Dear Imf: Don't Make Asia's Flu Worse
Move over, Alan Greenspan. The global economy is now in the hands of Michel Camdessus, a French Socialist (of all things!), trained at the elite Ecole Nationale d'Administration and skilled in the arts of dirigiste economics. While Greenspan, the conservative free marketeer, runs the Federal Reserve and is clearly in charge of America's economy, it is Camdessus, the quintessential Eurocrat, who leads the International Monetary Fund in the battle to contain the Asian financial crisis before it sinks the world economy. Camdessus and the IMF are crafting the policy measures designed to get Asia growing again. But they may end up doing the opposite. In a deflationary economic environment, where political problems are at the root of financial distress, typical IMF policy prescriptions can do more harm than good.
In IMF-speak, the Asian financial crisis was caused by the misallocation of investment because of easy access to cheap foreign capital. Translation? In Indonesia, Korea, Malaysia, and Thailand, politicians and bureaucrats used government-controlled banks to funnel money to friends, family, or chosen entrepreneurs who then returned the favor by kicking back campaign contributions or personal gratuities. Markets played too little a role in allocating investments. Politicians used taxpayers' money to build huge public-works monuments to themselves. Businesspeople speculated in property and constructed enormous overcapacity in cars, chips, steel, textiles, and electronics. Cheap capital from the U.S. and elsewhere, chasing Asia's image of itself as the growth machine of the 21st century, overheated its economic growth. Asia's high savings rates, inexpensive labor, and strong exports would have supported high enough growth rates. But throw billions of extra bucks into a corrupt crony-capitalist system that is immune to market discipline, and the result was economies run amok.
Asia does not have the traditional financial problems of excessive government spending that once typified Latin America, and certainly not its huge trade deficits. So traditional IMF policy remedies won't cure this Asian flu. Camdessus is demanding that countries receiving IMF funding raise taxes and cut spending to balance government budgets. But governments in Bangkok, Jakarta, Kuala Lumpur, and Seoul already run fairly tight fiscal policies. The IMF is also demanding that interest rates be raised to cool off these economies. Yet inflation is not a significant problem in most of Asia, where domestic savings rates have always been very high.
The danger is that IMF prescriptions will intensify the deflationary pressures that are beginning to squeeze the global economy. Gold and commodity prices have been falling for some time. Prices are declining in China, Japan, and much of the rest of the world. Higher taxes and interest rates can only cut domestic demand, and IMF-sanctioned currency devaluations not only lower consumer buying power but also unleash new waves of exports on international markets, further depressing prices. Fiscal profligacy may require austerity, but crony capitalism does not. Asia has an efficiency problem, and it needs structural changes in its political systems that will open these economies to market forces. Without being more attuned to market forces, neither Korea's chaebols nor Southeast Asia's family-owned conglomerates will be able to compete effectively and avoid overcapacity.
Now that communism is dead, mercantilism is the last refuge of authoritarianism, both economically and politically. The IMF should encourage lower taxes and an easing of monetary policy to stimulate domestic consumption while insisting that the iron grip of politicians, bureaucrats, and their business buddies on Asia's banking system be broken once and for all. To restart its economic engine, Asia needs deep structural change that promotes markets and breaks up elite power, not out-of-date contractionary policies that put common people out of work.