All fall down: ten years after the Asian financial crisis

Mar 07

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

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

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

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

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.

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