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