To what extent are the criticisms of the International
To what extent are the unfavorable judgments of the International Monetary Fund’s handling of the East Asiatic fiscal crisis of 1997-98 justified?
- The East Asiatic Model
- Onset of crisis
- Causes of crisis accounts
- IMF response
- Evaluation of IMF place.
The East Asiatic fiscal crisis of 1997-98 is now more than a decennary old. In the resulting period much argument has taken topographic point sing the causes and effects of this crisis – this with peculiar mention to the function of the International Monetary Fund ( IMF ) . Any apprehension of crises of this magnitude in the planetary political economic system needfully requires an historical analysis of the roots of this exigency, the stableness and sustainability of the establishments and constructions involved, and the reactions of the assorted bureaus and agents of control.
First I think it will be necessary to sketch and analyze the alone constructions and development of what has been called the ‘East Asian’ theoretical account of economic development which occurred during the post-war period, since this may hold had some bearing on the beginnings and class of the exigency.
Traveling on to the nucleus of the essay I will so analyze the oncoming of the crisis following its beginnings to the currency jobs in Thailand which foremost emerged in May 1997 when there occurred heavy guess against the Thai currency – the tical. This localised phenomenon was to take to an on-going contagious disease in the part which so developed into a full graduated table fiscal ( and finally economic ) catastrophe for much of the East Asiatic part. It is besides deserving analyzing why some of these states escaped more or less unharmed ( China, Taiwan, Singapore and Hong Kong for illustration ) whilst others were more badly affected ( Philippines, Thailand and most of all, Indonesia ) . Malaysia, was a particular instance as we shall see.
Designation and geographic expedition of any causal connections which might be between this Asiatic Model and the jobs which it faced in the late ninetiess is besides appraised. Were the causes of the crisis exogenic, which has been suggested by some, or endogenous which has been suggested by others? Additionally, scrutiny as to the causes of the crisis and the response of the many-sided establishments – chiefly the IMF – will be investigated. Given the IMF’s analysis, its policy options would be shaped in visible radiation of their reading of events. To what extent was the IMF’s perceptual experience of the fiscal instability in the part correct, and how good suited were the exigency steps which were put into topographic point successful in covering with the state of affairs?
Finally it is necessary to measure all the assorted accounts of the East Asiatic crisis with the benefit of historical hindsight. What was the most plausible account of events and what, if anything, has been learned from these events one decennary subsequently.
THE EAST ASIAN MODEL:
Broadly talking at that place have evolved three theoretical accounts of capitalist development. These can be approximately categorized as 1. The Anglo-American neo-liberal market capitalist economy. 2. The Continental European societal market capitalist economy. 3. The East Asian developmental capitalist economy. Mindful that there has been some convergence of these systems over the old ages the cardinal and typical characteristics of each remains clearly identifiable in footings of constructions, establishments and patterns. Given the limited range of this essay it will be necessary to restrict ourselves to the East Asiatic theoretical account.
Japan represented the paradigm theoretical account of East Asian development capitalist economy in the post-war period. Equally tardily as the 1950s Japan was in economic footings was small different from any other developing state. Its entire exports were below that of India ( Krueger 1995 ) . Exports consisted of staple labour intensive merchandises such as silk. However, there was a political will to take the state onto a way of sustained growing and industrial take-off. This it should be noted was in complete resistance to the standard wisdom of conventional development theory: viz. , that a state should specialize in those merchandises in which it had a comparative advantage. ( Ricardo 1973 ) . It has been commented in this regard that:
The advice to follow free-market policies seem to be … contrary to the lessons of virtually the whole of economic history since the Industrial Revolution. With the possible exclusion of the first moving ridge of industrialization in Britain, every state which has moved into the strong sustained growing, which distinguishes industrial from post-industrial, from any other society in human history, has done so in straight-out misdemeanor of pure, free-market rules. ( Ormerod 1994 p.63. )
The cardinal establishments in this guided revolution from above were the Ministry of Finance and the Ministry of International Trade and Industry ( MITI ) . Nipponese and later East Asiatic capitalist economy developed as the consequence of planning, heavy province engagement, protection of baby industries, duties ( both overt and covert ) and bank funded industrial development and export-led growing. Indeed, Japan ( and a small subsequently South Korea ) both actively discouraged inward foreign investing ; such foreign engagement in the internal development of these economic systems which did happen consisted of guided and frequently straight controlled import and deployment of foreign engineerings. Undoubtedly the policy was successful and mensurable in quantitative footings.
In 1950 Japan produced merely 5 million dozenss of steel and 30,000 cars. US production at that clip was 90 million dozenss of steel and 7 million cars … By the mid-60s, Japan emerged as the lowest cost steel manufacturer in the universe and was outselling the US steel industry in the US itself. By early 1970 it was bring forthing every bit much steel as the US. By 1975 Japan had overtaken Germany as the largest exporter of cars in the universe. By 1980 Japan produced more cars than the US. Looking back upon this phenomenal growing, this unbelievable gimmick up occurred over the comparatively short clip infinite of 30 old ages. ( Singh 1999 p.11 )
The first moving ridge of East Asian development consisted of Japan followed closely by South Korea, Singapore, Taiwan and, in its ain manner, Hong Kong. The 2nd moving ridge consisted of Malaysia, the Philippines, Thailand and Indonesia – this latter group was to go known as the ‘emerging markets’ . It is of import to observe that this 2nd group was to a greater grade integrated into the progressively globalised economic system and was more unfastened to capital influxs – portfolio and foreign direct investing – than the first group. This fact had an of import bearing on the 1997-98 crisis.
GDP growing rates among this latter group of emerging economic systems was systematically high during the period 1970-1996 as were the figures for the first moving ridge, averaging out for Hong Kong 7.2 % , Singapore 8.3 % , Taiwan 8.2 % , South Korea 8.3 % , Malaysia 7.5 % , Thailand 7.7 % , Indonesia 6.9 % and China 10.1 % . (The Economist01/03/1997 ) Impressive statistics ( IMFSurvey16/08/1997 ) besides recorded important falls in infant mortality rates, increased life anticipation, and worsening grownup illiteracy in Indonesia, Malaysia, the Philippines and Thailand.
In visible radiation of all the economic indexs available, hence, there seemed to be no ground to say that within these emerging economic systems the positive tendencies would non go on into the future – this notwithstanding the fact that Japan had fallen into a deep downswing with the bursting of their belongings and equity bubble in 1989.
ONSET OF THE CRISIS
Much to the surprise of informed sentiment, the East Asiatic fiscal crisis – or more correctly series of crises – that hit equities, currency, banking and belongings markets in the emerging economic systems in 1997-98 became the large fiscal intelligence narrative of the clip. Summarizing up the state of affairs Joseph Stiglitz was to compose:
The crisis took most perceivers by surprise. Not long before the crisis even the IMF had forecast strong growing. Over the predating three decennaries East Asia had non merely adult faster and done better at cut downing poorness than any other part of the universe, developed or less developed, but it had besides been more stable. It had been spared the ups and downs that marked all market economic systems. So impressive was the public presentation that it was widely described as the ‘’East Asia Miracle.’’ Indeed reportedly so confident had the IMF been about the part that it assigned a loyal staff member as manager for the part, as an easy pre-retirement poster. ( Stiglitz 2002 p.90 )
The beginning of the East Asiatic crisis can be traced to early May 1997 when the Thai currency, the tical, came under increasing force per unit area from foreign investors. Thailand had liberalised its economic system in 1990 and this led to influxs of foreign capital ; largely short term credits or what is more conversationally known as ‘hot money’ . This in its bend resulted in a bad roar in belongings, equities, and commercial building. These capital extracts were made in the chief by Nipponese and US investors, and by Thai Bankss who themselves were borrowing short-run from abroad loaners. However as the roar began to acquire out of control, Thailand was left with merely $ 40 billion in foreign exchange militias but owed foreign investors some $ 60 in debts. (New York Times08/01/1997. ) Clearly Thailand was over-reaching itself and the roar was presuming bubble features – a bubble ready to split furthermore.
These jobs of the Thai economic system – and by deduction many of the other emerging economic systems in the same part, since their developmental constructions were non that dissimilar to Thailand – began to leak out and investors began to get down selling off the tical. In add-on to the sentiment that the roar was stoping at that place was the upseting intelligence that Japan was approximately to raise involvement rates which would hold been highly serious intelligence for Thailand’s extremely leveraged private sector which was highly dependent on these Nipponese loans. The Tai authorities at foremost attempted to support the value of the currency against the sell-off by increasing involvement rates and buying its ain currency with its decreasing stock of foreign militias ; this was intended to stabilise against the downward force per unit areas being applied by investors cut downing their exposure to the tical. These steps failed, nevertheless, and later the Thai governments abandoned the fixed rate for the tical against the US $ : on 2 July 1997 the cardinal bank allowed the tical to drift freely against other currencies. There followed an immediate devaluation of 20 % . The rise in both Thai and foreign involvement rates meant led to a generalised prostration in belongings markets and increasing degrees of loan defaults for Thai Bankss. The depreciation of the Thai currency compounded the progressively acute crisis experienced by Thai borrowers as they faced steep additions in their refund agendas for both their domestic and hard-currency debts.
The state of affairs was now presuming crisis proportions and worse still, in the early summer of 1997, the terror started to distribute ; investors in other emerging markets, Malaysia, the Philippines and Indonesia in peculiar began to cut and run from these markets besides. This contagious disease consequence was termed ‘Asian Flu’ . In an East Asiatic fiscal Domino consequence the currency of Malaysia – the Ringgit – came under force per unit area about instantly after the natation of the tical ; this occasioned a autumn in stock monetary values and increasing troubles for Bankss as foreign recognition became progressively costly and diminished. The belongings market was besides capable to impairments as a consequence of the general recognition contraction.
It was the same narrative in the Philippines. The problem began about instantly after the natation of the tical on 2 July 1997. Again there was a mass hegira of abroad short term credits with the predictable consequences. In this case nevertheless the Filipino pecuniary governments allowed the peso to drift after a nominal gesture of opposition. This was 11 July 1997.
The contagious disease was finally to distribute to Indonesia and South Korea with the by now familiar fiscal pandemonium of fall ining equity and belongings markets every bit good as the depreciation of the currency. And worse was to follow as the fiscal crisis started to go an economic crisis with bankruptcies and lifting unemployment.
On August 11 1997 an IMF bailout of $ 17billion was agreed for Thailand (New York Times10/24/1997 ) . In October 1997 Indonesia approached the IMF for support and was granted a bond out of $ 40 billion (New York Times11/02/1997 ) . The Philippines approached the IMF for aid and was provided with a $ 4billion bail-out bundle (New York Times08/12/1997 ) . Finally in December 1997 the South Korean authorities and the IMF agreed on a bail-out bundle of some $ 57 billion.
Of class the IMF monies did non come without strings. These ‘conditionalities’ were based upon the IMF’s understanding – justly or wrongly – of what had given rise to the fiasco in the first case. Suffice it to state that their analysis gave rise to their fiscal and economic prescriptions. It is to these that we now turn.
CAUSES OF THE EAST ASIAN CRISIS
From the point of view of the IMF, and other well-thought-of leading lights of US pecuniary policy, such as the so foreman of the Federal Reserve Board, Alan Greenspan, and Under-Secretary to the US Treasury, Lawrence Summers, the crisis in East Asia had been brought approximately by a figure of endogenous ( that is to state intrinsic ) factors. In the words of the IMF’s Deputy Managing Director, Mr Stanley Fischer the crisis was basically ‘home grown’ . ( Singh 1999 ) It should be understood, nevertheless, that the mentality of the IMF, US Treasury and Central Bank were structured by their general beliefs sing economic sciences in general and trade and development economic sciences in peculiar. The prevailing orthodoxy of the clip was the alleged ‘Washington Consensus’ . The constituents of this peculiar thesis were that free-trade, fiscal liberalization, transparence, deregulating and free-markets were ever and everyplace the best policy options. If, in a universe of imperfect markets these ideal-types were unachievable, so policy should be directed to convey about the nearest possible estimate to these conditions.
The IMF conventional wisdom held that the crisis was attributable to inordinate authorities intervention in the workings of the market which had led to a misallocation of investing and resources. South Korea in peculiar had been ‘guilty’ of intercession, including directed loans, inordinate ordinance and assorted subsidies to industry – peculiarly export industry. Indonesia besides suffered from a excess of ordinances which included restrictions on trade and monopolistic patterns. Such unfavorable judgments were besides levelled at Malaysia and Thailand. Worst of all was the remarkable deficiency of transparence of the fiscal sectors in these states. This produced an ambiance of uncertainness with respect to the activities of cardinal Bankss in the part and there was besides concern sing in the opaque nature of policy execution peculiarly with determinations associating to public substructure undertakings. Such an ambiance had an inhibiting and destabilizing consequence on inward investing and subsequent growing and development.
IMF communiques were excessively diplomatic to province what they truly meant: viz. that corruptness and nepotism were widespread and were holding a damaging and finally black consequence on the economic development of the part. Korea could be regarded as something of a market leader in this regard with the immense family-controlled pudding stones – theChaebol– ruling the Korean economic system and political sphere held to be peculiarly blameworthy in this regard.
Since the 1950s, the monstrous South Korean chaebol industrial imperiums have been the engine-rooms of the state ‘s economic system, their concerns revered, their leaders treated like Gods. And when the chaebols ‘ darker sides have been exposed in immense graft and corruptness dirts, the work forces at the top have been forgiven with impressive velocity. Corruptness is an acknowledged portion of concern life. This is a state where the size of payoffs paid by one pudding stone to a political party in 2005 created the popular term “cash trucking” . (The Times23/04/08 )
It would look that small has changed in the intervening period.
Therefore for the IMF the failure of the East Asiatic theoretical account was to be explained in footings of its going from the norms of and practises of the Washington Consensus and subsquent deficiency of market subject which had led to authorities failure ; but more significantly the being of widespread corruptness and rent-seeking particular involvements played a important function in the fiasco. Where the success or otherwise of concern is determined by a corrupt web of interactions and relationships, between business communities and authorities bureaus, which may be formal or informal, and authorities largesse in footings of procurance policies, revenue enhancement interruptions, subsidies, grants and legal licenses are distributed on this footing, the system will necessarily be dysfunctional. The term ‘crony capitalism’ was coined to depict this phenomenon and was the premier perpetrator for the IMF.
However, there were other accounts of the East Asian crisis which suggested that it was in kernel caused by external ( exogenic ) factors. But one thing needs to be nailed out the beginning. The impression that ‘crony capitalism’ and corruptness was someway specific to East Asia. In visible radiation of the dirts in the US – Enron, Worldcom, Long Term Capital Management, Junk Bonds and so forth, and the UK – Hollinger, Equitable Life, Bank of Commerce and Credit International – it becomes clear demonstrates that corruptness is cosmopolitan and endemic to the system. One should barely be surprised at this, human nature being what it is. One writer in peculiar has drawn direct analogues between events in the Far East and the US which occurred in 1997. This with specific mention to the prostration of the US Hedge Fund, Long Term Capital Management and its subsequent bail-out.
Representative Bruce F Vento, a Democrat from Minnesota, accused Alan Greenspan of holding ‘two regulations, a dual criterion: one for Main Street and one for Wall Street.’ The Federal Reserve Board’s engagement in the LTCM bail-out resembled the type of ‘’crony capitalistm’’ which the US was continually condemning in East Asiatic states. ( Chancellor 1999 p.343 )
The theoretical review of the IMF’s analysis was based upon the rather simple thesis that unrestricted influxs of ‘hot money’ had the consequence of destablising the economic systems of the most vulnerable states of the part. The cause of the crisis was hence exogenic and had small to make with the internal constructions and practises of these economic systems.
Whilst the influx of foreign direct investing may good hold good effects on the receiver economic system supplying employment, conveying technological know-how, and possible engineering transportation and diffusion, the same can non be said for short term bad flows of ‘hot money’ . Rushs of hot money does non travel into productive investing but portfolio investing such as stocks, belongings and currency. This foremost has the consequence of forcing equity, belongings and currency ratings manner beyond their equilibrium degree. In short they induced bubbles in these three countries. Second when these flows went into contrary – as they did in 1997 – there followed a prostration of the hyperbolic monetary value degrees during the resulting fiscal crisis. Worse still, the fiscal crisis so became an economic crisis with serious losingss in end product, investing and employment.
Harmonizing to figures from the Institute of International Finance, the five East Asiatic states hardest hit by the crisis, ( South Korea, Indonesia, Thailand, Malaysia and the Philippines ) experienced in a individual twelvemonth a turnaround of US $ 105 billion, making more than 10 % of combined GDP of these economic systems ; the displacement was from an influx of capital of US $ 93 billion in 1996 to an estimated escape of US $ 12 billion in 1997. Most of this dramatic swing was from commercial bank loaning which fell by US $ 76.8 billion whilst foreign direct investing remained changeless. ( Griffith-Jones & A ; Kimmis 1999 p.68 in Michie and Grieve Smith [ eds ] )
Even some of the former protagonists of the Washington Consensus were of the position that liberalization of fiscal flowsif right handledwould finally hold a positive result, nevertheless this policy could go debatable if applied randomly in a one-size tantrums all manner. :
There is … some grounds that foreign direct investing does hold a strongly positive impact on growing, as does portfolio equity.The same is non true of debt making flows.( Wolf, M. 2004 p.283 – my accent )
Briefly summerised it was argued that the East Asiatic crisis was caused by the injunction of the IMF and its sister many-sided establishment, the World Bank, that these emerging economic systems liberalise and open up their economic systems to influxs of foreign capital. This led to unrestricted influxs of short term credits which pushed up exchange rate of the local currency, portions and belongings. This resulted in roar conditions and loose pecuniary policy ; the roar so transmuted into a bubble, exchange rates became overvalued and as a consequence the part became progressively capable to merchandise imblances. This state of affairs evidently can non last. At this point investor assurance begins to coggle. This so led to an increasing deficiency of assurance, so investors begin to wind off their places – the roar so turned to break.
This was non the position of the IMF nevertheless ; and it was the IMF who was naming the shootings. The bail-out conditions which came with IMF monies were supposed to set the houses of these contrary East Asiatic economic systems in order. These states must halt populating beyond their agencies and would be required to accept an asceticism bundle dwelling of increased involvement rates, cuts in public outgo and additions in revenue enhancements. Furthermore, what was besides demanded were structural reforms of these assorted economic systems which went beyond economic reforms and could more decently be described as political. This insofar as the IMF bundle extracted understandings from the local governments, most dramatically in the instance of Korea, to hold to and follow sweeping programs for the restructuring of their economic systems conveying them in line with the Anglo-American theoretical account, and do foreign capital incursion even easier. Such reforms – including bizarrely a demand that Indonesia should extinguish the practise of giving presidential buddies moneymaking monopolies in certain concerns ( Krugman 1999 p.115 ) – seemed clearly outside of the remit of the IMF and to the more leftist critics a re-emergence of ‘imperialism’ .
International monetary fund policy was strikingly evocative of the pre-war deflationary prescriptions of Herbert Hoover, 31stpresident of the United States who actively opposed a policy of financial and pecuniary activism in covering with the 1929 American economic downswing ; he was voted out of office and succeeded by F.D.Roosevelt who advocated interventionist policies – the New Deal. In maintaining with the Washington Consensus the policy prescriptions of the IMF were based upon financial asceticism, deregulating, fiscal liberalization and export led growing. This bundle was the same in all fortunes ; a one-size-fits-all attack. The policy was exactly the antonym of how a similar crisis in the developed universe would be dealt with.
The IMF’s policies for deciding the crisis did non run into with success. Indeed it has been pointed out by one of the most blatant critics of the Fund that
As the crisis progressed, unemployment soared, GDP plummeted, Bankss closed. The unemployment rate was up fourfold in Korea, threefold in Thailand, tendfold in Indonesia. In Indonesia about 15 per centum of males working in 1997 had lost their occupations by August 1998, and the economic desolation was even worse in the urban countries of the msian island, Java. In South Korea, urban poorness about tripled, with about a quatrter of the population falling into poorness ; in Indonesia poorness doubled. In some states, like Thailand, people could return to their rural places. However, this put increasing force per unit area on those in the rural sector. In 1998, GDP in Indonesia fell by 13.1 per centum, in Korea by 6.7 per centum, and in Thailand by 10.8 per centum. Three old ages after the crisis, Indonesia’s GDP was still 7.5 per cent below that before the crisis, Thailand’s 2.3 per centum lower. ( Stiglitz 2002 p. 97 )
Theories are one thing, facts are rather another.The empirical grounds points to the fact that the IMF prescriptions really made things worse, in the short to medium footings at least. What made this all the more inexcusable was the cognition that such deflationary policies would merely do the crisis deeper merely because they were traveling with the downswing of the rhythm – they werepro-cyclical. Raising involvement rates will be given to suppress investement for obvious grounds. It will besides do exports more hard since it will be given to force up the country’s exchange rate. It will besides by the same nominal brand imports less expensive and in making so worsen the current history shortage. On the demand side cuts in public outgo will cut down the degree of aggregative demand in the economic system and besides hence exacerbate the downswing. For its portion the IMF argued that high involvement rates were necessary to support the value of the currency doing it more attractive for investors to keep and in this manner fresh investing monies would flux into the state from abroad. However this theory did non take into history the extremely leveraged place of many of the houses in East Asia. High involvement rates merely had the consequence of doing these houses insolvent – they merely went flop. In add-on the effort to keep the value of the currency besides led to the panicky autochthonal investors to travel their money out ot the state. Capital flight added another negative input to the crisis. Confidence sank further and investing flows dried up.
However, alternatively of acknowledging that it and its policies were at mistake the IMF blamed the victim in the form of the states involved. They had non applied the IMF prescriptions with sufficient energy, and there were still extant issues outstanding. ( In fact the affected states did in fact comply with the IMF’s injunctions ; the Thais, Malays and Indonesians were bulldozed into a policy of hair-shirt economic and societal self-flagellation. Indonesia was ordered to shut over 200 Bankss after having IMF bail-out monies. The meltdown continued nevertheless. ) Of class the IMF’s instead impolitic outburst merely inflamed the state of affairs farther. Harmonizing to Stiglitz:
Rather than reconstructing assurance that would take to an influx of capital into the state, IMF unfavorable judgment exacerbated the stampede of capital out. Because of this … the perceptual experience through out much of the underdeveloped universe, one I portion, is that the IMF itself had become portion of the job instead than portion of the solution. ( Stiglitz 2002 p.97 )
Stiglitz was by no means the lone critic of IMF policies. Other high economic experts included Paul Krugman Jeffry Sachs and the good known currency bargainer George Soros. Finally even the IMF had to acknowledge licking and have up.
In its appraisal of the IMF’s handling of the Indonesian, South Korean and Brazilain crises of 1997, 1998 and 1999 the Independent Evaluation Office of the IMF concluded that ‘IMF survellience was more successful in acknowledging and analysing in deepness the hazards originating from fiscal sector and corporate balance sheet failings and the governance-related jobs that contributed to those failings. ‘ This is bureaucratic wording for ‘The Fund blew it.’ Unquestionably it did. ( Quoted in Wolf p.290 )
Merely to rub more salt into the lesion those states which were least affected by the crisis – China, Malaysia, Singapore and Hong Kong – were the very states which chose policies which were the antonym of what was urged by the IMF. China pursued Orthodox Keynesian pecuniary and financial policies, whilst Malaysia – unorthodoxy of hersies – really introduced controls on the entry and issue of capital.
Capitalism is a really resillient animal. It can and does sit out even the most acute downswings and policy mistake and this was no exclusion. By 2000 the East Asiatic recovery was underway although there was considerable cicatrix tissue. The growing which was lost will non be recovered and unimpeachably these states have been set back to a grade.
The chief lesson of this crisis is that many-sided establishments like the IMF are to a big grade hermetically sealed off from the broader concern and academic universe. They operate within an ideological model which reflected and interacted with that of the western fiscal community. The policy devising was non unfastened for treatment and was carried out covertly ; ironically, this deficiency of transparence in IMF processs led to policy mistakes exactly due to the absence of such critical examination. Had the IMF been more conformable to open treatment so the policies might hold been different and the East Asiatic fiasco may ne’er hold happened. This is certainly the lesson of the 1997-98 crisis. Whether this lesson has been learned is a moot point nevertheless.
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