The Asian monetary crisis and the global economy
The Asian monetary crisis and the global economy
Banks are collapsing all over Southeast Asia; Congress has tied Clinton's hands; terrified depositors are pulling their money out of Hong Kong; Brazil's market has plunged 40 percent. Look out, the ghost of 1929 is haunting the world. Will Hutton and William Keegan in London and Ed Vulliamy in Washington say the parallels are uncanny and unnerving.
LONDON/WASHINGTON: The parallels are uncanny and unnerving. A United States where the President's free-trading authority has been questioned, wave upon wave of devaluation being forced upon Asia and Latin America, and national banking systems in these continents imploding from bad debts and risky lending.
The flows of international capital upon which the viability of the world financial system depends are fleeing from the once fashionable "emerging markets".
A previously complacent policy-making establishment is now desperately trying to stitch up a rescue operation for the countries which were once meant to constitute "the Asian miracle". And Congress itself it holding back the American contribution to American-led International Monetary Fund loans for hard-pressed Southeast Asia.
Modern central banks, most notably the U.S. Federal Reserve, are much more aware of "systemic risk" than they were in the early 1930s, and Fed chairman Alan Greenspan and his central banking colleagues are already on amber alert. Nevertheless, the speed with which the Asian crisis has threatened to spread, and the new mood in Congress, conjure up uncanny memories of the concerns of the 1930s. Similar forces are abroad today.
There is a U.S. Congress that in the small hours of last Monday morning refused the President the "fast-track" legislation he required to negotiate international trade deals, showing that the political majority for free trade that has existed since the World War II is threatening, in the U.S. at least, to disintegrate -- just as a tidal wave of cheap exports from Asia and Latin America threaten to hit the U.S., with its associated impact on American jobs and wages.
The political consequences in the U.S. promise to be incalculable, with politicians of Right and Left no longer prepared to talk up the benefits to the U.S. of its US$800 billion of exports -- but rather to accept that the dislocation caused by imports (the price, after all, of being able to export) is no longer acceptable. The traditional escape valve for the world's developing countries -- exporting to the U.S. -- is in danger of closing.
But Asia and Latin America need both the job-generating export business and the hard currency it earns urgently. There is the collapse of the Thai banking system, the fears for Indonesia's and South Korea's -- a fear now spreading to Brazil with its stock market collapsing a full 40 percent over the past three weeks. Last week saw an unprecedented run on an important bank in Hong Kong as depositors grew terrified that their money had been lent on now valueless property deals.
The IMF, which has already bailed out Thailand and Indonesia, may need a full $200 billion to replace the private capital flows in Asia alone that are now disappearing as confidence collapses -- $200 billion that it does not possess.
But if it cannot fulfill its duties, what stands between these countries and an implosion of their economies, and between their financial systems and our own? The world economy is facing its most serious challenge since the oil shocks of the 1970s. Globalization, argued for as an unalloyed advantage, is now showing us its dark side.
Events tens of thousands of miles away in economies of which we know little can set in train a series of shock waves, transmitted freely by unregulated financial markets from country to country and whose impact on the real world of trade and employment is enormous.
It may be that the international system is flexible and open enough to roll with the punches, and that the individual countries which have been forced into painful recessions and price slumps can survive without too much social upheaval. Equally the knock-on effects to the rest of the world economy may be limited -- but nobody can now predict either out-turn with any certainty.
Even the normally ebullient Economist magazine warns that while the world system will probably accommodate the shocks, there is a risk that it could all go badly wrong. Public pronouncements last week from Greenspan were designed to reassure, but even these acknowledge that U.S. exports and economic growth are likely to be more muted. Behind closed doors the concerns are very much greater.
It is a story at its heart of Asian hubris and nemesis, although the West's willingness to believe in the unchallengeable wisdom of free financial markets is also part of the plot.
The Asians, over the past 10 years, have begun to believe their own propaganda; that the normal rules of capitalism have been suspended for them. They can boost investment to new heights and not worry that it may translate into stock market and property booms that get out of hand; they can peg their currencies to the dollar and sustain high exports however uncompetitive they become; and that they are so attractive as destinations for new investment from abroad that the tap will never get switched off. They have been proved wrong on all counts.
Until the current crisis, much popular discussion revolved around the putative threat to output and jobs in the West from low-cost competition from Asia. Yet, ironically, one of the advance indicators of trouble in the tiger economies, including super-tiger South Korea, was a rapidly deteriorating balance of payments position.
These countries were in fact importing more than they were exporting, and becoming increasingly dependent on very short-term inflows of capital -- capital known traditionally as "hot" money, because of the speed with which it can also flow out.
But how the money had flowed in! The Bank for International Settlements in Basle monitors the world financial system, and noted in its June annual report that "total net flows to Latin America and Asia in 1996 alone exceeded total flows for the entire 1980s". Indeed, the BIS report was replete with warnings about "financial fragility" in Asia.
The source of the trouble has been the system of fixing national exchange rates to the dollar rather as the pound was fixed to the mark in the old ERM. It is said to be counter- inflationary, but it has also had the effect of encouraging borrowers to borrow and foreign lenders to lend in a compact in which there is no longer any exchange rate risk -- that's borne by the government in question, whether Hong Kong's, Brazil's, Argentina's, Thailand's or South Korea's. In Asia what that has meant is a risk-free source of capital; and stock market booms. That in turn has driven up their domestic inflation rate, and as a result their currencies have become steadily less competitive. The world's currency speculators have attacked a series of Asian currencies; first Thailand's, then Indonesia's, then Malaysia's, then the Philippines and latterly those of South Korea and Hong Kong -- with eddies touching even Australia and New Zealand.
Interest rates have been forced up, stock and property markets have slid with a vengeance, and suddenly banks whose loans appeared solid have been exposed as having feet of clay. A fifth of all loans in Thailand no longer receive any interest; and the figure is above 15 percent in Malaysia and South Korea.
The size of the rescue operations being arranged under the aegis of the IMF to stabilize their financial markets is truly remarkable -- $18 billion for Thailand, $38 billion for Indonesia, with even speculation about South Korea.
Analysts think the banking systems of Singapore and Hong Kong are reasonably robust, although the run on Hong Kong's International Bank of Asia was an ominous sign that it too may follow the others. But recent assessments from international officials close to the scene are terrifying, even though the language is opaque. It is reported, for example, that in South Korea, where there has been much misdirected lending under state guidelines, the banking system is "technically bust". And the "net capital value of the Thai banking system is negative by a large amount". Such wipe-outs of a national banking system have not been seen since the 1930s.
Having gone overboard with "tiger funds", some overseas investors have now advised a complete withdrawal from Southeast Asia, and the contagion has spread to Latin America, where Brazil, too, has had to institute an austerity program.
If the Brazilian real is forced into a devaluation along with the South Korean won, and both countries plunge into financial and economic crisis, then there is little doubt the world would stand on the threshold of a potential recession. As Will Ollard of Latin American Economy and Business observes, if Brazil falls into recession it is so large it will bring down Argentina, 50 percent of whose exports are shipped to the $750 billion Brazilian economy. Already interest rates have doubled while the government wrestles with an austerity package to please the financial markets; car sales have slumped. Ollard's judgment, though, is that Brazil will hold -- just.
But will Japan? Its economy has been stagnating most of this decade under the weight of a high yen and an overhang of debt and excess industrial capacity. Its banking system is precarious, and is closely intertwined with the rest of Asia; already there are fears that its involvement with the fatally disabled South Korean financial system could be the last straw. The government seems incapable of launching an aggressive program of economic expansion, hamstrung by fears of inflation and high public borrowing.
Last Friday's stimulation package typically contained no new spending, and with little expected next week the financial markets blew a collective raspberry -- with the stock market dropping another 2 percent over last Friday's trading. If the situation in Japan breaks, then the world will not face a potential recession -- but a certain economic and financial calamity. And, remind officials, never forget the precariousness of the former Soviet Union if the dam were to break.
And while all this turmoil has been mounting, President Clinton lost his "fast track" trade negotiating rights. It met resistance from two quarters. The first was within his own Democratic Party, mobilized by America's newly buoyant and muscular organized labor movement, and articulated by the leader of Clinton's own party in Congress, Richard Gephardt. He is the man now emerging as the main challenger to Al Gore for the nomination to the White House in 2000. Fast track, said Gephardt, did not place enough emphasis on seeking environmental and labor improvements while negotiating free trade treaties -- in either the U.S. or the treaty nation.
The second hostile camp was more complex. Republicans are loath to give Clinton a free rein in anything, and are anyway torn between "America First" inclinations and free trade commitments. But the House leader and Clinton's apotheosis on Capitol Hill, Newt Gingrich, decided to back the President and muster Republican support for fast track. It was Gingrich who, late on Sunday night, called the White House to tell his unlikely ally that his effort was 20 votes short, and would stumble and fall if presented for a vote.
Some Republicans joined the populist consensus that America is the victim of unfair international competition; but even the free trade wing of the party took exception to the very labor and environmental clauses needed to get Democrat support. Senator Phil Gramm, usually a staunch free trade advocate, was furious that fast track would give the President executive license to negotiate trade deals which would change U.S. environmental and labor laws. This made the scheme "absolutely unacceptable". But the U.S. is not alone in its growing xenophobic attitudes towards trade and finance, intensified by the experience of the past four months.
In Asia the Japanese are leading discussions about establishing a new financial regime for the area which will declare independence from Western rules; they want a $100 billion Asian Monetary Fund to back a new regime in which countries can impose tough capital controls against foreign exchange rate speculation, and still get loans even if they adopt quasi- protectionist policies against American and European exports.
Eisuke Sakakibara, Japan's vice-minister for international affairs at the Ministry of Finance, who has been touring the region drumming up support for the initiative, spoke of the need to challenge the "Washington consensus" -- that the only route to economic success is some mixture of Thatcherism and Reaganism. Asia must have a financial regime that allows it to declare independence from such thinking, he argued.
Senior officials from all over Asia are meeting in Manila this week to discuss the fund, but Western officials are trying to ensure it comes under the umbrella of the IMF. We may be entering new territory. The U.S. could now find it difficult to impose its commercial and financial hegemony on Asia and Latin America, and leaders around the Pacific understand well the political consequences of the loss of the fast-track legislation -- which Clinton had boasted would be the basis of a new Pacific free trade area. Asia teeters on the edge of a full-blown financial crisis, which if Latin America joins will overwhelm the resources of the IMF and so trigger a world financial calamity.
Regional leaders are looking to protect themselves in great regional blocs. Even if the world survives the current shock, the lesson is clear: we need new rules and better institutions urgently. Without them the prosperity that free post-war trade has brought in its train could collapse.
-- The Observer News Service