What To Do About Asia
It was the budget speech heard around the world. In early January, Indonesian President Suharto outlined ambitious spending plans that defied moves demanded by the International Monetary Fund in return for a $43 billion bailout loan. To panicked financial markets, it seemed Suharto and other Asian leaders were losing the will to tackle their countries' urgent problems. Frantic calls from Bill Clinton, Helmut Kohl, and Ryutaro Hashimoto ensued. Then came a diplomatic SWAT team from Washington, followed by the head of the IMF to talk sense into an aging dictator.
The wild episode in Jakarta shows how, in short order, a seemingly isolated financial bust that started last summer in Bangkok has escalated into the biggest threat to global prosperity since the oil shocks of the 1970s. Unless the U.S., Europe, and Japan organize a much more coherent, high-profile response, the damage to the global economy could be deep and long-lasting.
For now, the world is breathing a bit easier. By mid-January, the South Korean crisis seemed to stabilize, Suharto was making conciliatory gestures to foreign bankers, and Asian stocks and currencies were starting to bounce back. But the region's once-booming economies remain fragile, and the debt crisis far from solved. Currencies are still half what they were worth seven months ago. Liquidity problems are crippling regional trade as companies in Southeast Asia can't pay Korean suppliers. Currency losses from Asian investments are pummeling profits in Japan. And now Hong Kong, which not long ago seemed rock solid, is getting sucked into the whirlpool: The city's leading investment bank, Peregrine Investment Holdings, has collapsed in a heap of unpaid debt.
So far, economists have shaved one percentage point off their estimates for global growth in 1998, blaming Asia. The Dow Jones industrial average remains well off its highs and continues to gyrate as news of lower corporate earnings rolls in. Still, most Americans and Europeans are surprisingly sanguine about Asia's turmoil. President Clinton has described it as a "glitch in the road," while a move is under way in Congress to oppose U.S. help. Optimists figure that the ongoing surge in U.S. production, employment, and exports to other regions will largely offset trade with Indonesia or Thailand.
Such complacency is dangerous. The cold reality is that the world's industries and financial systems are inextricably intertwined. Just as no one anticipated how swiftly a local panic in Thailand would bring down an entire region, no one really understands how the the collapse of the world's biggest growth zone will ripple through the West. At this point, confidence has become so shaky that one more big shock--a currency devaluation by China, another plunge in Japan's Nikkei average, or a key Asian borrower reneging on its IMF terms--could well trigger reverberations that will rock the globe. Eisuke Sakakibara, Japan's vice-minister for international finance, is even more alarmist. "This isn't an Asian crisis," he says. "It's a crisis of global capitalism."
Exaggerated? Perhaps. But another round of deep devaluations in Asia could force Latin America to follow suit. That would deliver a second whammy to U.S. exports, corporate profits, and stocks. Capital investment would drop, and consumers--seeing much of their mutual-fund wealth disappear--would spend less. The West could slip into economic stagnation, Asia into a long recession. With "globalization" no longer delivering the goods and social turmoil breaking out, big developing countries such as China might postpone free-market reforms for years.
IN DENIAL. That's why halting the Asian contagion now is essential. The IMF has been trying, but so far with little success. Why not? It has taken months to gauge the magnitude of the problem in the face of Asia's opaque accounting and financial secrecy, compounded by a crazy quilt of currency regimes and financial systems in the region. Coordination between Asian and Western leaders and banks has yet to materialize, largely because Asian leaders have spent weeks denying the obvious. And no Western leader has spoken openly and publicly about the gravity of the crisis and how it could endanger global prosperity.
What's needed is a comprehensive plan of action, one that would focus the world's attention on Asia. It would entail not only short-term fixes but also measures to help shape up the Tigers for a global economy. The plan would include new institutions to establish regionwide rules that recognize just how closely Asia's economies are interlinked.
First, global leaders should appoint an emergency task force that would have real clout to deal with the problem on a regional basis. It would include leaders of the lending banks, accounting firms, Asian finance ministers, and central bankers who would work with the IMF. At some point, a meeting of global leaders may be necessary to ratify the task force's mandate.
The next step would be to expose all of the bad debt that remains hidden. Lenders need a firm idea on how much more is needed to fix the problem.
Then, stabilize the currencies fast before hyperinflation hits. That means setting interest rates as high as it takes to halt capital flight and put a floor under the currencies. These moves could bring on a short-term recession, but plunging currencies would create a depression.
Once the true costs are known, liquidity flows back to the system. Many of Asia's banks cannot meet their short-term commitments to overseas lenders or extend credit to needy local borrowers. To keep core banks from collapsing, new repayment schedules are a necessity. The solutions would include converting much of the debt into private securities and government bonds. Some governments may also want to guarantee only interest payments on short-term private paper to avoid expanding their national debt. Foreign lenders will have to settle for less than full payment. Rich Asian and Group of Eight nations may have to pony up an additional $100 billion to cover any acute liquidity shortfalls. Once the rollovers restore some calm, Western lenders can tackle the corporations that can't pay. They will probably have to swap debt for equity.
As the task force nears the end of its life it will probably want to create some permanent agency, perhaps under the aegis of the Asia Pacific Economic Cooperation forum to enforce the agreed upon rules. Longer-term, an Asian Reconstruction Fund could also help settle any remaining bad debts and sell nonperforming assets, from office towers to factories. That means finding buyers around the world and within the region to pick up these assets at discount prices. That would also help channel investment back to Asia. Another agency must devise uniform rules of disclosure and supervision of the region's banking and corporate sectors.
For any of this to work, however, a tremendous amount of political salesmanship is ahead. Asian leaders have to convince their populations that there is no way to avoid a wrenching shakeup. And with congressional critics on the right and left already gearing up to take aim at the IMF, Clinton will have to explain why more American funds should be sunk into the Asian money pit. To date, he has not started. Says former Secretary of State James A. Baker III of the Clintonites: "They haven't made any effort to build public support for the rescue plan, even though the situation has some systemic risk." But before Congress and other Western governments sign on, there must be clear evidence Asian aid won't simply end up in the pockets of the old-guard political cronies or the irresponsible industrialists.
Of course, all these measures will be meaningless unless Japan also makes some serious commitments. So far, Tokyo has stood out as one of the chief villains in the crisis. It has let the yen slide to boost its own exports at the expense of its neighbors. And it has clamped down on its domestic growth, ignoring pleas to import more Asian goods. That leaves only the U.S. to absorb East Asia's exports. Corralling Japan into the effort will be a major challenge.
The recovery plan is a tall order, to be sure. But even this is just the beginning. After the financial crisis is resolved, money has to be pumped back into Asia's economies. Direct foreign investment will play the key role in Asia's reconstruction. But instead of these funds going to the same oligarchy of crony capitalists and conglomerates currently dominating the scene, it must flow to a new breed of dynamic, more globally-oriented entrepreneurs.
For this to happen, Asian governments must dismantle the corrupt nexus among bureaucracies, banks, and big business. The IMF workouts will serve as an enormous cleansing exercise. In return for new money, overstretched conglomerates would be broken up. Many subsidiaries could be spun off to professional managers or sold to Western investors.
At the same time, a massive investment in training must raise the army of bankers, securities regulators, and corporate accountants Asia will need to manage in today's global economy. Western banks, accounting firms, and governments can supply much of the training. And finally, since few Asian countries have a social safety net to help the millions of workers laid off as a result of IMF terms, the World Bank and industrial countries will have to step up aid programs.
Building and holding together a political consensus for bailing out Asia will likely be the biggest and most complex foreign-policy challenge facing Clinton in the remainder of his term. In the U.S., conservative Republicans and union leaders will rightly fume about spending taxpayer money to help corrupt governments and reckless capitalists. At the same time, the U.S. will have to keep the pressure on Asian leaders to follow through with a structural overhaul of their economic models as South Korean workers take to the streets and rioters spill out of Jakarta's slums.
WIDE RIPPLES. But the truth is that the U.S. has no choice but to step up to the challenge. Whether Asia's immediate impact on the U.S. is severe or mild, America's industries are inextricably linked to Asia, which now accounts for one-third of global trade and, by any calculation, an enormous share of future world growth.
Companies from General Electric to Boeing are counting heavily on the $1 trillion the World Bank estimates Asia will need to invest over the next decade on power plants, telecom, transportation, and other infrastructure. "It's simply not credible that a third of the world can suddenly go from dynamic growth to widespread recession without affecting our own economy," says Jeffrey E. Garten, a former U.S. Commerce Dept. official.
There also are important geopolitical stakes. A prosperous Indonesia has been the bulwark of regional stability and remains a check against possible Chinese adventurism. Longtime ally South Korea, still hosting 37,000 U.S. troops, has been a deterrent to expansion from the north. And if North Korea collapses and unifies, the cost to the U.S. of keeping the peninsula stable would be staggering if Seoul were greatly weakened. "It's important the U.S. be more than Mr. Observer in this thing," says Maurice R. Greenberg, chairman of American International Group Inc.
Then there is the much larger question of America's ability to continue promoting the ideals of democracy and free trade, the pillars of U.S. policy since the end of the cold war. South Korea, the Philippines, and Thailand have ousted military-backed authoritarians. And while their transition to market economies and democracies was far from complete, there's no disputing. that they've made tremendous strides in liberalizing trade and opening their markets. Now, investors seem ready to abandon them.
Many Asians believe the West also has a moral obligation to help clean up the mess. That's debatable. Asian governments welcomed the money at first and squandered much of the foreign investment on ill-conceived property and industrial projects. But Asian governments also caved into U.S. and IMF pressure to dismantle capital and currency controls even before they had created the institutions needed to oversee the risk. Says Park Yung Chul, president of the Korea Institute of Finance: "The West pushed us to open our markets, but what are we getting in return? Through globalization we have created a monster."
If Asia now acts in good faith, and the West still turns it back, America credibility will suffer. The U.S. sees the next century as the age of globalization, free markets and increasing prosperity. It's a beautiful vision. A devastated Asia will make a mockery of it.