He was an active participant in the international discussions surrounding the 1997-8 Asian Crisis. Since then, he has been active in fostering better regulation and international cooperation. There would be few who could match his authority and insight about the events of the past dozen years.

Dealing first with the Asian Financial Crisis (‘AFC’), Sheng finds fault with all the main players – the affected countries, the IMF and also the developed countries that pontificated on the causes of the crisis. Japan’s pivotal role, with its boom-and-bust experience in the 1990s, low interest rates, volatile exchange rate, and strong home-bias in investments, is also highlighted. Sheng notes that before the crisis, the Japanese ‘flying geese’ model of industrial development, with government policy playing a key role in spreading and advancing technology throughout the region, was an important prelude to the 1997-8 crisis.

This point is particularly important for the current debate about the RMB valuation, because the complex supply chains that have built up throughout the region need to be factored into this debate. The role of the yen ‘carry-trade’ and associated capital flows in the AFC was understated at the time. Not only is it now better understood, it is also relevant again to current circumstances, as the global economy again faces the prospect of renewed disruptive international capital flows.

Sheng’s comparison between the AFC and the Global Financial Crisis (‘GFC’) of 2007-8 is also valuable. Importantly, he resists the glib point-scoring arguments that would occur to many who observed both crises, when the countries that had lectured East Asia about the deficiencies of crony capitalism exhibited some of the same symptoms themselves ten years later.

As Sheng states, these were different crises with different causes.

But, as Sheng points out, both crises raise questions about our core belief in the ‘magic of the market’. The common thread is that in both cases the market did a poor job of price discovery, identification of good investment opportunities, arbitrage, and the pricing and distribution of risk. These deficiencies must be the core concern of policy-makers responding to the GFC.

Sheng brings his story full circle by observing changing paradigms. The AFC reflected the breakdown of the ‘Tokyo Consensus’ (the Japanese view that industrial policy will generate growth and prosperity), and in the GFC the ‘Washington Consensus’ that replaced it ‘was put to the stress test and found wanting’.

What will replace it is less clear: a ‘Beijing Consensus’? Sheng looks forward to the era when ‘Asian economies emerge to become economic powers in their own right’. Whatever the commonality between 1997-8 and 2007-8, if another crisis occurs, ‘there will be no one else to blame…except ourselves’.

The list of GFC causes is long. Complex financial engineering often involving derivatives; ubiquitous and convoluted network effects creating intricate interconnectedness; excessive and non-transparent leverage; the serious assessment mistakes of credit rating agencies; the ‘illusion of liquidity’; central banks underwriting of financial stability; loose monetary policy; the Minsky problem that ‘stability is destabilising’; accounting deficiencies; moral hazard; ill-directed incentives; blinkered risk management and greed all contributed to the 2007-8 crisis. While some of these elements may have been present in 1997-8, the later experience was clearly different in nature, magnitude and impact. Regulators were left impotent by the power of vested interests and failed to respond to the challenge of macro-prudential stability (even though it had been extensively discussed in the decade leading up to the GFC).

What should be done?  Simplicity should replace complexity and counter-cyclical regulatory action should replace the existing pro-cyclical regime. Regulatory capture has to be addressed; political economy is at the heart of the required reform. As Sheng points out, ‘the crisis is ultimately political in nature’.

As the GFC unfolded, a senior Mexican official observed, ‘thank goodness it’s not our fault this time’. Andrew Sheng goes further, and explains how and why the two crises differed. This is a valuable contribution to a growing literature, having as its special attribute the Asian perspective which Sheng brings.

Stephen Grenville is a visiting fellow at the Lowy Institute for International Policy and a former deputy governor at the Reserve Bank of Australia.

This piece is an edited version of a book review of From Asian to Global Financial Crisis from Andrew Sheng, Cambridge University Press.