Financing East Asia's Success

by MICHAEL T. SKULLY and GEORGE J. VIKSNINS

PREFACE

The title of this volume is a bit ambitious, for we do not focus explicitly on China or Japan, the two most important countries of East Asia, but rather on four pairs of developing countries in East and Southeast Asia. We believe that the experience of these eight market-oriented and relatively open countries during the past three decades presents some valuable lessons for other developing countries in Asia and the rest of the so-called 'Third World'. They are all successful cases of export-led growth, but also more than just that, though their past successes may be much more difficult to replicate during the next 30 years. Broadly speaking, these eight countries, along with Japan (and perhaps Pakistan and Sri Lanka recently), could be called 'The Capitalist-Roaders of Asia'- a title we considered for this book but discarded as overly cute.

The eight countries we discuss include seven independent nations and the very interesting multi-national entity of Hong Kong. Politically their history represents a mixed picture. Although the term 'Crown Colony'is now seldom heard in polite society, Hong Kong will continue to be administered by the British until 1997. Singapore and Malaysia are also former British possessions. Most of Indonesia was colonized by the Dutch, while the history of the Philippines contains elements of both Spanish and American influence. Thailand managed to preserve its independence during the colonial era, while both Taiwan (formerly Formosa) and Korea fell under Japanese domination during the first half of the century. Despite this heterogeneity in historical backgrounds, there seems to exist a good deal of political and sociological similarity in all eight of these modernizing societies. Today they all have relatively stable and firmly anti-communist governments with a fundamentally Western (and even a pro-US) tilt, although their political alignment has varied over time and country-bycountry. For example, Indonesia started out as militantly non-aligned in the 1960s, which tended in practice under Sukarno to mean 'antiAmerican'. On the other hand, South Korea appears to be quite willing even today to maintain a close working military relationship with the US. In Taiwan public opinion is probably much more proAmerican than American opinion is pro-Taiwan, though that is a bit of an over-simplification. Thailand was formerly the home of six air bases and a major military port for the US Navy and fought on the US side in Vietnam. The Philippines still houses major US military installations at Subic Bay and Clark air base. Both countries, however, are continuing to re-examine their long-run strategic interests, and the change of government in the Philippines may call into question its strategic relationships as well. With an eventual resolution of the conflict in Kampuchea, the members of the ASEAN (now also including Brunei) are fervently hoping that its ZOPFAN concept (Zone of Peace, Freedom, and Neutrality) becomes a reality in Southeast Asia. In all eight countries a genuine system of parliamentary democracy and party politics cannot be said to exist - as it similarly does not in Japan. As in Japan, however, the requirement of political stability does not entirely eliminate dissent, discussion, and even demonstrations. By and large, ordinary citizens are free to come and go, send their children to study in Cambridge, Tokyo, or Sydney. For most, it is also possible to deposit some of their assets with the Gnomes of Zurich, London, or Wall Street. Except for the two city states of Hong Kong and Singapore all countries still have a sizeable and productive agricultural sector, but are industrializing rapidly. All eight have significant trade and investment ties to Japan, the US and Europe, as well as with Australia and New Zealand.

Their future economic significance is likely to increase even further if we extrapolate recent trends. American trade with Pacific Asia now surpasses that with Europe. The export performance of the 'Gang of Four' - Hong Kong, Korea, Singapore, and Taiwan - has been based upon the competitiveness of their manufacturing sectors, but the other four countries enjoy a rich assortment of natural resources. For example, both Indonesia and Malaysia are exporters of oil and gas, tin and rubber, and other important primary commodities. Exploration for hydrocarbons is continuing in both the Philippines and Thailand, which are now energy importers, but experts are quite optimistic about their potential in that field. In general, future prospects are predicated upon the continuation of relative stability, both economic and political, in all eight of these countries. A key indicator of such stability - of people's expectations about the future - is the rate of inflation. A high rate of inflation essentially reflects a vote of no confidence for the policy-makers of that country, an unwillingness to hold money issued by its monetary authorities, and a fear of property expropriation.

These expectations and fears are also reflected by the long-run movements in a country's foreign exchange rates. Thus, a rise in money holdings per capita - expressed relative to income or in foreignexchange equivalent units (Special Drawing Rights (SDRs), for example) - reflects the relative financial development and over-all outlook for these eight countries. It can also be argued that an increase in money holdings per capita is likely to be associated with increased popular participation and a more equal distribution of income and wealth.

The proximate cause for the writing of this volume was a conference on inflation in East Asian countries, which took place in May 1983 in Taipei. The conference was sponsored by three organizations: the Chung-Hua Institution for Economic Research, the Taiwan Institute of Economic Research, and the American Enterprise Institute for Public Policy Research. During the spring semester of 1983, Michael T. Skully was a visiting research associate at Georgetown University on study leave from the University of New South Wales. George J. Viksnins, of Georgetown University, participated in the Taipei conference as a discussant, and the idea for this book was born - to combine our mutual interest in financial development in Asia with the main findings of the conference papers in a companion overview volume with the latter providing a summary for the non-specialist. In a very general sense that has been done - spiritually, this book is a supplement to the handsome volume of conference proceedings already published in Taiwan by the Chung-Hua Institution of Economic Research. However, we quickly realized that we did not want to write a 50-page summary of the conference, which at times got a bit esoteric, but a somewhat longer and more general overview for scholars, businessmen, and other readers interested in the area and the topic.

The resulting product is truly a joint effort - with 60 per cent coming from both authors. Michael T. Skully had primary responsibility for Hong Kong and Singapore and Indonesia and the Philippines, while George J. Viksnins agreed to concentrate on the other four countries. However, since Skully had just completed a project dealing with Malaysia for the World Bank, and was engaged in a comprehensive consultancy with the Asian Development Bank on related matters as this book was being written, a good deal of the factual material in all chapters came from Skully and a lot of the overly expressive prose from Viksnins. We owe an intellectual debt to all the many people implicated in the bibliography, and a number of others who read bits and pieces of the final draft.

Also, the authors wish to acknowledge with gratitude the help of a number of people, who provided factual information and/or useful advice, but who should not be blamed for any shortcomings that still remain. A partial list of these individuals includes Francis Chan (Citibank), Hang-seng Cheng (Federal Reserve Bank of San Francisco), Kasigod Jamias (Sycip, Corres, Velayo & Co.), H. S. Kartadjoemena and D. Nurjaman (Bank of Indonesia), Paul Lau (United Overseas Bank), Soo Shin Lee (Bank of Korea), Yung-San Lee (Central Bank of China), Chen Young Mee (Monetary Authority of Singapore), Viraphong Vachratith (Bangkok Bank), J. H. Y. Wong (Hong Kong and Shanghai Banking Corporation), Kwi Sob Yoon and Chang Ho Choi (Bank of Korea), as well as Robert Emery of the staff of the Board of Governors of the Federal Reserve System and Maxwell J. Fry of the University of California at Irvine. Thanks go to Tom Johnson and Ed Somensatto of AEI which provided financial support for this volume, for their patience and encouragement since the project took rather longer than was anticipated, as well as to Keith Povey for a fastidious editing job. We should also like to thank the staff of the Georgetown University economics department: Susan Bredenberg, Joe Ganley, Michael Guidry, Shirley Kan, Allan Mascarenhas, Jacqueline Pirozzi, Kurt Stitcher, Tony Turjoman, and a number of others who patiently processed the words that follow.

Finally, we hope that the future of all those millions of people in these eight countries that we have visited will indeed bring with it continued increases in real money balances per capita.

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