East Asian Growth

The 'Asian Tiger' economies experienced an economic ‘miracle’ during the 1980s and 1990s and a financial crisis in the late 1990s. The miracle did not last too long as with all economic ‘miracles’ it was flawed. The 'tiger economies' include Japan, South Korea, Taiwan, Thailand and China and Hong Kong and Singapore were among the best performers.

One of the important factors of some of these East Asian economies is the way businesses conglomerate around a central business and bank. In Japan they are called 'keiretsu' and are the successor of the large conglomerates known as 'zaibatsu' broken up after World War II as part of the reform programme. They are large family controlled vertical systems. There are 6 post-war ‘keiretsu’. They operate as a mutual support system with a financial structure that lowers the cost of capital for industry. The number of 'keiretsu' is very small. The 'chaebol' system that operates in South Korea is also made up of conglomerate groups. The 'chaebol' families dominate the South Korean economy.

The Asian financial crisis began with a loss of confidence among investors and institutions in the international financial markets. In Thailand the currency collapsed. The loss of confidence led to rapid outflows of capital from affected countries. One flaw in the system was that the problems were made worse by the close links between the firms in the 'chaebol' and the banks at their centre. Another was to try and peg the exchange rate of an emerging economy, Thailand, when even major currencies were fluctuating.

Financial crises have been fairly common - Israel, Argentina, Chile, Uruguay, Mexico and Scandinavia. It is not unusual for countries experiencing rapid growth to experience economic problems. Rapid globalisation of business and financial markets is a cause for concern. They are difficult to regulate. The tiger economies may have been a victim of their own success. They became too attractive to investors and institutions with huge amounts of capital. The fact that there was such a loss of confidence suggests that the emerging markets were not seen as a long term investment.

The 'chaebol' invested in a diverse range of industries with no apparent synergy. It may also have been a mistaken Government policy to encourage the expansion of certain industries. Increases in production capacity have created large industries. In Japan the ROI fell for years in some other countries it was worse.

The problems that led to the crisis already existed in the Asian economies but the financial crisis brought them out into the open. Things are changing as foreign companies are becoming more active in certain areas as 'keiretsu' loosen control. In South Korea the 'chaebol' are reforming following the crisis and more recent problems. They also have to adjust to the emergence of China as a leading world economy and accession to WTO. Reform and restructuring may help the Asian countries affected worst by the crisis to recover and return to more sustainable growth and expansion.