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.