Asia’s Economic Crisis

There is plenty of blame to go around when it comes to explaining the cause of the economic meltdown that has many Asian countries in its grip. On the global level, the economic policies espoused by the United States, the World Trade Organization (WTO), the International Monetary Fund (IMF), and the World Bank, added to the activities of the international investors and currency speculators, all share responsibility. On the national level, unwise investment choices, lax banking regulations, corruption, excessive public and corporate debt, excessive expansion of credit and inadequate foreign currency reserves all played their part.

From the late 1980s until mid-1997, Southeast Asian currencies were set at a fixed exchange rate tied to the U.S. dollar. As the dollar lost value against the yen, their exports to Japan and Europe became cheaper and labor and land in the region also became cheaper, so foreign money flooded in and many Japanese manufacturers moved their factories to Southeast Asian countries. Although this resulted in higher income and a strengthening of the ASEAN currencies, the authorities did not allow them to rise against the dollar. High interest rates and undervalued currencies attracted even more foreign money. In 1995, however, when the United States and Japan agreed that the yen was overvalued and took steps to devalue it, resulting in the dollar appreciating from ¥80 to ¥130, Southeast Asia’s low-cost advantages began to be lost, for the ASEAN nations’ currencies were still pegged to the dollar. As exports became more expensive in Europe and Japan, long term investment became less attractive to Japan, growth slowed drastically, the current account (balance of trade) grew to a negative 8 percent, and ASEAN currencies came to be seen as overvalued. Thailand’s baht was the first to be sold short, in February, 1997 and again in May, and on July 2nd, the Thai government gave up on supporting the baht and let it float.

The float, however, was only the beginning of Thailand’s troubles. Currency speculators dumped baht, driving its value further down. Thailand was forced to rely on short-term loans at high interest rates to finance its current account deficit. The fact that many of its long-term loans had been used for real-estate speculation meant that many of them could not be repaid when called and this led to a rash of bank and business failures and large numbers of employee layoffs. Thailand was forced to seek IMF aid.

The fall of the baht made investors nervous about other Asian currencies. Soon the Indonesian rupiah was under attack and had fallen to less than half of its previous value. The domestic consequences of bank and business failures and job loss were worse than Thailand’s so that Indonesia, too, was soon forced to request IMF loans.

Next, foreign investors and speculators, in November, pulled their short-term loans out of South Korea. Its foreign currency reserves were soon depleted and it, too, fell into the clutches of the IMF.

The Asian economies were certainly not blameless for what happened. Thailand could have mobilized more domestic capital and relied less on foreign loans. It could have regulated foreign investment more closely so that the abrupt “cut and run” behavior that so exacerbated the situation could not have happened. It could have regulated its own banking industry more carefully so that there wouldn’t have been so many of the speculative investments that turned into unredeemable loans.

Many of the same “could haves” apply even more to Indonesia. Its authoritarian, nepotistic Suharto government has been even more dependent upon short-term foreign investment and characterized by more lax banking regulation than Thailand.

In South Korea, the chaebol, with their high debt-to-capital ratio, politically-motivated investment decisions and their close ties to the banking community and the latter’s practice of overextended loans, were highly vulnerable to investment decisions made abroad.

Notwithstanding the misjudgments of the Asian nations, events beyond their control had much to do with their troubles. In 1971, with the abandonment of the Bretton Woods system of fixed exchange rates between major currencies linked with gold, economic growth was freed from the constraints of a relatively inflexible monetary supply, but the door was also opened to speculation in currencies, an aggravating factor, if not the major cause of Asia’s present economic troubles.

Another external factor was the deregulation/free-market-above-all measures of the Reagan/Thatcher governments, policies also adopted by the IMF and World Bank. These measures, together with the debt crisis of the early 1980s, led to a rash of corporate mergers, buyouts, and bankruptcies, changes accelerated by the 1987 stock market crash. These changes shifted the center of economic activity and power from producers and marketers to financiers– merchant banks, institutional investors (managing pension and mutual funds), stockbrokers, currency speculators, etc.

These changes resulted in an unprecedented concentration of financial power and an attitude that finance capital and its manipulations are the essence of economic activity. In 1975, about 80 percent of foreign exchange transactions went to pay for the production or trade of goods and services; the remaining 20 percent was in expectation of profit from the buying and selling of currencies themselves, based on their changing values. Since then, currency deregulation, the “electronification” of money and the computerization of market systems have made currency trading much quicker and transaction costs much lower. Thus, today we find that a mere 2.5 percent of foreign currency exchange is to pay for goods and services and 97.5 percent is speculative. About $2 trillion in currencies is now traded each day. “This is equivalent to the entire gross domestic product (GDP) volume of the United States being turned over via currency trading every three days.” Banks are now only a minority player in a game dominated by institutional investors, but even they now derive 30 to 50 percent of their profit from currency transactions rather than interest from loans.

The changing value of currencies, a source of great wealth for speculators, is a threat to manufacturing business and national governments and economies. Total central bank reserves worldwide total about $600 billion, equivalent to only a few hours of currency trading, so if the traders make a concerted “attack” on a particular currency, no government, even that of the United States, has sufficient dollar reserves to defend its currency. The irony and injustice of this situation is that when a nation’s economy is brought to its knees by the currency speculators and must call on the IMF for help, it is the ordinary citizens who bear the brunt of the austerity measures mandated by the IMF through unemployment and cutback of social, educational, and medical services.

While speculators can profit handsomely from fluctuations in the value of currency– they thrive on instability– manufacturing businesses are hurt by uncertainty and instability. For example, suppose a Japanese or American firm, attracted by low land and labor costs, sets up a factory in Thailand. It converts dollars or yen into baht to buy the land and build the factory. In operating it and selling its product, most transactions are in baht. In the meantime, however, if the value of the baht drops by half, a profit earned within Thailand will be greatly reduced when converted into yen or dollars. If the owner should decide to liquidate the business and repatriate the proceeds, half the value of the investment is lost simply because of the baht’s decline in value.

The IMF is providing $17.2 billion for Thailand, $43 billion for Indonesia, and $57 billion for South Korea. There are, of course, strings attached and the aid will be dribbled out as the IMF’s conditions are met. Some of these are reforms that most everybody agrees should have been made long ago: freeing central banks from political control, opening the finance sector to public scrutiny (thereby reducing cronyism and corruption in the granting of loans), requiring reasonable reserves to back up loans, etc. In Indonesia, the breakup of the cartels and monopolies that have made some of President Suharto’s family and friends wealthy is part of the IMF requirements.

It is what the IMF is demanding that nations do vis-à-vis the outside world that worries the Asian nations and arouses suspicion that the IMF package is simply a plot by the multinationals to gain control of national firms on the cheap. For example, in Korea, the package requires raising the limit on foreign ownership of Korean stocks to 55 percent, permitting the establishment of foreign financial institutions in Korea, fully opening the financial/capital market, diversifying import sources, abolishing the car classification system (thus making it easier for U.S. and Japanese automakers to break into the Korean market), etc. These measures, plus the requirements that the national governments reduce taxes and spending, are seen by social critics as virtual enslavement to the IMF. Why, they ask, should Thais, Indonesians, and Koreans have to suffer for the greed of money speculators?

Although there is anger and bitterness that the “Asian Tigers” have so suddenly become housecats in the lap of the IMF, there is also much self-reflection and a determination that this shall not happen again. There is a resolve to rely more on domestic capital and less on foreign capital, a will to strengthen the of-late much-neglected agricultural sector, recognizing a strong farm economy provides a cushion against urban unemployment and a higher degree of national self-sufficiency. There is also talk of a retreat from rampant materialism and consumerism, and a return to spiritual values and simpler living. This ill wind may, indeed, blow some good. If it leads to strengthened local communities, greater democracy and perhaps even new media of exchange, it could form a bulwark against the relentless and undemocratic global economy.

Lewis and his wife Rose Lewis edit Windows East and West, a Society of Friends publication on Asian issues. Lewis teaches Japanese at Chemeketa Community College in Salem, Oregon. Both are active in the Friends Community.