Economic Stability: Will Asia's Economies Fail or Return to Growth?
Dwight H. Perkins
For three decades the economies of East and Southeast Asia grew rapidly despite flaws in the institutions governing them. The Asian financial crisis of 1997–98 revealed the underlying weakness of the industrial policies in the region. Close government-business ties created extreme forms of moral hazard that led to excessively risky investments, which in turn led to weak financial systems overloaded with non-performing assets. Despite these institutional weaknesses, many of the economic fundamentals in East and Southeast Asia remain strong—except in Japan. The rate of investment in most of the region remains high, many countries have large low productivity labor forces that can be shifted to higher productivity jobs, and educational levels in most countries are high. The degree to which these fundamentals will translate into high rates of growth over the next decade will depend on the pace at which these countries reform their economic institutions.
In that respect Korea has been a leader; China has also vigorously tackled reform since the late 1990s. Japan and Indonesia, however, albeit for different reasons, have done little to put the necessary reforms in place.