by Chow Wei Cheng

[ This article was published in Links magazine Number 10, March-July 1998. Chow Wei Cheng is a financial analyst and at the time was a member of the National Committee of the Australian Democratic Socialist Party. He was expelled in May 2008 and is now a member of the Revolutionary Socialist Party.]

Around the Asian region, currencies and stock markets have collapsed by up to 80 per cent.1 In Hong Kong overnight interest rates at one stage hit 300 per cent to defend the “peg” between that country’s dollar and the us dollar. Runs on the Thai baht, the South Korean won, the Malaysian ringgit and the Indonesian rupiah have prompted massive International Monetary Fund (imf) bailouts on very harsh terms. The Japanese finance ministry has declared that bad debts in the Japanese banking system amount to ¥76 trillion ($630 billion).

Malaysian prime minister Dr Mahathir has accused the West, unrestrained market forces and a Jewish conspiracy for the crisis. Meanwhile mobs in the street have burned effigies of George Soros, whose name has become synonymous with the currency speculation that has supposedly brought down the great miracle of the world economy—the newly industrialising countries (nics) of Asia. On the other side of the globe Alan Greenspan, the head of the us Federal Reserve, has advocated the extension of free market forces throughout these regulated Asian economies as the only way to solve their crisis.

All of a sudden, the model that became the golden hope of renewed world growth and expanding markets and which was to take impoverished Third World economies up to the status of advanced capitalist countries and lead to the birth of the Asian century, has been crushed. This has not seen “two decades of growth wiped out in two weeks”, as Mahatir put it, but the devaluations of the Asian countries has precipitated a massive structural crisis in the dependent economies of the region: the value of their labour has been brutally downgraded in relation to that of the advanced capitalist (imperialist) world.

False explanations

Given the role the Asian “miracle” economies have played in the ideological campaign to prove that a capitalist road to development is open to all backward countries, it’s inevitable that numerous false explanations of this crisis have been put into circulation.

Firstly, the “Asian currency crisis” is a double misnomer. Any serious analysis will reveal that this is a global not a regional crisis and not a currency but an economic crisis that has exposed the limited nature of the nics’ economic development.

The orthodoxy coming from the imf, Bill Clinton and Alan Greenspan is that these problems stem from protection of the national market and government intervention. The neo-liberal theorem argues that such protection eventually makes local industries less competitive and hinders the free (and hence efficient) operation of the market. Supposedly, were these economies more open to competition and more deregulated, their local industries and banks would be better placed to weather these problems. Thus attempts to hinder global capital flows and free trade will be met with a similar backlash from global capital markets.

Secondly, and this is a theme favoured in the Australian media, there is the racist jibe that lays the blame on “Asian cronyism” and the “Asian way of doing business”. This “way of doing business” is riddled with corruption, nepotism and favours for mates—unlike Rupert Murdoch, Christopher Skase and Alan Bond.2

At the opposite side of the spectrum we find Mahathir, the radical populist avenger who denounces currency speculators as “morons”, “criminals” and “wild beasts” and blames unregulated currency trade as “unnecessary, unproductive, immoral”. Mahatir has singled out George Soros as the lead Jewish conspirator who, together with the jealous and devious Western powers, has manipulated the currency market to bring down the dangerously successful economies of the East.

Mahathir has even gone so far as to denounce the free market itself, and is now being labelled a “globophobe” in some neo-liberal quarters. At the Asia-Pacific Economic Cooperation Conference, held in Vancouver in November 1997, Mahathir reportedly said that the view that “the market can do no wrong, is sacrosanct, is your benefactor, saviour and ticket to prosperity is now as extreme as was the communism and socialism of yesteryear.” He said “today’s self appointed…proponents of market forces” have condemned millions of people to misery, just as socialist dogma did for 70 years.3

There are other false diagnoses of the crisis, to which I will return later, but this debate is really centred around who will control whom and the extent of such control rather than about the efficacy of markets or the costs and benefits of speculation. The crude reality is that the advanced capitalist economies and their agency, the imf, are exploiting the crisis to increase their access to the economies of Asia and that the local relatively independent bourgeoisies are resisting this move to the extent that their sharply worsened situation allows.

What is the real dimension of the Asian crisis? The basic picture is as follows:

• Runs on currencies, forcing their floating and massive depreciations, in the case of the Indonesian rupiah by up to 70 per cent.
• Continual and dramatic stock market collapses over last year culminating in a crash on October 28 last year. At the end of February 1998 the year’s loss in the value of East Asian stock markets amounted to around $700 billion.4
• Bank collapses in Indonesia, Korea, Thailand and Japan, with bad debts ballooning, and many banks being closed down by the governments.
• The folding of at least seven chaebol, including Kia, the eighth largest of these South Korean conglomerates.
• imf bail outs of Korea, Thailand and Indonesia in exchange for increasing deregulation, privatisation, austerity and the opening up of their economies to imports and ownership and control by foreign capital.
• Ever more pessimistic growth rate forecasts, to the point that some economic forecasters have described any specific forecast growth figure as unreliable.
• Predicted growth rate cuts in the imperialist economies of around 0.5–1 per cent, based mainly on reduced exports into the Asian region. These figures are unlikely to take full account of the ramifications of the Japanese financial crisis.

Causes of the crisis

The crisis of the dependent Asian economies is at bottom a world-scale, medium-term (that is, not cyclical) crisis of overaccumulation. This is most clearly revealed in Figure 1, which shows capacity utlisation in manufacturing in mid-1997 for a number of Asian economies. But we will work through to this underlying cause by way of a diagnosis of the “transmission mechanisms” that totally occupy the screen in most analyses—the role of the foreign exchange markets, the banks and financial intermediation in general. This angle of attack is necessary because, once more and inevitably, the analyses of the crisis that are designed for popular consumption exhibit large doses of what Marx called “the fetishism of money”, the illusion that the financial sphere operates of its own accord, without any connection with developments in the realm of production.

Pegged currencies and the crisis

One of the fundamental financial settings for the nics for many years was the pegging of their currencies to the de facto world currency, the us dollar. During the growth period, this peg played a stabilising role of ensuring no exchange rate risk against the dollar, thereby ensuring that investment and loans into Asia were safe from the devaluation that a depreciation of the local currency (against the dollar) would entail. This arrangement fuelled foreign investment on a large scale.

However, the peg also brought with it a relationship between domestic inflation and interest rates and us inflation and interest rates. Domestic interest rates were significantly higher in the nics because inflation and money supply growth were pumped up to underpin high domestic growth rates and maintain the peg. However, this monetary stance made borrowing in us dollars (or other imperialist currencies) disproportionately cheaper than domestic borrowing.

For the foreign lender, the peg reduced exchange rate risk—Citibank could lend to Asian firms at low premia to us interest rates because there was no threat of a depreciation. (Current account deficits, although large, were judged to be under control.) Indeed, given low growth rates in imperialist home markets, especially Japan, the developing Asian economies were particularly inviting. As a result, by the mid-1990s over-willing borrowers were rushing into the arms of over-willing lenders.

The volume of private foreign debt rapidly spiralled. The World Bank estimates that net inflows of long-term debt, foreign direct investment and portfolio investment into the Asia-Pacific region, which amounted to only $25 billion in 1990, had expanded to $110 billion by 1996. Total debt, private and public, ranges between 100–200 per cent of Gross Domestic Product.

Table 1 shows exchange rate and prime lending rate movements for the nics and the four main asean economies (Thailand, Malaysia, Philippines and Indonesia) from 1989 to 1996. It reveals that us or Japanese prime lending rates were as much as half the Thai and one third the Indonesian prime lending rate.

Table 1. Asian economies: interest rates and exchange rates, 1989–96

nics prime lending rates (end of year)                             1989     1990     1991      1992     1993     1994     1995     1996

Hong Kong                                                                           10.00    10.00    8.50       6.50       6.50       8.50       8.75       8.50
Singapore                                                                              6.25       7.73       7.10       5.55       5.34       6.49       6.26       6.26
Korea                                                                                     15.40    18.50    19.00     14.00    12.20    14.30    12.00    12.60
Taiwan                                                                                  10.38    10.25    8.88       8.32       8.05       8.00       7.80       7.53
nics $us exchange rate index)                                         100.1    100        99.8       98.8       100.5    99.7       97.3       99.3

asean-4 prime lending rates (end of year)
Thailand                                                                                12.50    16.25    14.00     11.50    10.50    11.75    13.75    13.25
Malaysia                                                                               7.00       7.50       9.00       9.50       8.50       6.50       8.20       9.25
Philippines                                                                             23.77    26.80    23.88     18.17    14.50    15.00    14.64    14.84
Indonesia                                                                              19.70    21.20    25.12     22.09    17.95    17.76    19.27    19.04

asean-4 $us exchange rate index                                   98          100        103.4     101.1    102.9    103.9    103.4    105.4

Other prime lending rates (end of year)
Australia                                                                                20.50    16.00    12.25     10.00    9.50       10.90    8.20       7.40
us                                                                                           10.50    9.75       6.50       6.00       6.00       8.50       8.50       8.25
Japan (official discount rate at April 1)                          4.64       6.00       4.50       2.50       1.75       1.75       0.50       0.50
Source: Jardine-Fleming Research, December 1997

With high rates of growth (up to nine per cent) and such cheap finance the Asian borrower would just have to keep pace with inflation to make a large profit. This clearly spurred overinvestment, massive credit growth as well as fuelling speculation in assets such as property and shares.

During this period exchange rates were not under pressure. (Table I shows asean-4-us dollar exchange rates between 1990 and 1995 depreciated by only 3.4 per cent while the nics’ exchange rates appreciated by 2.7 per cent over the same period.) Despite the generally higher inflation levels in the Asian economies relative to the imperialist countries (see Table 2), which would by itself have produced pressure for devaluation, the Asian economies were becoming more competitive and exporting more, and so there was a counterbalancing pressure for currencies to appreciate. Indeed, in the case of the South Korea the export boom of the late 1980s produced a heavy upward pressure on the won, such that the government forced its successful exporters to invest their earnings in foreign currency “sterilisation” bonds.

Table 2
Comparative inflation rates

Annual per cent change           1989   1990   1991   1992   1993   1994   1995   1996

Hong Kong                    10.1    9.8       11.6    9.3       8.5       8.2       8.6       6
Singapore                       2.3       3.5       3.4      2.3       2.3       3.1       1.7       1.4
Korea                              5.7       8.6       9.3      6.2       4.8       6.3       4.5       5
Taiwan                           4.4       4.1       3.6      4.5       2.9       4.1       3.7       3
nics                                 5.7       7          7.5      5.9       4.7       5.8       4.8       4.4
Thailand                         5.4       6          5.7      4.1       3.3       5.1       5.8       5.9
Malaysia                        2.8       3.1       4.3      4.8       3.6       3.7       3.5       3½
Philippines                      10.6    14.2    18.7    8.9       7.6       9          8.1       8.4
Indonesia                       6.4       7.8       9.4      7.5       9.7       8.5       9.4       7.9
asean-4                         6.1       7.4       9          6.3       6.6       7          7.4       6.9
Major oecd                   4.6       5          4.3      3.3       2.9       2.4       2.3       2.2

Source: Jardine Fleming Research, December 1997.

Clearly the crucial factor in maintaining this “win-win” equation was the rate of growth and the confidence of investors that it could be maintained. If the sources of growth were endangered, the very mechanisms that assisted growth had the potential to unleash a crisis.

There were two key issues. Firstly, the peg might break under pressure to depreciate if the economy was weakening and the central bank had insufficient reserves to support its currency at the pegged level. Secondly, irrespective of the fate of the exchange rate, the spiralling debt that was so cheap to borrow would become increasingly difficult to repay once growth began to stall. And once combined, these two separate dynamics could be lethal.

It’s not that economists and economic institutions were unaware of this possibility, especially after the December 1994 Mexican peso crisis. Indeed, the Asian Development Bank, in its 1995–96 Asian Development Outlook, asked “whether similar events could occur in Asian emerging markets”, but concluded that “certain fundamental differences exist between the Mexican economic management and most Asian emerging markets”. The happily anonymous authors must wish the following words, explaining the improbability of a peso crisis in Asia, had never made the light of day.

First, most of the developing Asian economies enjoyed high rates of economic growth in the 1980s and continue to build on this growth in the 1990s, while most-debt-ridden Latin American countries, Mexico included, has little growth in output in the 1980s and early 1990s.

Second, most developing Asian economies have a good record of macroeconomic management, including exchange rate policies, and have shown considerable resilience in adopting corrective measures whenever the situation demanded.

Third, while a majority of Asian economies have high investment rates, they also have high domestic savings rates, thus limiting their requirement for external capital. The current account deficit in the balance of payments, a measure of the external resource requirement of a country, has been low in the case of the Asian economies.

Fourth, most developing member countries have received significant amounts of non-debt inflows in the form of foreign direct investment and portfolio investment. The latter is no doubt volatile and there could be some outflows, especially if interest rates are further raised in the industrial countries. This is unlikely to have a major destabilising effect on currency markets, however, since most Asian economies have built up relatively large foreign exchange reserves in recent years and the ratio of liquid, volatile portfolio investment and short-term debt to total private external liability continues to be much lower in Asia than it was in Mexico.5

The authors’ advice was simple:

<Quote>The main lesson for developing country policymakers is that sound macroeconomic management, including prudent exchange rate policy, is essential in attracting external capital and in avoiding the destabilising influences of sudden outflows.6

So what went wrong? Table 3 takes us to the immediate problem, the sudden worsening in the current account balance of nearly all nics and asean economies in 1994–95.

Table 3
Current account balances

As per cent of gdp         1989   1990   1991   1992   1993   1994   1995   1996

Hong Kong         12.0    8.9       7.1       5.7       7.4      1.6       -3.9     -1.3
Singapore            9.5       8.3       11.2    11.3    7.4      17.0    16.9    15.0
South Korea       2.3       -0.9     -3.0     -1.5     0.1      -1.2     -2.0     -4.9
Taiwan                7.6       6.7       6.9       4.0       3.1      2.7       2.1       4.0
nics                      5.8       3.5       2.4       2.3       2.8      2.0       0.6       -0.1
Thailand             -3.7     -8.5     -7.7     -6.2     -5.2     -5.6     -8.1     -8.2
Malaysia             0.8       -2.1     -8.8     -3.1     -4.5     -5.8     -8.5     -5.2
Philippines          -3.4     -6.1     -2.3     -1.9     -5.3     -4.6     -4.5     -4.7
Indonesia            -1.3     -2.8     -3.4     -2.2     -1.5     -1.7     -3.4     -3.4
asean-4              -2.0     -4.9     -5.4     -3.6     -3.6     -4.0     -5.9     -5.4
Australia             -6.0     -4.9     -3.2     -3.5     -3.6     -5.0     -5.0     -3.8
Japan                   2.2       1.3       2.5       3.2       3.0      2.6       1.9       1.4

Source: Jardine Fleming Research, December 1997.

This was due to the sharp decrease in exports, whose annual rate of growth fell from 21 per cent for the nics and 22.5 per cent for the asean-4 in 1995, to 4.3 and 5.5 per cent respectively in 1996, due in part to a glut on the semi-conductor market but also to the mid-1995 rise of the us dollar against the yen.

In the case of South Korea the real effective exchange rate of the won appreciated by eight per cent at the same time as prices for the country’s main exports crashed. Semiconductor exports, which had grown by 70 per cent in 1995 contracted by 20 per cent in 1996. Steel exports fell by 15 per cent from 30 per cent growth while petrochemical products recorded a six per cent decline after 51 per cent growth. As a result South Korea’s terms of trade index crashed in the space of three quarters from 102 to 88 (base year 1990) and its merchandise trade deficit ballooned from $4.7 to $15.3 billion.

When balances on non-merchandise trade and payments to foreigners in deficit to the tune of $8.4 billion, the current account deficit amounted to $23.7 billion ($15.3 billion plus $8.4 billion). This would have produced an overwhelming immediate pressure for devaluation (the economy had only $33.2 billion in foreign exchange reserves on average through 1996, save that the capital account showed a surplus of $17.2 billion, $4.4 billion of which represented porfolio investment by foreigners in the stock market.7

Nonetheless, with the inflation differential with the us and Japan still operating, current account deficits expanding and growth beginning to slow, pressure for depreciation began to increase. This was especially the case with the economies running the highest current account deficits, Thailand, Malaysia, Indonesia and South Korea.

More fundamentally slowing growth worsened the debt burden and cut back corporate earnings. As this occurred, the profitability of local firms weakened and the huge debt burden that was once so cheap to borrow became a very tight noose around the necks of firms. No place reflects better the state of profitability and earnings outlook than the stock market. And the stock market crashes spoke volumes about the deteriorating prospects for profits. Table 4 tells the story of declining gdp and corporate profitability growth.

Table 4
gdp and corporate profitability, 1989–96

Country           Growth                                      1989    1990    1991    1992    1993    1994    1995    1996

Hong Kong     gdp                                            2.6       3.4       5.1       6.3       6.1       5.4       3.9       4.9
Corporate earnings                 18.6     7.6       25.9     24.9     22.6     14.5     13.1     12.7

Singapore        gdp                                            9.6       9           7.3       6.2       10.4     10.5     8.8       7
Corporate earnings                 10.6     22        -2.2      -33.2    22.2     14.6     9.4       19.3

South Korea   gdp                                            6.4       9.5       9.1       5.1       5.8       8.6       9           7.1
Corporate earnings                 33.3     -4         -11.7    4.2       -15       70        25        -65

Taiwan             gdp                                            8.2       5.4       7.6       5.1       5.8       8.6       9           7.1
Corporate earnings                 1.1       -21.9    21        -9.8      13.1     37.3     7           -6.8

nics                  gdp                                            6.6       7.3       7.9       5.8       6.3       7.7       7.4       6.4

Thailand          gdp                                            12.2     11.2     8.5       8.1       8.3       8.9       8.7       6.7
Corporate earnings                 3.6       17        4           0.9       9           31        0.9       -18.4

Malaysia         gdp                                            9.2       9.6       8.6       7.8       8.3       9.2       9.5       8.2
Corporate earnings                 10.3     20.1     3.7       7.4       30.1     19.2     14.3     17.1

Philippines       gdp                                            6.2       3           -0.6      0.3       2.1       4.4       4.8       5.7
Corporate earnings                 na        5           -5.7      3           28        28        25        26

Indonesia        gdp                                            9.1       9           8.9       7.2       7.3       7.5       8.2       8
Corporate earnings                 na        61.1     -2.1      -4.8      9.9       18.3     27.6     37.7

asean-4           gdp                                            9.5        8.7        7.2        6.6        7.1        7.8        8.1        7.3

Source: Jardine Fleming Research, December 1997.

A banking crisis

The local banks in these economies had facilitated the splurge of foreign borrowing. They borrowed massive amounts from foreign banks (mainly Japan) and lent into the local markets. As a result net debt as a proportion of gdp in the region was around 150 per cent in many tigers (see Table 5).

Table 5
Anatomy of asean-4 debt*

Indonesia    Malaysia    Philippines        Thailand

External public 26.2                                       21                  33.7             9.2
External non-bank                                         22.2              8                   9.3                      16.6
Total external   48.4                                       38.5              48.3             42.6
External debt service                                      7.4                 5.5               6.9                      4.1
Total internal    54.2                                       132.8            84.3             59.6
Private fixed-income debt                             6.9                 13.3             2.4                      12½
Internal interest payments                            9.2                 13.2             12.5                   25
Total debt                            109.5            175.1           129.6                 197.9

Bank capital/total assets**                          9.9                 6.3               13.2                   9.8
Non-performing loan ratio                            5% private   3.9               1.2                      7.7
17% state
Property lending/total lending**                  19.7              25.5             10.9                   13.7

*              As per cent of gdp.
**           Per cent.
Source: Goldman Sachs.

In the era of growth the banks lent recklessly to firms investing in industries which had overcapacity, commodity-style earnings and razor-thin margins, as well as in property and share market speculation. However, these poor lending and investing decisions were being forgiven by booming growth and inflation. When growth slowed, the recklessness of the decisions was rapidly exposed.

This in turn ate into bank profits and capital reserves, particularly in Korea and Thailand, where many banks did not have sufficient reserves to weather the bad loans on their books. Many banks themselves became insolvent and had either to be shut down or bailed out.

Bad loans in region are now estimated at around 15–20 per cent of total loan books compared to about one per cent for the us. This is severe in comparison with previous banking crises. Thailand and Korea in particular are estimated by Jardine Fleming to have non-performing loans of around 20 per cent of gdp. Assuming 70 per cent of non-performing loans become bad loans, this means 14 per cent of gdp will be wiped off these economies! This will obviously have many second round effects that will cascade through the system (see Table 6).

Table 6
Severity of present Asian banking crisis

Country             Dates        Non-performing        Current
loans/gdp and           crisis
to total loans (%)      estimate (%)

Philippines        1981–86  4              14.7            7.2            13.4
Thailand           1984–87  5              15                20             19.3
Singapore          1985         Not known                                  3.8
Malaysia           1985–90  4              30.5            22.9         15.6
South Korea     1986–88  1              11.3            16–21*
Indonesia          1991–94  6              15                10.8         16.8
Taiwan              1995         $1.2b bailout             Not at risk

*              Per cent of loans.
Source: Jardine Fleming, December 1997.

Towards prolonged recession?

The last four months have seen the crisis enter the phase of vicious circles. All banks have had bad loans and as these have hit their profitability, they have squeezed their remaining customers for repayments and increased interest. This has put even more pressure on surviving firms and may force more bankruptcies. Corporate collapses have in turn worsened the plight for banks, which in turn worsens the plight for corporates.

The main features of the present phase are:

• Currency depreciations and the abandoning of the peg has seen the foreign debt balloon in local currency terms and made servicing that debt more difficult. The loans, given the peg, were unhedged, that is, without insurance against a depreciation. ubs Securities estimates that an additional ¥5 trillion could be owed to Japanese due to the depreciations in the region. Nowhere is this so clear as in the case of Indonesia, where the financial cabal around the Suharto family is desperately trying, despite imf pressure, to fix a rupiah-dollar rate that would enable it to stave off bankruptcy.
• The outflow of short-term portfolio investment is leading to increased selling pressure on currencies, exactly as in the Mexican crisis.
• The crash of speculative assets such as overvalued property and shares are making loan repayment harder and may force more into bankruptcy.
• To stem depreciation pressure governments may be forced to raise domestic interest rates. This will further decreases property and share values, exacerbating even more the difficulty of repaying debt.

South Korea as a case in point

I now sketch in summary how these dynamics have operated in the individual countries of the region.

South Korea is probably the most spectacular example of the crisis. Despite the claims of the authors of Asian Development Outlook, it has been marked by comparatively low foreign exchange reserves ($33.2 billion), a declining balance of trade, slowing economic growth and worsening corporate earnings. There was a 40 per cent fall in (South) Korean Stock Exchange and a 20 per cent fall in the won in the three months to December 1997. The country was forced to accept an imf bail-out of around us$57 billion.

Debt is a huge problem: average firm debt to equity ratios for top 30 chaebol is estimated to be around 300 per cent and for the top 300 chaebol it is estimated at 400 per cent).8 This compares with the average in the advanced capitalist countries of 30 per cent. Total foreign private debt exposure is estimated to be around us$160 billion, of which us$60–70 billion is mooted to be short term.9

The performance of the chaebol has been similarly unspectacular. Sales growth has been above average but it has not been very profitable growth and return on equity in indistrial stocks on average is poor, ranging from -2.4 in the automobile sector to 8.6 in electronic components. The chaebol returns have been poor, as they are losing their low cost advantage, with wage costs rising. Over the past 10 years sales growth has averaged 17 per cent a year, but administrative overheads (includes wages) have grown by 19 per cent and margins have been squeezed.10 Furthermore, the chaebol are finding it very difficult to make the transition to high quality-high technology production: they are stuck in cyclical industries already burdened with overcapacity and thin margins such as vehicle, ship-building, petrochemicals and semiconductors.

These firms have been protected from foreign competition by South Korean government and so have been free to charge prices at a 20 to 30 per cent premium in local markets. These margins subsidised razor thin margins in exports which helped export growth and market share. The imf-driven opening up of the economy will remove this advantage and place further pressure on the chaebol.

Investment decisions by South Korean capital have been based on excessive capacity growth funded by foreign debt. Cheap finance has only exacerbated the trend for the chaebol to get involved in everything. For example, the top four conglomerates are engaged in over 140 different businesses. Typically, Samsung has recently decided to enter the automobile industry with new investment worth three billion dollars. This industry is already crowded by other South Korean firms and exhibits global over-supply see Figures 1 and 2). (When asked by Fortune why they chose this, Samsung replied that it was to keep up with other conglomerates.) Similarly, Hyundai wants to spend us$5.5 billion in an integrated steel mill at a time when bhp, one of the world’s most competitive steel producers, is looking to exit steel altogether. And this when other investments are starting to look poor and labour costs are rising.

This poor earnings record and high debt has in turn generated the current bank crisis in which of Korea’s 30 merchant banks nine have suspended operations and 12 are likely to be liquidated. Fully recapitalising the banks is estimated by Fortune to require $50 billion and by the Economist us$60–$100 billion, more than the $57 billion commitment by the imf.

Figure 1
Capacity utilisation rates in manufacturing, mid-1997

 

Source: Montreal Bank Credit Analyst Research Group

The runs on the won and the ensuing imf bail-out has meant that South Korea has had to agree to take around $60 billion in debt; to adopt a 3 per cent growth target (rather than 5 per cent); to maintain a 5 per cent inflation target and improve “labour market flexibility”; to liquidate 12 debt-ridden merchant banks; to cut the government budget by ten per cent; to increase taxes including broadening the base of the country’s value added tax; o cut expenditure on pubic works; to reduce the current account deficit from $13 billion in 1997 to $5 billion in 1998 (1 per cent of gdp); and to increase the economy’s openness to foreign imports and investment by reducing import-licensing restrictions and other trade-related subsidies.

Figure 2
South Korean vehicle industry, output and capacity utilisation

 

Source: The Economist, September 6, 1997

Thailand’s similar path

Thailand has become increasingly vulnerable since 1993, as best reflected in a widening current account deficit that peaked at 8 per cent of gdp in 1996. Debt has also exploded with $70–80 billion in external debt most of it owed by the private sector.

In 1996–97, there was a sharp slow down in exports and investment, gdp growth and growing difficulties in the private sector. Finance companies began to experience difficulties. Runs on the baht began until the government introduced a managed float, which subsequently saw the currency depreciate by about 20 per cent against the us dollar. The government was forced to suspend the operations of 58 out of 91 finance sector institutions!

One of the causes of the crisis is the “property bubble” and the fact that Thai wages are estimated to have risen 79 per cent since 1989, when the country was Nike’s largest manufacturing source. Today Nike relies on China and Vietnam due to their lower wages.

The $16 billion imf rescue package has followed the usual pattern: growth capped at three to four per cent; a 6–9 per cent cut in 1998 budget expenditures; increased value-added taxes to create budget revenue of 60–70 billion baht; increased user pays for utilities; inflation capped at 8–9 per cent; the current account deficit to be cut from 5 to 3 per cent of gdp in 1998; openings for foreigners to buy majority stakes in financial institutions; and the already mentioned closure of 58 finance companies and the institution of new capital requirements

Indonesia’s debt noose

In Indonesia the key problem is the large private debt. Government debt is $65 billion and private debt is estimated at anything between $55–$90 billion. As a result, a 30 per cent fall in rupiah adds anything up to $27 billion in additional debt. As a result, 16 banks were closed. The borrowing spread was also very large, 18 per cent compared to an approximate 11–12 per cent cost of funds. For example, Indofoods owned by the Salim Group admitted it had $800-900 million in unhedged loans: it would have additional debt of 300 million or more as a result of depreciation. Given that the rupiah has at times plunged as low as 15,000 to the dollar, it’s no surprise that the Suharto regime has been attracted to the idea of a currency board of the Hong Kong or Argentinian type.11

The imf bail-out conditions are: a current account deficit target of two per cent of gdp; a budget surplus of 1 per cent of gdp; expansion of the privatisation program; cuts in government spending and deferred public works; increased taxes and other duties; cuts to food subsidies and import controls on wheat, flour and soybeans; fewer state loans; closure of unviable banks and stronger bank supervision; the elimination of tariffs; lifting restrictions on foreign investment; eliminating local monopolies and allowing increased private sector participation in infrastructure.

Japan could be worst hit

Japan is the source of 60 per cent of whole region’s finance, with over $200 billion invested in Asia.12 A large portion of the region’s debt is owed to the Japanese: $37.5 billion of a total of $70 billion of Thailand’s debt, and $22 billion of Indonesia’s $55 foreign debt.

Japan’s economy is also highly geared to the crisis countries. Over 44 per cent of Japan’s exports go to the region, and in recent years exports have been the only source of growth for Japan. As a result Nomura Securities has forecast 0–0.2 per cent growth for Japan next year.

The financial crisis has also affected Japan with exposure to bad debt. Yamaichi Securities has collapsed with debts of ¥24 trillion as has Sanyo Securities. These are the country’s fourth and seventh largest brokers. Hokkaido Tokushoku, the eleventh largest bank, has also collapsed.

The government has stated that bad debt could be as much as ¥76 trillion ($630 billion), while ratings agency Moodys believes at least nine of 49 major banks will need some form of government assistance. The reserve positions of banks have been almost wiped out. When the reserve position of the top 20 banks are compared at November 1997 as against March 1997 the fall in yen involved is from ¥80.3 trillion to a mere ¥19.2 trillion!13

Clearly, a severe banking and financial crisis in Japan will have much more severe effects for the global economy than the immediate fall out of the nics. However, while the initial signs indicate Japan will be deeply affected by the crisis, the impact on the global economy is harder to predict.

False explanations revisited

It should be clear by now that the currency crisis is a result of the general structural crisis of the nics, the development of global overcapacity in the industries in which they have most specialised and their ongoing technological dependence on the imperialist countries (especially Japan) despite their best effort to reach “world’s best practice” in technological lead industries.14

The mainstream line that has surfaced is that the crisis proves the supremacy of the market and accordingly that “there is no going back from globalisation”. There are two limbs of this argument: firstly that free markets provide the most efficient outcome and secondly, that international capital markets are all powerful. Thus where a government intervenes to distort the market and protect domestic capital, it will be met with a fierce backlash by global capital.

Market forces and globalisation

The first limb of this argument states the crisis was a result of not enough deregulation, too much government interference in the market and a lack of foreign competition within these markets. Therefore the solution is to deregulate, open to foreign imports and majority ownership within the domestic market. This is the same neo-liberal message put forward by the imperialist powers for some time now.

However, the truth is that none of these economies could have developed the extent to which they have without significant government intervention, as the World Bank itself concedes in the most thorough analysis of the East Asian nics to date, The East Asian Miracle—Economic Growth and Public Policy.15 These neo-liberal arguments merely mask the imperialist intention to take more economic control of these economies.

What the imperialist powers most object to is the fostering and protection of domestic business as against foreign business. For some time now, cheap goods from the nics have competed with the output of the imperialist multinationals. The agenda for imperialism is that of economic counter-attack to open the East Asian economies up to foreign capital and to remove any protection the local governments may provide their domestic capitalists.

The Australian Financial Review accurately interpreted Greenspan’s speech to the Economic Club of New York on December 2, 1997 as a message to South Korea which was in the midst of negotiating with the imf the terms of its rescue package. The message was: to stop defending the chaebol and the banks that have financed them or else presumably the imf would not make finance available.16

Moreover, the imf-us line mystifies the root causes of the nic crisis, which lies not in government policy, although this has certainly fostered overcapacity, but the inability to break out of general technological dependence on the advanced capitalist multinationals.

The growth profile and access to technology was limited for these economies, relegating them to commodity-driven earnings and dependence on imperialist markets. However, with the Cold War finished there was no reason to support these economies, give them financial and technical assistance as well as preferential access to us markets.

The role of the speculator

The second limb of the argument centres on the role of global finance, in particular the role of financial capital and currency and their power relative to the Asian economies. According to Mahathir, for example, given the large volumes of money engaged in currency trading, speculators can push a currency to any value they like, setting exchange rates and profitting as a result of their manipulation.

This argument assumes that currencies do not reflect the economic fundamentals of the country, but can be set purely due to the large trading volumes of speculators.

This is clearly untrue: any one speculator or even a group acting in concert cannot defy the laws of the market. If they were to profit from such actions, it would mean that other speculators in the market would accept an irrational price existing in the market. That is, foreign exchange market participants, even the biggest, are price takers.

If a currency trader attempted to move a currency away from its fundamentals, buying large volumes of at the current market rate, with the aim of driving up its value and later selling at the higher rate, one of two things would happen.

Firstly, and assuming that nothing has happened to change the fundamental value of the exchange rate, there would be an equal amount of supply and so no market impact that is, no change in the exchange rate. Secondly, if the volume bought was so large that there was market impact and an appreciation of the currency followed, all holders of the currency would see the temporary increase as an opportunity for profit-taking by selling the overvalued currency. The speculator would end up with a lot of the currency at the original exchange rate.

Of course, this is not to say that speculative operations don’t yield profits and losses, nor that exchange rate adjustments aren’t precipitated via operations on the foreign exchange markets, nor that what “fundamentals” are is always transparent. The point is that, given a currency that is out of alignment with the economic fundamentals, the adjustment would have happened anyway. In short, if it hadn’t been Soros, it would have been someone else.

The currency speculator profiteers by spotting currencies not in line with fundamental economic forces and they keep trading until the currency is moved back to its fundamentals. This is exactly what happened in the East Asian currency crisis. The currencies were artificially high due to the peg and, if they had been freely floating would have depreciated due to deteriorating export earnings and a worsening economy.

Speculators made this judgement, saw the low level of reserves that the countries had to maintain their currencies and commenced selling the currencies towards what the market rate should have been. Indeed, given that most countries could not hold the peg or keep their currencies from depreciating, the speculators made the right call. Blaming them is therefore like shooting the messenger.

Regional impact

The bankruptcies and financial crisis will take some time to work their way through the system. The full scale of the bad debt problem is only now beginning to be appreciated.

There will certainly be a sharp reduction in growth and investment in the region and no-one knows the extent of the plunge. Some forecasters are honest about this: the chief economist at Morgan Stanley, Stephen Roach, admitted in late January that the agency was “finally throwing in the towel” on its forecasts for several Asian countries. Roach said:

<Quote>The forecast rise in [South Korean] gdp of 1–2 per cent is a ruse…Many respectable Korean economists—working in both official and unofficial sectors—are forecasting that gdp will actually fall by three to five per cent in 1998…

Schubert judged that the South Korean government had been forced to overestimate gdp growth because of constraints imposed by the imf.

The imf seems to have argued a very monetarist line, which says that any increase in the money supply will directly result in an increase in either gdp or inflation. This means that if expected gdp growth is weaker, then money supply growth must be lowered otherwise inflation will rise. The South Korean government is afraid that an economic policy that forces lower money supply will make the recession worse.17

Morgan Stanley’s revised forecasts for those countries where its “thrown in the towel” show sharp slumps, with China down from nine per cent to seven per cent, Singapore from three and a half to zero per cent, Thailand from minus two and a half to minus eight per cent and Indonesia down from -½ to -9 per cent.

Further bank and industrial collapses and mergers will lead to a rationalisation of productive capital and increased unemployment and pressure on wages for restraint. One chaebol official interviewed by Fortune, when asked what percentage of staff they ideally should have given the current circumstances, replied that “seventy per cent is the best we could hope for. Of course, it should be thirty per cent, but that’s impossible”.

There will also be less access to capital in these countries, except on the most unfavourable terms. Government bonds in the “tigers” have received numerous downgrades making debt more expensive. As long as volatility and uncertainty over currencies and economic conditions persist, foreign direct investment, portfolio funds and debt will be difficult to obtain.

There will be less fiscal and regulatory protection of domestic industries and less foreign ownership restrictions. An increase in foreign acquisitions of distressed businesses, particularly banks, is likely. Already Proctor and Gamble have acquired Ssanyong Paper of South Korea and German industrial group Robert Bosch has bought control of its joint venture with Kia. In the financial press he list of foreign corporates eyeing off potentially undervalued Asian businesses grows longer each day.

Global impact

The impact on world economy is less easy to assess. The impact on any particular country will depend on trade ties and its investments in the region. Asia was the main source of economic growth for the world economy in the 1990s, accounting for around fifty per cent of world real gdp growth. The imf’s world growth forecasts for 1998 as at December 1997 was 3.5 per cent, 0.8 per cent points lower than their previous October forecasts.

There will be some fall out to other economies as well, given that many companies are reliant on Asian markets for exports or have investments there which will return less in us dollar terms.

However, it remains to be seen whether this crisis in itself is large enough to have a severe impact on imperialist economies. This is because most trade and investments are based in or among the advanced capitalist economies. Furthermore, while the growth rates are high in Asia, the absolute size of their gdp and contribution to world trade is small relative to the world economy, thereby mitigating their impact. The potential for deeper recession resides most of all in the Japanese economy: then minor imperialist economies such as Australia’s could begin to experience greater cuts to growth than the 0.5 to one per cent being forecast at present.

Conclusion

The greatest immediate impact from the East Asian crisis current crisis will be on politics. Given that only two major Third World economies,18 South Korea and Taiwan, ever actually began catching up with the advanced capitalist world, the severity and depth of the crisis will make claims about the closing of the North South divide even harder to sustain. And over time the austerity associated with the imf packages should also put rest to the claim that deregulation and the free market will once again set these economies on growth rates of 8–10 per cent.

The underpinning’s of that growth were the very state intervention and protectionism that the imf is now moving to eliminate. Withdrawing cheap credit and state subsidies from the chaebol may mean quicker, easier and more “transparent” bankruptcies in the future, but it will also reduce the research effort, and permanent technological renewal that is the basis of profitability in today’s economy.

A South Korea will find itself squeezed on two fronts: its chance of becoming an advanced industrial economy based on competitiveness in high technology will be reduced and, at the same time, its high wage structures relative to the asean-4 and other developing Asian economies rules out a return to its previous phase of low-wage “Fordist” development.

Speculation, however, should be indulged in only to a point. Much more important is for the left to develop its own programme of resistance to what will be a new phase of imperialism-enforced restructuring of the economies of East Asia. Our demands must include:

• Opposition to imf and government austerity drives such as increased regressive taxes, cut backs to public expenditure and wage restraint. The debt these policies are paying for is private sector capitalist debt not the debt of working people.
• Anti-imperialist demands against Japanese, us and imf capital penetration and debt subjugation.
• Opposition to nationalist campaigns based around Buy Indonesian or Buy asean to alleviate consumption of imports and foreign currency.
• Nationalisation of the banks and finance institutions, for social control over the allocation of capital.
• A state monopoly on foreign trade, and hence no need for a freely traded currency.

Endnotes

1.             At the end of 1997 stock markets in Thailand, Indonesia and Malaysia had lost 70-80 per cent of their value in $US terms.

2.             These last two were “high-flying” Australian financial and real estate speculators of the late 1980s. Both went broke, the first successfully escaping to Spain and avoiding extradition, the second now in jail.

3.             Australian Financial Review, November 25.

4.             Based on market capitalisation of the Hong Kong, Singapore, Malaysian, Thai, Indonesian, Philippines and South Korean stock exchanges at at 31 January 1998.

5.             Asian Development Bank, Asian Development Outlook, 1995-96, pp. 10-11.

6.             Ibid., p. 100-11.

7.             Asian Development Bank, Asian Development Outlook, 1997-98, pp. 35-36.

8.             Fortune, December 29, 1997.

9.             Far Eastern Economic Review, December 4, 1997.

10.          The Economist, October 18, 1997.

11.          Unlike a conventional central bank, which is free to print money and issue debt at will, a currency board issues domestic notes only when there are sufficient foreign-exchange reserves to back these. Under a strict currency board regime, therefore, interest rates adjust automatically: if the domestic currency is sold the domestic money supply shrinks, causing interest rates to rise until the local currency eventually becomes attractive enough again. The precondition for a successful currency board regime is a large enough supply of foreign exchange reserves. This is what Indonesia lacks.

12.          Far East Economic Review, September 25, 1997.

13.          Australian Financial Review, November 15, 1997.

14.          See Chow Wei Cheng, “Lessons of the East-Asian nics”, Links Number 8, pp. 26

15.          Published by Oxford University Press, Oxford, 1993.

16.          Australian Financial Review, December 5, 1997.

17.          Australian Financial Review, January 28, 1998.

18.          We leave aside Singapore and Hong Kong and the oil-rich Gulf states as special cases.