The East Asian financial meltdown

In the wake of the East Asian economic turmoil, the international financial system has experienced a severe crisis. The aim of this article is to articulate several hypotheses about the dynamics and historical causes of this phase of instability in the world capitalist system and highlight some of the more critical developments, which could hasten a global economic slump. Since the outbreak of the Asian economic crisis in early 1997, Russia and Latin America have succumbed to the "contagion" effect. Despite the impending threat to trade and investment as a result of the slump that is now engulfing these emerging markets, Wall Street has continued its irrational exuberance. Yet the evidence suggests that the problem of global excess capacity has not been resolved, while commodity prices have not fully recovered from their historic lows. The critical question proposed is whether the global financial crisis is now poised to enter into a second phase. At the very epicentre of this emerging crisis is the growing trade imbalance between Japan and the United States. A looming trade war across the Pacific would prefigure the onset of economic rivalry between the three major economic blocs in the European Union, Japan/East Asia and the United States over markets, investment outlets and access to raw materials. Since the onset of the Asian financial meltdown, the credibility of conventional neoclassical accounts should be treated with a certain degree of scepticism. Indeed, official World Bank/IMF reports and almost every other reputable forecaster had failed to predict the impending crisis. Innumerable studies have since appeared and with the benefit of hindsight, platitudes have masqueraded as serious analysis. The usual culprits in these ex post facto attempts to re-write history are the rather crude caricatures of "crony capitalism," which have ostensibly characterised these Asian countries. As a result, it is argued that their lack of transparency and integrity has corrupted financial markets. Arguments highlighting the "moral hazards" associated with government guarantees for private loans have also proliferated (Krugman, 1997). In stark contrast to these neoclassical accounts, this study will be informed by the Keynes-Kalecki theory of international trade under the conditions of excess capacity.