Surprise East Asian Responses to the Financial Turmoil
International Herald Tribune
October 28, 1998
Philip Bowring

Crises engender change. A year or more into the Asian turmoil, the responses of Hong Kong and Singapore, Malaysia and South Korea to severe and unexpected challenge show a reversal of expected roles.

Prickly, straitlaced Singapore, with its espousal of "Asian values," its history of tight government regulation and distrust of freewheeling capitalism, and its past tendency to accuse foreigners of interfering in its affairs, might have been expected to become more of a hedgehog than ever.

That would have meant tighter regulation of banks to reduce dangers of irresponsible lending, controls on foreign use of the Singapore dollar to keep it strong and stable, and official intervention to stabilize asset prices. A distaste for flashy financial derivatives would enhance preference for worthy manufacturing rather than exotic services. Decadent Western values might have been blamed for hedge fund mayhem.

Meanwhile, freewheeling Hong Kong might have been expected to revel in the problems of economies less accustomed to volatile markets — as indeed it did at the start of the crisis. With barely a nationalistic sinew in its body, with a noninterventionist government espousing no particular values except those of the marketplace, and with an economy containing a tiny manufacturing sector and heavily reliant on financial services, Hong Kong would take the rough with the smooth.

If other Asian countries could not stand the heat of financial markets, so much the better for Hong Kong, for 150 years the beneficiary of flight capital from around the region, and the current Asian operations center for many a hedge fund.

But surprise, surprise. Faced with the new challenge, Singapore let its currency fall, accepted that property and share prices had to find their own level, and pushed for lowering of total wage costs. It has actually speeded up financial sector liberalization including, most importantly, opening up the capital market to allow international bond issues in Singapore dollars.

Granted, most of these measures had been planned before the crisis. But Singapore had the wit to seize the opportunity that the crisis offered, rather than be afraid of change. It also had the sense to stop lecturing the world about values. Whether social aspects of Singapore move similarly remains to be seen, but at least there is movement.

Change may be partly attributable to Singapore's sense of vulnerability to the uncertainties in Malaysia and Indonesia. This is no time to be losing friends in the West or encouraging closure of markets in the East.

Whatever the motive, the result is in stark contrast to Hong Kong, whose senior bureaucrats now cross the globe criticizing the excesses of free movement of capital. Foreigners and hedge funds are wrong for exercising their rights to play in Hong Kong's futures markets. They are to blame for volatility, not a fixed and overvalued exchange rate, or rigged (by repeated government intervention) property and share markets; not an unwillingness of the government of a supposedly laissez-faire economy to accept salary cuts. Result: Hong Kong is losing financial business to Tokyo, Shanghai and Singapore, and meanwhile making mere gestures toward reviving its manufacturing sector.

Hong Kong's response may be attributable to a sense that big brother in Beijing will always come to the rescue, if only to save its own face. Another factor may be a leadership which has scant experience of the cruel world outside.

The South Korean contrast with Malaysia is rather similar. The Hermit Kingdom had always been wary of foreign investment and had a long history of government intervention, state ownership of banks, draconian capital controls, etc. Many of its recent problems could be attributed to over-rapid opening to foreign loans and subsequent panic exodus of Western banks. South Korea, with the epitome of a nationalist ethos, had reason to resent the forced sale of assets to foreigners at a time when asset prices had collapsed because of withdrawal of foreign credit.

But, however reluctantly, South Korea has resisted sullen resentment and accepted the idea of change, of opening up, of playing on the terms of the West and Japan and beating them at their own game. It has even gone further than was necessary in paying back foreign banks rather than let the national image be sullied. The process has even been accompanied by huge steps toward normalization of its fraught trade and emotional relationship with Japan.

South Korea has responded to a challenge in a way that keeps its head high and shows that it will change in pursuit of its global goals. Contrast this with Mahathir bin Mohamad's blaming of foreigners for his troubles, and his capital controls on one of the developing world's most open and successful economies.

Recent South Korean liberalization may have been a product of outside pressure and may still be meeting stiff domestic resistance. But it has happened, and yet receives much less attention than Mr. Mahathir's capital controls, although South Korea has a much more important economy.

Only history will tell which country responded correctly to the crisis. But those who reacted positively and realistically to adversity may be more likely to come out ahead.

Copyright © 2006 the International Herald Tribune