---------- Forwarded message ----------
Date: Sun, 27 Sep 1998 10:36:33 +0000
From: "Janet M. Eaton" <[EMAIL PROTECTED]>
To: [EMAIL PROTECTED]
Subject: Tragedy repeats itself -The HINDU Times Sept 26
" Without introducing capital controls and without reasserting
democratic controls over our sources of livelihood, we risk
deepening the economic depression. To advocate fiscal
restraint and staying the course of market reforms is like Marie
Antoinette advising hungry Parisians to eat cake when
they asked for bread! "
FYI
je
______________________________________
THE HINDU, September 26, 1998
Tragedy repeats itself (SE Asian crisis)
Date: 26-09-1998 :: Pg: 12 :: Col: c
By Ravi Arvind Palat
NOTHING encapsulates the current world economic situation
better than the Uruguayan novelist, Eduardo Galeano's paraphrase of a
famous aphorism: For us, he said, history is a tragedy repeating
itself as tragedy.
And so it has done for 15 months as the world economy
lurched from crisis to crisis. Since the Thai baht went into a
free-fall on July 2 last year, the fundamental premise of the
International Monetary Fund(IMF)-led strategy to contain financial
chaos has been to tie loans to thorough-going reforms.
In Thailand, Indonesia and South Korea, the IMF provided
loans to prevent industrial enterprises and financial institutions
from defaulting on their foreign debt on condition that these
countries reform their banking sectors, adopt prudent and
transparent lending protocols, dissolve insolvent enterprises,
eliminate nepotism and corruption, sell state-owned
enterprises and nationalise the overseas debt of private
enterprises.
In each case, it was assumed that these changes would
provide a firewall behind which these emerging market economies could
recover and, more importantly, prevent the contagion from spreading.
No currency flotation, loan guarantee or structural change
to the financial sector has arrested the headlong descent of these
economies. Though the implementation of the draconian remedies
prescribed by the IMF has led to large-scale
unemployment and to the collapse of Mr. Suharto's regime in
Indonesia, they appear to have intensified the economic
malaise. Mr. Goldman Sachs predicts that this year the
real GDP will contract by 15 per cent in Indonesia, 8 per cent in
Thailand andMalaysia and 7 per cent in South Korea.
The Deutsche Bank estimates the unpayable overseas debt of
these countries at $30 billion for South Korea, $ 22 billion for
Indonesia, and $ 13 billion for Thailand. Non-performing loans from
domestic banks are estimated to be almost 40 per cent of
the South Korean and Thai GDP, more than 30 per cent for Indonesia
and Malaysia.
Despite this spectacular record of failure, the IMF
continues to prescribe the same bitter tonic to Russia, where the
rouble has witnessed a free-fall and its government is a shambles.
Unlike the debt crises in Latin America in the early 1980s
and the Mexican crisis of 1994, it proved impossible to quarantine
the current crisis to the emerging market economies as the malaise
spread across the world. Its effects have ricocheted
through Japan, the world's second largest economy, where the
unemployment rate has risen to a record 4.3 per cent.
And, the Dow Jones Industrial Average's meteoric rise was punctuated
by its two highest-ever point losses on October 24 last year and on
August 31 this year.
Venezuela, Brazil and Mexico are said to be poised to tip
over the cliff into recession. In another mark of the times, though
the All Ordinaries hit a 12-year low, the Australian Treasurer, Mr.
Costello, was able to say Australia's 3.4 per cent growth made it
the strongest economy on the Pacific Rim. Before the Thai
collapse, such a rate of growth would have seemed catastrophic to
Asia's miracle economies. If the breathtaking scale of the crisis
invites comparison to a contagious disease, the metaphor of an Asian
flu sweeping across the planet may be wrong. Firewalls have failed
to contain the crisis because it does not inoculate the system
itself.
First, the worldwide sweep of the crisis indicates that the
crisis cannot be treated on a case-by-case, event-by-event basis.
When it affects economies as disparate as Russia and Japan, Indonesia
and the United States, New Zealand and Venezuela, we need to see it
as astructural crisis of the global economy as a whole.
As the popularity of terms such as ``Pacific-Asia'' and
``Pacific Rim'' indicates, trade and production structures along
the region are tightly integrated. By the early 1990s, intra-Asian
trade overshadowed trade across the Pacific as large
transnational corporations began producing or purchasing
low-technology components in low-wage areas like Thailand, China and
Indonesia. Parts embodying intermediate technology were
produced in South Korea, Taiwan, Hong Kong and Singapore. Product
design and high- technology components continued to be produced in
Japan and the U.S. So if enterprises in Thailand, Indonesia and
Korea became insolvent, the entire chain of production was
disrupted. In contrast, the Latin American economies that incurred
large debts in the 1980s had constructed relatively insular economic
structures. Then, a U.S. Deputy Secretary of the Treasury warned the
debtor states that unless they complied with the dictates
of structural adjustment programmes, their ``foreign assets would
be attached by creditors throughout the world: exports
would be seized by creditors at each dock where they landed, its
national airline unable to operate and its sources of
desperately needed capital goods and spare parts virtually
eliminated. In many countries even food imports would
be curtailed.''
Such punitive measures cannot even be contemplated against
the Tigers. As the world trade in components has grown exponentially
in the last decade, these economies make vital parts for products
assembled inAmerica, Europe and Japan, in automobiles, consumer
electronics andcomputers. No embargo on exports or
imports is feasible in an increasingly interdependent world.
Equally, while much of the media attention is focussed on
the large foreign loans incurred by industrial enterprises and
financial institutions in the former Asian miracles, many of the
large firms routinely subcontracted production to smaller
firms. These firms have not been paid and it has been estimated
that everyday some 2500 small-and medium-sized firms go
under in Korea. This further disrupts production.
Second, far more than a mere financial crisis, it is a
crisis of overproduction due to increasing inequalities in income and
wealth. Economic deregulation has driven down wages everywhere. Even
where unemployment rates have fallen dramatically as in the U.S.,
wages have not risen. In real terms, the former U.S. Secretary of
Labour,Prof. Robert Reich, estimates that the average
American, 50-year old male is worse off today than he was 20 years
ago.
By many estimates, Thailand, South Korea, Indonesia,
Malaysia, and the Philippines accounted for almost half the growth of
the world manufacturing output since 1991. The crisis of
overproduction occurred in these economies because they
were the focus of the most extensive expansion of manufacturing
capacity.
What does a prudent investor do? When currency movements are
so volatile, it is unwise to invest in factories and businesses.
Sudden changes in exchange values make it impossible to calculate
risks andprofits in emerging markets. It is wiser to
park their investments in futures, derivatives and other financial
innovations. So we have soaring values in stocks and shares.
Investors in the U.S. became so enamoured of the sharp
rise in stock values that now 57.6 per cent of household
financial assets are allocated to stocks more than to homes and bank
deposits combined. Rather than investing money in productive
enterprises like factories, a frenzied speculation in stock prices
leads to the decline of millions of well-paying jobs.
Finally, economic deregulation means that we have no tools
to deal with the speculative flows of funds. The IMF and the World
Bank were set up to deal with member-states. They have neither the
personnel, the expertise, nor the tools to deal with non-
governmental actors like hedgefunds which can gut entire economies by
speculating against the currencies.
Enjoying excellent credit ratings, these funds can mobilise
vast sums. Is it merely a coincidence that the Bundesbank admitted
to lending 400 tonnes of its gold reserves to an unnamed client
shortly before the attack on the Hong Kong dollar last October?
While evidence is oftencircumstantial in the shadowy world of high
finance, the Canterbury University historian, Dr. Neville Bennett,
reports that market gossip suggests that some funds made a billion
dollars each in Thailand and several billions more in Hong Kong. Are
the Malaysian Prime Minister, Dr Mahathir Mohamad's
rantings against foreign currency speculators so off the mark
after all?
Neither the IMF nor the World Bank has the tools to monitor
and control the activities of such powerful private credit ratings
agencies as Moody's Investors Service and Standard and Poor's
Ratings Group. Even the merest whisper of a rumour that one of these
agencies is considering downgrading a country's sovereign
debt rating can raise the cost of borrowing substantially and
puncture the best bailout plans.
Without introducing capital controls and without reasserting
democratic controls over our sources of livelihood, we risk
deepening the economic depression. To advocate fiscal
restraint and staying the course of market reforms is like Marie
Antoinette advising hungry Parisians to eat cake when
they asked for bread!
(The writer is Senior Lecturer, Sociology Department,
University of Auckland, New Zealand).
