In Focus: Asian Financial Crisis

[Interhemispheric Resource Center <ircalb@swcp.com>]

Foreign Policy In Focus: Asian Financial Crisis 

Volume 3, Number 8
April 1998

Written by Tim Shorrock  
Editors: Martha Honey (IPS) and Tom Barry (IRC) 

Key Points

* The $120 billion bailout for four troubled Asian economies, crafted by
the IMF and the U.S. Treasury, is the largest financial rescue plan in
history.

* In Asia, hundreds of thousands of people have lost their jobs as
insolvent factories close; total job losses could be in the millions. In
the U.S., one study predicts that one million industrial workers could be
laid off as Asian countries export their way out of the crisis and cut into
U.S. markets.

* The IMF bailout has sparked a lively debate in Washington about economic
policy, but opposition to IMF policies is coming mainly from the right. 

A series of bank failures and corporate bankruptcies in 1997 sent Asian
currency markets tumbling, sparking a sudden flight of foreign capital that
sent the economies of four East Asian nations into a free-fall. To contain
the damage, the International Monetary Fund (IMF) and the U.S. Treasury
quickly crafted the largest financial rescue plan in history. 

Over $120 billion from the IMF, the World Bank, the U.S. government, and
other institutions went to South Korea, Thailand, Indonesia, and the
Philippines to help their governments pay billions of dollars owed to U.S.,
European, and Japanese banks, to reestablish business confidence, and to
persuade foreign investors to return to their markets. In exchange, the
four countries agreed to restructure their economies by shutting down
insolvent enterprises and banks, ending monopolies, phasing out government
restrictions on investment, and opening their markets even further to
foreign capital. Those moves have paved the way for a massive sell-off of
Asian assets to foreign companies.

The "Asian crisis," as these events have been dubbed by the U.S. press, is
having a dramatic impact on workers in Asia, and its ripple effects are
being felt throughout North America. Already, hundreds of thousands of
Asian workers-10,000 a day in South Korea alone-have lost their jobs as
factories close down. Families are suffering as state controls on food
prices, transportation, and other commodities are phased out. 

By the end of 1998, job losses are expected to be in the millions. In
Indonesia, an authoritarian country ruled by the powerful Suharto family,
food riots and antigovernment demonstrations are spreading across the
country as Suharto and his generals intensify their political control. 

In the United States, the Economic Policy Institute (EPI) has estimated
that over one million industrial jobs are threatened as Asian countries
export their way out of the crisis, adding to the huge U.S. trade deficit.
U.S. jobs will also be lost as Asian goods, which are suddenly less
expensive because of currency depreciations, replace U.S. exports to Asia
and other emerging markets. Those job losses, according to the EPI, will be
concentrated in key manufacturing industries, including steel, electronics,
apparel, and automobiles.

In Washington, the Asian crisis and the Clinton administration's request
for $18 billion in additional funds for the IMF have sparked a lively
political debate about the IMF and future U.S. economic policy. Groups on
both the left and right challenged the IMF's programs in Asia as a waste of
U.S. taxpayer money to bail out international banks that poured capital
into questionable Asian projects. But the Clinton administration, led by
Treasury Secretary Robert Rubin, mounted a strong counterattack, arguing
that the IMF bailout is necessary to restore economic stability in Asia and
to prevent a broader crisis that could cause serious damage to the U.S.
economy and an even greater loss of jobs. The administration also linked
the Asian crisis to U.S. national security interests, saying that serious
social unrest in Indonesia and other Asian countries could somehow lead to
involvement by the U.S. military and could threaten the use of the
Indonesian sea lanes, through which about 30% of global shipping passes. 

The U.S. Senate, with strong support from the business community (and with
organized labor largely on the sidelines), passed the bailout legislation
by a vote of 84-16 in March 1998. In the House, most of the opposition came
from Republican conservatives who believe the IMF is violating free market
principles. Democrats who opposed fast-track trade legislation, such as
Rep. David Bonior, D-MI, and Rep. Barney Frank, D-MA, agreed to support the
IMF replenishment on two conditions: that the IMF pay more attention to
labor and environmental issues, and that Treasury establish an advisory
panel from U.S. business and labor to review IMF programs. Meanwhile, U.S.
steel, shipbuilding, and semiconductor companies secured an amendment that
will: 1) impose penalties on Asian countries that dump their goods in the
U.S. market by selling them at below-market prices, and 2) prohibit the IMF
money from being used to increase capacity in certain industries.  

Problems With Current U.S. Policy

Key Problems 

* Ignoring other factors, the Clinton administration has blamed "crony
capitalism"-close links between Asian governments, banks, and
industries-for the Asian financial collapse.

* Asian growth, although very high by world standards, has largely been
based on export-led development strategies crafted by authoritarian
governments that repress labor unions and political freedoms.

* In the 1990s, private capital markets replaced public funding as the
primary engine of growth in the developing countries of Asia. Under this
deregulated system, private capital flows to developing countries reached
$243.8 billion, constituting 85% of total investment in those countries. 

In explaining the Asian crisis to the American people, the Clinton
administration has focused primarily on the structural problems caused by
so-called "crony capitalism"-the incestuous relationship in Asia between
governments, banks, and corporations. Although those structures have
created serious impediments to sustainable development in Asia-a point
often made by Asian unions and social organizations-they are just one piece
of the total picture. 

Until very recently, the Asian economies were praised by the IMF, the World
Bank, and the U.S. business elite as miracles of growth. But though Asian
growth rates were impressive by any standard, the pattern of development in
Asia closely followed two historical developments: the export-led economic
agenda advocated by the United States and adopted by South Korea and other
U.S. allies during the cold war, and the rapid opening and deregulation of
capital markets in the developing world in the 1990s. 

Export-led development follows a rather simple formula: countries peg their
growth to producing and selling manufactured goods, agricultural products,
and natural resources overseas. This is accomplished by attracting foreign
investment and loans and then siphoning it into industries designated by
economic planners and businessmen as competitive on the world market. In
nearly every country where this pattern has been followed, the policies
have been guided by authoritarian governments who favored certain business
groups and maintained low wages by stifling labor unions and independent
political organizing. That was the case in South Korea, which was under
military dictatorship from 1961 to 1987, and is still the case in
Indonesia, where General Suharto and a military-dominated government has
ruled since 1965. All four countries receiving the IMF bailout are key U.S.
military allies and major recipients of U.S. military aid. 

The spread of export-led capitalism has also been accompanied by policies,
championed by the U.S. government and its allies in the IMF and the World
Bank, to deregulate the flow of capital around the world. After the Latin
American debt crisis of the 1980s, private bond and investment markets
replaced the IMF, the World Bank, and government development funds as the
primary suppliers of capital to foreign countries and corporations. By
1996, according to the World Bank, private capital flows to the developing
world had jumped from $44.4 billion in 1990 to $243.8 billion, constituting
85% of total investment in those countries. This figure included $109.5
billion in foreign direct investment, $88.6 billion in bonds (long-term
loans purchased by foreign investors), and $45.7 billion in portfolio
investment in the stock market. 

Over 75% of private foreign investment has gone to 10 developing countries,
led by China, Indonesia, Mexico, South Korea, and Brazil. This money is not
just from rich investors; U.S. workers have a big stake in Asian capital
markets through their pension plans and mutual funds. The Wall Street
Journal has estimated that over 11% of the total assets of pension funds
are invested overseas.

In Asia, the first phase of export-led industrialization was financed by
Japanese corporations and banks, which invested heavily in manufacturing.
The surge in Japanese capital began during the Vietnam War and was
encouraged by the United States after its defeat in Indochina as part of a
cold war strategy to encourage market capitalism and discourage the spread
of planned socialist economies. But the flow of Japanese capital to the
region began to wane in the early 1990s, partly the result of Japanese
banks taking heavy losses from speculative investments in real estate-a
mistake that was later repeated in Thailand and other Southeast Asian
countries. 

To attract foreign investments from other countries, governments in the
region raised domestic interest rates and pegged their currencies to the
dollar. The IMF, the World Bank, and the Clinton administration strongly
backed these policies, which brought billions of dollars from private
investors in the United States and Europe. Between 1985 and 1995, GNP in
Southeast Asia grew between 6% and 10% a year. By 1996, Asia was buying
more than 30% of all U.S. exports.

The problems that engulfed the region were sparked by the misallocation of
the enormous flows of capital. In Thailand and Indonesia, much of the
investment was funneled into high-profit ventures with a quick turnaround
time, primarily stocks, consumer financing, and real estate. In South
Korea, government-supported banks directed the loans to conglomerates
competing with each other to expand capacity in automobiles,
semiconductors, and other industries. 

But a crisis developed in mid-1997 when Asian banks began to topple as a
result of a glut in real estate and a slowdown in manufactured exports.
That, combined with a wave of currency devaluations, triggered a massive
panic by foreign investors, who quickly sold off their stocks and bonds,
sparking the intervention of the IMF. Now, transnational corporations
(TNCs) from the United States, Europe, and Japan are taking advantage of
the crisis-and the big drop in prices-to buy Asian companies and integrate
them into their global operations. Many Asians fear that these purchases
will lead to a loss of their national sovereignty and a surrender of key
economic assets to global capital. By buying up bankrupt Asian companies,
U.S. TNCs might expand U.S. markets. But they will more likely use their
low-cost Asian operations to export goods to the United States, as so many
U.S. corporations do today. 


Toward a New Foreign Policy

Key Recommendations 

* A new policy on Asia should press for a thorough reform of the IMF and
should develop a new framework for capital markets so that economic
development reflects the needs of entire societies, not just the wealthy
elite. 

* The U.S. should suspend the rapid opening of capital markets abroad until
better global controls are in place and economic recovery is under way in
Asia.   

* The U.S. should support an economic model based on sustainable,
domestic-led growth that recognizes the benefits of open trade but is not
solely dependent on access to U.S. markets. 

Despite the IMF bailout, the crisis is far from over. Indonesia, the
world's fourth-most-populous country, has been resisting change,
particularly IMF demands that members of Suharto's family divest themselves
of control of key industries. Governments in Thailand and South Korea, in
contrast, have adopted many IMF reforms-such as policing how corporations
allocate capital-and have attracted new investment from foreign mutual
funds and bond buyers. But they are continually looking over their
shoulders to see if China, which has lost export markets to its Asian
rivals, devalues its currency to maintain its own competitiveness. Japan,
meanwhile, continues to resist calls from its neighbors and from the United
States to expand its domestic economy and slow its export growth so it can
absorb exports from the troubled Asian economies.

For U.S. industrial workers, the situation in Asia is dangerous. Already,
hundreds of jobs in U.S. export industries, from aircraft to wood pulp,
have been lost as Asian countries have cut back on imports that have
doubled in price since their currencies plummeted in late 1997. If
Indonesia crumbles, the crisis could worsen, particularly in South Korea,
where banks have over $5 billion in outstanding loans to Jakarta. A further
weakening in Korea, the fifth-largest overseas U.S. market, would be
another blow to U.S. exports. The threat of deeper job losses if the Asian
situation doesn't stabilize was a key factor in the AFL-CIO's decision not
to oppose the administration's request for new money for the IMF.

Policymakers and administration officials should acknowledge that the
deregulation of financial markets in developing countries is part of the
problem, not the solution. The Clinton administration should suspend the
rapid opening of capital markets abroad until better global controls are in
place and economic recovery is under way in Asia. For similar reasons, the
U.S. government should lobby against the Multilateral Agreement on
Investment, which would make it much harder for any country (including the
U.S.) to impose labor or environmental conditions on capital. Protectionist
trade policies that don't address key issues-such as the U.S. role in
promoting exports from abroad and wide disparities in wealth and labor
standards-should be opposed.

To alleviate problems in financial markets-such as sudden, destabilizing
flights of capital-the global financial system and multilateral
institutions like the IMF need to be substantially reformed. Among the
proposals currently floating in labor and progressive circles are the
following: the Tobin transaction tax (a small tax on capital flows overseas
that would create emergency funds for future crises); Chile's requirement
that foreign capital remain for at least one year; and investor George
Soros's proposal for an International Credit Insurance Corporation that
would force banks to finance a private bailout fund instead of relying on
governments.

Short of calling for its abolition, the U.S. should use its clout in the
IMF (18% of voting power) to press for sweeping reforms in this highly
secretive institution. Policymakers should oppose the IMF charter change
that would give the institution more authority to demand that countries
eliminate capital controls. With the IMF deeply engaged in economic
restructuring in Asia, any legislation to bankroll the fund should
stipulate that IMF procedures become more transparent and that the fund
condition future lending programs on strong political as well as economic
reforms. 

The traditional IMF prescription for growth in developing
countries-export-led development fueled by foreign capital and based on low
wages-is deeply flawed. In Asia, it has supported a tiny group of elites
who have integrated portions of their countries' economies with the world
market while keeping a tight lid on political activities and labor unions.
Policymakers and citizen groups should work to develop an economic model
based on sustainable, domestic-led growth that recognizes the benefits of
open trade but is not solely dependent on access to the U.S. market. A key
element of such a model would be support for labor rights and higher wages
in developing countries-and opposition to efforts by corporations like Nike
to keep wages low-so workers overseas can start buying the products they
produce. At the same time, the Pentagon must stop supporting governments
(like Suharto's in Indonesia) that repress their people.

Tim Shorrock ( trox51@aol.com ), a journalist and labor activist
specializing in Asian affairs, is based in Washington, DC.


Sources for more information

World Wide Web 

Asia Crisis Homepage   
http://www.stern.nyu.edu/%7Enroubini/asia/AsiaHomepage.html 
(Excellent resource; everything you ever want to know about the Asian
financial crisis, put together by Nouriel Roubini, Associate Professor of
Economics and International Business at the Stern School of Business, New
York University.)

Asia Week   
http://www.pathfinder.com/asiaweek/ 

Korea Herald   
http://www.koreaherald.co.kr/ 

Nautilus Institute   
http://www.nautilus.org (Daily news summary from Northeast Asia.)

NIKKEI   
http://www.nikkei.co.jp/enews/
(The Wall Street Journal of Japan.)

Organizations 

East Timor Action Project 
East Timor Action Network
110 Maryland Avenue NE #30 
Washington, DC 20002 
Voice: (202) 544-6911
Fax: (202) 546-5103 
Email: etandc@igc.apc.org 

Economic Policy Institute
1660 L Street NW, Suite 1200
Washington, DC 20003
Voice: (800) EPI-4844, (202) 331-5510
Email: economic@cais.com
Website: http://epinet.org 

Japan Policy Research Institute
2138 Via Tiempo
Cardiff, CA 92007
Voice: (619) 944-3950
Email: cjohnson@ucsc.edu 

Korean Confederation of Trade Unions
Voice: (011) 822-3673-0685 
Website: http://solinet.org/lee/korea.html 

Pacific Asia Resource Center
PO Box 5250
Tokyo International, Japan
Voice: (011) 813-291-4901
Fax: (011) 813-292-2437 
Email: parc@twics.com 

Publications

Walden Bello, "The End of the Asian Miracle," The Nation, January 12-19, 1998.

William Greider, One World, Ready or Not: The Manic Logic of Global
Capitalism (Simon & Schuster, 1997).

Doug Henwood, Wall Street (Verso, 1997).

Left Business Observer, ed. Doug Henwood (Monthly newsletter that explains
capital markets to the layperson. See "Asia Melts," January 21, 1998.) 

Chalmers Johnson, "Cold War Economics Melt Asia," The Nation, February 23,
1998.

Jeffrey D. Sachs, "The Wrong Medicine for Asia," New York Times, November
3, 1997.

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