Asian Financial Crisis: The Movie Walden Bello, author of the seminal Dragons in Distress, which correctly identified all the weaknesses of the so-called Dragon economies more than ten years ago, explains in this article what really caused their current economic woes. By Walden Bello
After seeing Steven Spielberg's syrupy tribute to Yankee patriotism, Saving Private Ryan, I told myself that, surely, I could manage something better on the Asian financial crisis. Anyway, here's the screenplay for a movie tentatively titled Asian Financial Crisis: The Movie - Heroes, Villains, and Accomplices.
First of all, there are no heroes. The Japanese could have played the role of knight in shining armour nearly a year ago, when they had the chance to reverse the descent into depression via the proposed Asian Monetary Fund (AMF) - a mechanism capitalized to the tune of $100 billion that was designed to defend the region's currencies from speculative attacks. But, in typical fashion, they shelved their proposal when Washington opposed it. Though the AMF is now resurrected as the Miyazawa Plan that would give the troubled Asian economies $30 billion in financial aid, i t is too lit tle and too late.
Villai n o f th e Piece : Cron y Capitalist s o r Foreig n Speculativ e Investors ? On the other hand, there are a number of candidates for the role of principal villain. Taking the cue from the Western press, one might begin with the practices and institutions that are usually presented to the public as the villains of the piece - that is, aside from Prime Minister Mohamed Mahathir of Malaysia, who has become the US media's favourite whipping boy - at the same time, i t must be noted, that they are in the process of elevating Philippine ActorPresident Joseph Estrada to the status of Asia's new hero.
One might begin by quoting a person who has come to be the chief screenwriter of one version of the crisis, US Treasury Secretary Robert Rubin. In assigning the blame for the financial crisis, Mr. Rubin assigned pride of place to lack of information on the part of investors. In a speech he gave at the Brookings Institution in April 1998, Rubin said:
"[T]here are obstacles to getting good information about economic and financial matters. One is the temptation - in the private sector and in government - to avoid disclosing problems. But sooner or later, as we have seen in Asia, the problems wil l make themselves known. In many cases, lack of data meant that no one had a true understanding of this build-up or of these economies' vulnerabilities." 1
This lack of transparency on the part of financial institutions went hand-in-hand with distorted incentives, lack of supervision, and the absence of so-called prudential regulation. Al l this is, in turn, part of a witches' brew of unsound and corrupt practices known as 'crony capitalism', which Larry Summers, the famous economist who is Rubin's Undersecretary, says is "at the heart of the crisis."2 Interestingly, it might be pointed out, Summers and others picked up a term - crony capitalism - that we Filipinos coined during the Marcos period.
Before going on, one might also briefly note here that this is a massive reversal of the view that held sway at the World Bank when Summers, who now plays an overweight, over-the-hill Sun
dance Kid to Rubin's Butch Cassidy on CNN, was that institution's chief economist in the late eighties and early nineties. For those too young to remember what the orthodoxy was then, one might cite the Bank's famous East Asian Miracle published in 1993:
"In each HPAE [high performing Asian economy], a technocratic elite insulated to a degree from excessive political pressure supervised macroeconomic management. The insulation mechanisms ranged from legislation, such as balanced budget laws in Indonesia, Singapore, and Thailand, to custom and practice in Japan and Korea. Al l protected essentially conservative macroeconomic policies by limiting the scope for politicians and interest groups to derail those policies."3
To repeat, economic policy-making by Asian technocats was largely insulated from political and business pressures, and this was a large part of the explanation for the so-called Asian miracle. Every mortal is, of course, entitled to an about-face. But the problem with the latest intellectual fashion from the Summers' salon is that the practices of 'crony capitalism' were very much part of economic life in the three decades that East Asian countries led the world in the rate of growth of GNP. If, indeed, crony capitalism was the chief cause of the Asian collapse, why did i t not bring i t about much, much sooner? How could economies dominated by these practices of rent-seeking that supposedly suffocate the dynamism of the market - including Japan and South Korea - even take off in the first place?
Moreover, 'crony capitalism' has, in recent months, become so elastic in its connotations - which range from corruption to any kind of government activism in economic policy-making - as to become useless as an explanatory construct. It is one thing to say that corruption has pervaded relations between government and business in East Asia. I t has, as it has in Italy or in the United States, where i t is legalized through such mechanisms as 'political action committees' (PACs) that make politicians' electoral fortunes dependent on favourable treatment of corporate interests. It is quite another thing to say that corruption and its companions, lack of regulation and lack of transparency, constitute the principal reason for the downfall of the East Asian economies.
Now, in the light of the developments of the last two months, criticizing the crony capitalist thesis might strike those who have followed recent events closely as beating a dead horse. I t is, but this dead horse deserves to be beaten and buried because i t has a way of resurrecting in Dracula fashion periodically. In any event, after the Russian crash two months ago and the collapse, the bailout of the hedge fund Long-Term Capital by the US Federal Reserve a few weeks ago, and Brazil's teetering on the edge, there is now little doubt that the central cause of the financial crisis was the quick, massive flow of global speculative capital and bank capital into East Asia in the early 1990s and its even more massive and even swifter exit in 1997.
And there seems to be little doubt as well that the multilateral institutions - in particular, the International Monetary Fund (IMF), played a key facilitating role by pressing, the A*sian governments
The Ecologist, Vol. 29, No 1, January/February 1999 ASIA N FINANCIA L CRISIS : THE MOVI E
incessantly to liberalize their capital accounts, in order precisely to encourage massive foreign capital inflows into their economies in the belief that foreign capital was the strategic factor in development. Indeed, one can say that the IMF has been the cutting edge of globalization in the region, since i t is financial liberalization that is the cutting edge of the integration of these national economies into the global economy.
Now, Western speculative funds came to Asia not because they were conned by crafty and dishonest Asian financial operators. Don't get us wrong: Asia was swarming with crooked financial operators. But that these Western investors were conned or fooled? Come on! No, speculative investors came into Asia because they perceived the opportunities to gain greater margins of profit on financial investments here to be greater than in the Northern money centres in the early 1990s, owing to the much higher interest rates, the low stock prices, and - not to be underestimated - the incredible hype created around the so-called Asian economic miracle.
The fact is, money was very eager to get into Asian capital markets in the early nineties, and whether or not the information was available, investors and fund managers were quite nondiscriminating in their moves into these markets. As Rubin himself admitted in a speech at Chulalongkorn University five months ago:
"One of the things that has most struck us about the Asian crisis is that, after the problems began to develop and we spoke to the institutions that had extended credit or invested in the region, so often we found these institutions had engaged in relatively little analysis and relatively little weighing of the risks that were appropriate to the decisions."4
The fund managers were going to see what they wanted to see. Not only did many not assess their investments and local partners or borrowers, but they actually made their moves mainly by keeping an eagle eye on the moves of other investors - especially those with great reputations for canny investing like George Soros or Long-Term Capital's John Merriwether. But i f there was little room or desire for serious analysis of markets in the entry phase,
there was even less in the exit phase, as the rush of investment leaders communicated panic to one and all.
Indeed, in the first months of the crisis, Stanley Fischer, the American deputy managing director of the IMF, was attributing the crisis, not to politicians or to lack of transparency or to crony capitalism but to the investors' herd behaviour: "Markets are not always right," he said. "Sometimes inflows are excessive, and sometimes they may be sustained too long. Markets tend to react late; but they tend to react fast, sometimes excessively."5
Bangkok, for instance, was a debtor's rather than a creditor's market in the early 1990s, with so many foreign banks and funds falling over themselves to lend to Thai enterprises, banks and finance companies, and they were willing to forego the rigorous checks on borrowers that Western banks and financial instititutions are supposedly famous for. The bad - indeed, shady financial history of the Thai finance companies - was not a secret. In the 1970s and 1980s, many finance companies resorted to questionable business practices to raise capital, including widespread speculation and manipulation of stock prices, leading to the closure of some of them. Any neophyte in Bangkok's financial club knew this history. Yet, the finance companies were flush with foreign cash, oftentimes urged on to them by foreign lenders unwilling to forego what could turn out to be a goldmine.6
Throughout Asia, American Chambers of Commerce, foreign correspondents' clubs and expatriate circles were replete with stories of rigged bids, double - sometimes triple - accounting, false statistics, cronyism in high places, but everyone accepted that these were the risks of doing business in Asia - you had to live with them i f you were going to have your share of the bonanza. In the end, what really served as the ultimate collateral or guarantee for the investments foreign operators made in Asian enterprises and banks was the 6-10 per cent growth rates that they expected to go on far into the future. Now, you might end up with some duds, but i f you spread your investments around in this region of limitless growth, you were likely to come out a winner.
The Ecologist, Vol. 29, No 1, January/February 1999