Endnotes

¹Less-affected countries include Hong-Kong, China; Philippines; Singapore; and Taipei,China.

²Rader (1976) generalized this result, making it less dependent on initial conditions. Foster and Sonnenschein required that the production possibility set be the intersection of a half-space with the non-negative orthant (for this to be the case, not only must there be constant returns to scale, but essentially there also must be no more than one non-produced factor of production). They also required convexity of preferences and normality of all goods. Rader's theorem dispenses with all these assumptions (Bergstrom 2002).

³Milgrom and Roberts (1995) provided a short but very clear review on the concept of supermodularity (pp.181–190). See also Amir (2003).

⁴Hausmann, Pritchett, and Rodrik (2005) provided a rather simple but very eloquent finding. Analyzing data from 1950 on, the authors identified 83 episodes of growth acceleration. They found that: (i) 85.5% of growth take-offs are not preceded or accompanied by economic liberalization reforms; and (ii) only 18.8% of episodes of economic liberalization are followed by growth take-offs.

⁵The indicators are: large-scale privatization, small-scale privatization, governance and enterprise restructuring, price liberalization, trade and foreign exchange system, competition policy, banking reform and interest rate liberalization, securities markets and non-bank financial institutions, and infrastructure. The European Bank for Reconstruction and Development indicators are ranked from 1 (no reform) to 4+ (full reform).

⁶An economy can have a very high RC and a very low RL, that is, an economic system can have a very high complementarity and adopt extremely market-unfriendly policies; autarchic state-planned economies constitute a good example. See section 3.4.1.

⁷The sample of new EU member countries included: Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovak Republic, and Slovenia.

⁸In this context, it is worthwhile to mention the World Bank's Independent Evaluation Group's report, which stated that, "it is crucial that complementary measures such as removing marketing and price distortions as well as competition policy, reducing labor market rigidities, and improving the regulatory environment (currently more commonly thought of as "investment climate" issues) accompany trade reforms" (World Bank Independent Evaluation Group 2006: XV).

⁹The works of Chang and Velasco (1998), Radelet and Sachs (1998), and Furman and Stiglitz (1998) provide extensive analyses of the Asian crisis and were the main references used in writing this section. A chronology of devaluations can be found in Box 1.

¹⁰In France and the United States, public debt in 2005 was 66% and 65% of GDP, respectively.

¹¹With regard to the moral hazard created by the International Monetary Fund (IMF)-Clinton administration plan, Milton Friedman (1999) could not be more assertive: "The Mexican bailout helped fuel the East Asian crisis that erupted two years later. It encouraged individuals and financial institutions to make loans to and invest in the East Asian countries, drawn by high domestic interest rates and returns to investment and reassured about currency risk by the belief that the IMF would bail them out if the unexpected happened and the exchange pegs broke."

¹²In fact, as Radelet and Sachs (1998) observe, the Asian crisis prompted the largest financial bailouts in history. The loan to Korea was nearly twenty times its IMF quota.

¹³In the Asia-4 and the Philippines, total net private flows amounted to US$93 billion in 1996 and US$-12 billion in 1997.

¹⁴The moral hazard problem can be limited by the usual elements of a well-functioning regulatory and supervisory system: punishment for the managers and stockholders of insolvent financial institutions, adequate accounting and disclosure requirements, adequate capital standards, prompt corrective action, careful monitoring of the institutions' risk management procedures, and monitoring of financial institutions to enforce compliance with the regulations. However, there are often strong political forces in emerging market countries which resist putting these kinds of measures into place. In the Asian crisis countries, the political will to adequately regulate and supervise financial institutions was especially weak because politicians and their family members were often the actual owners of financial institutions (Mishkin 1999).

¹⁵Real exchange rate appreciation is a good predictor of currency crises. Frankel and Rose (1996) and several post-1998 empirical works confirm this relation.

¹⁶For the purposes of this paper I define "economic system" as a group of interrelated policies. The use of the term "system" in this context intends to reflect the idea that policies are interdependent.

¹⁷Lack of transparency also plays a role here. If depositors have difficulty distinguishing sound from unsound institutions, then they may trigger runs on healthy banks (Chang and Velasco 1998). Hence, bad bankruptcy laws and information problems join together to make crises more probable. Interestingly, Indonesia was the country with the biggest immediate impact from the crisis (its GDP per capita decreased 14.3% in 1998). This large impact was certainly related to the fact that Indonesia had the worst bankruptcy law as well as the worst and least transparent institutional environment among the Asia-4.

¹⁸Bergoeing, Loayza, and Repetto (2004) considered that slow and costly recoveries are the result of impediments to the natural process of resource reallocation. These impediments can result from government policy interventions, such as excessive labor protection, directed credit to inefficient sectors, entry barriers to the establishment of new plants and firms, and burdensome bankruptcy laws. By reducing the extent of restructuring, these obstacles alter the recovery path that follows aggregate shocks, inducing economic stagnation. The authors presented convincing cross-country evidence. Bergoeing, Kehoe, Kehoe, and Soto (2002) compared the experiences of Mexico and Chile in the 1980s and noted that, while both were affected by similar shocks—the 1980s debt crises—Chile was able to recover and "find" a decade that turned out to be lost for Mexico. They argued that a key element in Chile's ability to recover was a bankruptcy law that facilitated the retrenchment of weak firms and the creation of stronger companies.

¹⁹As of 1998, only four Asian economies—the People's Republic of China; Hong Kong, China; Korea; and Mongolia—had any form of unemployment benefit scheme. Benefit rates were generally modest. Coverage was comprehensive in Hong Kong, China only. In Korea, half of all employees were covered, while elsewhere, coverage extended only to a minority of formal sector employees (International Labour Office 2000).

²⁰This, together with the aim of maintaining a clear focus on the Asia-4 countries, prevents the use of econometric techniques in this paper.

²¹See Appendix B [ PDF 304KB | 6 page ] for a detailed explanation on the way the ratings in each area were built.

²²A simple infrastructure index was built for the purposes of this paper, based on World Bank data. The variables used to compute this index were electric power consumption, percentage of paved roads, proportion of Internet users, and telephone mainlines per thousand people. High-income Organisation for Economic Co-operation and Development (OECD) countries were the benchmark (that is, R = 10).

²³Respectively: labor market, capital flows, financial system, trade policy, and entry mechanisms.

²⁴Using ARL_IQB to calculate GQ corresponds to assuming that RC_IQB is relevant. At first glance, expanding this methodology to explore the idea of coherence of politico-institutional systems seems appealing and can possibly constitute a promising line of theoretical and empirical work. However, such work is out of the scope of this paper. In this particular case, as RC_IQB is very high in the four countries (that is, the five dimensions of IQB have similar levels), ARL_IQB and RL_IQB are rather similar.

²⁵In the World Bank's Doing Business project, the topic closing a business "identifies weaknesses in existing bankruptcy law and the main procedural and administrative bottlenecks in the bankruptcy process."

²⁶Thailand implemented an unemployment benefits scheme in 2004.

²⁷This expansion "was part of a quid pro quo conceded by government and employers' organizations in order to obtain the agreement of workers' organizations to legislative changes designed to facilitate lay-offs in specified circumstances" (International Labour Office 2000: 162).

²⁸Amendments to the law were introduced in 1997, 1999, and 2002.

²⁹According to the International Labour Organization, the most generous unemployment protection systems are found in Austria, Belgium, Denmark, Finland, France, Germany, Iceland, Luxembourg, Netherlands, Norway, Portugal, Spain, Sweden, and Switzerland.

³⁰In an alternative scenario, a single point was attributed to these three countries because they had severance pay regulations. Severance pay was higher in Indonesia (nine months salary for an employee who had worked for four years at a firm) and Thailand (6 months) than in Malaysia (2 months), but the share of informal workers (60–70% in Indonesia, 50% in Thailand) was much larger in the two countries than in Malaysia (30%), so it is reasonable to consider the average protection arising from severance pay to be, eventually, more or less the same in the three countries. However, as discussed in Vodopivec and Raju (2002) and Addison and Teixeira (2001), the literature is not conclusive in showing that severance benefits regulations have a positive effect on employment and overall productivity. Yet, this alternative scenario does not influence the results.

The views expressed in this paper are the views of the authors and do not necessarily reflect the views or policies of the Asian Development Bank Institute (ADBI), the Asian Development Bank (ADB), its Board of Directors, or the governments they represent. ADBI does not guarantee the accuracy of the data included in this paper and accepts no responsibility for any consequences of their use. Terminology used may not necessarily be consistent with ADB official terms..

Comment(s)

There are [0] comment(s) for this entry. Post a comment.