Friday, May 18, 2007

New light on east Asian crisis

In my post yesterday on the east Asian crisis, I mentioned the list of "causes" commonly trotted out.

FT has an insightful edit on the subject. It argues that the vulnerability to capital outflows arose from a more fundamental cause: the erosion of competitiveness of east Asian exports following the rise of China. This is also the reason that post-crisis growth in the east Asian economies is a full 2 percentage points below pre-crisis levels.

It now seems that the crisis of 1997 was not the cause of Asean's woes but rather a highly dramatic symptom. The export performance of the "tiger" economies deteriorated in the 1990s, leading to large current account deficits, and vulnerability to capital outflows. That was partly due to inappropriately high pegged exchange rates, but also due to China's emergence as an exporter, creating a vast new competitor with an almost limitless capacity to sell at a lower price.

That has meant a change of economic model for the tigers, away from exporting finished manufactures to advanced economies, and toward exporting ommodities, components and services (such as tourism) to China. Asean can still grow, and grow fast, but there is now a speed limit. Until another generation has passed, and China itself has grown rich, export-led industrial growth will be hard for anyone to achieve. Ten years on, the meaning of the 1997 financial crisis is starting to become clear.