All Fall Down: Ten Years After the Asian Financial Crisis

Mon, 08/06/2007

Ten years after the Asian financial crisis, the Pacific economies have yet to really recover. Meanwhile, finance capital continues to resist any form of global regulation, making more financial crises likely.

Ten years after the Asian financial cataclysm of 1997, the economies of the Western Pacific Rim are growing, though not at the rates they enjoyed before the crisis. There is no doubt that the region has been indelibly scarred by the crisis, the key indices being greater poverty, inequality, and social destabilization than existed before the crisis. South Korea’s painful labor market reforms, for instance, have produced the quiet desperation that is resulting in one of the highest suicide rates among developed countries.

What global financial architecture?

Meantime, despite all the talk about a “new global financial architecture,” there is little in place to regulate the massive movements of capital shooting through global financial networks at cyber speed.

Leave-it-to-the-market enthusiasts tell us not to worry and confidently point out that there’s been no major crisis since the Argentine bankruptcy in 2002, but people who know better, like Wall Street insider Robert Rubin, who served as Bill Clinton’s Secretary of the Treasury, are very worried even as they resist regulation: “Future financial crises are almost surely inevitable and could be even more severe. The markets are getting bigger, information is moving faster, flows are larger, and trade and capital markets have continued to integrate…It’s also important to point out that no one can predict in what area—real estate, emerging markets, or whatever else—the next crisis will occur.” A recent study by the Brookings Institution confirms Rubin’s fears: there have been over a hundred financial crises over the last thirty years.

The reign of finance capital

The amounts of speculative capital sloshing around in global financial circuits are truly mind-boggling. According to McKinsey Global Institute, the global stock of “core financial assets” stood at $140 trillion in 2005. Traditional commercial banks held a significant amount of global financial assets, but non-bank financial operators, which have become important intermediaries between savers and investors, accounted for $46 trillion in 2005, hedge funds for $1.6 trillion, and private equity investors about $600 billion. These figures and other data on the stupefying rise and scale of global finance capital were presented by economist C.P. Chandrasekhar at the conference “A Decade After: Recovery and Adjustment since the East Asian Crisis” held in Bangkok, the epicenter of the 1997 financial earthquake, on July 12-14.

The explosive growth of finance capital is seen by some analysts as stemming from the overcapacity that is plaguing the global economy. This has resulted in a marked slowdown in investment in major parts of the global economy, with notable exceptions like China and the US. With stagnation, capitalists are less motivated to invest in more productive capacity and have more incentive to move their money to speculative activity, that is, to try to squeeze more value out of already created value. This is indicated by the fact that the ratio of global financial assets to annual world output has risen from 109 per cent in 1980 to 316 per cent in 2005, according figures from the McKinsey Instituted cited by Financial Times columnist Martin Wolf.

Speculative activity as a mode of profit-making has also outran trade, with the daily volume of foreign exchange transactions in international markets standing at $1.9 trillion daily, compared to an annual value of $9.1 trillion of trade in goods and services -- that is, speculative activity in a single day amounted to 20 per cent of the annual value of global trade! Martin Wolf, one of the cheerleaders of globalization, captures today’s power relations among the fractions of global capital when he writes: “The new financial capitalism represents the triumph of the trader in assets over the long-term producer.”

Ten years after the IMF and the US put the blame for the crisis on the alleged non-transparency of financial transactions in Asian countries, opaqueness is the order of the day when it comes to global finance, as the movements and mutations of speculative capital have outrun the capacity of national and multilateral regulatory authorities. In addition to traditional credit, stocks, and bonds, new, esoteric financial instruments such as derivatives have exploded on the financial scene. Derivatives represent the financialization or the buying or selling of risk of an underlying asset without trading the asset itself. Today risk on everything can be financialized and traded, from the pace of carbon trading to the rate of internet broadband connections to weather predictions.

Paralleling the emergence of more complex instruments has been the rise of hedge funds and private equity funds as the most dynamic players in the global casino. Hedge funds, said to be key villains in the Asian financial crisis, are even more freewheeling now. Now numbering over 9500, hedge funds take short and long positions on a variety of investments, with a view to minimizing overall risk and maximizing profits. Private equity funds target firms with the end in view of controlling them, restructuring them, then selling them for a profit.

Accumulating reserves as a defensive strategy

With the absence of global financial regulation to tame the whirlwind of global finance, the Asian countries have taken measures to defend themselves from the volatile global speculators that brought down their economies by pulling $100 billion in panic from the region in a few fateful weeks in July and August 1997. The ASEAN countries have banded with China, South Korea and Japan to form the “ASEAN Plus Three” financial grouping that will enable member countries to swap reserves in the event their currencies are targeted by speculators, as they were in 1997.

Even more important, they have built up huge financial reserves by running massive trade surpluses, an objective they have achieved by keeping their currencies undervalued. Between 2001 and 2005, according to Nobel laureate Joseph Stiglitz, eight East Asian countries -- Japan, China, South Korea, Singapore, Malaysia, Thailand, Indonesia, and the Philippines -- more than doubled their total reserves, from roughly $1 trillion to $2.3 trillion. China, the leader of the pack, is estimated to now have over $900 billion in reserves, followed by Japan.

This has resulted in a highly paradoxical situation. In a global economy marked by strong tendencies toward stagnation, China as producer and the US as consumer are the twin engines that keep the world economy afloat. Yet keeping US economy going necessitates a constant flow of credit from China and the other East Asian countries to the US to finance middle class consumption of goods from China and Asia. In the meantime, countries that really need the capital from East Asia, such as countries in Africa, get very little of these reserves since they are not considered creditworthy.

The demise of the IMF

The building up of massive reserves on the part of the Asian countries is directly related to their bitter experience with the International Monetary Fund. Governments recall the crisis as the result of a one-two-three punch delivered by the IMF. First, the Fund, along with the US Treasury Department, pushed them to liberalize their capital accounts, which resulted in the easy exit of foreign capital that brought down their currencies. Then, the IMF provided them with multibillion dollar loans, not to rescue their economies but to rescue foreign creditors. Then, as their economies wobbled, the Fund told them to adopt pro-cyclical expenditure-cutting policies that accelerated their plunge into deep recession.

“Never again” became the slogan of a number of the affected governments. The Thaksin government in Thailand declared its “financial independence” from the IMF after paying off its debts in 2003, vowing never to return to the Fund. Indonesia has said it will pay off all its debts to the IMF by 2008. The Philippines has refrained from contracting new loans from the Fund, while Malaysia defied it by imposing capital controls at the height of the crisis.

Ironically, then, the IMF has become one of the key victims of the 1997 debacle. This arrogant institution of some 1000 elite economists never recovered from the severe crisis of legitimacy and credibility that overtook it -- a crisis that was deepened by the bankruptcy of its star pupil Argentina in 2002. In 2006, Brazil and Argentina, following Thailand’s example, paid off all their debts to the Fund in order to achieve financial independence. Then Hugo Chavez let the other shoe drop by announcing that Venezuela would leave the IMF and the World Bank.

What is, in effect, a boycott by its biggest borrowers is translating into a budget crisis for the IMF. Over the last two decades, the IMF's operations have been largely funded from the loan repayments of its developing country clients rather than from the contributions of wealthy Northern governments. But with the biggest borrowers refusing to borrow, debt repayments are being to be reduced to a trickle. The upshot of these developments is that payments of charges and interests, according to Fund projections, would be cut by more than half, from $3.19 billion in 2005 to $1.39 billion in 2006 and again by half, to $635 million in 2009. These reductions have created what Ngaire Woods, an Oxford University specialist on the Fund, describes as “a huge squeeze on the budget of the organization.”

This succession of events has left the IMF with scarcely any influence among the big developing countries and groping for a new role. But the unraveling of the authority and power of the IMF is due not only to the resistance to further Fund intervention by developing countries. The Bush administration itself contributed to eroding the Fund’s search for a meaningful role in global finance when it vetoed a move by the conservative American deputy director of the Fund, Ann Krueger, to create an IMF-supervised “Sovereign Debt Restructuring Mechanism” (SDRM) which would have allowed developing countries a standstill in their debt repayments while negotiating new terms with their creditors. Many developing countries regarded the proposed SDRM weak, and what Washington’s veto showed was that the Bush people were not going to tolerate even the slightest controls on the international operations of US finance institutions.

Neoliberalism rejected: Thailand

It is not only the IMF but neoliberalism, the dominant ideology of the nineties, that came crashing down in the aftermath of the crisis. Malaysia imposed capital controls and stabilized the economy, allowing it to weather the recession in 1998-2000 better than other afflicted countries. It was, however, Thailand that most dramatically broke with neoliberalism. After three stagnant years under governments faithfully complying with the IMF’s neoliberal prescriptions, the newly elected government of Thaksin Shinawatra propelled countercyclical, demand-stimulating neo-Keynesian policies to get the economy back on track. Rural debt was frozen, government-financed universal health care was instituted, and each village was given one million baht to spend on a special project. Despite dire predictions from neoliberal economists, these measures contributed to propelling the economy into a moderate growth path, one that has since been sustained by export growth stimulated by China’s red-hot economy.

The 1997 financial crisis, which saw one million Thais drop below the poverty line in a few short weeks, turned Thais against neoliberal globalization. Even as the government refocused on stimulating domestic demand through income-support for the lower classes in the countryside and the city, popular sentiment went against free trade. On Jan 8, 2006, several thousand Thais tried to storm the building in Chiang Mai, Thailand, where negotiations for an FTA (free trade agreement) were taking place between the US and Thailand. The negotiations were frozen; indeed, Prime Minister Thaksin’s advocacy of the FTA became one of the factors that contributed to his loss of legitimacy and eventually his ouster from power in September 2006.

The souring on globalization has been paralleled by the rise in popularity of an economic paradigm promoted by the country’s popular monarch, King Bhumibol. Dubbed “sufficiency economy,” it is an inward-looking strategy that stresses self-reliance at the grassroots and the creation of stronger ties among domestic economic networks. Taking advantage of the King’s popularity, the military-supported government that overthrew Thaksin is said by critics to be invoking the sufficiency economy to legitimize its rule. Whatever the case, globalization is an unpopular word in Thailand today.

Neoliberalism imposed: Korea

While Thailand broke with neoliberalism and the IMF, Korea followed almost to a “t” the neoliberal reforms forced on the government by the Fund: undertaking radical labor market restructuring, trade liberalization, and investment liberalization. According to sociologist Chang Kyung Sup, “labor shedding was the most crucial measure for rescuing South Korean firms. Even after the breathtaking moments were over, most of the major firms continued to undertake organizational and technological restructuring in an employment minimizing manner, and thereby got reborn as globally competitive exporters.”

Regarded as the classic activist developmental state that a report of the US Trade Representative once characterized as the “most difficult place in the world” for US enterprises to do business in, Korea under IMF management has become a much more liberal economy than Japan. Denationalization of Korea’s financial and industrial firms has taken place with “appalling speed,” Chang told the Bangkok conference, with foreign ownership now accounting for over 40 per cent of the shares of Korea’s top financial and industrial conglomerates or chaebol. Samsung now has 47 per cent foreign ownership, Posco, the steel company, over 50 per cent, Hyundai Motors 42 per cent, and LG Electronics 35 per cent.

The IMF has touted Korea as a “success story.” However, Koreans hate the Fund and point to the high social costs of the so-called success. Poverty has increased sharply, from three per cent of the population in 1996 to 11.6 per cent in 2006, and the Gini coefficient that measures inequality jumped from 0.27 to 0.34. Social solidarity is unraveling, with emigration, family desertion, and divorce rising alarmingly, along with the skyrocketing suicide rate. “We have one big unhappy society that looks back to the pre-crisis period as the Golden Age,” says Chang.

All fall down

In retrospect, the Asian financial crisis of 1997 may have brought about the downfall of the IMF, but, as economist Jayati Ghosh pointed out at the Bangkok meeting, it also marked the demise of the East Asian developmental state that had aggressively and carefully managed the integration of the national economy into the world economy so that it would be strengthened, not marginalized by global economic forces. Despite their different pathways from the crisis since 1997, all the economies of East Asia have been irrevocably scarred and weakened. The crisis marked the end of their being at the forefront of development, as models to be emulated. The 21st century that was supposed to be their century slipped away. The cataclysm marked the passing of the torch to China, and indeed, in their weakened state, the smaller East and Southeast Asian economies have now become increasingly dependent on the dynamism imparted by their giant neighbor.

Walden Bello, a fellow of the Transnational Institute, is professor of sociology at the University of the Philippines at Diliman and a senior analyst at the Bangkok-based research and advocacy institute Focus on the Global South.