RN: East Asian crisis


Jan Slakov

Dear Renaissance-Network,    Nov. 30

The three items below shed some interesting light on the current financial
crisis in East Asia.

It is all too easy for people in North America to convince themselves that
East Asia's crisis is largely due to an unfortunate regional tendency for
corruption. Certainly, our mass media seem convinced of this glib explanation.

So thank you to Eric Fawcett in Canada,  Daryl Copeland (also in Canada, I
think) and Wendell W. Solomons in Sri Lanka, for these articles.
all the best, Jan

PS For those of you who tried to send messages (re: Pinochet) to Jack Straw
and Robin Cook, it turns out only Jack Straw has e-mail; the other address
doesn't work.

Date:   Mon, 23 Nov 1998 23:03:30 -0500
From: Eric Fawcett <•••@••.•••>
Subject:  Malaysia's real sin is against the New World Order  

From:   Eric Fawcett <fawcett>
        see also REPLY below for a "reality check" by Daryl Copeland, who
        unlike the media commentators at APEC know something about Malaysia

Malaysia's sin is NOT violation of Human Rights, as all the western media
are saying, but defiance of the Nuclear Powers, and worse even, refusing
to submit to the IMF "reform" measures.

The second is the greater challenge to the New  World Order, but they are
two sides of the same coin, which means that after achieving nuclear
abolition our struggle must continue!  The roots of war are the lust for
power, and the nuclear states and their allies in NATO see their weapons
in this light.

1] Malaysia in 1997 (and again in 1998) introduced at the United Nations
a resolution calling for negotiations, starting in 1998 (1999) on a treaty
banning all nuclear weapons, in accord with the 1996 World Court opinion.

2] APEC Meeting, report by John Stackhouse, Globe and Mail, Nov 18, 1998
Heading: Malaysian PM ridicules Chretien on human rights
Sub-heading: Blames North American Greed for Asian crisis
   On the eve of the annual gathering of Asia-Pacific leaders, host Prime
Minister Mahathir Mohamad lashed out at Canada for its human rights stand
in the region, and at North American greed for throwing Asia into crisis.
   In a major speech to business leaders, Dr. Mahathir called for swift
action against currency speculators, blaming them for driving Asian
currencies to unprecedented lows, and blocking any hope for recovery. 
He also condemned the Group of Seven industrial powers, including Canada,
for failing to rein in currency traders.
   "We still believe that currency traders are too powerful and completely
irresponsible." Dr. Mahathir said.  "They don't mind bankrupting countries
and regions, impoverishing millions of workers and destroying whole
economies in their quest for profits."

    After firing  his deputy prime minister Anwar Ibrahim, an ardent
market liberaliser, in September, Dr. Mahathir shut down currency trading
in Malaysia, froze the value if the ringitt, and announced that investors
would not be allowed to withdraw their money from the country for one year.
    Other counties that opted for the tough medicine of the International
Monetary Fund are still ailing, Dr. Mahathir said.  "The people in these
countries are suffering unemployment and acute shortages of food and other 
goods," he said.  "None of the currencies of these countries have regained
their previous strength."

From: Daryl Copeland <•••@••.•••>, editor "Behind the Headlines"

Eric - I think that you are on to something. And the larger story is
instructive as a case study in international political economy.

Malaysia is a country of many interesting twists and ironies, and its
govvernment of course makes mistakes and has problems. The Malaysian
press, for its part, is with few exceptions simpering, self-censoring and
sycophantic. But Western political leaders and their own media toadies in
Kuala Lumpur for the APEC festivities earlier this week did little to raise
the benchmarks of informed discourse or good governance. Indeed, many of
the events and much of the foreign commentary surrounding this week's APEC
leaders meetings had the quality of a fiasco. Subtlety, nuance, and a
knowledge of the subject matter were notable mainly for their absence. 

>From the analytical perspective afforded from this side of the Pacific, the
sense of disconnect throughout the proceedings was palpable. Perhaps
somebody handed poor Al Gore the wrong speech. Or maybe he thought he was
somewhere else. But the content and context of of his celebrated remarks
about "people power, doi moi and reformasi" and references to the brave
Malaysian people calling out for democracy were nothing short of astonishing. 

International media coverage of this intervention and other instances of
human rights sermonizing was bereft of background research and was
appallingly unquestioning and superficial. Malaysia has held elections
fastidiously since independence. I was working in the country during the
last contest, in 1995; it was lively and pluralistic. The most effective
opposition to the ruling UMNO coalition came, interestingly, from the PAS,
an Islamic party with a strong base of support in the Northeast. Mr.
Mahathir, a strong believer in the secular state, nonetheless won his
largest majority ever, with 65% of the popular vote. 

Though I can't rule it out, it is far from clear to me that the Malaysia's
PM has lost his touch. He is sometimes erratic, often outrageous and always
unpredictable, but he is a canny politician whose pronouncements always
contain enough truth that they cannot be dismissed. He has styled himself
as a lightning rod for issues close to  NAM and G77, and clearly relishes
exposing what he considers to be Westerm duplicity and double standards.
This has made him unpopular in some quarters.

Malaysia is not, however, Indonesia, and the tendency to put Mr. Mahathir
in the same archtypal box (corrupt, unrepresentative, authoritarian, etc.)
as former President Suharto is a serious mistake which should have been
resisted. Dr. Mahathir's careful, if calculated  management of
inter-communal relations has been at times heavy-handed, but he has secured
social peace in a country with profound ethnic, racial and religious
differences. In many other countries with a similarly volatile mix - Sri
Lanka, the former Yugoslavia, much of central Asia - things have not gone
as well.

Mahathir's vision of economic development has taken a toll on the
environment and indigenous peoples, but he has achieved much for the
country in terms of health care, education and infrastructure. Among the
majority in the kampongs and rural areas, the standard of living has
improved markedly on his watch. I suspect that he continues to enjoy
widespread support.

The country's human rights record is relatively good, especially if
assessed by regional standards. Former Finance Minister Anwar Ibrahim,
moreover, is a rather unusual victim and unlikely hero. He certainly would
not have been my choice of champion if I was a speechwriter for a visiting
dignitary. PM Mahathir's former protege and heir apparent rarely spoke out
during his 15 years in government. He was silent during the harsh crackdown
against the Al Arquam religious movement in 1994, which ended in an
unseemly show trial its leader, and a televised confession of religious
"deviance". Mr. Ibrahim's strongest defense against charges that his family
had benefitted unduely from schemes to distribute wealth to ethnic Malays
was that he did not sit on any of the committees charged with making such
decisions... I don't doubt that his persecution is politically motivated,
but he is apparently being accorded due judicial process and the court is
still in session.

Malaysia's response to the Asian financial crisis, imposed against the
advice of Mr. Ibrahim, provides another telling illustration of the gap
between appearence and reality.  Fearing the kind of chaos wrought on
Thailand and Korea, and sensitive to anything which might jeopardize its
delicate inter-ethnic balance, the Mahathir fired Anwar, assumed the
finance portfolio and instructed the government to place minimum length of
stay requirements on foreign investment, peg the value of ringgit and limit
its convertability. 

The fact that Chile, Hong Kong and China, respectively, have been praised
for pursuing elements of this strategy seems not to have occurred to most
international financial commentators. Instead, this action had the effect
of stimulating World Bank types, investment house pundits and sundry
cheerleaders  for neo-liberal ideology to dump on Malaysia from great
heights, conjuring an inevitable future marked by the darkest consequences. 

What happened as a result of this re-regulation? The stock market
rebounded, interest rates fell, and after a 5% contraction in 1998 (modest
indeed by regional standards) the economy is forcast to grow by 2% in 1999.
Social costs have to date been contained, and for most Malaysians life goes
on much as before.  Compare that performance to those who bought into the
conventional analysis and swallowed the IMF's bitter "recovery" pill:
Russia? Indonesia? Brazil? 

Most of the underlying factors of production which made Malaysia an
attractive destination for foreign investment in the first place still
apply. Time will tell regarding the possibility of grave downstream impacts
as a result of experimenting with alternative approaches to the challenges
of globalization. It may be significant that although his call began as a
cry in the wilderness, more and more voices are now speaking in support of
Dr. Mahathir's critique of speculative currency flows and their sponsors. 

It is a short road from heresy to prophesy. And as regards contemporary
Malaysia, so far the rich broth of received wisdom is tasting rather like
thin gruel.

Date: Sun, 22 Nov 1998 18:19:30 -0800
From: "Wendell W. Solomons" <•••@••.•••>
Subject: IMF and East Asia

Subject:        Robert Wade on Asia's Monetary Fund

The Economist, November 7-13, pp. 19-21
"The resources lie within"
Robert Wade and Frank Veneroso

Robert Wade is a professor of political science at Brown University and
the author of, among other works, Governing the Market, a celebrated study of
economic development in East Asia. Frank Veneroso of Veneroso Associates
is an adviser on global investment strategies.

THE world is awash with proposals for new crisis-fighting mechanisms. The
United States, Canada, France and Germany have all expressed serious
interest in the idea of an expanded IMF , or a financial supervisory
organisation parallel to the IMF , or even a second Bretton Woods conference
to rethink the world's financial architecture from scratch. Part of the
hidden agenda is to prevent the Asians from going off on their own.
In August 1997 Japan proposed an Asian Monetary Fund to deal with the
crisis in South-East Asia. It secured pledges of $100 billion mostly from
itself, China, Hong Kong, Taiwan, and Singapore. The United States
Treasury pulled out all the stops to kill the proposal, and it died. 
The Treasury explained that the IMF should be the sole co-ordinator
of the rescue effort.

Now the idea is again being seriously discussed in the region. This time
the West must encourage it. The Asian fund could make an important
contribution to recovery in Asia and the rest of the world. Too much is at
stake to worry about Asia going its own way.

How would the fund help? It would be better able to appreciate and build
on the distinctive strengths of Asian financial systems than the IMF has
proven to be. It would allow Asian governments and companies to refinance
their expensive western loans and provide selective new loans for recovery
programmes. And the creation of the fund would send a signal that Asians
were taking charge of their own destiny and no longer dependent on
bail-outs. This may prompt western bankers and portfolio managers to
supply new finance-helping to solve Asia's current short-term funding

The Asian model

Talk of "the Asian financial system" is no doubt too simple. But many
countries in East and South-East Asia share enough features to make a
simple picture tolerably accurate. Above all, they save a lot compared to
western countries, and the savings are done mostly by households. Domestic
savings run at roughly twice the American rate, or more than 15 percentage
points of GDP higher. Households typically put most of their savings into
(low-risk) banks rather than into (higher-risk) equities. Corporate
investment is financed in large part by loans from banks.

This mechanism has delivered extraordinarily high rates of investment. In
America, by contrast, most household savings go to finance households' own
investment in housing, and most corporate investment in real productive
fixed capital is financed from depreciation and retained profits, with
less reliance on bank debt.

High levels of corporate debt must be buffered by long-term financial
relations between firms and banks, with the government standing ready to
support both firms and banks in the event of shocks that affect swathes of
the economy all at once (such as sharp rises in interest rates, or sharp
falls in demand). If long-term relations did not exist, such shocks would
prompt creditors to call their loans and liquidate firms; and where debts
are large, the failure of some firms propagates the failure of others much
faster than where they are small. This is the financial rationale for what
used to be called Asian "alliance capitalism", and has now come to be
maligned as "crony capitalism". It is also the rationale of the "convoy"
system of Japan, where strong companies support weak ones under various
kinds of official encouragement.

In some Asian countries, more household savings have been transferred to
the enterprise sector through equity markets. Singapore and Malaysia have
specialised institutions, such as pension and provident funds financed
partly by payroll taxes, which purchase large quantities of equities. In
Taiwan both government-and party-directed funds buy equities. However,
these are all forms of government-sponsored forced-investment regimes.
They share with the debt-transfer systems long-term relationships
connecting government, financial sector, and enterprises.

In a pure Anglo-American free-market regime, competition and short-term
profit maximising make high-debt structures unstable in the face of shocks
that interfere with debt-service payments. Creditors seeking to safeguard
their assets call in loans and liquidate firms. Bank depositors "run" on
banks that might be too exposed to defaults. This collective behaviour
causes the whole financial system to shrink, and this spills over into
price deflations and depressions. To avoid these outcomes Anglo-American
nations long ago agreed that the state had to create a lender of last
resort and a body of regulation that placed limits on the indebtedness of
private firms, banks and households. These limits of prudent indebtedness
were set far below the levels permitted in Asian alliance capitalism.

A larger truth

Alliance capitalism sounds like an invitation to corruption and insider
dealing. The crisis has shown the truth in this allegation, most
conspicuously in Indonesia. But there is a larger truth: until the
mid-1990s, Asian alliance capitalism generated the highest sustained
economic growth for any region in world history. It worked not only as a
"catch-up" strategy for countries far from the world technological
frontier, but also for Japan as it reached the frontier in the 1980s. To
describe it as "a free-market veneer over a state-managed economic
structure", which has "inevitably led to the investment excesses and
errors to which all similar endeavours seem prone", in the words of senior
officials at America's Federal Reserve, misses the point.

For a variety of reasons most Asian governments opened their economies to
foreign capital in the 1990s. Global banks and portfolio investors flooded
in. After 1995 the rise of the dollar and the depreciation of the yen and
the yuan led to a loss of export competitiveness in those Asian economies
whose currencies were pegged to the dollar. The capital inflows
exacerbated the real appreciation of the exchange rates and the loss of export
competitiveness, resulting in large, and out-of-character, current-account
deficits in Thailand and Malaysia. The inflows also contributed to
domestic-asset bubbles, credit excesses, and a growing fringe of bad

Foreign investors were providing funds to Asian firms with debt ratios and
long-term alliance relationships that would have been unacceptable in the
West. When the crisis hit, the violence of the outflow owed much to the
realisation that much of the capital should not have been committed in the
first place, according to western prudential standards.

Enter the IMF

When the Fund negotiated its programmes with Thailand, Indonesia and Korea
it demanded high real interest rates and fiscal restriction. This was
based largely on its experience in Latin America. There, fiscal deficits
to be large and inflation chronic. Currency devaluations set off
hair-trigger inflationary expectations. The cure, quite plausibly, was IMF
-style austerity. High real interest rates could be tolerated because
corporate debt-to-equity ratios were quite low, because inflation kept
eroding the real burden of the debt.

In Asia, the Fund failed to see the danger of fiscal restriction where
budgets had long been roughly in balance. More seriously, it also failed
to see the danger of high real interest rates in economies with high levels
of private indebtedness and low inflationary expectations. Under those
circumstances, high real interest rates have disastrously deflationary
consequences, which give rise to capital outflows regardless of the
attractions of high interest rates.

Further, the Fund tried to strengthen weakened Asian financial structures
by imposing western measures of financial restructuring. Basle rules of
capital adequacy were to be applied. Highly indebted banks and firms were
to be closed. Labour laws were to be changed to make it easier to fire
workers, facilitating the closures. Regulations on foreign ownership were
to be lifted in order to allow foreign banks and firms to buy domestic
banks and firms.

Similar measures were applied in a narrower setting to solve the American
savings-and-loan crisis in the late 1980s-and they worked. But it is one
thing to undertake such reforms where real interest rates are very low and
indebtedness not high (as in America), and another to undertake them where
both real interest rates and indebtedness are high. In these conditions
the result is closures and lay-offs, with deflationary repercussions and
accelerating capital flight.

This is why the IMF 's strategy for Asia has failed. The currencies did
stop falling in early 1998. But by May deepening contraction, rising
unemployment and fear of unrest combined to produce a second wave of
capital outflows and renewed falls in currencies and stockmarkets. The
second-quarter resumption of the collapse is what finally forced Asian
governments to begin to turn away from the initial IMF strategy. They
began to cut interest rates and turn fiscal restriction into fiscal

Malaysia slapped on exchange controls in September, the better to engineer
an expansion at home without risking further currency falls. South Korea
has used government funds to buy out bad loans and finance bank mergers.
Japan is seriously discussing nationalising the banks so as to break out
of its current trap, in which the attempt to maintain Basle standards of
capital adequacy while bank equity falls prevents the needed expansion of
credit. Japan is also discussing the reintroduction of exchange controls
to allow rapid monetary expansion without depreciating the yen (which might
destabilise other currencies in the region and make trade frictions
worse). China has suspended the restructuring of state enterprises and banks,
because of the deflationary consequences of restructuring in crisis

There is a growing insistence in the region that Asian arrangements have
strengths which have been denied in the West-and which need to be built
upon to speed recovery. Asia is the world's great savings-surplus region.
Its governments' foreign-exchange reserves of almost $800 billion dwarf
those of all other regions. Virtually all of these reserves are claims on
America (Treasury bills and deposit holdings) and to a lesser degree
Europe. The private sectors of Japan, Taiwan and Singapore are also large
net lenders to the West. How ironic that a region with such massive
savings surplus and net foreign assets should be plunged into crisis by the
of capital belonging to institutions that reside for the most part in the
United States, a massive net debtor with a savings deficit.

So try an AMF

An Asian Monetary Fund, or AMF , would build on Asia's savings surplus,
foreign-exchange reserves, and net-creditor status (including reserves,
Treasury bills, and the like). The most severely affected countries-South
Korea, Thailand, Malaysia and Indonesia-have gross external debt of
perhaps $400 billion, of which over $100 billion has long-term maturities and
favourable terms and does not need refinancing. The amount of debt needed
to be refinanced in order to stabilize the situation completely is small
compared to the aggregate net-creditor position of the region-less than
$300 billion.

The degree of economic interdependence within Asia that has built up over
the past decade means that crisis in one country hurts other Asian
countries above all. The all-too-evident neighbourhood contagion effects
give each creditor country a strong interest in pooling resources with
others in order to avoid further disruption.

The AMF would have core financing from subscriptions by member
governments. The fact that pledges of $100 billion were quickly secured
in August 1997 suggests that sizeable sums would be forthcoming.
Additional resources could be tapped by issuing World Bank-type
bonds on regional financial markets, guaranteed jointly by the members.

The fund would make quick-disbursing loans available to members in
difficulty, with conditionalities limited to stabilisation rather than to
IMF -type structural reforms. It would operate to reinforce the
demonstrated strengths of Asian-type financial systems, and not to
disavow them.

The AMF would save Asia money. At present the region lends much of its
savings to the West at American Treasury bill and deposit rates of 5%,
while it borrows from western creditors at 10% or more. With the AMF ,
Asian lenders would lend at slightly better than 5%, and Asian borrowers
would borrow at only slightly more, say 6%. The borrowing governments
could repay the more expensive western loans. Asia would then earn the risk
premium in the interest rate on emerging Asia's external debt that is now
paid over to western creditors.

Taking charge of Asias destiny

Would Asia not suffer by having western financial markets less involved in
resource allocation-as Robert Rubin, America's Treasury secretary, and
Alan Greenspan, chairman of the Federal Reserve, have been saying? No.
Western financial institutions have failed to discriminate correctly among
both sovereign and private borrowers. They piled in to fuel a speculative
bubble, and then stampeded out even in the face of high risk premiums,
cheap assets, and current-account surpluses. The economic performance
of the emerging Asian economies prior to the crisis suggests that Asian
governments and their financial institutions can allocate resources more
efficiently than that.

Isn't an AMF by now redundant? Aren't the current efforts-some bilateral,
some involving the existing mutlilateral machinery-quite adequate? No. The
existing machinery is based on a "bail-out of basket-cases" myth. The AMF
approach says that Asia is unique in having ample financial resources to
handle the external financial difficulties of its weakest regional members.
It calls on Asians to take charge of their own destiny, and even, in part,
to close the door to the West. The threat of closure may even encourage
capital flows back to the region, as western bankers try to retain their
Asian markets and as portfolio managers, now underweight in Asia, seek to
restore their positions and ride the recovery curve.

Of course the AMF would compete with the IMF . But the IMF wants
competitition for others, and should not be averse to it for itself. The
only serious losers would be the western speculators who extract a risk
premium they do not deserve.