THE ASIAN AFFAIRS PUBLISHER'S MOOD
THE PUNDITS WERE WRONG (issue nș 12)
In 1997/1998, seven economies of Asia producing about a quarter of the world’s output, home to more than 600 million people, experienced an economic slump bearing an eerie resemblance to the Great Depression of the 1930s. Economies that were growing at a rate of 7/8% a year for a decade went into recession, and most analysts were all of a sudden predicting a continuing slump. Never again, we were told, would Asian economies enjoy a high growth rate.
Fortunately, as always, the pundits were wrong. Three years later, most of those economies were again enjoying substantial growth rates well above those enjoyed by the European or American economies.
Was the Asian crisis at that time reclassified as a global financial crisis in 1998 before being labeled a by-product of globalization in 1999, tamed because the lords of world finance got it right and the leaders of Asia were good students? Were bad economic practices, the Asian ones, replaced in due course by good Western economic principles?
To answer those questions, we first asked various personalities what the crisis meant. From Japan to Malaysia, from South Korea to Hong Kong, the reply was the same. The crisis was primarily the result of a miscalculation. The seeds of the crisis were planted when in the early 1990s East Asian countries had liberalized their financial and capital market, not because they really needed to attract more funds but because the motto of the day was free trade for all and for everything (see what Mike Moore says about the benefits of free trade in that issue). These changes provoked a flood of short-term capital, the kind of capital that is now fueling the high-tech craze and the dot-com mania. But in those days, only Li-Ka-shing of Hong Kong was smart enough to pile up what was then considered as bad investments in a wireless network called Orange or in unknown companies in the United States.
As Joseph Stiglitz, then the chief economist of the World Bank would say, short-term capital only looks for the highest return in the next day, or the next week. Factories were out, real estate and all kinds of tradable items were in.
Since the crisis is no longer around, except in the slums of Manila or Jakarta, but that is not really new, it is easy to think that something has happened, that indeed the experts got it right and were able to fix the problem before it became truly catastrophic. But as the Prime Minister of Malaysia, Dr. Mahathir, emphasizes, there is not much difference between yesterday and today, except that the rich are richer and the poor poorer. Although his unorthodox way put his country back on track, Malaysia is currently enjoying a 7% economic growth rate again, he points out once again that the driving force of economic activities are not the IMF prescriptions, nor the WTO stand on free trade, nor money contrary to what economists believe but only, and as always, power.
A great deal has been said during the crisis about cooperation, but confrontation was the order of the day. Look at South Korea; The crisis was engineered by a run on the currency. It had little to do with the chaebol system, but then the companies being wounded in the process, a power struggle ensued. Today, is there a real winner in Korea?
With hundred of trillions of bad loans to clear up, its banking sector is in an even worse shape than Daewo was. But who is going to say it? You have to read the fine lines to learn that the refinancing of the banks will cost about one-third of the GDP of the country. Is it manageable? No one knows. In the meantime, the economy relies on a financial sector entirely managed by the President and his advisers. In other words, the economic power has shifted from the chaebols to the Blue House.
In Japan, the economic power has always been in the hands of the bureaucracy and the politicians, or so it seems and its ever-lasting crisis is more about power than bad or good economic principles.
Michel Camdessus, the former International Monetary Fund Managing Director has a lot to say about the crisis, but after listening to what he said, we decided it was not really worth publishing. It is hard to pay attention to the IMF because of what it thinks. Its Managing Director was saying in 1998 that he would “show the yellow card a little more” and eventually would “use the red card of going public with its negative opinion on a given country”. Today, the Fund conceded that it should have been able to anticipate events better than outside observers and its new Managing Director is making statements about poverty alleviation, a far cry from the call for austerity of his predecessor. Nevertheless, it would not be wise to conclude that IMF can be ignored. In fact, it is as dangerous to ignore the institution as it is to kowtow to its whims. James Tobin, the Nobel prize winner would actually put it more bluntly. Central bankers (Michel Camdessus was one), finance ministers and the IMF faced with currency crises invariably give priority to finance and it is wrong. That is where the heart of the matter is. Is it right to give priority to finance? That is where Mahathir and Camdessus disagree.
Who is wrong, who is right? Well, it all depends who you are. The Asian crisis, as everyone in this issue concurs, was and will remain in the text-book a classic financial crisis in one country (Thailand) that ended up in a currency run in other countries thanks to a new category of unregulated traders (the currency traders) using exotic and untested instruments (the hedge funds). Hence the total mismatch between the IMF formulas and the realities the Asian government had to confront.
In the past, before the Asian crisis that is, it was admitted that currency difficulties were not necessarily the victims’ fault. Bank runs can be what they are: a psychological fluke that will topple any sound bank if not stopped. In the Asian case, the contagion effect was without any economic logic. Yet to justify it came an official explanation emphasising long-standing defects of economic structure, anti-competitive and corrupt alliances among oligopolistic businessmen, bankers and politicians. However objectionable this “crony capitalism” may be, it is nothing new, and it is not particularly “Asian” as the Microsoft case outlines. It could hardly have been the main cause of the 1997 financial crisis since it is very much part of the economic scene since day one and will never disappear. Such an explanation was blatant political rhetoric at its worst, yet went unchallenged for a while.
If the Western politicians took advantage of the crisis to debunk the so-called “Asian values” and in the process ended up way off the mark, economists and analysts who were supposed to be more scientific in their methods, did not fare better. Unable to find a plausible answer for the depth and suddenness of the crisis, unwilling to look critically at the globalization concept considered the nirvana of the future, their informed economic opinion was that it had to do with bad investments, poor decision-making, and a resulting of excess capacity.
In truth, it is very hard to judge what bad investment is. We mentioned Li-Ka-shing. When today a French national company (France Telecom) or a German one (Deutsche Telekom) are proud to announce that they are paying the equivalent of the GDP of Malaysia to get hold of two of his “bad” investments (analysts heavily criticized his move in telecommunication when he did it), it is clear that something doesn’t add up somewhere. Economic fundamentals are therefore not the issue, what matters is perception and that is the scary part.
Perception can’t be all. Maybe that is what the IMF forgot. The human and economic costs of a slump are self-evident. To forget it is callous. For the Indonesians who will now lived in poverty for the rest of the decade if not more, for the Vietnamese that have now little chance to catch up any of their neighbours, for many in Asia who are not piling up large capital gains because they do not play the stock market, money is a matter of survival, not of speculation.
What the Asian crisis teaches, we knew it already but keep forgetting, is that international economic policy ends up having very little to do with economics. As Paul Krugman would put it, it is now an exercise in amateur psychology, in which a number of Western people whose credentials are impressive, try to convince politicians of countries they know little about, to do things they hope will be perceived by the market as favorable.
But is the market always right? The Asian crisis shattered to pieces the untold assumption that it was. Look at Hong Kong. It took billions of dollars to put it back to normal (Joseph Yam would not write about it for this issue) and if anything, what is now clear is that in an unregulated environment, self-fulfilling speculative attacks do exist and tend to be the order of the day (the dot.com mania was another example of this trend). In other words, economic policy that makes sense in terms of the fundamentals is no longer enough.
What to do then? What are the rules? What are the guarantees? In fact, none. The ultimate lesson is that economic policy must play by the fickle rules of the confidence game. Is it then a game worth playing? Yes, says Mike Moore of the WTO. Free trade will increase wealth. But the Asian crisis raised doubts that are going to haunt the international scene for a long time. After all free trade in currency did not increase wealth but impoverished many. Why? That is the question the Asian people want to know and that the NGOs are now forcefully putting to the international scene.