Keynote Proposal 4

• President and Chief Research Officer,
  Research Institute of Economy, Trade & Industry (RIETI)

The 1997 Asian financial crisis, which surprised everybody, took place only several years later after the World Bank published in 1993 a report entitled East Asian Miracle. This report highly appreciated 30-long sustained high growth in East Asia. What really happened during such a short interval? What is a link connecting between the Miracle and the Crisis? Only when we can coherently analyze such two apparently contradictory phenomena, that is, the strength represented by the Miracle and the weakness revealed by the Crisis, we can successfully design a more appropriate development paradigm for post-crisis East Asia. Furthermore, we can apply our coherent analysis to the case of China so that China can continue to achieve sustained high growth without suffering from a serious financial crisis. The link between the Miracle and the Crisis can be analyzed from two angles. One is international monetary economics coupled with the balance-sheet analysis. The other is an institutional evolution approach. From the former angle, we can identify the new nature of the Asian crisis which can happen in spite of strong and sound macroeconomic fundamentals such as balanced budget and low inflation rates. From here, I have developed the new concept of "capital account crisis", distinguished from conventional current account crisis. From the latter angle, it becomes very clear that financial liberalization often creates new risks, which, however, can not be managed by the existing institutions featured by weaknesses in financial supervision, legal frameworks and corporation governance. The gap between such new risks and the limited capacity of the existing institutions results in a serious financial crisis. Regional cooperation from these two angles will be indispensable for preventing the 1997 type capital account crisis in China in the near future.