The Asian crisis: Pendulums and orthodoxy

By Gwynne Dyer

This the second of a series of three articles examining the economic, social, and political implications of the crisis that began in Asia and now threatens to involve the entire world.

LONDON (JP): One major difference between my personal economy and that of South Korea is that if a foreign bank should agree to lend me a few hundred million dollars so that I can produce this column from my own 60-story office tower, rather than banging it out on airline meal trays and the kitchen table, the bankers will want a close look at tedious details like my collateral, cash flow, etc. Whereas with South Korea, until recently, it was Christmas every day.

Another difference is that if I should go belly-up, the only help I will get is directions to the nearest bankruptcy court. The International Monetary Fund will not step in to save me and the bank from our joint folly. Whereas when South Korea faces bankruptcy, the IMF makes US$57 billion available on short notice to get both the Koreans and their creditors off the hook.

Never mind the injustice of this. (I'm used to it.) Consider instead what it may portend for the reigning economic orthodoxy of the global market.

In 1936 John Maynard Keynes wrote: "The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood... Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist."

For the first generation after World War II, the most influential defunct economist was Keynes himself, and the world economy has never grown faster than it did in 1950-1970. But human nature can subvert any economic doctrine ever invented, and by the late 1970s "Keynesian economics" was about as fashionable as acne.

Keynes's goal, writing in the middle of the Great Depression, was to save capitalism from destruction by its own excesses, and the disaster of mass unemployment persuaded a generation of Western leaders to adopt his prescription for smoothing out the economic cycle. Or rather, they bought half of it: the bit about running deficit budgets during a downturn to boost employment. But somehow they could never manage to run surplus budgets during the upswing, so eventually soaring inflation discredited the whole notion.

Enter Milton Friedman and his neo-laissez-faire doctrines: government intervention is bad for you, The Market Knows Best, the "hidden hand" will take care of the future. It's recycled Adam Smith, really, but there weren't many other options: there are only a few Big Ideas in economics.

For two decades Friedman and the "Chicago School" have had things all their own way, but human beings will always conspire to beat the system -- and now we live in a global market.

How big a change is this, really? There was already a global market in goods in the 19th century, after all, and by the start of this century it included both trans-national companies and large foreign investment flows. But it wasn't much like our world: there was no real-time global financial market, for one thing.

For another, there was no menu of competing economic theories to choose from. Even in the political domain, the relatively few democratic countries were only gradually settling into the routine of alternating left-wing and right-wing parties, each picking up the pieces after the other has made a hash of things, that we now see as the natural order in domestic politics.

Then, between 1917 (the Bolshevik Revolution) and 1960 (the effective end of the decolonization process), the "first global market", which once incorporated almost 100 percent of the world's people, fell to a mere 40 percent. Everybody else was locked up in various fascist, communist, and authoritarian "socialist" states -- and it's only since the late 1970s that we started climbing back to the current 95 percent.

This "second global market", thanks to instant communications, is a faster-moving, more sophisticated beast. It wouldn't be surprising if it began to show the same alternation between the poles of economic theory, the same pendulum swing between left- and right-wing ideas, that already characterizes domestic politics in most societies.

Perhaps we have already seen such a pattern in the shift to Keynesian ("left") doctrines in the third quarter of this century, and then to Friedmanite ("right") doctrines in the last quarter. Two lurches in opposite directions do not necessarily add up to perpetual oscillation -- but if ideas start to shift back to more intervention in the present crisis, then there is a real case to answer.

The huge bail-outs now being organized in Asia are a betrayal of Friedmanite orthodoxy, and the great man is livid. "It's utterly immoral to have unelected, unaccountable officials spending taxpayers' money helping out other countries with their bad debts," said Milton Friedman last week. And it's all the IMF's fault: the rot set in with its 1995 bail-out of Mexico. After that, Friedman alleges, "investors said to themselves: 'Why not take the risks' -- they knew they would be bailed out if anything went wrong."

One can only wonder at the political naivete of a man who thinks the United States should have let its big next-door neighbor collapse into chaos in 1995, but these arguments are irrelevant now. The problem of the moment is that if any of the bigger Asian countries defaults on its foreign debt, the resulting chaos might well force the others into default as well. Then we're looking at $400 billion in bad loans and an imploding world economy.

So the IMF is committing a necessary heresy -- but as far as possible, it is still playing a very orthodox game. For example, the IMF used the negotiations with Seoul to push a battering ram through the door of the highly protectionist South Korean economy. Since December 30, foreigners are allowed to purchase up to 55 percent of any listed company in South Korea. By the end of this year, they will be able to buy them outright.

Credit Lyonnais Securities recently estimated that only 87 of South Korea's 653 listed non-financial companies are safe from foreign predators. With the won worth less than half what it was three months ago, a lot of the South Korean economy is going to be snapped up by foreigners, and there is bound to be a nationalist backlash.

Seoul already came close to default once in the frantic December negotiations with the IMF, and the pressures will mount rapidly on president-elect Kim Dae-jung. But the incoming government has done one clever thing: it has taken George Soros on as Kim's "unofficial adviser".

Soros, the Hungarian-born financier who built a $12 billion fortune on currency speculation, is not a popular man in Asia, and he is particularly unpopular with Malaysia's Prime Minister Mahathir Mohamad. "All these (Asian) countries have spent 40 years trying to build up their economies, and a moron like Soros comes along with a lot of money to speculate, and ruins things," Mahathir complained last July.

"(Dr. Mahathir) is a menace to his country," replied Soros, blaming the Malaysian prime minister's motor-mouth rhetoric for highlighting Malaysia's relatively modest economic problems when a lower profile might have let it escape as lightly as, say, Taiwan. It grew into a world-class slanging match, casting the two men as archetypes of corrupt "Asian way" crony capitalism and doctrinaire Western free-market triumphalism. (One suspects that neither of them gets contradicted very often at home.) But their ideas are not really that far apart.

In only two decades, Mahathir Mohamad has transformed multi- ethnic Malaysia from an impoverished backwater of Singapore into one of the most impressive "tiger" societies. He did it using all the standard "Asian" methods: special concessions to political cronies to start up new enterprises; cheap loans from a compliant banking system; protection against foreign competition in the home market. And it worked: Kuala Lumpur has not only the world's tallest building, but also decent low-cost housing for poor people.

Then Mahathir got blind-sided by the change in the global rules. The cozy "Asian way" capitalism that served the "tigers" so well in the first phase of industrialization (as it served Japan too, a century before) suddenly ran out of rope. The flood of money from outside exacerbated all its worst tendencies to over-investment and non-accountability -- and then exposed it to a scrutiny it could not survive. Crash.

Mahathir was wrong to blame Soros for the crash, and his demands for tighter controls on currency speculators have attracted unwelcome attention to Malaysia's own economy. But basically he's right: this should never have been allowed to happen.

George Soros doesn't believe it should have happened either, though he would argue that speculators are just the ultimate enforcers of financial discipline when all other controls have failed. The problem, as he sees it, is that there are no controls on international lending.

That's why he is proposing the creation of an International Credit Insurance Corporation as a sister institution to the IMF. It would guarantee international loans for a small fee, and borrowing countries would have to give it information on all foreign loans. The point is to keep a running tally on how deeply any country is getting into debt (which currently, believe it or not, is impossible not only for the lenders, but for most borrower governments too).

The International Credit Insurance Corporation would set a limit for each country on how much it was willing to guarantee, based on total loans outstanding and the state of the local economy -- and beyond that limit, lenders would be on their own. "This would render any excessive credit expansion unlikely," Soros explains dryly. If investors cannot be trusted to act with enough prudence to prevent huge booms, panics, and collapses, self-restraint must be supplied by regulation. Just like in the domestic markets.

Trends are hard to identify at the start, but unless the law of gravity has been repealed, pendulums still swing. For two decades, right-wing economics has held sway in most of the world, with just the results you would expect: low inflation, high unemployment, moderate economic growth, and rapidly widening income differentials. This crisis could start a swing back in the other direction.

Globalization is inevitable. Globalization according to the rules written by the "Chicago School" of economists is not the only way, or even the likeliest. As Yilmaz Akyuz, chief macro- economist at the United Nations Conference on Trade and Development (UNCTAD), said in this year's report: "A return to full employment policies is necessary to prevent a popular backlash against globalization."

Akyuz is implicitly assuming that the "popular backlash" will matter because decisions will be taken democratically, but that is precisely the question in Asia now. The old system is collapsing, but which way will Asians jump?