Lessons from the Asian Meltdown
Multinational Monitor magazine, January / February
Globalization is in Crisis. That is the most profound meaning
of the ongoing Asian financial meltdown.
The Asian meltdown was caused in large part by South Korea,
Thailand, the Philippines, Malaysia and Indonesia's heavy reliance
on short-term foreign loans. When it became apparent that private
enterprises in those nations would not be able to meet their payment
obligations, international currency markets panicked. With the
same herd-like mentality that led them to blindly commit to the
Asian economies, currency traders rushed to sell their won, baht,
pesos, ruppiah or ringgit. As the traders converted their money
back into dollars, the Asian currencies plummeted, making it impossible
for the Asian nations to pay off their loans (which had to be
repaid in dollars or other foreign currencies, and therefore appeared
more expensive after the devaluation).
This is the immediate story. As Walden Bello and George Aditjondro
explain, more fundamental problems with the Asian economies underlay
the crisis. For reasons that included corruption and insufficient
financial regulation, domestic and foreign banks made imprudent
loans to companies that were engaging in wasteful, unnecessary
and speculative investments in areas like real estate, and, especially
in South Korea, to corporations that were over-investing in manufacturing
for markets that were saturated.
Most of these problems are rooted in globalization. The unregulated
financial flows into the region reflected IMF and World Bank influence
and more generally the Asian countries' strategy to attract foreign
capital. But reliance on foreign investment left these countries
vulnerable to the sudden withdrawal of foreign monies. The overinvestment
in factories is the logical consequence of globalizers' entreaty
that all nations produce for export and de-emphasize the local
market. Both overinvestment and real estate speculation reflect
insufficient and inequitably distributed domestic demand that
would encourage investment in production to meet local needs.
With their currencies in free fall, the Asian countries needed
outside assistance to meet their debt payments and reinstate confidence
in their economies. The United States squashed a Japanese attempt
to lead a regional initiative to buttress the Asian economies,
insisting that any rescue attempt be undertaken through the IMF.
Enter the IMF and U.S. Treasury Secretary Robert Rubin. They
acknowledged the problems of corruption and secrecy in the Asian
economies, and even hinted at the underregulation of the financial
But they diagnosed the essential Asian problem not as too
much globalization, but too little. And they prescribed the most
vicious version of globalization-structural adjustment.
The IMF programs, agreed to by the Asian countries as a condition
for receiving the money needed to pay off debts to foreign banks,
forced interest rates up in an effort to reattract foreign capital.
They envision the Asian countries exporting their way out of economic
distress. They therefore do not worry about depressed wages and
workers thrown out of their jobs-indeed, in this view, lower wages
make exports more competitive. And, out of concern that public
sector debts will exacerbate balance-of-payments difficulties,
they demand governments maintain balanced budgets, even as tax
revenues drop due to declining economic activity.
The overriding "logic" of these measures is that
harsh medicine now will prevent worse pain later; that high interest
rates, devalued currencies and balanced or surplus budgets will
attract the foreign investment that will jumpstart the Asian economies.
This could be described as mean-spirited globalization. Indeed,
the IMF-mandated austerity measures are so extreme, so cruel that
many establishment voices-from the New York Times to BusinessWeek
to Jeffrey Sachs to George Schultz-have harshly criticized the
Fund. Even those that have supported structural adjustment in
Latin America and Africa argue that those policies are inappropriate
in the Asian countries which already had balanced budgets and
high savings rates and where the foreign debt was contracted by
private enterprises, not governments.
The Fund itself has acknowledged that its austerity measures
have backfired. They are so severe that they have undermined domestic
confidence in the Indonesian and other economies, deterring local
investment and creating the instability that scares off foreign
Nonetheless, there has been no basic change in the Fund's
program. For millions of people in East Asia, the results are
In Indonesia, the IMF has forced the removal of fuel and food
subsidies on which the poor have relied for three decades; food
riots are becoming more prevalent as the Monitor goes to press.
Economic collapse has led hospitals to conserve on the use of
thread during surgery. In South Korea, the IMF has forced the
closure of banks and corporations-one million workers are expected
to be thrown out of their jobs by the end of the year.
None of this pain has been shared by the big European, Japanese
and U.S. banks that made bad loans in Asia. The IMF bailouts,
and the complementary bailout packages from the U.S. and other
rich countries, are all about injecting money into the Asian economies
so they can pay back their foreign debts. The money comes in and
goes out. The banks get their money, the countries contract new
debts to the IMF and get stuck with the IMF austerity demands.
By all rights, one of the consequences of the crisis should
be that the banks which made bad loans in South Korea and elsewhere
in Asia should have to eat their losses. The amounts at stake
are not insignificant: U.S. banks' exposure in South Korea is
estimated to total more than $20 billion. BankAmerica alone reportedly
has more than $3 billion in outstanding loans to South Korean
firms, and Citicorp more than $2 billion. The other major U.S.
banks with outstanding loans to South Korea include J.P. Morgan,
Bankers Trust, the Bank of New York and Chase Manhattan.
There is still more. Among the counterproductive conditions
imposed by the IMF and Rubin on the Asian countries are requirements
that they open up their economies further to foreign investors.
(These demands relate to foreign `'direct investment" in
factories, agriculture and service operations ranging from tourism
to banks, not just "portfolio" investment in stocks,
bonds and currency.) Rubin has specifically and successfully pressured
South Korea to open up its financial sector.
Translation: the very U.S. banks which contributed to South
Korea's crisis now stand to buy up lucrative sectors of the South
Korean economy. Similar demands have successfully been made in
other troubled Asian countries.
Not only is the double subsidy to the Big Banks unjust, it
helps perpetuate the very problem it is designed to remedy. When
the IMF bails out the banks-in effect providing free insurance-it
sends a message: "Don't worry about the downside of your
international loans. As long as enough banks get in too deep,
we'll rescue you at the end of the day." That encourages
more reckless bank lending, since the banks can earn high interest
on high risk loans without having to absorb losses.
In this sense, the U.S./IMF bailout of Wall Street in the
1995 Mexican economic collapse paved the way for the current crisis.
Against this backdrop, a host of reforms are needed-but even
more crucial is to abandon the foreign-capital dependent, export-oriented
economic model of the architects of globalization.
Even the IMF is now hinting that it may be appropriate for
developing countries to adopt modest capital controls to curb
the influx of hot money-the short-term loans that place enormous
pressure on national economies. Chile has effectively placed a
tax on short-term foreign loans, which seems to have put a damper
on these credits. It probably would be a good idea for other countries
to adopt similar measures.
New regulations must be imposed in creditor countries as well.
There is insufficient review of foreign loans in the rich countries-nothing
like the scrutiny which attends domestic lending-and this must
be changed. History has proved beyond dispute that banks will
make reckless loans if not restrained by regulators.
Steps also are needed to lessen the volatility of international
currency markets. Nobel laureate James Tobin has proposed a tax
on international currency transactions. That tax would slow rapid
trading in currency. In other words, currency traders would be
less likely to buy baht one day, sell them for dollars the next,
turn those dollars into yen the day after, and convert the yen
into rupiah the next day if a tax was going to cut into the small
margin of profit on each transaction. It is time for global finance
ministers to get to work negotiating such a tax, which must be
applied worldwide if it is to succeed.
International currency markets could also be cooled by imposing
higher marginal requirements on futures markets. (In futures markets,
a buyer promises at some set day in the future to purchase a commodity
or, in this case, a currency, at a set price, which may be higher
or lower than the current price. Buying a "future" is
effectively a bet that the value of a currency is going to go
up or down.) Mass buying of futures that bet a currency is going
to drop can help create the market mentality that makes this so;
and when currency traders can buy futures without showing the
ability to pay, they have gained inappropriate influence.
There are countless reforms needed at the IMF-it is overly
secretive, it does business with dictators, its austerity measures
worsen situations they are designed to improve, it is oblivious
to the human devastation it wreaks-but talking about reforming
the Fund really misses the point. It should be abolished.
If the Fund is abolished, some other institution would probably
be needed to take its place. While it is hard to say what exactly
that institution should like, it is possible to sketch some guiding
principles. First, in balance of payments crises-when countries
cannot pay their foreign obligations -the burden of adjustment
should be shared by both the debtor and the creditor, who contributed
to the problem by making improper loans. This principle should
apply both to private actors and governments.
A second principle is even more important. There must be a
shift away from the globalization model with its emphasis on export-driven
economies and foreign-investment dependence. The model throws
countries into a perverse competition in which low wages and weak
environmental standards are rewarded; and it leaves nations overly
vulnerable to the vagaries of international financial managers.
Economies should instead be encouraged to mobilize domestic resources
for domestic production to meet domestic needs. Governments should
promote economic equality, both as a matter of social justice
and to build up the domestic demand necessary for a healthy economy.
The new world economy should move in the direction of encouraging
localism, reducing foreign control over national economies and
a serious commitment to environmental protection and ecological
World Bank, Structural Adjustment