Asias Reserve Accumulation: Part of a New Paradigm

Abstract

So far, various contributions have failed to explain Asia’s fat foreign currency reserve accumulation. In this paper, I analyze reserve holding decisions in a wider social, political, and economic context. Using Weber’s heuristic of ideas and interests as determinants of actions, I show that Asian countries' reserve accumulation is caused by a paradigm shift. In Asia’s former Development State paradigm, accumulation of huge reserves was not of central importance because of closed and heavily regulated financial markets. After the Development State paradigm had collapsed in the 1980s, a new paradigm was built around the ideas of liberalism, the unconditional avoidance of any further financial crisis, and high employment. In order to harmonize the requests of liberal politics and open financial markets in addition to ‘full’ employment driven by export-led growth and the avoidance of further crises, hoarding reserves was a suitable strategy.