What the new US Treasury chief has in store for Asia (fwd)

[Robert Weissman <rob@essential.org>]

BusinessWorld (Philippines)
07/26/1999
Page 1
[writer's name not provided online]
PERSPECTIVE: What the new US Treasury chief has in store for Asia
Larry Summers, the new US Secretary of the Treasury, first crashed into my
consciousness in 1991, when, as chief economist of the World Bank, he
penned
the notorious internal World Bank memo justifying toxic waste exports to
the
Third World on the grounds that they were "underpolluted." "Just between
you
and me," he asked close colleagues, "shouldn't the World Bank be
encouraging
more migrations of the dirty industries to the LDCs ?"
The reason for this, he argued, was that toxic substances such as
carcinogens
will have a greater impact "in a country where people will survive to get
prostate cancer than in a country where under-five mortality is 200 per
thousand." So long as there exist wage disparities between rich and poor
countries, continued the memo, "the economic logic behind dumping a load of
toxic waste in the lowest wage country is impeccable and we should face up
to
that." "Grating" is how even the Economist, a Summers fan, described the
leaked document.
Summers made an even bigger splash in 1995, when, as Robert Rubin's
undersecretary, he emerged as the brains and manager of the Clinton
administration's massive $20-billion rescue package for Mexico in early
1995.
The commitment of IMF and US money bailed out hundreds of US investment
funds
and banks, and the lesson that many of the world's high rollers drew from
the
episode was that countries in which massive amounts of speculative capital
were committed would not be allowed to fail. Reassured, many of the same
players moved from Mexico to play the overheating Asian casino, and the
term
"moral hazard" entered the popular vocabulary.
Which brings us to Summers and Asia. What really is Summers's record on
Asia?
One might begin by pointing out that Summers was the World Bank's chief
economist when the most important Bank research he oversaw was written and
produced: the now famous East Asian Economic Miracle. In accounting for the
"miracle," the Bank identified as a key factor the fact that "in each HPAE
[high performing Asian economy], a technocratic elite insulated to a degree
from excessive political pressure supervised macroeconomic management." It
went on to say that "the insulation mechanisms ranged from legislation,
such
as balanced budget laws in Indonesia , Singapore, and Thailand, to custom
and
practice in Japan and Korea. All protected essentially conservative
macroeconomic policies by limiting the scope for politicians and interest
groups to derail those policies."
With the outbreak of the Asian financial crisis, Summers, scarcely batting
an
eyelash, made a 180-degree turn and attributed the developing disaster to
"crony capitalism," or a typical Asian brew of government intervention,
monopoly control, and financial shenanigans.
But even as Summers and his boss embraced the crony capitalist explanation,
many close observers of the Asian scene were unconvinced and some, in fact,
pointed to their policies as central to the crisis. As a remarkable New
York
Times expose that appeared earlier this year revealed, the Rubin-Summers
team's "too dogmatic" insistence on free capital flows was identified by
their own colleagues as a major factor that touched off the financial
implosion. In the case of Korea, for instance, a key Treasury memo on June
20, 1996 sought to use accession to the OECD as a "way of prying open
Korean
markets in part to win business for American banks and brokerages." Nowhere
in the strategy memo's three pages "is there a hint that South Korea should
improve its bank regulation or legal institutions."
Once the crisis got going in earnest in mid-1997, Summers again played a
decisive non-constructive role, this time by preventing what could have
turned out to be a quick stabilization mechanism: the Asian Monetary Fund
(AMF). Capitalized to the tune of $100 billion, the AMF was conceived as a
multipurpose, low-conditionality, quick-disbursing fund that would have
provided Asian economies with reserves to defend their currencies against
speculative attack. Backed by Japan and practically all East Asian
governments, the Fund was nevertheless vetoed by Summers on the grounds
that
the AMF would weaken the ability of the IMF to extract "reforms" from the
troubled Asian economies. Moreover, as analyst Eric Altbach has noted,
Summers and Treasury "saw the AMF as more than just a bad idea; they
interpreted it as a threat to America's influence in Asia" coming from
Tokyo.
As the continuing speculative attacks forced Asia's currencies down,
Summers
and Treasury pushed Thailand, Korea, and Indonesia into the straitjackets
of
orthodox IMF stabilization programs, with their stress on high interest
rates
and fiscal cutbacks. Not surprisingly, this had the effect of turning a
downturn into a deflationary spiral from which the Asian economies still
have
to recover.
Conservative monetary and fiscal policies of the emerging economies
combined
with radical free-market reform have constituted the principal thrust of
Treasury's Asia policy since then. Yet so evident has been the central role
of speculative capital in activating the virus of financial instability
that
spread to Russia and Brazil that even Summers and Rubin have had to speak
about the need for a "new global financial architecture." That was all
rhetoric, however, and Treasury's strategy in the G-7 has been to dilute or
kill efforts to control hedge funds and other speculative institutions and
install the equivalent of speed bumps on the flows of speculative capital.
The recent G-7 program for global financial stability issued at Cologne in
June was quintessentially Summerian in its stress on the usual litany of
more
transparency, better monitoring, and reliance on voluntary risk management
by
the private sector. The lack of teeth in a proposal for global reform is
both
disappointing and alarming, especially in light of Summers's admission in a
Time interview that "Global capital markets pose the same kinds of problems
that jet planes do. They are faster, more comfortable, and they get you
where
you are going better. But the crashes are much more spectacular."
This exercise in deconstructing Larry inevitably leads to the question:
With
such a record of environmental insensitivity, analytical errors, and
macroeconomic missteps, how did Summers qualify to be secretary of the
Treasury?
Part of the answer lies in the Rubin-Summers team's unsurpassed skills in
manipulating the media. The selling of Summers as whiz kid, top economist
of
his generation, and natural heir to Robert Rubin has been going on for
several years now. It reached its climax in 1998, at the height of the
Asian
crisis, when, on the TV evening news, Summers would play Sundance Kid to
Rubin's Butch Cassidy. The spreading global financial crisis often appeared
to be simply a backdrop for the performance of a mutual admiration club,
with
tough questions serving as the cue for the boss to compliment the young
Summers as the real strategist behind the US economic team and yield the
stage to him.
But, aside from superior media management, there is one area where Summers
has indeed been successful, and this is in promoting US economic interests.
The grand buyout of depreciated Asian assets by US financial and industrial
corporations now in progress from Bangkok to Seoul owes itself to Summers
and
Rubin's taking advantage of the crisis to pursue the strategic goal of
opening up Asia to US corporate interests. Summers's vision for the
post-crisis Asian economic order may be gleaned from his comments in a
speech
he gave to the Council of the Americas on May 3, 1999. In the same smooth
way
that his predecessor equated the common good with the US interest, Summers
said: "Today, fully 50% of the banking sector, 70% of private banks, in
Argentina are foreign-controlled, up from 30% in 1994. The result is a
deeper, more efficient financial market, and external investors with a
greater stake in staying put." Asia was, of course, as much on Larry's mind
as Argentina.
Yes, Larry Summers may be a neanderthal when it comes to the environment
and
he may have an unenviable record as global economic manager. But you have
to
grant that he does a pretty good job at pushing the interests of American
banks and corporations on the benighted and the recalcitrant. And that,
after
all, is what makes somebody a good secretary of the Treasury.