Watch out for Asian fallout in the West

Watch out for Asian fallout in the West

By John Gray

LONDON: Asia's economic crisis has not ended. It has moved into another and deeper phase that is bound to have serious repercussions for western economies. In a globalised economy, we must expect Asia's worsening economic difficulties to be propagated swiftly across much of the rest of the world. After all, that is what is meant by globalization, is it not?

In fact globalization can mean two very different things. It can mean simply the spread of modern industrial production throughout the world -- an unstoppable historical process that has been going on for generations but which has accelerated in recent decades. When it is used by political and business leaders, however, globalization usually refers to something else -- worldwide economic deregulation and the universal reach of the Anglo-American free market. In this latter sense, globalization is not an inexorable historical trend. It is a neoliberal political project.

That project may now be headed for a fall, the first signs of which can already be seen in Indonesia. The core of globalization in the neoliberal sense is freeing up flows of capital from any kind of national -- or for that matter transnational -- regulation or control. But, as George Soros has been urging for many years, there is no tendency to equilibrium built into financial markets -- if anything the opposite. History suggests that left to themselves financial markets are prone to speculative booms and devastating busts.

The Indonesian crisis shows how sudden large movements in deregulated currency markets can inflict profound and enduring economic hardship on entire populations. Perhaps the free flow of capital helped topple the spectacularly corrupt and oppressive Soeharto regime. But the government of Soeharto's appointee is no more democratically legitimate. The Habibie government looks less like a successor to the Soeharto regime than its ragged tail-end.

While turmoil in Asian financial markets may have helped trigger Soeharto's downfall, the longterm economic damage it did in Indonesia could well have ensured the emergence, perhaps after a period in which the country becomes near-ungovernable, of another authoritarian regime.

If the knock-on effects of Indonesia's crisis have not yet been felt fully across Asia, the reason is partly that China has not bowed to western pressure and surrendered political control of its currency. But it is doubtful whether China can insulate itself for much longer. Its internal problems are daunting. China is currently undergoing the largest movement from country to town in human history. This enormous transformation is occurring at a time when unemployment has exceeded the 100 million mark and the economy is showing ominous signs of emerging deflation. Yet the Chinese government has embarked on an ambitious program of privatization whose upshot can only be still higher unemployment. In a system in which housing and other benefits are often tied to employment this is a recipe for large-scale unrest. Will China's domestic problems, together with the deepening economic difficulties of its neighbors, compel it to devalue its currency? If so, what will that mean for the global economy?

Conventional opinion is confident that, if only by default, through the disarray or meltdown of other types of capitalism, the Anglo-American free market has won out. But global laissez- faire has no long-term winners. It is too volatile for that. Instead it works to transform all varieties of capitalism -- including the American model whose victory is being trumpeted. America's bubble economy is acutely vulnerable to a worsening of Asia's troubles.

Japan is facing the onset of deflation. Like China it may judge that it has no option but to devalue its currency. The new phase of the Asian crisis we are now entering could be a prelude to a trade war -- initiated by protectionists in the U.S. Congress -- and a major setback on Wall Street. In that event, with the sudden disappearance of considerable amounts of stock market-generated wealth, the triumph of the American model will surely follow the Asian tiger economies down the memory hole of history.

-- Guardian News Service