Asia back to the center of global 'cybercapitalism'

Asia back to the center of global 'cybercapitalism'

By Eisuke Sakakibara

The following article is based on a paper presented at the Asia Press Forum seminar on challenges and opportunities facing Asia in the 21st century. The seminar, from Sept. 14 to Sept. 16, was jointly organized by JoongAng Ilbo and the Yumin Foundation in Seoul, South Korea. This is the first of two articles.

SEOUL: Throughout the crisis of the last few years, South Korea and Japan, along with other Asian countries, have cooperated closely to overcome the difficulties and to prevent the occurrence of similar crises in the future. This may be a good occasion to look back and put these events in a somewhat more long-term analytical perspective.

Since the crisis erupted in Asia in 1997, I have consistently insisted that it was not an Asian crisis but a crisis of global capitalism. I think it is fair to say now that many have accepted this proposition and agree that the crises of 1997 and 1998 should be analyzed as a continuation of the "global" crisis that broke out in Mexico and Argentina in 1994 and 1995.

Unlike the Mexican crisis of 1982, where external factors, such as a steep rise in U.S. interest rates and the sudden appreciation of the U.S. dollar, played a major role in triggering the crisis, there were no apparent external causes of the crisis in 1994 and 1995.

International conditions, including the U.S. market, were stable, and economic reforms in both Mexico and Argentina were well received by the international community.

Some economists, notably Rudiger Dornbusch, argued that overvalued currencies were the direct cause, as in the case of the Asian crisis of 1997. Indeed, throughout the crisis from 1994 to 1998, overvaluation of real effective exchange rates was a factor that triggered the panic. Also, the short-term debts of Mexico and Argentina in 1994 exceeded the level of foreign reserves.

In particular, Mexico's 1995 short-term official debt denominated in U.S. dollars (tesobonos) of around $28 billion, which was scheduled to be paid within several months, far exceeded the level of foreign reserves, which at that time was only $6 billion. A similar situation existed between private short-term debts and the level of foreign reserves in Thailand, Indonesia and South Korea in mid-1997. In Asian countries, it was private, short-term debts -- not official debts such as tesobonos -- which had accumulated.

Despite some signs of growing vulnerability, these crises from Mexico to South Korea were not predicted by market participants and analysts until certain events -- political uncertainty or bankruptcies of big corporations -- triggered panic.

Risk premiums in loans remained low, and rating agencies, such as Standard & Poor's and Moody's, maintained their relatively high rating of sovereign bonds until the onset of the crises. Many analysts and financiers, particularly at the outset of the crises, argued that the lack of proper disclosure and high-level transparency hampered the appropriate assessment of risks.

However, objective evidence and data seem to indicate that the pertinent information, such as real effective exchange rates, short-term foreign debts in the private sector, current account balances and balance sheets of banking sectors, was largely available.

The problem was that this information was not appropriately incorporated into the risk assessment of the markets. Particularly when considering factors in the behavior of nonbank financial institutions, such as hedge funds and pension funds, one is inclined to believe that the herd mentality has been more prevalent than rational and detailed calculation of emerging market risks. Moreover, so-called rational calculations a la Long Term Credit Management turned out to be misleading in that their models assumed a stable equilibrium.

Thus, looking more objectively at the details of these crises, one is led to believe that they are testaments to the inherent instability of liberalized international capital markets where sudden reversals in market confidence cause periodic panics of differing magnitudes and durations.

Also, it is interesting to note that both the Mexican and South Korean crises occurred immediately after these countries joined the Organization for Economic Cooperation and Development and began to conform to the code of capital liberalization of the organization.

Indeed, after the substantial liberalization of the capital account of five Asian countries -- South Korea, Indonesia, Malaysia, Thailand and the Philippines -- around 1993, approximately $220 billion in private capital flowed into the region during the three-year period from 1994 to 1996.

The reversal of flows in 1997 due to the sudden shift in confidence amounted to roughly $100 billion. No country or region can tolerate this kind of sudden shift in market sentiment from euphoria to panic that causes such a huge reversal in private capital flows.

Fernand Braudel, the great French historian and one of the leaders of the Annales school, which focused on long-term trends in history, is known for opening up new horizons in the study of history.

In his last interview in 1985, he said that if viewed in terms of economic stages, the world has centered on a single city in each phase of development: Venice, Genoa, Amsterdam, London and currently New York. These cities in their respective days of prosperity enjoyed economic vigor as well as different problems than those of other cities, he said.

In short, he argued that capitalism exists in only a single hub at a given time, and that shifts of the hub are always accompanied by economic crises. The Great Depression in 1929 followed the shift from London to New York. He said that the crisis at the time was accompanying a shift from New York to somewhere as yet unknown.

Now, a little more than 10 years after Braudel's death, I am increasingly convinced that the next center of capitalism will not be an actual city or region, but cyberspace.

When we look back on incidents involving international finance and other economic relations over the past five years to 10 years from Braudel's perspective, two things come to the forefront: the emergence of "cybercapitalism" and the convulsions of the world's economic system stemming from the shifting of the center of the world economy from New York to cyberspace.

The revolution in the field of telecommunications, which progressed at a fast and accelerating pace in the 1980s and 1990s, is spreading from personal computers to the Internet and changing the world's financial system.

The market no longer needs to be a physical one because it can exist in computer networks. Exchanges of financial products worldwide are quickly changing shape. Financial business, particularly on an international level, is becoming more like the telecommunications and information business, in which trading is carried out in the virtual world of cyberspace with a constant flow of information.

Since capitalism is a system based on markets, the transformation of the markets brought about by the revolution in the information and telecommunications sector means the transformation of capitalism itself.

In cybercapitalism, a tremendous amount of information is processed in real time in cyberspace, and on the basis of the information, a huge amount of funds changes hands in an instant. The combined volume of daily foreign exchange trading carried out worldwide, for example, amounts to $1.5 trillion. This means that an amount equivalent to Japan's gross domestic product is traded in 2.5 days on the foreign exchange markets.

The interaction between the processing of information in cyberspace and information feedback concerning financial trading is massive and extremely fast. In physics, it is widely known that the faster the information feedback of a system, the more unstable it becomes. Likewise, the cybercapitalism that is starting to take shape is likely to become an extremely unstable and risky system.

Eisuke Sakakibara Ph.D. is a former Japanese vice minister of finance for International Affairs.