A Note on the Role of Banking in Developing Economies in the Aftermath of the East Asian Crisis

The End of the East Asian Model? The East Asian financial crisis in 1997, as well as the prolonged slump in Japan in the 1990s, is widely perceived as casting doubt on the viability of the so-called East Asian model in the context of increasingly integrative and competitive financial markets. Some people have been prompted to claim the end of the East Asian model and the universal superiority of the so-called Anglo-American model. However, such a claim is often based on an ambiguous and scientifically unspecified notion of the " East Asian model. " It also holds that an economic model that has been proven successful in a particular historical and developmental context have universal applicability and therefore ought to be emulated anywhere. Any arrangement that deviates from such an ideal model is diagnosed as outmoded and is therefore rejected. Now that the immediacy of the crisis has subsided, it is perhaps a good time to reflect on its nature and draw lessons from it. Particularly, should developing and transition economies in East Asia abandon quests for their own paths of economic development and earnestly try to conform their institutional arrangements with the so-called Anglo-American model? Since there are actually a variety of institutional arrangements across East Asian and South East Asian economies, it is hard to conceptualize a universally valid East Asian model in the sense of a coherent institutional arrangement. However, it has long been considered that bank-oriented financial systems and active, often discretionary, government involvement in the economic domain are some common characteristics observed in these economies. Indeed, the financial and currency crises in Thailand and Korea have largely been caused by the over-borrowing of banks that are not properly regulated. The prolonged slump of the Japanese economy is also largely due to the credit crunch caused by the bad debt problems that engulfed the banking sector. A collusive alliance between the banking regulator and the banking sector, as well as between the security regulator and the securities industry, is considered to have brewed the problem over time, although it is now being broken down (Aoki [1995]). So there seems to be an emergent consensus even in this region regarding the need for transparent, autonomous