Investment Opportunities and Challenges in Southeast Asia

Introduction

For the last decade before the 1997 crisis, countries such as Thailand, Malaysia, Singapore, Indonesia, Hong Kong, and South Korea — which collectively form part of Southeast Asia — registered consistent economic growth year after year, establishing an impressive position in international economic development (Pempel, 1999). These countries recorded growth in Gross Domestic Product at an average annual rate of 6% to 9%. The dawn of 1997, however, darkened the glory of these nations with a major slump in economic conditions and financial development. The Asian financial crisis that erupted in 1997 miserably affected the local stock and currency markets of the affected countries. Stock markets declined by approximately 70%, and currencies depreciated by a similar margin against the dollar, forcing governments to seek financial assistance from the IMF (Corsetti, Pesenti, & Roubini, 1999).

The purpose of this paper is to analyze the transformational changes brought about in Asian nations following the crisis and their impact on major economic sectors. Policy implications and regulatory frameworks are analyzed through the work of economists, academics, and economic and business journals, forming the secondary source of data. Particular emphasis is placed on Western companies seeking investment opportunities in the Southeast and South Asian markets, along with the challenges they face.

Institutionalization and Transformation After the Asian Crisis

Many economists argued that the developmental model applied in the Asian region — which had been the primary source of growth for these nations — was itself a contributing reason behind the crisis. Various economic reviews observed that East Asian economies were more prone to external shocks because democratization had restricted government's contribution toward promoting financial reform and incorporating new industrial policies (Allen & Gale, 2000). The Asian crisis opened new avenues for examining the growth prospects of these economies and diverted attention from developmental models toward the state's role in reform, growth, and development. The transformation of Asian countries in the wake of the crisis presents a live example of how developmental states were exposed to internal and external influences to incorporate change, and what role democracy played in providing public goods.

The Asian Economic Model, often referred to as Asian Capitalism, was widely praised by economists for its successful implementation during the 1980s and 1990s. The Asia-Pacific region — especially Japan and South Korea — were prominent players in the effective implementation of this capitalism model, more so than any Western state. The focus of the Asian Economic Model was on integrating market economics with policy formulation by a centralized government. The coordination between market players and government in the formulation of business policies was particularly credited to the Asia-Pacific region, where it was applied at its most optimal level. Asia's economic prosperity was attributed by many economists to this model. However, the concept was widely criticized in the West, where scholars argued that the growth of the Asia-Pacific region — especially Japan — was not the result of government-business collaboration but rather the outcome of high levels of education, increasing saving rates, and strong labor market contributions.

With the advent of the Asian financial crisis and its effects at the international level, the prevailing view of the Asian Economic Model changed. Many economists, policymakers, and academics concluded that Asia's dependence on government-directed investment and a weakly regulated financial system was a risky combination for regional development. Such structural weaknesses resulted in excess debt, over-investment, and financial crisis. It seemed difficult for Asian economies to adopt structural transformation, and many authoritarian voices still supported the Asian economic model and its core "Confucian values," remaining reluctant to move away from the business-government cooperation model toward a Western economic model. It was difficult for them to accept such structural reform even after the collapse of the debt burden and the crash of stock and exchange rate markets during the crisis.

Asia's structural changes ultimately included the relaxation of government-business collaboration arrangements, the dissolution of critical failing banks and companies, the tightening of financial disclosure regulations, and the establishment of a freer economic system through deregulation, opening the economy to foreign investment and international competition (Radelet, Sachs, Cooper, & Bosworth, 1998).

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