ASIA: by Patrick Byrne and Brendan RodwayNews Weekly
, June 13, 1998
When a number of Asian economies went into currency free fall last year, financial observers spoke of a weakness in their fundamentals which the market was set to correct. It is true that Thailand, Malaysia, South Korea, Indonesia and The Philippines are not run on textbook lines but it is also true that the treatment that was meted out bordered on the irrational. Forgotten in the explanations was the role of foreign investors who were happy to lend money despite these “fundamental weaknesses” — i.e., varying degrees of corruption, cronyism and lack of accountability — but, because of the speculative nature of their investments, were easily spooked and their ensuing rush for the door turned a problem into a crisis. But there was another factor at work.
The “Wall Street Journal” is the mouthpiece of American capitalism. It identified the bad advice of the International Monetary Fund as the trigger for the meltdown. On April 15, 1998 it editorialised:
“In a speech last November, IMF Managing Director Michel Camdessus wondered why what began as a local problem in Thailand spilled into crisis for Malaysia, Indonesia and South Korea — economies that had been growing at a famous clip until ‘contagion’ sent their currencies into free fall. Mr Camdessus noted that the currency slides in the Far East ‘acquired an almost self-perpetuating character’ and asked ‘how could it happen?’
“We suggest Mr Camdessus consult the mirror on the wall. The IMF tripped this crisis by urging the Thais to devalue, then promoted ‘contagion’ by urging everyone to do likewise. Now Mr Camdessus and US Treasury Secretary Robert Rubin want fresh billions to deal with the train wreck.
“Recall the events that sent Asia reeling. By early last year, Thailand was running into problems, borrowing abroad in dollars for projects at home that were not paying off. Clearly this put downward pressure on the baht, which was roughly tied to the dollar. But the Thais had a choice. They could curtail baht creation to defend the exchange rate, which would force a reckoning with the bad banks and finance companies. Or they could try to paper over the problem by devaluing.
“The IMF began urging Bangkok to devalue the baht ... What followed was anything but stable.
“To compete with Thailand, Malaysia devalued the ringgit. Indonesia — pressured by the IMF to devalue the rupiah — followed suit. In line with IMF prescription, the Philippines devalued. South Korea let slide the won. By late October what began as an IMF program for ‘stability’ had turned into round after round of competitive devaluation.
“The world stared briefly at the possibility of a global currency crisis, in which competitive devaluations could jar normal business so far out of alignment that even relatively healthy economies might face collapse ... Asia’s crisis has been primarily a currency crisis, not an explosion of economic fundamentals. Devaluations made it much harder to service foreign, dollar-denominated debt. That, in turn, caused lenders to run for the exits, fearing the last one out would be stuck with any defaults. And that stampede caused a series of genuine dislocations which chopped value off what might otherwise be profitable ventures ...
“Asia’s crisis has, by the IMF’s own calculations, lopped some one per cent off global economic growth this year. That’s trillions of dollars worth of wealth lost. The brunt falls not on rich lenders, or on the officials at the IMF and treasury departments, but on ordinary folks in places like South Korea and Indonesia — who have seen their jobs, savings and hopes wiped out in one swift swat.”
IMF aid comes with conditions. To understand how extensive these can be, one need only consult the January 15, 1998 ‘Memorandum of Economic and Financial Policies’ which the IMF laid before the Suharto regime.
According to Paul Kelly, the international editor of “The Australian” — who, incidentally, finds much to applaud in the IMF’s prescription:
“This is a document for our times. It renders obsolete notions of national sovereignty and casts the IMF in a transformed role as agent of a market-oriented liberalism, one of the most potent forces history has produced for this cause. In this document Indonesia, in effect, is told and agrees to implement about 80 key policy changes.
“They relate to:
- its budget deficit target of one per cent of gross domestic product;
- what subsidies are to be eliminated and when;
- what taxes are to rise and when (value-added tax exemptions to be removed are electricity for private companies, taxis, soybean food, sugar, personal goods, medical equipment);
- a five per cent sales tax on gasoline;
- cancellation of 12 significant infrastructure projects;
- abolition of any tax or credit privilege for the national car project, phasing out preferential tariffs for carmakers;
- a bank restructuring program to merge, downsize and then privatise the four state banks;
- a new legal framework for the banking system and a level playing field for foreign investors;
- tariff cuts (inclusion of agricultural goods in tariff reductions); and
- a ‘campaign to deregulate and privatise the economy in order to promote domestic competition and expand the scope of the private sector’.”
A heavily indebted Australia may one day be issued similar instructions.