The Seoul Summit is particularly important because it is held following the fiscal crisis in Greece last March that has been spreading to other members of the eurozone as well. South Korea is an excellent showcase of a successful Asian model of export-led development strategy not only by adopting an mercantilist undervalued exchange rate but also by raising labor productivity and reducing transaction costs in her economy.

The Summit delegations can witness the rapid transitions of the Asian economies from state control to market-based system and the movement of their exchange rate system from fixed exchange rate to a more flexible one. Asia is also nurturing both domestic and regional demand in ASEAN+3 to compensate for the falling exports in its traditional markets in the US and Europe. Crisis-hit countries in Southern and Eastern Europe can learn from Asian experiences in 1997 on how to pull the economy from crisis.

Having failed in other regions, “the communist system” works well in East and Southeast Asia. Prior to recent liberalization and deregulation processes, the role of the state was very dominant in the economies of these regions. The governments in Asia do not merely play their traditional role to ensure the working and raising efficiency of the market by protecting individual property rights, enforcing contracts, improving transmission of market information and correcting market failures.

The governments in this region not only make policy decisions, but also own many public companies operating in many sectors of the economy. The world can learn from experiences of paternalistic Asian systems on how to make use of state involvement in the economy and limitations to that.

Following the Japanese example, South Korea and other emerging countries in Asia, including the Peoples Republic of China (PRC), adopted an export-led development strategy with strong government control. Prior to the formation of the WTO and Asian financial crisis of 1997, there were five key policy instruments to improve external competitiveness and implement the export oriented strategy.

First, directed credit with subsidized interest rates from dominant public banks.

Second, undervalued exchange rates to subsidize exports and tax imports.

Third, high protective tariff rates and distorted non-tariff barriers.  

Fourth, subsidies on other input such as labor, land, energy and tax holidays.  

The fifth strategy has been to upgrade labor productivity through training and education.

Southern Europe and Eastern European countries can learn from Asia on how to pull back from the economic crisis. During the crisis of 1997, Korea, Thailand and Indonesia swallowed the bitter IMF medicines: Massive devaluation, trade liberalization, corporate reform, severe austerity programs and liberalized financial system. Within two years of the onset of the crisis, the recovery had begun and fundamental causes of the crisis had been fixed.

Now their banks are better capitalized and supervised, the corporate sector is stronger and has greater foreign exchange reserves. Except in some highly sensitive products, such as rice, their markets for goods and services are now widely open to import penetration. The role of public banks is declining while participation of foreign banks is increasing and the scope of directed credit is reducing.

Through the initial public offering (IPO), even state banks of the PRC are now open to foreign ownership. With the more liberal international economic system, Asia has now put more emphasis on improving competitiveness though labor productivity and modernization of infrastructure and other measures to reduce transaction costs.

Severely criticized during the crisis in 1997, the soft market-based capital control that is widely practiced in Asia is now highly praised by the IMF, which even endorses the use of the policy as an instrument to avoid the destabilizing short-term capital inflows. Asian countries actively strengthen external values of their currencies as a policy to restructure their industrial bases away from labor intensive manufacturing industry that produce low value-added to more high technology with the sophisticated sector with high value-added.

At the same time, the exchange rate policy has been used in Asia for internal structuring away from the non-traded sector of the economy with low productivity to the traded sector with high productivity.
 Without formal agreement, through private-sector trade and investment, the economies of East and Southeast Asia (ASEAN+3) have been closely integrated both horizontally as well as vertically. To promote closer regional integration they are now signing a web of bilateral Free Trade Agreement (FTA), but no ASEAN+3 wide FTA.

Even though it is neither the FTA, like NAFTA, or a common market or currency union, such as the EU, ASEAN+3 established a bilateral currency swap facility under the Chiang Mai Initiative (CMI) in May 2000. The meeting of ASEAN+3 finance ministers in Madrid in 2008, decided to enlarge the size of the facility, reduce the portion of the facility that is subject to the IMF conditionality and makes CMI a multilateral institution to reduce transaction costs and avoid wasteful duplication of loan contracts. The new CMI is expected to operate this year. The availability of the currency swap facility will facilitate greater regional trade and investment.

The writer is a professor of economics at the University of Indonesia.

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