E-Notes

The Asian Panic, Round Two

by Harvey Sicherman

May 22, 1998

Harvey Sicherman, Ph.D., is President of FPRI and a former aide to three U.S. secretaries of state.

The rioting against Indonesia’s President Suharto has inaugurated Round Two of the Asian economic crisis, a phase where politics will count even more than money, and President Clinton will be put to a severe test. At stake is not only the well-being of East Asia, but in a broader sense the U.S.-sponsored international financial structure inherited from the Cold War era.

The Asian panic began when the sudden devaluation of the Thai baht shocked international investors into a realization that their economic assessments were severely flawed. The psychology of panic — as important as the numbers — was a spreading fear that vital information had been overlooked if not concealed. Confidence and capital then fled. While the IMF’s painfully reached rescue agreements with various governments offered a brief respite, forecasts are now quite gloomy. One estimate: a GDP drop of 12.5% for Indonesia, 2% for Malaysia, 5% for South Korea, and 7% in Thailand. And these numbers are already translating into real pain for the populations of the stricken countries.

As we enter this phase, the more political consequences of the panic are evident.

First, the so-called Asian model is being discredited. This exaggerated term is often used to mean the late twentieth century version of benevolent autocracy: an authoritarian government establishing a modern, “free” economy with much less risk and pain than the “creative destruction” of classic capitalism, while also (in the optimistic view) preparing the way for eventual democracy. The result has sometimes been a government less authoritarian than it used to be but not as democratic as it might yet become. Such governments may lack the advantages of either form if they are no longer strong enough to compel sacrifice, not yet popular enough to call it forth voluntarily, and still corrupt enough to be discredited the moment things turn bad. Thus far, two governments have been removed by election (South Korea, Thailand), and the new leaders are under heavy pressure. Suharto of Indonesia has resigned in the face of public unrest, and the veteran leader of Malaysia still talks but no longer shapes events.

Second, the market knows all, but what does the market really know? The notion that emerging markets should rapidly come to duplicate the regulated capitalism of the West has also been hard hit and with it the confidence that the democratic values associated with such markets would also be absorbed. Markets need information, and the emerging markets turn out to be acutely vulnerable to manipulation and concealment. The Thai reserves, the South Korean debt, the Indonesian bank positions — like the earlier Mexican case - - all illustrated that reality and what the “market knew” were not the same. This, too, induced panic.

Third, U.S. leadership is not a free ride. The Clinton administration, which has ceaselessly hyped the “new world” of economic power and America’s leading role, was oddly hesitant at first to organize an Asian rescue operation. This was due partly to self-induced paralysis ("the market will fix it"), partly to underestimates of the contagion factor (despite the Mexican precedent) and partly to earlier experience (Congressional reluctance to support the Mexican bailout). Washington then led with the IMF but soon discovered that this offered no respite from responsibility, especially when governments began to gag on the IMF’s politically suicidal advice, which translated into severe economic dislocation for the population. It is not clear whether Clinton’s personal interventions with Suharto had much effect, but it is clear that the president’s assertions of leadership came in the absence of a Congressional consensus about the wisdom of it all. The Asian crisis has thus sharpened political divisions in Washington as well.

Fourth, international financial institutions are at risk. The lack of consensus in Washington in U.S. foreign policy in the post-Cold War era is now almost a fixed feature of the capital’s landscape. Neo-isolationist Republicans often join liberal Democrats, especially in the House of Representatives, to oppose international objectives that might cost money or risk lives. Until recently, however, America’s international economic policy had been exempt from these divisions. In late 1993, Clinton had scored a notable victory on NAFTA by combining mostly Republicans and some Democrats, despite the political cost of breaking with the AFL-CIO. Two years later, however, the consensus failed to hold in the Mexican crisis. Despite the support of both then-Senator Bob Dole and House Speaker Newt Gingrich in January 1996, Clinton was forced to use the dollar stabilization fund to do the job. Even more tellingly, the president allowed “fast-track” authority on trade to expire in his first term. He did not seek to regain it, fearing to rub party wounds already raw from NAFTA.

As the Asian panic forced the IMF to the limits of its resources, the Clinton administration could no longer evade a test of congressional support. But most of the old internationalist Republicans were gone, and the AFL-CIO was more determined than ever to push the president toward protectionism. One by one, Clinton lost: no money for the UN (the abortion issue); no money for the IMF (Republicans and Democrats opposed to “bailing out the banks” or “saving foreign jobs"); no fast-track authority (no more NAFTAs). As a result, the president could only sound a weak and uncertain clarinet at the recently concluded G-8 meeting, regardless of the merits of the IMF policies which are, and should be, subject to debate.

Taken together, these political consequences of the Asian panic cast a dark shadow over attempts to grapple with the second — and more desperate — phase of the economic crisis now underway. As least three conditions will be necessary to soften the landing, and each requires a strong act of political will. First, the Japanese will have to face up to their own financial trouble. Asia cannot recover from the crisis by export-led growth that relies only on the U.S. or European markets. Unless the Japanese economy begins to grow again soon, a prolonged depression and further social strain are the outlook. Unfortunately, the Japanese have not yet impressed anyone, especially their consumers, with the pump- priming announced thus far.

Second, the Clinton administration and the Congress will have to find some way to support the international institutions, including the IMF. If not the IMF, then some international device will be required to supply liquidity for nations that are not bankrupt but temporarily short of capital that cannot be raised from skittish banks. In the absence of U.S. leadership, no other combination of nations can do the job. And the U.S. cannot lead unless the president does the hard work of persuading, cajoling, and coopting the Congress.

Third, the People’s Republic of China will have to hold the line against devaluation if the crisis is to be contained. Beijing escaped damage in the first phase of the crisis, and Hong Kong sustained its own dollar peg through high interest rates that took a heavy toll of property assets. But the PRC is entering the most delicate phase of its own economic reform, which requires millions of new jobs to accommodate workers displaced from moribund state-owned industries. Its economy depends on capital imports and export-induced growth. Should Beijing devalue to hold or recover export markets now shifting to its stricken but more competitive neighbors, then we can expect yet another round of devaluations. And the Chinese commercial communities, already at risk in some countries, will become fresh targets for popular anger.

Unhappily, the score thus far on two of the three — Japan and the U.S. — is zero. But all three will be needed if the crisis is to be overcome. Otherwise a financial panic with political implications will be compounded by a growing political panic. President Clinton, who began his second term musing about the lack of great challenges, now confronts one. Washington, acting in concert with Tokyo and Beijing, can ease the crisis. But to do that, the administration will have to forge a new consensus with the Congress first or find itself helpless to avert disaster.

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E-Notes

The Asian Panic, Round Two

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