“if You Want to Get Somewhere Else, You Must Run at Least Twice as Fast as That!”: the Roots of the East Asian Crisis

The primary hypothesis in this paper is that most East Asian economies have been following growth trajectories which involve ever-intensifying competition in external product markets. The financial crisis of 1997-98, whilst clearly having roots in the operations of both global and national financial systems, is in large part a reflection of these long-run growth trajectories. This is because the concentration by these economies in commodity-sectors with low barriers to entry has resulted in macroeconomic policies which depend for their success on depreciations in real exchange rates. The crisis in 1997-98 reflects a return to these growth-paths after the divergent appreciation of real exchange rates in the early 1990s. Not all Asian economies have followed this path, with Japan, Singapore, Taiwan and perhaps Korea being the exceptions. The analysis is pursued through the calculation of long-run terms of trade and real exchange rates, and through a case-study of the Korean electronics sector.