ABSTRACT
Robert Wade begins his account of “the history of the [Asian] crisis” by explaining the background to the “capital push into Asia” (Wade 1998a: 1538).1 The starting point was, Wade argues, the Plaza Accord of 1985, which “caused a rise in the value of the yen against the US dollar” (ibid.). In response, “Japanese companies sought a new cheaper manufacturing base in a US dollar zone”, and for this purpose, “Southeast Asia was the obvious choice”—in addition to being close to Japan and having currencies pegged to the US dollar, these countries could offer “cheap and well-educated workers” (ibid.). These factors, combined with “very cheap credit in Japan” and “strong Japanese government encouragement”, resulted in a “Japanese-led investment and export boom in Southeast Asia” (ibid.). At the time, not only Japan but also European countries were trying “to stimulate domestic consumer demand and economic growth by means of expansionary monetary policies” (ibid.). These policies were, however, of limited effectiveness and thus the result was “excess liquidity in the world system at large” (Wade 1998a: 1539). This excess liquidity “spilled over into fi nancial asset markets worldwide”, Wade explains, with much of it ending up “in the hands of fi nancial institutions in the United States, Japan and Europe”, which “invested in the US stock market . . . [and] heavily in Asia” (ibid.). These factors combined to create a massive increase of capital fl ows into Southeast Asian countries. From 1994 to 1996, capital fl ows to South Korea, Indonesia, Malaysia, Thailand and the Philippines rose from $47 to $93 billion, with private commercial banking accounting for $32 billion of the increase (ibid.). “The fl ow of borrowed money had a self-reinforcing effect on confi dence, investment and economic growth”, Wade argues, and thus, he contends, “there was less and less compulsion on the part of lenders, borrowers or governments to improve fi nancial supervision or control bank asset quality” (ibid.). These capital fl ows were, however, “premised on the assumption that the exchange rate would hold”—which, ultimately, it didn’t (ibid.).
