Learning from the Southeast Asia Crisis
by John Miller
Dollars and Sense magazine, November/December
It all happened so fast. By year's end, the crisis had spread
throughout Southeast Asia and even affected the richer economies
to the North, especially South Korea. The value of currencies
across the region collapsed-not just the Thai baht but also the
Indonesian rupiah and the Malaysian ringgit, Southeast Asian financial
markets crashed as well. Plummeting stock prices and plunging
currencies combined to slaughter three-quarters of the value of
Indonesian and Thai financial assets. Financial capital, unlike
the proverbial ocean liner, turned on a dime, withdrawing more
funds in less than a year than accumulated in the region over
the previous seven years.
The miracle economies of Southeast Asia are in depression.
Conditions vary from country to country. Recession prevails in
Malaysia, and in Thailand the steep downturn will cause over two
million workers their jobs by the end of 1998. In Indonesia, crippling
stagflation threatens to double prices at the same time that it
pushes nearly one half the population into poverty.
These once high-flying Southeast Asian economies are tending
to the wounds from their sudden fall to earth. Thailand and Indonesia
are in receivership, undergoing austerity measures administered
by the International Monetary Fund (IMF) in return for emergency
loans to help repay foreign lenders. Meanwhile Malaysia independently
administers similar austerity measures. The $63 billion bailout
crafted by the IMF and the U.S. Treasury exceeds the U.S. financed
bailout of Mexico in 1995. With South Korea added in, the East
Asian bailout package is over $100 billion.
The IMF continues to say that the leading economies in the
region-Indonesia, Malaysia, the Philippines, and Thailand-will
recover in 1999, if only modestly. But the Thai and Indonesian
economies may not have hit bottom yet.
More pessimistic observers fear that the Southeast Asian financial
crisis has triggered a deflationary spiral likely to suck all
of East Asia, and perhaps the world, into a depression. The threat
of economic collapse is real enough, especially if conditions
worsen in Japan, the region's most important economy and already
suffering a decade-long recession. During most of the 1990s, East
Asia accounted for nearly one-half of the expansion of the world
economy. In addition, the region's financial crisis has rattled
financial markets around the globe in a way the Mexican peso crisis
of 1995 never did. Latin American, European, and Russian currencies
all have come under attack. Even the booming U.S. economy slowed
this summer under the weight of a ballooning trade deficit caused
by fewer exports to East Asia (see box on page 14).
For those not blinded by free market faith, the Southeast
Asian crisis is a shocking reminder of the failures of markets.
Capitalism remains much as Marx and Engels described it one hundred
and fifty years ago in the Communist Manifesto - dynamic but unstable
and destructive. We need to look more closely at what lessons
we can learn from the economic sufferings and financial miseries
of Southeast Asia.
A story of market failure
The financial crisis in Southeast Asia differs in important
ways from previous crises in the developing world. Unlike the
Latin American debt crisis of the 1980s, the roots of the current
turmoil are in private sector, not public sector, borrowing. Most
of the afflicted countries have run budget surpluses or minimal
budget deficits in recent years. At the same time, private sector
borrowing increased heavily, especially from abroad and especially
_ short-term. For instance, loans to Thai corporations from international
banks doubled from 1988 to 1994. By 1997, Thai foreign debt stood
at $89 billion - four-fifths of which was owed by private corporations.
But most disturbingly, one-half of the debt was short-term, falling
due inside a year.
The Southeast Asian miracle economies got into | trouble when
their export I boom came to a halt as these short-term loans were
due. For instance, stymied by a decline in First World demand,
especially from recession-ridden Japan, Thai exports grew not
at all in 1996. Also, opening domestic markets to outside money
(under an early round of pressure from the IMF) brought a deluge
of short term foreign investment and spurred heavy short-term
borrowing from abroad, fueling a building boom. By the mid '90s,
a speculative binge in everything from high-rise office towers
to condos to golf courses accounted for nearly 40% of growth in
Now that the bubble has burst, the region endures a horrendous
drying out process. Southeast Asian exports from autos to computer
chips to steel to textiles now glut international markets, all
made worse by intensifying competition from Chinese exports. Foreign
financial capital has fled. Domestic spending is collapsing. Banks
fail at unprecedented rates. Unemployment mounts, and as more
and more people across the region fall into poverty, the Southeast
Asian financial crisis has become a story of tremendous human
In the language of economists, the crisis is also a story
of market failure. Southeast Asian capital markets failed in three
critical ways. First, too much capital rushed in. Lured by the
prospect of continued double digit growth and searching for new
places to invest its overflowing coffers, financial capital continued
to flow into the real estate sectors of these economies even when
financial instability was widespread and obvious to all. Second,
the capital markets and the banking system could not channel these
- funds into productive uses. Too much money went into real estate
and too little went into productive investments likely to sustain
the export boom. Third, too much capital rushed out, too quickly.
The ~ excessive inflow of l capital reversed itself and fled with
little regard for the actual strength of a particular economy.
In their more candid moments, leaders of the financial community
have owned up to these market failures. For instance, late in
1997, just a few months into the crisis, Stanley Fischer, economic
director of the IMF, confessed at a regional meeting in Hong Kong
that: "Markets are not always right. Sometimes inflows are
excessive and sometimes they may be sustained too long. Markets
tend to react late; by then they tend to overreact."
Where the right went wrong
Despite the doubts of their high priests, most financial conservatives
continue to believe that international markets are stable, if
subject to periodic excesses, and that whatever their excesses
in the East Asian crisis might be, they can be traced back to
a misguided interference into those markets. The culprit varies-industrial
crony capitalism, fixed exchange rates or some other shibboleth.
But in each case, these conservatives would have it that the economies
of Southeast Asia ran into trouble because non-market forces had
a hand in allocating credit and economic resources better left
entirely up to the financiers.
The conservative solution to the crisis? That is easy, if
painful: Put an end to these non-market allocations of resources.
Alan Greenspan, the chair of the U.S. Federal Reserve, believes
that the current crisis will root out "the last vestiges"
of this sort of thing and ultimately will be regarded as a milestone
in the triumph of market capitalism.
But none of the leading economies of the region relies on
government-managed industrial policies to direct economic growth.
One World Bank study placed Malaysian and Thai trade policies
as among the most open in developing economies. Since the 1970s,
another study reports, the Thai government tended to "allow
free markets rather than to intervene with them."
Nor was the crony capitalism which the right derides the cause
of the current crisis. This widespread practice-of political connections
guiding private sector investment decisions-was a constant, not
a new element in the Southeast Asian economic mix, just as present
in the boom as in the crisis. And there is no evidence that cronyism
is what turned investment in its speculative direction. Nor that
the charge of cronyism can't be lodged equally against the first
world bankers who financed the "cronies" of the region.
On top of this, there is no reason to believe that greater
transparency in financial transactions would have done anything
to extinguish the speculative frenzy in Thailand that was in full
cry curing the 1990s. "Transparency" refers to the disclosure
publicly traded companies are required to make about their operations
to their investors. But signs galore of financial instability
and overcapacity were there for anyone to see, even first-time
visitors to the region. Bangkok alone had over $20 billion of
vacant residential and commercial units by 1997. Despite plunging
returns, foreign investors pumped more loans into Thailand betting
that double-digit growth would continue and make these risks pay
In addition, we should remember that this crisis hit first
and hardest in Thailand and then Indonesia, the two Asian economies
with private domestic banking systems recently deregulated and
opened to foreigners. The shortfall of Japanese investment in
the early 1990s left Thailand desperate for foreign funds. Under
pressure from the IMF and the WTO, Thai authorities moved to further
open their economy to foreign investors, allowing foreigners to
own stock, real estate and banking operations as well. On top
of this, government policies lifted Thai interest rates above
those in the West, making Thailand a place where westerners could
turn a quick buck.
Tying the value of their currencies to the dollar didn't cause
the crisis either. If pegging exchange rates to the dollar was
the source of Southeast Asia's problems, these economies surely
would have improved by summer's end 1997. By then speculators
had forced the Thai, Indonesian, and Malaysian governments to
drop the practice. And despite each currency losing over one-half
its value with respect to the dollar, the crisis continued. Exports
did not recover, even with their lower price tags abroad. Instead,
imports needed for manufacturing became more expensive to buy
in the local currency, hurting the export sector even more.
Having stable exchange rates was an important building block
for the region's trade relations. It allowed manufacturers to
import components from Japan and Korea for assembly in Thailand
and elsewhere in Southeast Asia, before being sold in the United
States and Europe. And pegging the value of their currency to
that of the dollar allowed the Thais, for example, to lure capital
into their country, fueling investments. But the Thai authorities
did not take the next step of regulating the foreign capital that
it attracted into its economy this way.
What seems clear now is that the cause of the economic crisis
of Southeast Asia was not misaligned exchange rates, or mistaken
domestic policy, or even a lack of transparency in the banking
sector, although that surely didn't help. Rather the root cause
of the crisis now threatening the world with depression is the
abrupt reversal of the excessively rapid rise of capital inflows
and the falling global demand for the exports from the region
that arose from a global economy increasingly turned over to the
rule of markets.
By the end of 1997, the Southeast Asian economies suffered
"the equivalent of a massive bank run on the region without
any lender of last resort," says economist Jan Kregel. In
1996, a net $78 billion flowed into the region from foreign bank
loans and short-term portfolio investments like stocks. In 1997,
that turned into a $38 billion outflow from the countries most
hit by the crisis-Indonesia, Malaysia, South Korea, Thailand and
the Philippines. The biggest drop came in short-term portfolio
investment, such as stocks, and bank lending.
The IMF, the prime candidate to act as lender of last resort,
turned down the role-instead putting in place policies that imposed
more austerity and yet tighter credit conditions. Steadfastly
insisting that the cause of crisis was "home grown"
as Stanley Fischer of the IMF put it, the IMF tightened credit
for these countries already suffering from the disappearance of
Even by the IMF's standard, these austerity measures were
applied in an arbitrary and disproportionate manner. First world
economies facing financial crises came in for far different treatment.
The leading industrialized economies (and the IMF) are urging
Japan to increase government spending, cut taxes, and keep interest
rates low to counteract its continued economic stagnation-just
the opposite of the IMF prescription for the rest of East Asia.
In the Southeast Asian crisis, some reckless behavior was
punished, while other reckless behavior was forgiven. Surely international
investors are just as much or more responsible for the instability
of the region as its local capitalist, bankers, governments, and
workers. Yet foreign investors are being bailed out by the IMF,
not punished. That is, foreign lenders will have their loans repaid.
The IMF has not deemed the foreign shareholders ravaged by plummeting
stock prices and collapsing currencies worthy of a bailout. Go
Lessons for the Left
Left readings of the crisis originating in Southeast Asia
are surely more persuasive than the conservatives' desperate attempts
to defend the infallibility of markets. But Left analyses need
to guard against two excesses: concluding with too much confidence
that the Southeast Asian economies have collapsed with rapid growth
never to return, and taking the current depression as proof that
the growth that preceded the crisis was artificial.
Depressions happen. Or depressions happen again, as Hyman
Minsky, the left-leaning economic theorist of financial fragility,
would have put it. Financial crises and economic downturns are
the flipside of periods of unbridled capitalist growth. For these
rapidly expanding, high debt, and now even less regulated Southeast
Asian economies to have fallen into crisis is hardly surprising.
But has the current crisis brought the Asian miracle to an
end or unleashed the forces that will bring down the world economy?
I am not sure. Whether or not the current crisis is the death
knell for rapid growth in the region, or the world economy for
that matter, I do know that the growth preceding the crisis was
dynamic and unstable- much like the capitalist growth that Marx
and Engels observed transforming Europe in the middle of the last
century. That the growth was based on brutal super-exploitation
and relied more often on capital from the outside does not make
it artificial or "ersatz," ready to disappear for that
reason, as some might claim. After all, the region sustained growth
over a long time, not just for the last decade when Japanese investment
The enhanced mobility of capital-domestic and foreign-during
the 1 990s adds to the instability of these economies and reduces
the bargaining power of labor. This is a very real concern, especially
in economies such as Indonesia and Thailand where a numbing absence
of social accountability has left the investors and corporations
to operate unchecked. A profoundly flawed economic development
has taken hold, both in their earlier period of rapid growth and
in the current crisis.
Limited capital mobility, sound economic development
A public policy that regulates capital, whatever its national
origins, is called for in Southeast Asia. Only regulation demanding
genuine accountability from both the cronies and the capitalists
offers the prospect of genuine reform. The crunch of economic
losses and slack labor markets makes reform more difficult. But
to the extent that the belief in infallible markets is punctured,
movements organize, and the opposition to free markets is strengthened,
the current crisis brings the potential for regulating capital.
The proposal most favored in the region to limit capital mobility
is a transaction tax on all cross-border flows of capital, designed
by Nobel prize winning economist James Tobin. Although on its
own it could not cool out a speculative fever or capital panic,
the Tobin tax would discourage speculation. As a bonus, the tax
revenues collected would more than adequately fund an IMF-style
agency, freed from the dictates of the United States, that would
bail out bankers and capital investors only when they invest long
term, pay living wages, and respect international labor standards.
In September, Malaysia took the more immediate action of imposing
capital controls-banning the trading of the Malaysian ringgit
outside of the country. Malaysia's prime minister Mahathir called
the plan, "the only way to isolate the economy from the currency
speculators and traders" whom he blames for causing the country's
economic crisis. Banning the trading of the ringgit in overseas
markets in effect decouples the Malaysian economy from the international
currency markets. While Malaysian stock prices plummeted in response,
the value of the ringgit remained steady, and Mahathir's move
found support from some surprising sources. Maverick mainstream
economist, M.I.T.'s Paul Krugman, endorsed the concept of capital
controls, for they allowed Malaysian authorities to lower interest
rates to counteract Malaysia's recession without causing the ringgit
In addition to controlling international capital, whether
internationally or domestically, public policy must also compel
domestic capital and local elites to accept greater social accountability.
Elites seldom pay taxes in these countries. Taxing elites will
add to sources of domestic savings and at the same time make more
equal the distribution of income. Also giving these governments
more money could add to domestic demand-providing a buffer against
the shortfall in global demand that had a hand in this crisis.
This social accountability must extend to conditions of work as
well-notoriously dangerous in Southeast Asia-recognizing the rights
of workers to organize, to work in safe conditions, and to earn
a living wage.
These forms of social accountability would foster a more sustainable
and equitable economic development, and perhaps lay the groundwork
for a Southeast Asian economy that does more to relieve human
suffering and less to add to it.
John Miller teaches economics at Wheaton College and is a
member of the Dollars and Sense collective.