Vancouver meet has to force govts to swallow bitter pills

By Gwynne Dyer

LONDON (JP): The party was last year in Manila. The hangover is this year in Vancouver. Rarely has hubris been punished so promptly.

Twelve months ago in Manila, the 17 countries of the Asia- Pacific Economic Cooperation forum (APEC) were convinced that the 21st century belonged to them. The nascent trading block around the Pacific Rim contained two billion people -- a third of the world's population -- including almost every 'tiger' economy on the planet.

China, Chile, Thailand, South Korea, Indonesia, Malaysia, Taiwan: all the economies growing at 7, 8, 9, even 10 percent a year were there, and the prospective Masters of the Universe were in the mood to crow about it. But that was then, and this is now.

Since July, Thailand's currency has fallen by 50 percent against the dollar, 58 financial institutions have been closed, and the net capital value of the Thai banking system is now negative by a large amount. The government has fallen, and Bangkok has received an emergency US$17 billion loan from the International Monetary Fund.

Indonesia is in hardly better shape: 16 banks closed, the currency down by 43 percent, unemployment in greater Jakarta alone up by one million this year, and a US$38 billion loan on the way from the IMF. The Philippines peso and the Malaysian ringgit have also crashed in flames, and the South Korean won is following them down: Seoul will probably ask for IMF aid next month.

Even the Hong Kong dollar, backed by China's huge reserves, has been under assault -- and we have not begun to see what happens when investors realize that China's own immense economy has been run with even less discipline than those of its neighbors.

The Asian 'economic miracle' is down the drain for the next 3- 5 years, and with just a little more bad luck the whole world will fall into a recession. Indeed, the word 'depression' (as in 1929) has been heard crossing the lips of senior bankers.

So it is a sadder group that gathers in Vancouver to survey the wreckage. Whether it is a wiser group remains to be seen. If it all descends into moralizing and finger-pointing, the worst- case predictions may come true. The real job is (a) to figure out what went wrong, and (b) to build a firewall around the Asian disaster.

It's not hard to figure out what went wrong. Last year, at the height of the frenzy, more foreign capital flowed into Asia and Latin America than in the entire decade of the 1980s. It was invested irresponsibly, much of it in wildly speculative real estate development. But it was also irresponsibly lent.

The borrowers were fools, and so were their governments. It was only two weeks ago, for example, that the Indonesian central bank called all the country's surviving private banks to a meeting and handed out a questionnaire (literally!) asking how much foreign debt they had accumulated. Nobody had bothered to track it -- and it turned out to be $65 billion.

Now half the construction sites in Jakarta and Surabaya have ceased work, but all that money must still be repaid -- with rupiah worth not much more than half what they were in August. Not clever. But what about the lenders?

The last time we went down this road (though not quite so far) was the frenzied 'recycling' of petrodollars to Third World countries in the 1970s. The fourfold rise of oil prices in 1973 deluged the major international banks with cash, and they had to shovel it out the door again as loans as fast as possible.

For a while, anybody could borrow large sums of money for any hare-brained scheme, especially in Latin America. Then the bankers' crisis passed, and the Third World got a 'debt crisis' instead.

In 1979, just before roof fell in, I was standing in the 44th- floor office of the head of Latin American operations for a major international bank, gazing down at the unsuspecting city of Sao Paulo, and I asked him: won't they hang you when all this debt goes bad? Of course not, he replied; everybody at headquarters had to sign off on the loans too.

He knew what was going to happen, and so did everybody else at the bank. They had fixed their balance sheet and satisfied their shareholders at the expense of naive borrowers, they had made sure no individual among them would be held responsible, and now other people could pick up the pieces.

It's equally true this time round: the lenders, like the borrowers, were either fools or knaves. The whole system became intoxicated, and it does not help to blame just one part of it. The trick is to bring the entire world financial system in for as soft a landing as possible, and that depends to a large extent on what the APEC leaders decide at Vancouver.

"Bite the bullet, swallow the bitter medicine, find any metaphor you like but take the pain and take it quickly. Get it over with," said Singapore's elder statesman Lee Kuan Yew on Nov. 18. He's right: if the half-dozen Asian countries that are already in dreadful trouble move fast, make the necessary reforms, and restore confidence, then probably the plague won't spread.

That is by no means guaranteed, however. To pass through the crisis in these countries quickly "we have to see collapses, banks closing, property companies going to the wall, the consequences of these mistakes being borne until the market recovers," observed John Mulcahy, managing director of Indosuez W.I. Carr.

Yet in the more authoritarian countries, the people who will thereby lose money are precisely the main supports of the regime, a narrow political-economic elite that has been bought and paid for with other people's money. If they cannot be brought to heel, then the whole effort collapses.

The real job, at Vancouver and after, is to find ways of persuading these governments to do the harsh things that are required of them, even at the risk of alienating their own supporters. Otherwise, the rot will spread. But it would help to remember that the blame for the mess does not all reside in Asia.