Lessons from the Asian Meltdown

Multinational Monitor magazine, January / February 1998


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 sector.

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 investors.

Nonetheless, there has been no basic change in the Fund's program. For millions of people in East Asia, the results are tragic.

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 sustainability.

IMF, World Bank, Structural Adjustment