- Email: [email protected]
The east asian economic crisis: Surging U.S. imperialism?
Review of Radical Political Economics Vol 32, 3 (2000) 379-387
Review of RADICAL POLITICAL ECONOMICS
The East Asian Economic Crisis: Surging U.S. Imperialism? Joseph E. Medley* Econotmcs
Department,
Unrverslty
of Southern
Marne, Portland
ME 04104
ABSTRACT The financial crisis that engulfed Asian countries m 1997-98 allowed the United States and the International Monetary Fund to attack the East Asian model of development. In return for needed aid, the IMF requned the affected Asian countries to implement deregulatory, free-market “reforms” which exacerbated their economic crises and curtailed their economic sovereignty. These countries, including Japan, are resisting U.S. and IMF attempts to dismantle what has been a relatively successful model of economic development. JEL classification:
N15; F35, 019
Keywords: East Asia, Imperialism; Economic development
* E-mail. [email protected] 0486-6134/00/$ - see front matter 0 2000 URPE. All rights reserved
380
J E Medley / Revrew of Raduzal Polltlcal
1. Introduction:
The Financial
Economm
32, 3 (2000) 379-387
Crisis in Asia
The financial crisis that engulfed many Asian countries m 1997-98 allowed the United States and the International Monetary Fund (IMF) to question the continued efficacy of the East Asian model of development. In particular, the crisis allowed the IMF to provide over $100 billion of emergency aid to the affected Asian economies contmgent upon then adoption of “structural adjustment programs.” The required “reforms” included trade liberalization; open and deregulated financial markets; and “western” accounting, financial, and legal practices that favor developed country banks and corporations. The IMF thus attempted to transform the financial systems and economic policies of the East Asian countries. The Asian countries, mcluding Japan, are resisting many of these reforms because, if fully implemented, they will dismantle a successful model of economic development. In 1997 Asia was hit by a massive financial crisis. Despite persistently positive economic performance (including high growth rates, low inflation rates, high private savings, budget surpluses, and strong exports) m most East and Southeast Asian countries, mternational currency speculators attacked Asian currencies and provoked a panicked withdrawal of massive amounts of short-term capital Starting with the Thai baht and spreading to currencies up along the east coast of Asia, affected currencies lost half of their value m less than a year. Stock markets in those countries dropped by about 50 percent (IMF 1998b). Accustomed to their recent economic successes, many in Asia struggled to understand why the crisis occurred, why it has been so severe, and what the implications are for the East Asian model of development. Ironically, economic success in East and Southeast Asia was, in a sense, a precondition for the financial crisis. High profits in the Asian economies attracted enormous, mostly short-term capital mflows from 1993 to 1996. Europe pumped $318 billion, Japan $260 billion, and the United States $46 billion mto Asian financial markets in search of quick returns. South Korea received $100 billion of these funds, Thailand received $70 billion, Indonesia $55 billion, and China $55 billion (FEER 1998a). These billions of speculative funds came primarily from private lenders. The vast majority of funds were borrowed for less than one year, m foreign currencies, by private banks who, without government oversight, re-lent the funds to risky, longterm local projects. Initially, this huge influx of money financed rapid and apparently profitable growth. As excess capacity m real estate and the local service and industrial sectors soared, however, confidence began to flag concerning whether even rapid increases in exports could pay off the accumulated loans. Then, when exports to Japan and the United States lagged due to increased competition from China, investor confidence
J E Medley / Revzew of Radxal
Pohcal
Economrcs
32, 3 (2000) 379-387
38 1
plunged and provoked speculative runs on the Thai baht and later on other regional currencies. Foreign investors withdrew their funds in an increasing panic that pushed down currency values, stock markets, and other asset prices. The resulting massive outflows of short-term funds meant that despite budget and trade surpluses, low Inflation and high private savings, and strong export performance, the affected Asian economies faced domestic credit crises that threatened the contmued viability of otherwise sound businesses.
2. IMF Interventions The financial crisis in East and Southeast Asia permitted aggressive interventions by the IMF into the economic affairs of the region. The currency, stock, and real estate market collapses made private lenders reluctant to loan money to businesses in the region. Japan had proposed setting up a U.S. $100 billion rescue fund in 1997 to prevent such financial crises in Asia. At that time the United States wanted the IMF to be in charge of any bailout and reform packages. So, U.S. Treasury Secretary Robert Rubin personally called IMF General Secretary Michel Camdessus to insist that the IMF block the Japanese bailout fund (New York Times 1998). Consequently, the IMF was the only agency able to gather sufficient funds to bail out domestic and mternational banks later that year and prevent economic depression across the region. The IMF pressed economic reform programs on the affected governments as a precondition for U.S. $113 billion in direct and multi-lateral loan funds. The required reforms included: (1) the imposition of flexible exchange rates to permit further currency devaluations; (2) a tightened monetary policy to attempt to slow capital outflows by raising domestic interest rates; (3) structural reforms to reduce trade barriers and liberalize/open the financial systems; and (4) reduced government spending to quiet inflation fears The IMF explained that forceful, far-reaching structural reforms are “. . . the centerpiece of the Asian programs.. .” (IMF 1998a). The fmancial system reforms also included closing bankrupt financial institutions and permitting increased foreign ownership of domestic financial institutions and businesses.
3. South Korea The South Korean economy adjusted to external shocks to its domestic stability in the 1970s and 1980s without suffering financial crises because government agencies regulated financial markets and assisted endangered firms. Government regulation ensured that Korean firms
382
J E Medley / Revrew of Radxal
Polrtlcal
Economm
32, 3 (2000) 379-387
could borrow funds only for productive investments. On the other hand, if firms needed funds to keep their businesses going in the case of a crisis, then the government provided them. When necessary, the Korean government also boosted the domestic economy with increased government spending to enable business to receive revenues sufficient to meet their financial obligations. Then, in the early 1990s the United States insisted that South Korea must reduce government intervention as a precondition for membership in the Organization for Economic Cooperation and Development (OECD) In addition, the Korean government was forced to abolish its Economic Planning Board, its major economic strategy mstitution (Wade and Veneroso 1998). The Korean government also acceded to U.S. demands to loosen controls on private currency trading. Korea then had to permit its domestic banks to borrow from foreign lenders and to lend to domestic and foreign borrowers without government supervision. These “reforms” severely reduced the Korean government’s ability to regulate and protect its economy from destructive external economic events like those that produced the Asian financial crisis. U.S. inspired deregulation of Korea’s financial system allowed the short-term foreign currency loans for speculative long-term investments that left the Korean economy vulnerable to the Asian financial crisis. Without government coordmation to restrict risky borrowing, Korean firms’ debt increased by more than $100 billion. Almost 70 percent of that money had to be repaid in less than one year. The borrowers were betting that they could obtain low-cost long-term funds in time to pay off their existing loans. Instead, the money that poured into Korea artificially boosted the value of Korea’s currency, making Korea’s exported goods more expensive (Chang 1997). As financial panic spread amongst foreign investors in the rest of Asia, the South Korean economy was exposed by weakened export performance and fragile debt structure Speculators’ unrestricted sales of South Korea’s currency slashed the won’s value and frightened potential lenders away. Businesses were then unable to borrow the money they needed to finance their operations. Korea was threatened with economic disaster unless it received immediate infusions of credit. The IMF stepped forward to bail out Korean financial agencies and their foreign lenders. In exchange, the IMF required Korea to adopt low mflation targets. South Korea’s 50 percent currency devaluation meant that the prices of nonsubstitutable imports sky-rocketed. The IMF-imposed inflation targets forced South Korean monetary authorities to severely cut back the amount of money available for domestic loans. With less money available for lenders, interest rates doubled ta over 20 percent. The domestic credit crunch pushed thousands of firms towards bankruptcy and threatened millions of jobs. The IMF then insisted on additional structural reforms to further restrict Korean government regulation of its commercial banks, to prohibit the government from lending directly to Korean firms, and to
JE
Medley / Revrew of Radrcal Polrtlcal
Economrcs 32, 3 (2000) 379-387
383
stop it from assisting individual corporations to avoid bankruptcy. The IMF also required wider opening of Korea’s capital accounts to enable even freer inflow and outflow of portfolio and direct investment capital (Wade and Veneroso 1998). Thus, the IMF agreement not only disassembled Korea’s banking system, it also created conditions that allowed foreign capital to begin to buy up South Korea’s most profitable industrial assets at “fire sale” prices. The IMF agreement, for example, lifted the ceiling on individual foreign ownership to over 50 percent by 1998, and allowed foreign financial firms to purchase domestic financial firms without limitation. In late December 1997, The Economist reported Korean press complaints that the IMF’s hidden purpose was to open doors for American business (The Economist 1997). In mid 1998, The Far Eastern Economic Review reported widespread sentiment in Asia that the financial crisis was managed by the IMF on behalf of the United States in order to bankrupt Asian manufacturers and financial firms, and to allow American companies to come in and buy up everything cheaply (FEER 1998b). The IMF did not create the financial crisis. The IMF did, however, exploit the crisis to push its policy goals m Asia. In particular, the IMF sought to dismantle the institutional foundations of the East Asian model of development. The IMF “reform” plans for South Korea, for example, reorganized the Bank of Korea so that it could no longer function as an independent central bank. They also curtailed the Korean Ministry of Finance’s industrial policy capabilities. IMF reforms made it impossible for these agencies to continue the monetary, credit, and interest rate policies that financed South Korea’s successful domestic economic development. Why did the IMF dismantle the institutions responsible for building the successful Korean version of the “Asian miracle?” Wade and Veneroso (1998) argued that the answer involved the interests of the owners and managers of international capital: “The reforms sought by the Fund are connected in one way or another with further opening up Asian economies to international capital.. ..” In other words, the IMF followed a political agenda to overturn the East Asian model and replace it with a U.S. inspired “free-market” approach that privileged interests at the expense of national mtemational corporations’ economic development.
4. Conventional
Interpretations
of the Crisis
The 1997-98 Asian financial crisis was seized upon as an opportunity and dismantle the East Asian model of to question, reinterpret, development. According to Michael Camdessus, Managing Director of was based on saving, prudent fiscal the IMF, the “Asian Miracle” policies, investment in physical and human capital, and liberalizing and
384
JE
Medley / Review of Radical
Polltrcal
Economm
32, 3 (2000) 379-387
opening up national economies. In his opinion the miracle had a “dark side” because it was plagued by destructive government/ business “cronyism.” The IMF portrays itself as the objective agency that can cast light on this “dark side” by displacing local government/business planning arrangements in favor of international capital. Its programs “.. . go far beyond restoring the major fiscal, monetary, or external balances. Their aim is to strengthen financial systems, improve governance and transparency, and restore economic competitiveness.. .” (IMF 1998c). The Clinton administration supported the IMF. Janet Yellen, former Chair of the President’s Council of Economic Advisors, argued that the “fatal flaws of the East Asian economies” are the “heart of the problems.” She continued by stating “.. .the crisis countries favored centralized and behind the scenes mechanisms for the allocation of capital.. .” and that “. . . m the long run, reliance on such behind the scenes relationships for capital allocation may lead to increasmgly poor investment decisions” (Yellen 1998). Yellen extended her critique to the Japanese economic model: “Hopefully, the apparent collapse of the Japanese model of capital markets abroad will reinforce Japan’s resolve to carry out the structural reforms that are needed to address the long-term problems facing that country” (Yellen 1998). Meanwhile, Robert Rubin, U.S. Secretary of the Treasury at that time, commented: “[tlhe IMF has...the expertise to shape effective reform programs, the leverage to require a country to accept conditions that no assistmg nation could require on its own, and it internationalizes the burden . . ..Failure to support fully the IMF now could shake confidence m American leadership in the global economy.. .” (Rubin 1998).
5. The Consequences
of IMF
and U.S. Intervention
As weakened Asian currencies drove down the prices of domestic assets, and as desperate governments invited foreigners into their economies, U.S. companies were increasingly able to buy up their Asian competitors. A former chief economist at Merrill Lynch and Co. said: “People with the longest time horizon and the deepest pockets are being given a once-in-a-generation opportunity” (Los Angeles Times 1998). US companies’also gamed access to long protected markets. Foreign lenders pressured Asian governments to open areas such as finance and telecommunications that were traditionally protected from foreign ownership. In addition, U.S. corporations obtained distribution networks and expanded low-cost manufacturmg operations at “rockbottom” prices. Foreign investment m Korea during the first half of 1998 jumped by 30 percent over the previous year. General Electric, for example, went on a “buymg spree” (Los Angeles Trmes 1998). Other U.S. companies such as Proctor and Gamble and Hewlett-
J E Medley / Renew
of Radical
Polrtrcal
Economtcs
32, 3 (2000) 379-387
385
Packard also bought into Korea’s domestic market by absorbing troubled local firms. Back in the Umted States, the Federal Reserve brokered a bailout of a major U.S. investment firm (Long Term Capital Management) in order to prevent large losses for maJor U.S. banks, to prop up falling U.S. stock market prices, and to forestall a credit crunch. Chairman Alan Greenspan said the intervention was necessary to avoid a “fire sale” of U.S. assets that might trigger a slowdown of the U.S. economy in 1999 (Associated Press 1998). Asian observers were troubled by U.S. policy-makers’ apparent double standard. At the 1998 IMF meetings, they sharply criticized the IMF (and the U.S. Treasury) for being insensitive to the political turmoil and human misery the IMF policies entailed for Asia while the same agencies protected U.S. business interests at home (New York Times 1998). Reports from Asia (“. . . there is a perception of double standards and even racism”) confirmed that bitterness and desperation reached the point where isolationist and anti-western solutions rose to the top of the agenda in several Asian countries (FEER 1998~).
6. Asian Response to the Crisis IMF pohcy prescriptions were intended to break up the governmentdirected East Asian economic model. Financial crisis forced Asian governments to accept the IMF’s deregulating and deflationary prescriptions. Ironically, the depth of the ensuing shock to the real sectors of Asian and other economies incited Asian governments to successfully resist IMF strictures against intervention. In mid 1998, for example, South Korea and Thailand broke with IMF plans and expanded their domestic economies by making low-interest funds available to at risk domestic businesses. South Korea challenged IMF limits by increasing domestic lending, as they had during past crises, to support expanded export production (FEER 1999~). In early 1999, Japan deployed a $30 billion initiative to promote economic recovery in Indonesia, South Korea, Malaysia, Thailand, and the Philippines. Japan aggressively reasserted its role in Asia by criticizing the deflationary cast of the IMF reforms (FEER 1999a). Expanded government spending programs, sharply devalued currencies (which entailed sharp wage and other domestic cost cuts in dollar terms), and strong U.S. demand for imports enabled South Korea and other Asian countries to increase income and output an estimated 3 percent during 1999, with the strongest growth in the countries that most resisted IMF restrictions (International Herald Tribune 1999). Malaysia, for example, rejected IMF programs and established currency and capital controls to protect its currency and financial markets from destabilizing speculation. These controls allowed Malaysian pohcy-makers to reflate the economy without triggering
386
J E Medley / Review of Radrcal Polltrcal
Economcs
32, 3 (2000) 379-387
additional destructive capital outflows. Malaysia thus avoided massive bankruptcies, layoffs, declines in income, and “fire sales” of assets (Reuters 1999). Malaysia proceeded to recapitalize its industries and banks by organizing new state agencies to manage the bailouts of threatened firms. In the context of these capital controls and a restabilized economy, foreign investors made over $2 billion of new, long-term investments (FEER 1999b). At the East Asian Economic Summit in October 1999, Malaysian Prime Minister Mahathir Mohamad criticized the IMF prescribed reforms, pointing out that the capital controls prohibited by the IMF were what “...made it posstble to secure currency stability, to pump-prime the economy without serious negative consequences, and to massively cut interest rates-thus to save the real economy” (Associated Press 1999). Malaysia explicitly compared its policies to those employed by the Japanese m the 1950s and early 1960s and to those employed by China and Taiwan more recently (FEER 1998d). That is, they reasserted that these key elements of the East Asian model were necessary for stable growth. They further claimed that their actions represented the sovereign right of Asian economies to be managed in their populations’ Interest, instead of for the benefit of Western corporations and governments. Finally, their actions, and those of several other Asian governments, assert viable alternatives to domination by U.S. and other capitals.
References Associated
Press. 1998. Associated Press report. October 2. 1999. Associated Press report. October 18. Chang,Fla-Joon. 1997. Perspective on Korea. LA Times. December 3 1. Far Eastern Economic Review. 1998a. Money Isn’t Everything. February 12. 1998b. Fund Under Fire. May 14. -1 1998~. Losing Faith. October 8. 1998d. Desperate Measures. September 10. -1 1999a. January 7. 1999b. April 8. -1 1999~. December 23. International Herald Tribune. 1999. October 15. International Monetary Fund. 1998a. The IMF’s Response to the Asian Crisis. International Monetary Fund intemet site. June 15. 1998b. The Asian Crisis and Implications for other Economies. Address by Stanley Fischer delivered in Sao Paulo, Brazil. International Monetary Fund internet site. June 19. . 1998~. From the Asian Crisis to a New Global Architecture. Address by Michel Camdessus delivered in Strasbourg, France. International Monetary Fund internet site. June 23.
JE
Medley / Revrew of Radical
Polrtlcal
Econom~s
32, 3 (2000) 379-387
387
LA Times. 1998. Asia’s Woes Prove a Capital Opportunity. October 4. New York Times. 1998. As Economies Fail. October 2: Al/AlO. Reuters. 1999. Reuters news release. September 30. Rubin, Robert E. 1998. Testimony before the House Agriculture Committee. Department of the Treasury, Office of Public Affairs intemet site. May 21. The Economist. 1997. New Illness, Same Old Medicine. December 13: 65-66. Wade, Robert and Frank Veneroso. 1998. The Asian Crisis: The High Debt Model vs. The Wall Street-Treasury-IMF Complex. Russell Sage Foundation (rsage.org) on the Electronic Policy Network. Yellen, Janet. 1998. Lessons from the Asian Crisis. Address to the Council on Foreign Relations. President’s Council of Economic Advisors intemet site. April 15.
Review of RADICAL POLITICAL ECONOMICS
The East Asian Economic Crisis: Surging U.S. Imperialism? Joseph E. Medley* Econotmcs
Department,
Unrverslty
of Southern
Marne, Portland
ME 04104
ABSTRACT The financial crisis that engulfed Asian countries m 1997-98 allowed the United States and the International Monetary Fund to attack the East Asian model of development. In return for needed aid, the IMF requned the affected Asian countries to implement deregulatory, free-market “reforms” which exacerbated their economic crises and curtailed their economic sovereignty. These countries, including Japan, are resisting U.S. and IMF attempts to dismantle what has been a relatively successful model of economic development. JEL classification:
N15; F35, 019
Keywords: East Asia, Imperialism; Economic development
* E-mail. [email protected] 0486-6134/00/$ - see front matter 0 2000 URPE. All rights reserved
380
J E Medley / Revrew of Raduzal Polltlcal
1. Introduction:
The Financial
Economm
32, 3 (2000) 379-387
Crisis in Asia
The financial crisis that engulfed many Asian countries m 1997-98 allowed the United States and the International Monetary Fund (IMF) to question the continued efficacy of the East Asian model of development. In particular, the crisis allowed the IMF to provide over $100 billion of emergency aid to the affected Asian economies contmgent upon then adoption of “structural adjustment programs.” The required “reforms” included trade liberalization; open and deregulated financial markets; and “western” accounting, financial, and legal practices that favor developed country banks and corporations. The IMF thus attempted to transform the financial systems and economic policies of the East Asian countries. The Asian countries, mcluding Japan, are resisting many of these reforms because, if fully implemented, they will dismantle a successful model of economic development. In 1997 Asia was hit by a massive financial crisis. Despite persistently positive economic performance (including high growth rates, low inflation rates, high private savings, budget surpluses, and strong exports) m most East and Southeast Asian countries, mternational currency speculators attacked Asian currencies and provoked a panicked withdrawal of massive amounts of short-term capital Starting with the Thai baht and spreading to currencies up along the east coast of Asia, affected currencies lost half of their value m less than a year. Stock markets in those countries dropped by about 50 percent (IMF 1998b). Accustomed to their recent economic successes, many in Asia struggled to understand why the crisis occurred, why it has been so severe, and what the implications are for the East Asian model of development. Ironically, economic success in East and Southeast Asia was, in a sense, a precondition for the financial crisis. High profits in the Asian economies attracted enormous, mostly short-term capital mflows from 1993 to 1996. Europe pumped $318 billion, Japan $260 billion, and the United States $46 billion mto Asian financial markets in search of quick returns. South Korea received $100 billion of these funds, Thailand received $70 billion, Indonesia $55 billion, and China $55 billion (FEER 1998a). These billions of speculative funds came primarily from private lenders. The vast majority of funds were borrowed for less than one year, m foreign currencies, by private banks who, without government oversight, re-lent the funds to risky, longterm local projects. Initially, this huge influx of money financed rapid and apparently profitable growth. As excess capacity m real estate and the local service and industrial sectors soared, however, confidence began to flag concerning whether even rapid increases in exports could pay off the accumulated loans. Then, when exports to Japan and the United States lagged due to increased competition from China, investor confidence
J E Medley / Revzew of Radxal
Pohcal
Economrcs
32, 3 (2000) 379-387
38 1
plunged and provoked speculative runs on the Thai baht and later on other regional currencies. Foreign investors withdrew their funds in an increasing panic that pushed down currency values, stock markets, and other asset prices. The resulting massive outflows of short-term funds meant that despite budget and trade surpluses, low Inflation and high private savings, and strong export performance, the affected Asian economies faced domestic credit crises that threatened the contmued viability of otherwise sound businesses.
2. IMF Interventions The financial crisis in East and Southeast Asia permitted aggressive interventions by the IMF into the economic affairs of the region. The currency, stock, and real estate market collapses made private lenders reluctant to loan money to businesses in the region. Japan had proposed setting up a U.S. $100 billion rescue fund in 1997 to prevent such financial crises in Asia. At that time the United States wanted the IMF to be in charge of any bailout and reform packages. So, U.S. Treasury Secretary Robert Rubin personally called IMF General Secretary Michel Camdessus to insist that the IMF block the Japanese bailout fund (New York Times 1998). Consequently, the IMF was the only agency able to gather sufficient funds to bail out domestic and mternational banks later that year and prevent economic depression across the region. The IMF pressed economic reform programs on the affected governments as a precondition for U.S. $113 billion in direct and multi-lateral loan funds. The required reforms included: (1) the imposition of flexible exchange rates to permit further currency devaluations; (2) a tightened monetary policy to attempt to slow capital outflows by raising domestic interest rates; (3) structural reforms to reduce trade barriers and liberalize/open the financial systems; and (4) reduced government spending to quiet inflation fears The IMF explained that forceful, far-reaching structural reforms are “. . . the centerpiece of the Asian programs.. .” (IMF 1998a). The fmancial system reforms also included closing bankrupt financial institutions and permitting increased foreign ownership of domestic financial institutions and businesses.
3. South Korea The South Korean economy adjusted to external shocks to its domestic stability in the 1970s and 1980s without suffering financial crises because government agencies regulated financial markets and assisted endangered firms. Government regulation ensured that Korean firms
382
J E Medley / Revrew of Radxal
Polrtlcal
Economm
32, 3 (2000) 379-387
could borrow funds only for productive investments. On the other hand, if firms needed funds to keep their businesses going in the case of a crisis, then the government provided them. When necessary, the Korean government also boosted the domestic economy with increased government spending to enable business to receive revenues sufficient to meet their financial obligations. Then, in the early 1990s the United States insisted that South Korea must reduce government intervention as a precondition for membership in the Organization for Economic Cooperation and Development (OECD) In addition, the Korean government was forced to abolish its Economic Planning Board, its major economic strategy mstitution (Wade and Veneroso 1998). The Korean government also acceded to U.S. demands to loosen controls on private currency trading. Korea then had to permit its domestic banks to borrow from foreign lenders and to lend to domestic and foreign borrowers without government supervision. These “reforms” severely reduced the Korean government’s ability to regulate and protect its economy from destructive external economic events like those that produced the Asian financial crisis. U.S. inspired deregulation of Korea’s financial system allowed the short-term foreign currency loans for speculative long-term investments that left the Korean economy vulnerable to the Asian financial crisis. Without government coordmation to restrict risky borrowing, Korean firms’ debt increased by more than $100 billion. Almost 70 percent of that money had to be repaid in less than one year. The borrowers were betting that they could obtain low-cost long-term funds in time to pay off their existing loans. Instead, the money that poured into Korea artificially boosted the value of Korea’s currency, making Korea’s exported goods more expensive (Chang 1997). As financial panic spread amongst foreign investors in the rest of Asia, the South Korean economy was exposed by weakened export performance and fragile debt structure Speculators’ unrestricted sales of South Korea’s currency slashed the won’s value and frightened potential lenders away. Businesses were then unable to borrow the money they needed to finance their operations. Korea was threatened with economic disaster unless it received immediate infusions of credit. The IMF stepped forward to bail out Korean financial agencies and their foreign lenders. In exchange, the IMF required Korea to adopt low mflation targets. South Korea’s 50 percent currency devaluation meant that the prices of nonsubstitutable imports sky-rocketed. The IMF-imposed inflation targets forced South Korean monetary authorities to severely cut back the amount of money available for domestic loans. With less money available for lenders, interest rates doubled ta over 20 percent. The domestic credit crunch pushed thousands of firms towards bankruptcy and threatened millions of jobs. The IMF then insisted on additional structural reforms to further restrict Korean government regulation of its commercial banks, to prohibit the government from lending directly to Korean firms, and to
JE
Medley / Revrew of Radrcal Polrtlcal
Economrcs 32, 3 (2000) 379-387
383
stop it from assisting individual corporations to avoid bankruptcy. The IMF also required wider opening of Korea’s capital accounts to enable even freer inflow and outflow of portfolio and direct investment capital (Wade and Veneroso 1998). Thus, the IMF agreement not only disassembled Korea’s banking system, it also created conditions that allowed foreign capital to begin to buy up South Korea’s most profitable industrial assets at “fire sale” prices. The IMF agreement, for example, lifted the ceiling on individual foreign ownership to over 50 percent by 1998, and allowed foreign financial firms to purchase domestic financial firms without limitation. In late December 1997, The Economist reported Korean press complaints that the IMF’s hidden purpose was to open doors for American business (The Economist 1997). In mid 1998, The Far Eastern Economic Review reported widespread sentiment in Asia that the financial crisis was managed by the IMF on behalf of the United States in order to bankrupt Asian manufacturers and financial firms, and to allow American companies to come in and buy up everything cheaply (FEER 1998b). The IMF did not create the financial crisis. The IMF did, however, exploit the crisis to push its policy goals m Asia. In particular, the IMF sought to dismantle the institutional foundations of the East Asian model of development. The IMF “reform” plans for South Korea, for example, reorganized the Bank of Korea so that it could no longer function as an independent central bank. They also curtailed the Korean Ministry of Finance’s industrial policy capabilities. IMF reforms made it impossible for these agencies to continue the monetary, credit, and interest rate policies that financed South Korea’s successful domestic economic development. Why did the IMF dismantle the institutions responsible for building the successful Korean version of the “Asian miracle?” Wade and Veneroso (1998) argued that the answer involved the interests of the owners and managers of international capital: “The reforms sought by the Fund are connected in one way or another with further opening up Asian economies to international capital.. ..” In other words, the IMF followed a political agenda to overturn the East Asian model and replace it with a U.S. inspired “free-market” approach that privileged interests at the expense of national mtemational corporations’ economic development.
4. Conventional
Interpretations
of the Crisis
The 1997-98 Asian financial crisis was seized upon as an opportunity and dismantle the East Asian model of to question, reinterpret, development. According to Michael Camdessus, Managing Director of was based on saving, prudent fiscal the IMF, the “Asian Miracle” policies, investment in physical and human capital, and liberalizing and
384
JE
Medley / Review of Radical
Polltrcal
Economm
32, 3 (2000) 379-387
opening up national economies. In his opinion the miracle had a “dark side” because it was plagued by destructive government/ business “cronyism.” The IMF portrays itself as the objective agency that can cast light on this “dark side” by displacing local government/business planning arrangements in favor of international capital. Its programs “.. . go far beyond restoring the major fiscal, monetary, or external balances. Their aim is to strengthen financial systems, improve governance and transparency, and restore economic competitiveness.. .” (IMF 1998c). The Clinton administration supported the IMF. Janet Yellen, former Chair of the President’s Council of Economic Advisors, argued that the “fatal flaws of the East Asian economies” are the “heart of the problems.” She continued by stating “.. .the crisis countries favored centralized and behind the scenes mechanisms for the allocation of capital.. .” and that “. . . m the long run, reliance on such behind the scenes relationships for capital allocation may lead to increasmgly poor investment decisions” (Yellen 1998). Yellen extended her critique to the Japanese economic model: “Hopefully, the apparent collapse of the Japanese model of capital markets abroad will reinforce Japan’s resolve to carry out the structural reforms that are needed to address the long-term problems facing that country” (Yellen 1998). Meanwhile, Robert Rubin, U.S. Secretary of the Treasury at that time, commented: “[tlhe IMF has...the expertise to shape effective reform programs, the leverage to require a country to accept conditions that no assistmg nation could require on its own, and it internationalizes the burden . . ..Failure to support fully the IMF now could shake confidence m American leadership in the global economy.. .” (Rubin 1998).
5. The Consequences
of IMF
and U.S. Intervention
As weakened Asian currencies drove down the prices of domestic assets, and as desperate governments invited foreigners into their economies, U.S. companies were increasingly able to buy up their Asian competitors. A former chief economist at Merrill Lynch and Co. said: “People with the longest time horizon and the deepest pockets are being given a once-in-a-generation opportunity” (Los Angeles Times 1998). US companies’also gamed access to long protected markets. Foreign lenders pressured Asian governments to open areas such as finance and telecommunications that were traditionally protected from foreign ownership. In addition, U.S. corporations obtained distribution networks and expanded low-cost manufacturmg operations at “rockbottom” prices. Foreign investment m Korea during the first half of 1998 jumped by 30 percent over the previous year. General Electric, for example, went on a “buymg spree” (Los Angeles Trmes 1998). Other U.S. companies such as Proctor and Gamble and Hewlett-
J E Medley / Renew
of Radical
Polrtrcal
Economtcs
32, 3 (2000) 379-387
385
Packard also bought into Korea’s domestic market by absorbing troubled local firms. Back in the Umted States, the Federal Reserve brokered a bailout of a major U.S. investment firm (Long Term Capital Management) in order to prevent large losses for maJor U.S. banks, to prop up falling U.S. stock market prices, and to forestall a credit crunch. Chairman Alan Greenspan said the intervention was necessary to avoid a “fire sale” of U.S. assets that might trigger a slowdown of the U.S. economy in 1999 (Associated Press 1998). Asian observers were troubled by U.S. policy-makers’ apparent double standard. At the 1998 IMF meetings, they sharply criticized the IMF (and the U.S. Treasury) for being insensitive to the political turmoil and human misery the IMF policies entailed for Asia while the same agencies protected U.S. business interests at home (New York Times 1998). Reports from Asia (“. . . there is a perception of double standards and even racism”) confirmed that bitterness and desperation reached the point where isolationist and anti-western solutions rose to the top of the agenda in several Asian countries (FEER 1998~).
6. Asian Response to the Crisis IMF pohcy prescriptions were intended to break up the governmentdirected East Asian economic model. Financial crisis forced Asian governments to accept the IMF’s deregulating and deflationary prescriptions. Ironically, the depth of the ensuing shock to the real sectors of Asian and other economies incited Asian governments to successfully resist IMF strictures against intervention. In mid 1998, for example, South Korea and Thailand broke with IMF plans and expanded their domestic economies by making low-interest funds available to at risk domestic businesses. South Korea challenged IMF limits by increasing domestic lending, as they had during past crises, to support expanded export production (FEER 1999~). In early 1999, Japan deployed a $30 billion initiative to promote economic recovery in Indonesia, South Korea, Malaysia, Thailand, and the Philippines. Japan aggressively reasserted its role in Asia by criticizing the deflationary cast of the IMF reforms (FEER 1999a). Expanded government spending programs, sharply devalued currencies (which entailed sharp wage and other domestic cost cuts in dollar terms), and strong U.S. demand for imports enabled South Korea and other Asian countries to increase income and output an estimated 3 percent during 1999, with the strongest growth in the countries that most resisted IMF restrictions (International Herald Tribune 1999). Malaysia, for example, rejected IMF programs and established currency and capital controls to protect its currency and financial markets from destabilizing speculation. These controls allowed Malaysian pohcy-makers to reflate the economy without triggering
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additional destructive capital outflows. Malaysia thus avoided massive bankruptcies, layoffs, declines in income, and “fire sales” of assets (Reuters 1999). Malaysia proceeded to recapitalize its industries and banks by organizing new state agencies to manage the bailouts of threatened firms. In the context of these capital controls and a restabilized economy, foreign investors made over $2 billion of new, long-term investments (FEER 1999b). At the East Asian Economic Summit in October 1999, Malaysian Prime Minister Mahathir Mohamad criticized the IMF prescribed reforms, pointing out that the capital controls prohibited by the IMF were what “...made it posstble to secure currency stability, to pump-prime the economy without serious negative consequences, and to massively cut interest rates-thus to save the real economy” (Associated Press 1999). Malaysia explicitly compared its policies to those employed by the Japanese m the 1950s and early 1960s and to those employed by China and Taiwan more recently (FEER 1998d). That is, they reasserted that these key elements of the East Asian model were necessary for stable growth. They further claimed that their actions represented the sovereign right of Asian economies to be managed in their populations’ Interest, instead of for the benefit of Western corporations and governments. Finally, their actions, and those of several other Asian governments, assert viable alternatives to domination by U.S. and other capitals.
References Associated
Press. 1998. Associated Press report. October 2. 1999. Associated Press report. October 18. Chang,Fla-Joon. 1997. Perspective on Korea. LA Times. December 3 1. Far Eastern Economic Review. 1998a. Money Isn’t Everything. February 12. 1998b. Fund Under Fire. May 14. -1 1998~. Losing Faith. October 8. 1998d. Desperate Measures. September 10. -1 1999a. January 7. 1999b. April 8. -1 1999~. December 23. International Herald Tribune. 1999. October 15. International Monetary Fund. 1998a. The IMF’s Response to the Asian Crisis. International Monetary Fund intemet site. June 15. 1998b. The Asian Crisis and Implications for other Economies. Address by Stanley Fischer delivered in Sao Paulo, Brazil. International Monetary Fund internet site. June 19. . 1998~. From the Asian Crisis to a New Global Architecture. Address by Michel Camdessus delivered in Strasbourg, France. International Monetary Fund internet site. June 23.
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LA Times. 1998. Asia’s Woes Prove a Capital Opportunity. October 4. New York Times. 1998. As Economies Fail. October 2: Al/AlO. Reuters. 1999. Reuters news release. September 30. Rubin, Robert E. 1998. Testimony before the House Agriculture Committee. Department of the Treasury, Office of Public Affairs intemet site. May 21. The Economist. 1997. New Illness, Same Old Medicine. December 13: 65-66. Wade, Robert and Frank Veneroso. 1998. The Asian Crisis: The High Debt Model vs. The Wall Street-Treasury-IMF Complex. Russell Sage Foundation (rsage.org) on the Electronic Policy Network. Yellen, Janet. 1998. Lessons from the Asian Crisis. Address to the Council on Foreign Relations. President’s Council of Economic Advisors intemet site. April 15.