. And fourth, businesses will capitalise on new technology development to meet export market opportunities.



An Asian Business Growth Model.


While Asian countries may well be players in the global market and caught up in the development of global information and commercial era, the 1997-98 financial crisis reveals the relevance of the interactional model in explaining Asia’s growth and Asia’s dilemma and, indeed, the extent of the regions commercial integration.


James Fallows in his “Looking at the Sun” (1994) suggests that an understanding of Japanese business strategy is the key to understanding the development of the rest of Asia. His endeavour is to explain an Asian view of Asia’s growth. He notes, first, that in the West the ultimate purpose of economic growth is to make individuals rich, while in Asia individuals go without in order that industries can grow strong. Second, he notes that the influence of the West in Asia may not be as strong or as pervasive as Westerners believe. While Asians may accept McDonalds and Levi Jeans, basic cultural, family and economic values remain distinctive. Third, that having experienced weakness under Western colonialism and war, there is an underlying commitment in Asia to become strong. (Fallows 1994: 15-17)  He suggests that these traits are fundamental to understanding Japan’s growth and expansion across E&SE Asia.


The story of E&SE Asian growth is very much a story about Japanese business growth and Japanese business growth strategies to develop low-labour cost industries across Asia to service their domestic and international markets. It is a well known story of how Japan, through the initial investment of US funds and access to US markets, after the Second World War was able to develop its economy through export trade. It is also well known that the US and Japan have struggled, if not argued, for several decades over market and reciprocal market access and trade surplus-deficit ratios. But a major turning point in the story, and an opportunity for E&SE Asian development, came in 1985 with the Plaza Accord international agreement. In an attempt to correct the US-Japanese trade problem, the G5 industrial countries agreed to take coordinated policy action to push the US dollar lower in value against the yen. The result was that the yen appreciated against the dollar by 89% increasing the cost of Japanese exports and encouraging Japanese businesses to move offshore.


Japanese business first moved to relocate their operations into the US and Europe to be close to their markets. The next phase of relocation was to seek low cost labour production opportunities in SE Asia. With the investment of capital and technology, Japanese businesses were able to continue to produce exports for its domestic and foreign markets. Japanese FDI in Asia in 1977 was about $6bil. but by 1994 it had reached $74.7bil., some 40% of all Japanese foreign investment by 1994 was in SE Asia. (Henderson 1998:5)   


Still, it appears that Japanese business strategy encompassed more than export growth. It was also an expansionist strategy that sought to develop a network of businesses and trade relations throughout the region. As Japan invested heavily in E&SE Asia, and made earnings on those investments, so to E&SE Asian products were sold into the Japanese market creating trade interdependency. While SE Asia proceeded to build a trade surplus with the US, Asia was to build a trade deficit with Japan rising from $9.3bn. in 1985 to $54.2bil. in 1995. (Hatch & Yamamura 1996:175)  John Fallows points out that:


From northern China to the eastern reaches of the Indonesian archipeligo, Japanese banks are the leading lenders in the region, Japanese trading houses are the leading exporters, Japanese cars are omnipresent, and the Japanese model is paramount in planner’s minds. (Fallows 1994:18)


The point is, that commercial forces that effect the Japanese economy have repercussions across the rest of the region.


   Japan's external trade with EC, ASEAN  and U.S.A.

   ( in US$ millions)



S.E Asia (85-90) /
ASEAN (91-98)

Merchandise Total




































  Source:  Monthly Statistics of Japan, No. 357 & No.446

 From this perspective it is understandable how the continued struggle of the US-Japanese trade surplus war in 1995 set the stage for the financial crash of 1997. Under the Clinton Administration, the US sought to increase the value of the yen against the dollar in order to off-set the trade balance of imported Japanese goods. However, in the two years following 1995, due to US domestic economic pressure, the US dollar rose 60% against the yen, taking the pegged Asian currencies with it. The overvalued Asian currencies led to a fall in regional exports in 1996. As economic growth continued to slow into 1997, these same Asian currencies were exposed to international currency speculation.





                        External Debt as a % of GDP, 1996




                                     (US$ Billion)                      % of GDP













Source: ASEAN Regional Outlook 1998-99: Institute for SE Asian Studies.




                        External Debt as a % of Exports, 1996



                                Total Debt/Exprts     Debt Service/Exprts

                                   End – 1996                   End-1996













                                    Source: ASEAN Regional Outlook 1998-99: Institute for SE Asian Studies.



In failing to move off the peg and thereby allowing Asian products to become expensive in the international market, the stage was set for the financial crisis in 1997 as demand for Asian goods in Western markets fell. Export growth rates across SE Asia in 1996 began to fall with Thailand dropping from 25% in 1995 to 0.1% in 1996.  By 1997 the effect was devastating with Malaysia’s exports growth falling from 26% to 4% in 1997, and Indonesia falling from 13% to 8.8%. (Henderson 1998:52)  When these countries decided to move off the peg, led by Thailand in June 1997, it was too late. As Japanese business continued to experience their own negative growth and as confidence in the Asian stock markets declined, followed by public and commercial panic and a run on the banks, SE Asia became the victim of the very forces that brought about its growth – foreign capital investment.




GDP Growth.

            (percent per annum)




-  1981-90










































            Source: ASEAN Economic Outlook, 1997-98.


The Japanese have been instrumental in influencing the growth patterns of E&SE Asia and, indeed, have been formative in establishing the growth strategy of industrialisation for export markets. To compliment Japanese expansionism and economic integration, the other important regional economic force has been the growth of Overseas Chinese investments. While these investments are not as easily identified as the Japanese, Michael Batman, writing for the Australian Department of Foreign Affairs, suggests that Overseas Chinese investments into the region may now exceed that of the Japanese. (Backman 1995:6) Through extended family networks, migration capital has moved into SE Asia and been mostly hidden foreign investment and the source of much of SE Asia’s growth capital. By 1997, Overseas Chinese comprised some 60 million people with estimated assets of over $2tril. Without a doubt, this dispersed population across E&SE Asia dominates much of Asia’s domestic business sectors.


The point is that Asia’s economic history reveals the development of business through relationships and integration, not through conflict. Accordingly, the correct model for reviewing Asia’s economics is the interaction-process paradigm, as against the generally accepted, mechanist-conflict equilibrium paradigm of the West. While Asia’s economic growth, and its decline, are linked to global commerce, they are, at their core, driven by regional economic forces. 


Regional Answers


US Treasurer, Robert Rubin, along with the International Monetary Fund, are among the many who have criticised the nature of government policy, nepotism and financial mismanagement by the banking sectors of Asia. (Rubin 1998:2)  All of these issues are valid criticisms and the financial crisis has provided an important lesson in domestic economic management. Yet, the other lesson to be learnt from the Asian financial crisis, is that while the global financial system can provide growth opportunities, it is inherently unstable. Certainly, short term loans and currency flows and fluctuations have created a problem for Asia and in 1997-98 been very unstable. In the context of developing domestic commercial architecture, this issue is very worrying.


It is for this reason that ASEAN and APEC members have been slow in recent times to promote their agendas for trade liberalisation. In addition to the general confusion,  and at times helplessness to know what to do, ASEAN and APEC are now not so sure that liberalisation is the best program to serve their countries at this time. There is a fear that the strong will gain and the weak will lose in the arrangement  - and there are more weak economies at this time than strong ones in Asia.


After two Eminent Persons Group (EPG) Reports and numerous Leaders and Minister’s Meetings in APEC, it could be assumed that the course for APEC and for Asia had been mapped out. The course is for APEC to become an open and free trade region by 2020.  Indeed, there has been much progress with the reduction in aggregate tariff rates across APEC economies and the introduction of computerised tariff databases. Still, trade liberalisation is on a slow track and, of itself, is a concern. When combined with other factors in global marketing and domestic financial control, however, the course and the timing are not so clear.


i. Liberalisation.


The liberalisation agenda contains two aspects: trade liberalisation and capital market liberalisation. While trade liberalisation in itself is not seen as a bad thing and can proceed at an organised and controlled pace since merchandise trade is easily recognised and organised, capital market liberalisation is another matter. Capital market liberalisation is generally viewed by ASEAN and APEC members as dangerous and problematic.


To be sure, there is good reason to be apprehensive about capital market liberalisation. The flow of money across boarders and across the world is mostly unhindered and even unnoticed. Peter Drucker reports that the amount of money moving through the London Interbank market in one day is greater than would be possibly needed to finance the ‘real economy’ of international trade and investment for a year. (Drucker 1995:126)  Capital markets are huge and with the continued growth of e-commerce, financial markets will also continue to move beyond the control and domain of domestic governments.


The essential problem is that domestic deregulation is seen to make economies vulnerable to global financial forces and leads to the boom-and-bust cycles that have been witnessed across Asia. The move toward fully liberised markets holds the fear that countries will give up their monetary independence. In this scheme, exchange rate volatility becomes costly as relative prices between traded and non-traded goods, and between exports and imports becomes too unstable. Given the inevitability of global commerce, the challenge is to find the right mechanisms to lightly manage exchange rates and to institute the necessary financial management architecture to allow domestic economies to survive in the global market place. This requires a separate agenda to trade liberalisation.


In the wake of the financial crisis and the realisation of just how powerful global capital movements have become, there is now a need to make a distinction in the ASEAN and APEC agendas between trade liberalisation and capital market liberalisation. Their continual alignment will endanger the whole liberalisation agenda. It is not only Asia which needs to revisit its financial management systems. In September, 1998, the Bank of International Settlements in Switzerland, called for the strengthening of  “the architecture of the world financial system, which is increasingly beyond the reach of national regulatory powers.” (AFP 1998:42)  Capital market liberalisation is as much a problem for the world as it is for Asia and needs to be approached differently from trade liberalisation.


Still, it is a difficult task to consider trade liberalisation in isolation of macro-economic management issues. The development of competitive advantages, price strategy marketing, market efficiency growth, and trade management, all are interrelated to global financing and borrowing management as well as financial institution management.  The objective of the liberalisation program has been to create efficient market economies and opportunities, and accordingly, there is a role that ASEAN and APEC can play on a regional level in furthering capacity building.


ii. Ecotech.


In addition to APEC’s trade and investment liberalisation agenda, is its concern for economic and technical cooperation (Ecotech) among its members. This is probably the most extensive active area of APEC’s program with some 10 working groups and some 268 separate projects under way.(Scolley 1998:9)  In the context of the financial crisis, the need for improved financial and economic management capacity has increased interest in Ecotech.


Still, the needs of member countries are not the same, nor are they the same as they were a decade ago. Apart from the different rates of development between the Asian Near Industrialised Economies (NIE) and the NNIEs, the financial crisis requires a significant extension of APEC’s Ecotech activities in order to help repair the economic and social damage brought on by the crisis. Indeed, it would not be surprising to see a reorganisation of priorities by APEC of its Ecotech programs and even direct assistance to those economies that have demonstrated a deficiency in institutional and technical capability.


There is no doubt that financial management architecture and government policies need to be revisited and strengthened in order to see Asia return to its previous high level output. At the same time, there is a need to directly address the issue of increased technology capacity and to encourage business growth by making technological development attractive in the host country. Indeed, while Drucker (1995:137)  questions the effectiveness of government intervention based on the Japanese Ministry of Trade and Industry’s failure to successful help business growth, there is, in the present environment, a need for governments to identify Ecotech capacity needs and to seek to provide attractive business development environments. While it is a truism that government doesn’t make growth, business does; in the Asian context, government can through their macroeconomic policies facilitate business growth.


Accordingly, there is genuine role that governments can play in capacity building. Commercial capacity, financial sector capacity and government service capacity all need development. In the area of finance sector training, in particularly, three areas stand out. The need for capacity building in financial management; the need to train staff in international finance, and the need to develop not only domestic but also global financial architecture.


It is quite feasible to imagine that Ecotech will be considered by many of APEC’s members as the new primary consideration. Technology transfer, human resource development and knowledge management, may well become the main regional concerns and focus of, not a trade strategy, but a development strategy for Asia.




There is no denying that E&SE Asia is integrated with the Japanese economy and that countries in this region must look to Japan for their future wellbeing. As the world’s third largest economy, and an economy with extensive influence across the Asian region, the process of redeveloping global capital market architecture in Asia should rightly start with Japan. The October, 1998 decision by the Japanese Government to initiate reforms to the banking system including the nationalisation of insolvent banks was designed to effect the stability of the Japanese finance market and to give impetus to the global capital market. (Sugawara 1998:1)  As the financial crisis was a regional problem, it will be resolved by regional efforts.


Asia, as a region, has been undergoing a transition, or transformation, for some 30 years in particular, as it rapidly moves from an era where social and political life was dominated by agricultural production to the information era where knowledge, communication infrastructure and global commerce influence business, political and social activity. In this context, the Asian financial crisis can be understood not as a problem caused by failure but one brought about by success. It can also be understood as another step along Asia’s path of transformation.


Still, while the observation that Asia will need to continue its technological development in order to participate in the emerging information era, it will not be helped by the imposition of Anglo-American growth criteria. As Asia has developed because of its interrelations and integration, so its commercial destiny will continue to be directed by regional business strategies and growth opportunities.





AFP, (1998) “Call to Revamp Financial System”, The Straits Times, Singapore, Tuesday, September 1.



Astbury, S. (1998) “Asia Defies Economic Wisdom”, Borneo Bulletin, September 4.



Backman, B. & the East Asia Analytical Unit, (1995) Overseas Chinese Business Networks in Asia, Department of Foreign Affairs and Trade, Canberra.



Drucker, P. (1995) Managing in a Time of Great Change, Butterworth-Heinemann, Oxford.



Fallows, J. (1994) Looking at the Sun. Pantheon Books, New York.



Hatch, W.& Yamamura, K. (1996) Asia in Japan’s Embrace: Building a Regional Product Alliance, Cambridge University Press.



Henderson, C. (1998) Asia Falling? McGraw-Hill, Singapore.



Krugman, P. (1998) “What Happened to Asia?”



Roubini, N. (1998) “An Introduction to Open Economy Macroeconomics, Currency Crisis and the Asian Crisis”,



Rubin, R., (1998) “The Asian Financial Situation”, Georgetown University, Washington DC, January 21.



Scolley, R. (1998) “APEC Strategy Towards 1999”, APEC Study Centre Consortium Conference, Kuala Lumpur, August.



Sugawara, S. (1998) “Japanese Agree on Banking Reforms”, Herald Tribune, London, September 19-20.



Templeman, J., (1998) “Flight to Safety: Asian Money Heads West”, Business Week, June 1.