International Workshop on AFTA and the ASEAN Economies
February, 1998

The Role of Foreign Investment in the ASEAN Financial Crisis and the Need for New Investment and Trade Strategies


Dr Christopher Reynolds
University of Brunei Darussalam



The Role of F-I in the financial Crisis of Asia



The Asian currency crisis has sent shock waves through all the economies in the region. No South East Asia (SE Asian) country has been left unaffected. Indeed, several countries may experience the effects of recession as economic growth stagnates and market opportunities diminish.

While the issue of the financial crash concerns much of SE Asia, it is of particular interest to ASEAN members as their leading economies have been the hardest hit by as their economies have been devalued. As an Association, there is an opportunity for ASEAN to seek anunderstanding of the problems and to find mutually beneficial programs and policies that may help member countries. ASEAN recognises thevalue of a regional focus to social and economic wellbeing while maintaining respect for individual sovereignty and policies regarding politicaland economic management. In this regard, each country has its own story to tell and its own housekeeping to perform. However, in endeavouring to find the reasons behind the financial crisis and the ensuing economic downturn, perhaps one common thing that lies at the heart of the crisis was the growth of foreign investment to fuel their economic development and trade.

In attracting considerable foreign capital investments, both foreign direct investment (FDI) and capital or portfolio investments, Asian countries have enjoyed rapid economic growth for many years. In 1995, more than $60bil., or two thirds of all FDI flowing into the developing world, came to East Asia1 From 1990 to 1996, foreign capital inflows in Asia quadrupled, amounting to some $100bil. in 1996.2. During this time, FDI was to be far outpaced by Foreign Capital Investments (FI) in portfolios and loans. FI as a proportion of total capital inflows was approximately 80% for Thailand, 60% for Indonesia and 40% for Malaysia) . While FI has been a necessary part of the growth formular, the financial crisis of 1997 and its continued turmoil exposed just how vulnerable Asia has become to global financial sentiment and foreign capital volatility.

The extent of the dependency upon FI became obvious in October 1997. Between October 20 –23, the Hong Kong Stock Market suffered its heaviest losses ever losing 23% of its value in four days. On October 24, it saw a further fall of 10.4%, spilling over to the New York Stock Market where the Dow Jones Index drops 554 points, or 7%, its largest single point drop in one day. From June to December 1997, currencies across East Asia suffered devaluation against the US dollar at alarming rates: The Rupiah fell from 3,500 to 19,000 to the US$, losing some 80% of its value, the Ringgit dropped 55% and the Baht lost 55%. As the financial situation worsened, the Rupiah fell 15% on January 5, and a further 18% on January 8. While Malaysia seemed more stable, new figures on the extent of short-term foreign debt released from the Bank of International Settlements on January 3, was probable cause for a further 18% drop off the Malaysian Ringgit.

Once the rapid withdrawal of foreign funds from Asian began, it had disastrous effects upon the banking sector as domestic panic set in with massive withdrawals of cash and a consequential currency crisis that spread across the region. Local firms and private depositors alike sought to flee the ensuring local currency problems and desperately tried to hedge their losses by seeking the safe haven of the US dollar, which, of course, further reduced the value of their domestic currencies.

The crisis and the ensuing review of bank borrowings and loans has revealed that banks in Indonesia, Malaysia, Thailand, the Philippines and Singapore have accumulated approximately US$73 billion in bad debts, or about 13% of those countries’ economic output. Josephine Jimeney, Senior Portfolio Manager for Montgomery Emerging Funds, estimates that Asian companies have accumulated some $700bil. in debt since 1992.

Short term loans, government guarantees and property speculation had become a volatile financial combination leading to debt fueled growth -and little real wealth creation. Asia has attracted extremely large amounts of private investment capital but an oversupply of foreign capital and the pegging of Asian currencies to the US dollar has ultimately led market forces to correct the estimated over-value of Asian currencies and economic worth.

The focus of the paper is on finance and trade strategies for SE Asia. The concern lies with the effect of the Asian financial crisis upon SE Asian international business. The thesis of this paper is to suggest that the Asian crisis is also an Asian opportunity. Particularly ASEAN countries have the opportunity to reassess the nature and value of their economies and their mutual economic future as part of an emerging global economy.

Properly dealt with, the finance crisis does not challenge the underlying export growth strategies of Asia that have resulted in years of growth.

Indeed, the economic welfare of ASEAN countries is now dependent upon a renewed focus on real wealth creation through export growth strategies and the management of financial services inducive to foreign investment stability.

Why Did Asia Crash?

Over the past 10 year, annual GDP growth for the ASEAN-5 (Indonesia, Malaysia, Thailand, the Philippines and Singapore) has averagedclose to 8 percent. The IMF reports that during the past 30 years, per capita income levels increased five fold for Thailand, and four fold inMalaysia. In Singapore, per capita levels are now higher than some industrial countries. While Asia has grown with outstanding export performance, it has effected growth across other parts of the world, with the US, for example, increasing its exports from 15% in 1990 to Asiato 19% by 1996. South East Asia is now responsible for almost 20% of the world’s exports. Truly, South East Asia is now part of the world economy and accordingly part of the global financial system that supports it.

While the ASEAN countries have been free to pursue their own domestic policies and market opportunities, the influence of the new era of theglobal economy has led to increased pressure on Asian countries to introduce more responsive and responsible financial managementinfrastructure. The currency crisis is an outflow of these growth tensions. Along with world trade has come the injection of huge amounts of foreign capital to fuel trade and development growth. ASEAN, as part of Asia, has become inter-dependent with the rest of the world for its trade, but also it’s finance. Still, in any language, foreign investment, FI, is a synonym for OPM (Other People’s Money) and carries with it a concern for good financial management. In this context of the global market, investors have become increasingly interested in Asia’s domestic economic and political activity and Asia is now experiencing the effects of globalization.

Indeed, the Asia crisis is somewhat unique as ‘crisis’ models go. It didn’t happen for all the usual reasons. First, all of the governments of the victim Asian countries were more or less in fiscal balance without runaway credit creation or monetary expansion. Second, none of the countries had substantial unemployment or a need to increase monetary flows. While governments and economic tensions are usually involved in causing financial crisis, in the Asian situation, government were only secondary players while the financial institutions took a leading role. As Paul Krugman, of the Massachusetts Institute of Technology, suggests, the Asian currency crisis was “… one brought on by financial excess and then financial collapse.” He continues; “Indeed, to a first approximation currencies and exchange rates may have had little to do with it: the Asian story is really about a bubble in and subsequent collapse of asset values in general…”

In hindsight, much of the crisis has been blamed on the mismanagement of funds by Asian banks. The banks, however, while not negating their role in the problem, need to be understood as playing a part in a bigger picture of Asian development. In reality, the banks operate as a conduit for the supply and demand for money and try to capitalise on the exercise. Over 30 years of continued economic growth saw a shift of economic gravity from the Atlantic to the Pacific as more foreign funds sought the opportunities of high returns in Asia. The resulting over-supply of money that followed led to a cavalier approach to fund management and a boom-bust approach by banks making loans for high returns that led to increasingly risky investments into Asian property markets.

The development of the context for the financial crash, to varying degrees involved business, governments as well as the banks. The core to the problem, US Treasury Secretary, Robert Rubin points out, was the close links between governments, banks and corporations which “led to fundamentally unsound investments by corporations funded by unsound lending by banks”. He says that: “Their financial systems lacked transparency, which masked the extent of the problem [and] … had inadequate financial regulation and supervision… In short, the essential underpinnings to a modern financial system were weak or did not exist”.

In the early 1990s Asian governments sought to peg their currencies. In the pursuing years, they moved to deregulate their financial markets. These actions inspired the commercial banks to become active borrowers of foreign money. Competition among banks in a context of government guarantees and inadequate regulation, led not only to risky property development loans, but long term loans fueled by short term bank funding in foreign currency. In making loans in domestic currency, the banks exposed themselves to the risk of currency depreciation and high current-account deficits. As the value of domestic currencies dropped against the US dollar, the cost of the foreign loans became more expensive and banks were left with an inability to make required payments. In the face of failing government guarantees, banks and their depositors were in a crisis.

The crisis emerged for two reasons: First the pegged exchange rates gave a level of security to both the investor and the borrower in their transactions and so they were less cautious than is usual in their investments. When currencies depreciated in 1997 and currency pegsabandoned, (Thailand abandoned its currency peg in July ’97, and Indonesia followed in August) then foreign debt suddenly increased in real terms and corporations and banks found themselves quite severely over-extended. Second, with weakening property markets, developers were unable to meet their debts. While domestic debt increased, repayment loan income was in short supply. In both instances, the regulation of financial institutions and foreign loans was at the centre of the problem.

Still, the crisis must be seen in the light of the growing international economy. The crisis of foreign debt repayments by the banks was theculmination of domestic economic and monetary policy with international financial and economic pressures. Indeed, the financial crisis and the pressures on governments to improve their financial and political infrastructure can be understood as part of the growth pangs of emerging economies adopting capitalism as the basis of their economic life. The wisdom of Asian monetary policies during the early 1990s led a numberof countries to peg their exchange rates to the US dollar. A sign of growing Asian economic strength, it would seem. But as the US dollar started to appreciate against other world currencies in 1995, Asian currencies became more expensive and Asian countries were pricing themselves out of the European and Japanese economies. In the context of an emerging Chinese economy, South East Asia faced stiff competition with cheaper Chinese exports.

Paul Krugman has argued that the ‘Asian miracle’ was hollow and that government-bank guarantees and foreign investment distorted the extent of real growth and wealth creation. The extent of the foreign debt and the sudden withdrawal of foreign investment leaving stock markets badly bruised testifies to the possible validity of such a proposal. Yet, close examination of the actual events of the crash show that much of the foreign investment was indeed Asian investment coming in from ‘other’ parts of Asia and that the real disasters were caused by regional loss of faith in SE Asian currencies.Along with Japan, combined investment flows within SE Asia make up the majority of al FI. The problem was not foreign investment but a lack of economic wisdom as to how to manage, regulate and direct investments toward secure projects by the host country. Still, as one economy, such as Japan or Korea, were effected,so investments were withdrawn from others. All this si to sat that investments, foreign or domestic, play an integral part in economic growth: one effects the other. 

In contrast to Krugman, Steven Radelet and Jeffrey Sachs, of the Harvard Institute of International Development, suggests that there is clearly a history of events that have led to the financial crisis and can be clearly identified and resolved. While it may take two to three years to improve the overall health of the banking sector, the crisis underscores the need to take this time to institute proper regulation and supervision of financial markets in order to create more stable growth in the future.

Another point of view is that the crisis and its solution can be understand simply in terms of credibility and investor confidence. Not to negate anything that has been said, it is clear that foreign investment, followed by domestic investment, was withdrawn as investors and depositors lostconfidence in the banking system and in governments to correct the problem. To a large extent, the financial crisis as such, was a decline of confidence in local currencies themselves. What governments and financial institutions now face is a problem of credibility. As economic and financial infrastructure is improved and investors believe in the credibility of banks and governments again, so their confidence will return followed by their investments. Given that it is likely for foreign investment to return to the market before domestic investment, it is that more important for governments to pursue international favour.

Foreign Investment

While the nature of international money flows and the speed at which money moves has changed, and changed the world economy in the process, the relationship between economic growth and investment capital has only become more apparent. Of particular significance is the steady increasing flow of transnational money through Asia over the past 30 years. Indeed, South East Asia’s economic growth through exports and trade has been fueled by large foreign investments.


From 1980-1995, the world stock of FDI (foreign direct investment) increased from US$514bil. to $2,658bil. This included a rise for ASEAN countries from $ 1980 to $168.8bil. in 1995: Almost a 7 fold increase. Yet, based upon IMF figures, FDI is only 25% of all foreign capital investments in ASEAN, with another 75% flowing as capital portfolio investments. A net private capital inflow of some $700 bil.for 1995.


Not that these statistics represent a problem. They speak of record high growth and exports for Asia and of the willingness of foreign investors to be involved in foreign markets. It also indicates the growth of capital investments, as portfolio investments, in the world economy. The OECD countries, for example, have seen a steady increase in GDP and export growth from 1985- 1995 of approximately 150% while FDI outputs rose some 300%.


By way of definition, FDI usually refers to capital applied to business developments, in the form of joint ventures or project development and maintenance. It usually comprises investments providing foreigners with more than 10% holdings in a business. In parallel, there are the large amounts of foreign capital that flows in the form borrowings by financial institutions and governments. Then, there are the capital or portfolio investments (FI) which are applied, usually on the short term, for dividend and interest returns. These make up much of the movement of stock markets. FI is very volatile, as Asia has recently witnessed.


Yet, it is not just Asia that is the recipient of foreign capital flows and FDI. Since the 1980s, the US became the world’s largest recipient offoreign capital investment. In 1990, FDI had reached a peak of $70bil. in the US. Still, this represents less than 30% of total capital inflows for

that year. At the same time, the US was also the world’s largest foreign direct investor with investments of $251bil. in 1985 rising to $705bil in


Clearly, international monetary flows occur based on private business initiatives and opportunities and not necessarily in response to government policy or economic plans. International financing has become bigger than any government. Foreign investments are seen as vital to economic growth and trade development. Governments in general welcome foreign investment as a source of capital and innovation. The OECD reports of a recent study in Canada showing that for every C$1bil. of FI, 45,000 new jobs were created. Similarly, a New Zealand Government report shows that foreign investors reinvest 90% of their profits, employ New Zealanders in 99% of the positions they create and pay New Zealanders 28% more than domestic firms.


Foreign Investment is not only an indispensable part of the world economy but indispensable to national economic growth. Of course, while FDI is very attractive to nation-state, FI appears less understandable and less manageable or controllable. But it is there, in every economy. For FI to return to ASEAN countries in the volume that has been witnessed in recent years, than economies need to be not only more accommodating but transparent and provide the sort of credibility and security needed to attract and maintain funds.


The Impact of Globalisation


Trade and economic growth are now inseparable from the movement of international finance. The flow of international finance has become so extreme that trade and investment, Peter Drucker suggests, have become integrated parts in the new world economy. While trade and investment are growing fast and take up the attention of most market and economic analysis, money and information flows outside of trade and investment are growing faster. Drucker tells us that; “The centre of world money flows, the London Interbank market, handles more money in one day than would be needed in many months – perhaps an entire year – to finance the ‘real economy’ on international trade and investment”


In this context, investment across the world needs to be seen as one aspect of international and transnational business. The general trend towards globalization is being driven by the changes in the way business is performed.


Alvin Toffler has suggested that the changes that are taking place are so immense that they are actually creating a new civilization. Where the agricultural era was replaced by the dominance of the industrial era, so now the world is witnessing the emergence of the information age. The flow and management of information now define the world economy. The flow of money is preceded and controlled by the flow and management of information. Toffler asserts that what is happening is nothing short of global revolution. A quantum leap in social intelligence. He says; “… we are the final generation of an old civilization and the first generation of a new one.”

Addressing this issue, Drucker points out that the transformation of organisations and business is not confined to the West. This is not a ‘Western’ change of civilization, but the emergence of a world civilization. Drucker agrees with Toffler that knowledge and management of knowledge is the fuel for the emergence of a new world era. This change, he points out, will bring tension as governments and society desire stability and the new organisations and business relationships will want autonomy and flexibility. By nature, modern business organisations are >destabilising and ‘change’ is itself a factor in the business equation. In particular, says Drucker, “Today’s world money flows have become the great destabilisers.” Drucker suggests that for businesses to be creative and survive they will need to be continuing to improve on everything an organisation does all the time, what the Japanese call kaizen – the need to improve the product, the service and the business itself.


It is interesting that in writing in 1994-95, before the financial crash, Drucker could see the sort of financial crisis Asia has just experienced as naturally occurring because of globalising trends. He says the destabilising effect of world money flows force “… a country into ‘crash’ programmes – to raising interest rates to astronomical levels, for instance, which throttle business activity, or into devaluating a currency over night way below its trade parity or its purchasing power parity – thus generating inflation pressures.” In the new world era, the Asian currency and finance crisis was to be expected. Asia had learnt that its economic future depended on export trade and its integration into the world economy. Globalisation has not been Asia’s enemy, to the contrary, the growth of the Asian economies has demonstrated quite clearly that participation in the world economy is the key to domestic economic growth and prosperity.


Crawford Falconer, writing for the OECD, suggests that the trend of globalisation and the realisation that trade and investment have become mutually complimentary, is leading to both the liberalisation of trade and investment procedures and at the same time a international desire toimplement some globally recognised agreements on a set of trade and investment practice disciplines. In the global context, there is no option to return to the protectionism and trade discrimination of the past. For governments to move to instituting liberalised trade and investment regimes is only to recognise the global business trends that have become so apparent.


It is in this new era that the emphasis of the business process moves from supply-side economics and supply-side marketing to demand-side economics and demand-side marketing. The ‘customer’ in the new era is empowered by the vast availability of information and choice in the purchasing decision. The impact of this for world trade is that marketing becomes much more sensitive to emerging markets and customer purchasing trends with the result of increased competition and product specialisation. Demand-side marketing incorporates the ‘change’ factor into process of economics and is seen in what is commonly referred to now as product life cycle: Products now have a half life, and will be replace by a new version or different product as customer respond to market options. In the global economy, production and sales are all now part of regional and international production systems. Goods are produced in one country, packaged in another and destined for several others.


Business management and marketing, as well as banking and finance, are all changing at an alarming rate, a destabilising rate, as the world economy takes form. ASEAN is experiencing some of these tensions of worldwide relationship and worldwide business. There is no preventing the kinds of changes that Toffler and Drucker suggest, there is only the option to learn to manage the change.

The Positive Side of Recession for Asia - finding the opportunity

The effect of the financial crisis is devastating for Asia. In some way, probably every business in the ASEAN countries will feel the effect of what has happened: and perhaps every citizen. The banking sector has been alienated as international short term borrowing rates are extreme and even letter of credit are denied or heavily scrutinised. Money will be in short supply. Next, the cost of imports and foreign services will have increased effecting both business costs and the cost of goods and foods for the troubled countries as their buying power is devalued. In trying to cut cost, both Indonesia and Malaysia have sent home probably over 1 million expatriates to their home countries, and many projects will be curtailed. The extent of the damage, however, can only be superficially counted at this time in terms of financial loss and bank closures. (The social cost and the effect of economic recession are incalculable at this time) In Indonesia, 16 banks were liquidated and in Thailand during >December 1997, the closure of 56 finance houses meant the loss of US$19.7 billion in assets. Indonesia now expects zero growth for 1998 with a 20% inflation rate. Recession is stalking SE Asia. The economies that were doing so well could now see declining growth rates with possibly up to two years before they return to 4-5%. The slump could worsen as shock waves effect the region and the worst hit economies drag the others down. The situation could also effect the demand for SE Asian goods across the world. At least, this is the worst scenario.Yet, there are those who would argue that the writing was on the wall, and it was possible to see it all coming. Krugman believed that the ‘Asian miracle’ was hollow; built on too much foreign capital. Too much ‘hot money’ (invested in stock markets) made the recipient countries vulnerable to international money movements. But like Mexico and Chile, a mismatch of short-term debt and foreign reserves, large current account deficits and overvalued exchange rates, are all common features in SE Asia. Michael Porter, from the Harvard Business School, suggested in March 1996 that massive rates of investment, opportunistic business deals and the lack of growth strategies would slow SE Asia from moving to the next level of economic sophistication. He suggests that SE Asia could only continue to growth, on the basis of its current industrial goods export strategy, for another five years before running into real trouble. Porter’s thinking appears to be complimentary to the thesis put forward by Toffler and then Drucker: The new information era will demand a highersophistication of business, financial management and economic growth strategies.

Still, the ‘recession’ may be over quicker than the prophets of doom would have us believe; stabilising currency rates, returned confidence in the political and banking systems, and reduced spending on unnecessary and speculative projects, could all see foreign investment return the markets to their high seasons within a year. Certainly, SE Asian currencies are all undervalued and markets and currencies will see a rise invalues as positive changes encourage the markets to stabilise. A rebound was certainly evident in the case after the world stock market crash of 1987. On the other hand, this may be ‘the recession SE Asia had to have’. The problems may well not be just ‘short term’ but reflect upon an entire way of doing business in Asia. There is a genuine need to improve the governance of the financial sector, build foreign reserves and make government and business more honest and transparent. At the same time, the ‘recession’ is also a time to reflect on the growth strategies that have built Asia and reassess their value for the future.

In the context of Asia’s future development, Sachs is probably more optimistic than most. He believes that the currency upheavals “reflect short-term financial considerations rather than a long-term crisis of regional growth.” He has no doubt in Asia’s economic future and suggests that by the year 2025, Asia may account for 55-60% of world income, with average per capita income throughout Asia rising to one third that of the US. In 1965 the GDP per capita for the SE Asian countries (Malaysia, Indonesia, Thailand and the Philippines) relative to the US was at 10%. This rose to 21% in 1995, and is projected to rise to 45% by 2025. The average growth rate for these countries from 1996 to 2025 is expected to be some 4.5%. Still, the argument is that growth rates will decline for a developing nation as its costs of production and its income rise in comparison to the US level. Countries with lower costs and income are likely to attract more export opportunities than more developed countries and therefore have a higher GDP growth rate. On this point, Krugman and Sachs agree that economic growth is driven by capitalaccumulation rather than by pure productive gains. Capital investment is a necessary part of the growth paradigm and when seen as income, can indicate the development growth rate of a country. In showing the relationship between income and growth, Sachs suggests that the marginal productivity of capital is likely to decline as the cost of production rises. For developing countries, growth rates tend to decline gradually as theclose the income gap with developed countries.

For example, where a country has an income level of one quarter of the US, Sachs suggests, they would have a growth rate of approximately 2.8 percentage points above the US rate. If the US growth rate is 2%, then the country in question would have a growth rate of 4.8%. This, Sachs says, would give an equivalent aggregate GDP growth of 6.5 –7%. As the income gap declines then so does the level of growth. Japan is a case in point. Where it was presumed in recent years that Japan would become the world’s leading economy, in reality, as its income levels rose, and with it the cost of production, its growth rates tapered off. In its simplest form, Sachs proposal makes logical sense: Countries with cheaper exports are likely to do more trade than countries with high>cost products. With devalued currencies comes devalued exports, making them more attractive to international markets. Following Sachs’ GDP model, it should mean that Asia is able to now grow at levels high than it has been, simply by reducing real income ratios as against the US.

Accordingly, the opportunities for growth in Asia, given other improvements and strategies, are excellent. The conclusion of this analysis is that the financial problems of Asia could be seen as fundamentally growth related. The rapid growth across Asia has been the result of capital growth and productive investment. Investment spending has a legitimate place in growth creation and, indeed, has been the major source of overall GDP growth in Asia rather than purely productivity gains. While there was an over-availability of capital and mismanagement generally of investment infrastructure, the financial crisis will act to resettle and realign the Asian markets. Asian countries will continue to grow and the high-income Asian countries will grow at a slower rate than they have experienced over the past 30 years.

Trade Growth Trends

East and South East Asian countries have used export-orientated programs to achieve economic growth and industrial development. They have also demonstrated that it is possible for poorer societies to substantially transform their economies and see rapidly rising living standards for its

poorest segments. Peter Chow demonstrates that the twin process of industrialisation and export expansion has fueled Asia’s economic growth.

While theories behind Asia’s growth range from Japan’s influence in the region to the role of foreign capital or laissez-faire economics, all recognise the important contribution of export expansion to development success. For Chow, however, the export drive constitutes the majorfeature and causal factor to East Asia’s success.


Sachs holds the same opinion. He suggests that developing countries typically lag many years behind the advanced countries, yet, Asian countries have done exceedingly well at catching-up to the advanced countries in the past two decades. This has not been achieved, however, by following traditional theories of development. There has been no ‘big-push’ by governments, as witnessed in China and Russia, whereby a focused concentration of resources is directed at achieving growth, nor has Asia succeeded by ‘import substitution’ programs implementing protectionist policies to grow national and infant industries. Sachs suggests that their growth was achieved through a ‘flying geese’ model. Developing countries have tended to imitate the patterns of countries just ahead of them. Sachs says the trick “…is to bring multinational production enterprises and their technologies into the poorer economies to link to the engines of growth of the advanced countries.” The consequence of this approach is a paradigm of export expansion. Domestic production and economic growth was linked to world market opportunities and to involvement of foreign firms and foreign capital. Trade and investment were complimentary, indeed, interrelated. The export expansion model, or paradigm, is still the most appropriate for Asia. But, growth figures demonstrate that it has been a changing focus ofthe export ‘product’ that has been behind the growth. Singapore, for example, moved from a production dominance in primary products of 71% in 1970 to a dominance in electronics and machinery of 58% in 1994. Similarly, Malaysia moved from primary product dominance of 94% in 1970, to electronics and machinery of 44%. If Asia is to grow, beyond the 5 year limit as suggested by Porter, it will need to move toward a new sophistication of goods and service export.

With this in mind, again, Peter Drucker provides some insight. He suggests that managed trade is a delusion. The domestic economy, specially in Asia, is responsive to the world economy. The only trade development question to ask is ‘will this policy advance and promote a countries participation in the world economy. Liberalisation of trade policies and free trade itself can only advance such an approach. Second, Drucker >would suggest that the wave of the future is predicated on the trends of today. The question to ask is “what has already happened that will make the future?” If only 5% of the US employment is in agriculture, and 15% in industry and manufacturing, while the service industry (including hospitality, banking, technology,) in the past decade has now reached 70%, it seems there is an obvious current trend that reflects theemergence of a new information age.

The key to SE Asia’s future is trade: The extension, innovation and globalization of trade. Any improvements made to the banking system mustbe done in the context of improving financial infrastructure for trade and investment. Trade expansion, as a strategy of growth, will not only continue to increase prosperity but bring a focus to domestic and regional politics as new interrelationships and opportunities are created.

The ASEAN Response

All ASEAN member nations have been effected in some way by the financial crisis. For the most part, it will primarily be the responsibility of each of the member nations to design policies and make their own adjustments to stabilise and improve their economies. Having said that, there will also be opportunities for ASEAN members to consider what regional and intra-national programs and policies might be put in place.

Indeed, the financial crisis is an opportunity for ASEAN members to consider the nature and value of their economies and the prospects for mutual economic development. The crisis is an opportunity for ASEAN to grow stronger. As a general overview there are four things ASEAN and its member countries can do in response to the crisis and restore international confidence in ASEAN economies

- Move to institute controls over the financial sector
- Seek to make government and business more transparent.
- Address the currency issue on a national and regional basis with the aim
of creating less dependency on the US$.
- Improve intra-ASEAN trade and trade practices.

No doubt, others will be able to add to the list but these issues are fundamental to future considerations in both national and ASEAN forums. Still, one point, above all others, needs to be emphasised again; the future of ASEAN’s trade growth will be dependent upon national, regional, and global reasoning.


Controls For the Financial Sector

Paul Krugman points out that Asia’s crisis was not brought on because economies were unsound but ‘…brought on by financial excess and then financial collapse”. .In the first assessment, the banking industry in SE Asia has appeared incompetent and irresponsible and in need of restructuring. Further consideration of the matter has shown how the banks got themselves, and their countries, into the crisis and that liberalisation of the financial sector will allow international banking competition and professionalism to develop in SE Asia. In the wake of the crisis, there is now little choice; economic and financial reform will take place for the leading ASEAN countries. Behind much of the proposed changes stands the International Monetary Fund (IMF). While the IMF appreciates the differences and similarities in Malaysia, Indonesia, the Philippines and Thailand, its common approach calls for substantial rises in interests rates to slow currency depreciation, and forceful improvement of the financial sector.


Government and Business Transparency

The problem has been knowing where the government ends and the corporation begins. It has become too common for opaque financial systems to hide the true value of loans and debts as well as the extent of government involvement in the support of corporate projects. While the issues of government corruption and extensive and extended interrelationships in government and business are hard to explore and explain, the point is that it all needs to be cleaned up. US Treasury Secretary, Robert Rubin, puts it succinctly when he say that the core of the problem has been the “…close links between governments, banks, and corporations [which] led to fundamentally unsound investments by corporations funded by unsound lending by banks. Their financial systems lacked transparency, which masked the extent of the problem.” It is not surprising that as the IMF made demands for transparency, financial issues spilled over into corporate relationships and then into politics. Thailand, followed by Indonesia and then Malaysia, was reluctant to make decisions that could effect corporate and banking wellbeing or disrupt the economic. IMF advise and loan requirements seemed too harsh, too radical. There seemed to be too much debt with no easy way to relieve the burden. But politics became an issue in itself for these countries as they stalled in making decisions or accepting the IMF’s help. While it may take up to 2 years to make improvements to the finance industry in these countries, and for governments to build confidence in their moral value, the optimistic view is that once there is credibility again, foreign investment will return very quickly and growth ratios will resume at their previous levels.

Currency Issues

There is a general recognition that the shortage of foreign currency and, to be more precise, a dependence upon US currency has played a major part in the financial crisis. It is understandable that there is a common desire to reduce demand for foreign currency in trade and to move away from dependency upon the US dollar. Encouraging ASEAN countries to move away from this standard of exchange, even for intra-ASEAN trade, can only help economic growth and decrease vulnerability to foreign currency demands. In the wake of the crisis in 1997, the

ASEAN Heads of Government (HSOG) met in Kuala Lumpur in December, 1997, and confirmed their commitment to increase trade-interactions within the region as a way to overcome the currency devaluation problem that ASEAN countries were suffering. It was agreed that intra-ASEAN trade could not only continue as before, but increase as long as prices remained competitive. Aware of the shortage of the funds problem that escalated the currency crisis, the HSOG Meeting encouraged countries to consider establishing appropriate ASEAN payment arrangements, allowing countries to conserve foreign exchange. There are numerous suggestions regarding currency regulation. One idea would be to create an AMF - an Asia Monetary Fund. The idea here is to create a regional body that can make development loans and monitor economic activity as well as stabilize currencies. Another idea is to introduce a currency board for the region. Again, the idea is to take a regional action to try and set exchange rates and prevent the kind of rapid devaluation of currencies that has been experienced in 1997 and 1998. While, such ideas may have merit, ASEAN will take its time to find a suitable and mutually beneficial answer. At this time it wants to recognise the role of the IMF to aid and support economic development for ASEAN countries, and to support measures to strengthen the

IMF’s ability to respond to financial crisis. In the context of the current need, the HSOG, at its December meeting, also endorsed the proposal that the newly formed ASEAN Central Bank forum be managed by a Select Committee with a permanent Secretariat. It is to work closely with the Asian Development Bank to “…develop in close cooperation with international financial agencies, a regional surveillance mechanism that would emphasis preventative efforts to avoid the emergence of risks that would precipitate a crisis.”

Improve intra-ASEAN trade

ASEAN countries have been growing at a excellent pace. Total ASEAN exports have expanded from $296bil. for 1995, to $323bil. for 1996, which represents an 9% increase, more than double the growth in world trade. At the same time, intra- ASEAN trade grew much faster, increasing from $68.7bil. for 1995 to $77bil in 1996, representing a 13.4% increase. Although, currencies may have been overvalued and financial management within ASEAN countries exposed the need for increased regulation and growth strategies, ASEAN countries have continued to demonstrate the strength and size of its export capacity.


The ASEAN Heads of Government Meeting in December, 1997, reaffirmed its recognition of the importance of trade to ASEAN growth and again showed commitment to the advancement of its intra-trade strategy. The Meeting agreed that plans for the ASEAN Free Trade Area (AFTA), the ASEAN Investment Area (AIA) and the ASEAN Industrial Cooperation (AICO) scheme be accelerated to increase intra- ASEAN trade. It also felt that further measures should be encouraged to increase the speed of goods in transit. They felt these measures would increase intra-trade and further integrate the ASEAN economies. An additional consideration for intra-ASEAN trade would be the encouragement of countertrade. Given the existence of a free trade zone and of enhanced trade flow, countertrade would certainly increase trade and reduce the dependency upon foreign exchange. There is no reason why various forms of countertrade, such as, counterpurchase, offsets, buybacks, and switch trading, could not all be active in the ASEAN region. This procedure has been popular for Asia in its international for some time as Western countries were forced to buy Asian goods in return for European or American goods. There is no reason why this practice, in its various forms, could not be further encouraged for intra-ASEAN trade. ASEAN is committed to implement AFTA and the HSOG Meeting in December expressed its desire to see it actualised by the year 2003. The depreciation of the ASEAN currencies has actually created favourable conditions to increase ASEAN exports both within the region and internationally. The HSOG Meeting believed that the economies of ASEAN countries remained strong and that the implementation of AFTA would facilitate long term adjustment of economies to enhance ASEAN financial resilience and make ASEAN countries that much more attractive to FDI and FI. What is evident is ASEAN’s commitment to develop regional strengths. An extension of this commitment is the ASEAN 2020 plan – a partnership in Dynamic Development – that will seek to forge closer economic integration within ASEAN. Under such a plan, trade liberalisation, the free flow of investments, and free trade, will move ASEAN in the direction of an economic union. From the desire of nation states across the world to form regional unions, it would seem that regionalism has become of itself anaspect of globalisation. While the flow of information, services and finance are now bigger than regional containment, regional groupings, whether in Asia, Europe or America, offer political, economic and social benefits through cooperation. There is no doubt that the sharing of resources, and developing human and economic services will benefit ASEAN countries, and it would seem that ASEAN is moving in that direction.



SE Asia’s continual growth and international business has forced them to move from centrally planned economies to market-responsive economies. In this broader explanation of the region’s political and economic development, the financial crisis of 1997-98 can be understood as another step in this direction. SE Asian governments, along with businesses, are learning to participate in global capitalism; although the nature of capitalism is itself changing in the new information era. The journey over the past 30 years has produced positive results for SE Asia and there is no reason to suspect that the changes that occur in response to the crisis will be anything but positive.


The ASEAN Secretariat, in its 1998 Macroeconomic Outlook, believes that the turmoil will not linger past the second half of 1998. The situation is likely to help the recovery of export growth as well as slow down import growth. For Indonesia, in particular, economic growth is expected to slow down to 7.5 and 7.7%. Malaysia will moderate and will be about 8%, while Thailand will slow to 2.3 % and Vietnam is expected to grow at 9 - 9.5%. While these figures may prove to be optimistic, there is a good chance that they may also prove to be right.


Still, ASEAN’s future lies beyond growth rates reflecting a process of industrialisation and catch-up. Of course, developing countries will develop quickly as investments seek to capitalise on export trade. ASEAN’s future lies with moving beyond being ‘flying geese’ following behind the trends of the leaders. While this works for SE Asia at present and in the near future, in the long-term, it is not sustainable.


The consequence of the Asian crisis is the opportunity for ASEAN to reassess and redirect its focus toward being a leader in the global economy. ASEAN has the opportunity, as a regional body and as a collection of member countries, to create new and enhanced trade growth strategies. That is, trade strategies that are global in focus and are directed at meeting global demands – growing demands, and new trends.

Both Porter and Drucker suggest that to think in terms of global economics is to allow the future, rather than the past, to dictate the present course of action. It is demand side economics and allows future market demands or trends to create innovations in business in the present.


A Global Demand Strategy will allow for the development of real value added wealth creation and not superficial overvalued economics. It will mean moving to an era of innovations in production, service industry development, and trade not based upon the trends and successes of other industrialising Asian nations, but based upon current and future world demands.


This can not be achieved over night. It requires serious consideration. But then Asia has always been good at taking the long-term view. In the meantime, and with prescriptions for restoring confidence in ASEAN economies taking shape, Asian countries are likely to continue to see rapid growth. The energy already exists for this to happen. Globalisation is dissolving boarders as money and commerce seek international opportunities. The best that government and regional bodies can do is to enhance and support this natural growth.