Issues and Aspects of Development, Growth, Trade and Investment
Edited by Tran Van Hoa
Chapter 10: The crisis of success and feedback quality in managing economic crisis
10. The crisis of success and feedback quality in managing economic crisis Xiaokai Yang 1 INTRODUCTION There are two different ways to explain the Asian financial crisis. One is to attribute this crisis to moral hazard caused by the state monopoly of the banking sector and cronyism. The other emphasizes financial insurance provided by the International Monetary Fund (IMF) assistance funds (a review of the two approaches can be found in Radelet and Sachs, 1998; Stiglitz, 1998). The first method cannot explain why China, which has serious moral hazard caused by state-owned firms and the state monopoly of the financial sector, was not seriously affected by the Asian financial crisis and why the financial crisis in South Korea was partly caused by the liberalization reforms. The second method, by playing down the role of moral hazard in causing the financial crisis, cannot explain why Taiwan, which successfully reduced moral hazard by liberalizing the financial sector, prior to the liberalization of international capital flows, was not seriously affected by the Asian financial crisis either (Shea and Yang, 1994). This chapter addresses the questions using several general equilibrium models with endogenous network size of division of labour. In section 2, we review two general equilibrium models that formalize the notion of the crisis of success. In the models with endogenous network size of division of labour, the trade-off between positive network effects of division of labour on aggregate productivity and reliability of the network implies that, as the risk for each transaction...
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