reports stating that the main source of the East Asian miracle was the growth of particularly 8 countries of East Asia: Hong Kong, Indonesia, Japan, Korea, Malaysia, Singapore, Thailand, and Taiwan. We share many economic characteristics, according to the World Bank. These include superior accumulation of physical and human resources, highly productive investments, rapid acquisition of technology, and efficient allocations of resources. They even admire efficient allocation of resources and strong productivity growth, This is the key word of the Asian miracle. This type of optimistic assessment of the World Bank on Asia during the first half of '90s somehow provided disincentives for Asia to reform. We became intoxicated with our own success. As a matter of fact, this type of appraisal reinforced a tendency toward a higher inflow of foreign borrowings and capital inflows to East Asia. The World Bank and ADB now look silly for holding the 8 countries in East Asia up for cmulation by the rest of the emerging market or the third world. Now we have collapsed, So seven months aRer Thailand, my country, devaluated its currency in July 1997 last year, setting off waves of financial turmoil that led to a massive bailout of Asia's battered economies. We all know the sequence of events and causes of the meltdown. They all share the common characteristics, namely large and constant trade deficits. All these countries have concentrated asset price rising to the levels beyond economic sustainability, a pool of trillions of dollars of international mobile capital, or what I call "hot money," pouring into Asia with a weak banking system. These factors ultimately led to the economic and financial meltdown in Asia.
Even the IMF, the latest mid-year report last year expressed some concerns about Asian economy but they were overall torn, and expressed the concept of overall optimism. Even at the World Bank meeting this year, both the IMF and the World Bank still gave us sweet words concerning Asia. So one of the major causes is that the enormous blocks of fast-moving capital swept through Asian financial markets and then abruptly deserted them. This created an enormous shock in Asia. The reverse flow of five East Asian countries in particular, the reverse flow in Indonesia, Korea, Malaysia, the Philippines and Thailand, hit hardest by this crisis. The private capital inflow dropped from $93 billion in 1996 to net outflow of $12 billion in 1997. That represents a $100 billion swing. It represents 11% of GDP, this swing. So I think these five countries cannot absorb this type of major swing in the capital flow. I must admit that it is very true that Asian countries have brought most of these problems onto themselves through investment speculation, uncontrolled bank credit, and grandiose public and private projects including the tallest building in the world. But many of us have associated this financial crisis and economic meltdown explicitly and implicitly with market liberalization or the so-called adverse effects of globalizaton. The World Bank even recognized that most Asian countries still lack the preconditions needed to ensure the sound use of private capital flow and manage the risks of large reverse flow. The consequences of such reverse flow have been extremely costly in economic, social, and political terms at the moment and are producing very destructive international consequences in the so-called globalization process.
Therefore, there is an urgent need to study the adverse effects of this globalization, New intentional rules must be put in place to ensure transparency in the marketplace and to regulate the under-regulated financial activities of global funds, particularly hedge funds. This lack of transparency is undermining the ability of the market to police them. Even the market can police them. Of the authority, the central bank in particular to regulate them, especially in the emerging economies. I agree with Mr. Sakakibara, with his suggestion at recent Davos Meeting that we need more surveillance of short-term capital flows. So we do share this view very much in Southeast Asia.
Professor Lester Thurow of MIT has rightly pointed out in his most recent book called, "The Future of Capitalism". He said that economic meltdowns are an intrinsic part of capitalism. Or the market failure of Professor Shumpeter. The big meltdowns, remember, were the Great Crash of 1929 in America, and more recently in the 1990s, the Japanese bubble that ended with shock stock down two-thirds and property prices down to 70%. So Lester Thurow claims it is now Asia's turn. As you all remember them the Great Crash of 1929 became the Great Despression of the 1930s because President Hoover was unable to come to grip with that situation. He needed Roosevelt to launch the New Deal.
Somehow in America they compare your current Prime Minister Hashimoto with President Hoover. Maybe you need Roosevelt here. Similarly many political regimes in Asia, in my part of the world today also, prove themselves to be ineffective in cleaning up the mess after the bubble economies. Corporate defaults and insolvency in Asia could even multiply within the next six months. There is
