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East Asia in Crisis: The Security Implications of the Collapse of Economic Institutions

Authored by Dr. Stephen J. Blank.

February 5, 1999

38 Pages

Brief Synopsys

The challenges to the United States and to its armed forces are numerous and highly significant. Moreover, we must begin to address them now even if other institutions cannot or will not do so with us. Those crises comprise ASEAN's decline as a meaningful security provider, Russia's collapse, Japan's stagnation, South Korea's unresolved democratic transition in economics and politics, Seoul's and Tokyo's inability or growing reluctance to support the 1994 nuclear accord with North Korea, the danger of an unforeseeable crisis emerging in North Korea, and most of all the rise of China with nobody but the United States to counter or balance it. The challenge confronting the United States and its allies involves nothing less then the creation of a new, legitimate order in Asia. That order must be shaped and created very much by the leadership of the United States in all fields of national power: diplomacy, economics, trade, investment, finance, defense, and culture. But doing so requires a strong U.S. leadership that will tie all these elements of power together in a comprehensive, politically persuasive vision, and the fortitude to implement them at home and abroad.


The financial crisis that began in Thailand in mid-1997 has now become a global one. It has consumed governments, upset defense planning and the regional standing of major powers in Asia, and is forcing us to rethink Asia’s entire past and future political trajectory. The security implications go beyond merely the crash of unsound financial systems. Governments have fallen across Asia and in Russia. Civil violence is currently taking place in Indonesia, a key Asian state. Defense research, development, and procurement have been postponed in most Asian countries. The crisis and its reverberations have shaken financial markets and governments as far away as Brazil.

In order to assess the dangers posed by this crisis to Asian and U.S. security interests, the Strategic Studies Institute (SSI) cosponsored a conference with the National Bureau of Asian Research and the Reserve Officers Association in Seattle, Washington, on June 9-10, 1998. This conference represented a unique opportunity to conduct such an assessment since it brought together participants from government, the military, academia, international financial institutions, and Asia.

The discussions were frank, open, and sobering. In fact, the conference raised several issues of great importance for the overall security policies of the United States in Asia. First, defense burden-sharing is less feasible, and military exercise programs have been scaled back. Second, despite widespread hunger and poor agricultural productivity, North Korea continues to maintain its Army on a war footing and is developing new classes of missiles nearing intermediate range. Third, the nuclear tests by India and Pakistan have weakened the leadership of the United States and created a new security dynamic.

Looking at the reaction of financial institutions to the crisis, not surprisingly, there was a strong tone of critique of the International Monetary Fund’s (IMF) forceful actions in Asia. While the critique strongly targeted against the issues of bailing out improvident investors and lenders (moral hazard), and the austerity that ensued as a result of the reforms that the IMF dictated; most presenters did not address the other side of the argument. In effect, this argument in defense of the IMF asks what would have happened had the IMF not imposed its terms. Would those states have been better off than they now are? After all, one can claim that many of the obstacles to healthier economic policy and growth were smashed due to the IMF’s forceful, even coercive actions. Furthermore, if the IMF calls for the same reforms that the United States is now urging, how would the latter implement its policies and “lead” the recovery without having a mechanism like the IMF at hand to implement that recovery? As many have called on the United States to adopt a stronger position in Asia as a result of the crisis, depriving it of what has been a reliable instrument does not harmonize with that call for action. Since it is the IMF alone that has the leverage abroad and the financial resources to impose, if need be, the desired reforms, it might be argued, then, that to curtail its powers would be to deprive the global community at large, and not just the United States, of the means to respond promptly to future crises in the global economy.

Further questions pertain to the role of other actors. Mention of Europe was noticeably scarce at the conference. In view of the size of the global economy, the globalization of economic crises’ effects upon those not directly affected, and the size of the response that is needed, Europe must play a greater role in resolving future crises. Here the IMF’s multilateral composition is a fundamental element of the solution. Should future crises of this scale break out again, a multilateral response will again be needed and a mechanism like the IMF or the IMF itself will have to coordinate the international action to ease the crisis. To improvise a multilateral mechanism of those capable of rescuing afflicted societies during the crisis will necessarily draw out and extend the crisis, perhaps past some societies’ breaking point.

Especially as the Euro that began circulation in January 1999 promises to be a major international currency, European participation through existing multilateral institutions is even more essential to preventing crises and then promptly mitigating their impact when they occur. Although China’s currency has been central to this drama, China hardly can be the engine of international recovery for Asia, let alone the world. China’s economy is fragile, state-owned industries are unproductive, and its banking system is in need of reform. China’s currency neither circulates freely abroad nor is it traded freely in world markets. Still, China’s restraint during 1998 in not devaluing its currency played an important role in the crisis. Ominously, however, while the rest of Asia has scaled back defense spending and military modernization, China is pouring money into improving its People’s Liberation Army. Thus the conference’s emphasis on China and exclusion of Europe’s role in the crisis and its resolution might bear some rethinking, but is at least understandable.

These are only some of the crucial policy-relevant issues that emerge from a consideration of the effects of this crisis upon Asian and international security. Undoubtedly these and other questions will continue to demand international political attention for quite some time. Precisely because of the continuing importance of these issues to U.S. security policy in Asia and elsewhere, SSI is publishing this summary of the discussions and the issues raised by the speakers. In this fashion we hope to contribute to the ongoing process of devising a U.S. security policy that includes economic help to Asia but goes beyond that to strengthen the possibilities for attaining the vital security interests of the United States in Asia and the Pacific.

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