"East Asia has both greatly benefited and greatly suffered from the effect of globalisation". Discuss.

Whilst protectionist measures where still in place in many of the regions economies, the spread of capitalist ideas where unable to have much effect on them. Therefore, many economies adopted export processing zones (EPZs), which allowed free importation for export production, though only in controlled geographical regions of the country. China is one example of this, where the government allows these zones to be set up in areas such as Shenzen, and Xiamen.

FDI has been a main source of development aid in Asia, and has helped the more open economies pull quickly through their industrialisation period. Since the mid 1980s FDI has grown faster than trade for Asian economies, and the primary mechanism of integration has shifted to it. What is important here, and a common element is the importance of MNCs. They bring in to a country much needed foreign exchange, and build new facilities, which are known as ‘Greenfield investment’. Furthermore, by MNCs merging or acquiring firms in host countries, they spread managerial, marketing, and technological expertise. “In the case of developing countries as a whole, inward FDI is twice as significant to the domestic economy as in developed countries”. With the decrease of outward FDI in the primary sector, and consequently an increase in FDI in service sector, it has led to faster rate of development. Although “until the early 1980s, the bulk of FDI was in manufacturing industry and was an integral part of the rapid growth and internationalisation of economic activity

Finally, South Korea has been one example of how Asian countries can expand beyond their own markets. This is seen through Korea’s ‘segyahwa’ (globalisation) policy, where the chaebol have pursued investment in European markets. In the long term, what this achieves is the growth of Korea’s domestic firms, and enables them “to acquire an independent technological capability, based on the notion of overseas investment acting ‘as a bridge over which necessary, advanced technology can enter the domestic arena’ (Korean Ministry of Finance and Economy 1995)”. 

A possible understanding of globalisation is that it is the process of creating a single global financial market. In order to achieve the homogeneity, differences in national financial markets must be minimised. Differences in financial markets are often due to differences in regulations regarding their operation. Deregulation of national financial markets that seek to harmonise regulations with those of other nations is therefore an important aspect of the globalisation process. The euro-market has helped the stem of this financial globalisation which has transpired to Southeast Asia over the last several decades. With Europe experiencing high influxes of ‘hot money’, it is easy to see why economic fundamentals have allowed for trillions of dollars to be exchanges in one economy over the time period of one day. This is mainly due to investors not paying deposit insurance, economies not having any interest rate regulations, and either low or no taxes. Contrary to this, Asia began to experience waves of ‘hot money’ which is what leads us to the collapse, and reform of many financial institutions in the region, as a result of globalisation, which has shifted control increasingly away from the national governments to the MNCs and financial institutions.

The immediate implication of this has been the “increase of relative importance of the external compared to the internal or home market in almost every nation”. This has had an impact on the handling of the financial institutions, with governments keeping a much tighter control on their fiscal and monetary policies, aiming to maintain low budget deficits and interest rates high. What had happened in the region was a severe blow of confidence to a region which was developing at a miracle rate. Moreover, what this does is discourage future investment and inflow of capital into these nations which have adopted new economic policy following the crisis. In the long run harming the ability of potential economic growth and stabilisation.

Further to the shift in economic policy, many nations in Southeast Asia have begun to resemble strategies of multinational corporations. Countries are now attempting to cut labour costs in relation to productivity, and so try and gain a competitive advantage over other nations. “With demand management policies abandoned by governments, the focus of national policies has also shifted away from the size of the market. Since the size of the external market lies largely beyond the control of individual national governments, macroeconomic policy now focuses on capturing a bigger share of the external market”, by gaining competitive advantage.

What financial globalisation has done in effect is reduce government control over its financial markets due to the spread of capitalist markets and speculators. As I will explain further in this essay, the effect of foreign speculators, and investors in Asian markets was one of the more prominent reasons for the Asian financial crisis. One of the main players to voice a concern about the financial trends in Asia was Dr Mahatir Mohamad by pointing out that he felt his government had lost control of their own financial institution, and that control was placed in the hands of Wall Street speculators.

From 1945 to 1997 the Asian economic miracle fuelled, what was regarded at the time of expansion, as one of the greatest expansions of wealth ever experienced. Many theorists and economists were speaking confidently about an ‘Asian Century’. Many had predicted that by 2020 the Asia Pacific region would produce 40 percent of the world total GDP, while the U.S and the European markets would recede to 18 percent and 14 percent respectively.

The crisis in Asia came as a shock, and many were later to blame the financial crisis mainly on globalisation, such as Malaysian President Dr Mahatir. This is a valid point, and is not just a conspiracy theory, although it was not so much that globalisation had helped cause the crisis, but that is fuelled its journey through the region, with the help of international financial centres and speculators. Furthermore, it is still debatable whether the regions crisis was related to the crisis in Russia and Brazil, as a result of capital outflows.

The unfolding events of the crisis began in early 1997, when a decline in Thailand’s exports caused domestic and foreign investors to lose confidence in that the government could not maintain the Baht pegged to the dollar. What consequently happened was that on the 2 July the Baht was de-pegged. Speculators like George Soros lost confidence in what they saw as an overvalued region, hence the region experience a huge outflow of capital. This left a high ratio of non-performing loans, and caused most of the domestic banking system to become insolvent, and financial institutions were unable to repay loans denominated in foreign currencies. Thailand, and Malaysia were hit very badly by this, and saw a drop in GDP, however Indonesia probably suffered the most and saw its economy shrink 14 percent. Not all economies suffered to that extent. The Philippines, who had just recovered from an earlier crisis, did not suffer as it had not experienced a surge of short term capital inflow. Singapore resisted the brunt of the crisis, as well as the transitional economies of Cambodia, Laos, Myanmar, and Vietnam, due to their closed economic policies.

What is important here is the economic fundamentals which were spread as a result of the regions globalisation. The region benefited from positive macro-economic fundamentals, which saw a stable economic and political region, with strong historical growth over the last several decades. Furthermore, there were liberalised trade and investment regimes in that “fiscal policies were prudent, with most countries enjoying surplus or balanced budgets; inflation rates were single digit; domestic savings rate were very high; international reserves were adequate when measured against imports; and debt/GDP ratios were not unduly high”. As a result of these economic conditions, the region experienced an influx of foreign capital, with investors and foreign banks speculating on “high gain with low risks”. When the surge of short term capital was withdrawn, the foundations of a financial crisis had already been laid.

The impact of the crisis in Indonesia had several effects, which emerged soon after the floating of the Thai Baht and Malaysian Ringgit, especially on the real sector. The devalued Rupiah did nothing to force exports up, and the increase in foreign debt caused a cut back in investment rates in the private sector. On the street level, individuals too cut back on consumption, and “finally the government cut back on its own spending, adding to the general reduction in aggregate demand”. Other implications were still having effect, with unemployment reaching the millions, corporate profits began to drop rapidly, which led to even bigger unpaid debts, and consequently a decrease in share prices which weakened the Rupiah. This had further economic repercussions, with inflations spiralling out of control through to early 1998. The region was also experiencing an environmental phenomenon called El Nino, causing food price to rise because the drought had reduced agricultural pruduction. From a financial sector point of view, Indonesia saw the government close down sixteen private banks due to severe liquidity problems. The resultant effects of this meant that confidence was lost domestically with peolpes deposits, and certainly with potential freign investors. While most of this could be attributed to the Thai Baht, and by some to globalisation, its difficult to shed away from the opinion that policy played a significant part in the country’s economic downturn. “A complex set of microeconomic policy concerns and political consideratrions then began to interact with this macro policy-induced problem so as to turn what initially seemed a minor financial disturbance into an economic catastrophe, resulting ultimately in the demise of the thirty two year old ‘New Order’ regime of President Soeharto”.

In Thailand where the crisis stemmed from, the poor suffered the most, even though they did not even benefit from the boom experienced in the fifteen year period leading up to the crisis. Wages for unskilled workers fell dramatically, and many lost their jobs. Food prices as in Indonesia continued to rise, as drought vanquished any prospect of a quick turnaround.  The wealthier branch of the nation saw their assets subside immensely in value, along with high interest rates, many were unable to service foreign debt. The crisis hurt on an institutional stage, with “a total of fifty-eight – two thirds of the country’s finance companies – had now been suspended”. China avoided much of the extent of the crisis compared to other Asian nations, due to its reliance on foreign direct investment rather than debt financing, though were not completely passed over when the impacts hit the region. “Reduced foreign investment from other Asian countries, more severe export competition and a shrinking international market in the aftermath of the crisis have led to a slowdown of China’s economic growth”.

When discussing the impact globalisation has had on the poor parts of East Asian society, it is obvious to see that there has been a significant change in opportunity because of the openness of their state economy. However, most argued cases against globalisation do not suggest that globalisation is increasing poverty, but that it is having a detrimental effect on the equity of the regions population. This implies that the gap between the rich members of society and poor is stretching even more due to global integration.

“In the early 1970s, more than half the population of the Asia- Pacific region was poor, average life expectancy was 48 years, and only 40 percent of the adult population was literate. Today, the percentage of poor people has decreased to around one third of the population, life expectancy has increased to 65 years, and 70 percent of the adults are literate”. This is how Clay Wescott of the Asian Development Bank has observed the progress of poverty reduction in Southeast Asia since the early 1980’s. The impact from this point of view on globalisation has been favourable, and the facts clearly speak volumes. Poverty reduction however, does not ensure the narrowing of income disparity. Since the 1980s, deregulation, reduced government interventions, declining commitment to earlier redistributive mechanisms, and greater government efforts to meet expectations of investors and foreign capital through MNCs have perhaps contributed to increased inequality in the region. Although rapid growth and export orientation have helped reduce the incidence of poverty, effective state mechanisms for redistribution have yet to be seriously adopted. The problem with globalisation here is that while it provides great opportunity to growth and development, it mainly benefits those who are endowed with skills, and are able to take advantage of open markets. While benefiting the educated, this leaves a wider income and social disparity with those who are unable to attain the necessary skills. To overcome inferiority like this, governments of the region must make the necessary changes in the legal an institutional framework to adapt to the global environment.

 

Whilst globalisation is having a positive effect on most areas of developing nations economies, when it comes to casting decisions on the world stage, it is the wealthy countries that set the agenda, with very little developing nations can do. This often leads to an uneven global trading system, where rich countries push for further import trade liberalisation of the poor countries, while the latter face difficulties in accessing the wealthier nations markets because of barriers against agriculture and labour intensive manufacturers.

Finally, away from globalizations effects on economic growth, we have witnessed other impacts it’s had, threatening social disintegration. The spread of Western influences such as MTV, and Hollywood have undermined traditional values and cultural identity, which the internet has helped proliferate. Furthermore, the environment is in danger of being harmed through forestry, mining and fishing. Ozone depletion consequently is a risk, as well as global warming through the greenhouse effect.

What much of this essay proves is that globalisation as a process is unavoidable, and irreversible, and undoubtedly leads to economic growth. As we have seen, the regions governments can not take economic growth for granted, and more governance and direction, with reformed financial institutions and possibly a reformed IMF need to mitigate the volatile globalised markets. East Asia has learnt that with global integration come external shocks, which in 1997 many countries were not ready for. With this in mind the Asia Pacific must learn to be economically competitive, and draw as many benefits it can from the inevitability of an ever racing globalising world.

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