The Asian crisis: The high debt model versus the wall street-treasury-IMF complex

New Left Review

Volumn , Issue 228, 1998, Pages 3-22

  Wade, Robert ^a   Veneroso, Frank ^a  

^a NONE

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EID: 0032373748     PISSN: 00286060     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Review

References (40)

1. Thanks to Paul Streeten, Martin Wolf, Adrian Wood, Peter Evans, J.D. Von Pischke, Francis Daniels, Devesh Kapur, Manfred Bienefeld, Bruce Scott, Richard Doner, Albert Fishlow, Robert Brenner, Thomas Biersteker, David Hale, David Seckler, Ronald Dore and Robert K. Merton for their comments, which do not implicate them at all in the result.
2. For example, Jeffrey Sachs, 'The Wrong Medicine for Asia', New York Times, 3 November 1997; Alice Amsden and Yoon-Dae Euh, 'Behind Korea's Plunge', New York Times, 29 November 1997, p. A39; Joseph Stiglitz, 'How to Fix the Asian Economies', New York Times, 31 October 1997; Stiglitz, 'More Instruments and Broader Goals: Moving Toward the Post-Washington Consensus', The 1998 WIDER Annual Lecture, Helsinki, Finland. Stiglitz is chief economist at the World Bank. He has not concealed his disagreements with the IMF'S austerity push. 'You don't want to push these countries into severe recession. One ought to focus. . . on things that caused the crisis, not on things that make it more difficult to deal with', he is quoted in a Wall Street Journal story as saying. The article continues, 'Mr Stiglitz's critique is a departure from the usual closed-door disagreements between the two institutions. . .An exchange of views "Isn't unhealthy", says IMF Treasurer David Williams, "but we shouldn't have closely related institutions coming out with different macroeconomic analyses".' ('World Bank Questions IMF Plan: Austerity in Asia may Worsen Crisis', Wall Street Journal, 8 January 1998). Stiglitz's views, however, are not the same as those of the operational part of the Bank dealing with Korea, which are closer to the IMF'S.
3. For example, Jeffrey Sachs, 'The Wrong Medicine for Asia', New York Times, 3 November 1997; Alice Amsden and Yoon-Dae Euh, 'Behind Korea's Plunge', New York Times, 29 November 1997, p. A39; Joseph Stiglitz, 'How to Fix the Asian Economies', New York Times, 31 October 1997; Stiglitz, 'More Instruments and Broader Goals: Moving Toward the Post-Washington Consensus', The 1998 WIDER Annual Lecture, Helsinki, Finland. Stiglitz is chief economist at the World Bank. He has not concealed his disagreements with the IMF'S austerity push. 'You don't want to push these countries into severe recession. One ought to focus. . . on things that caused the crisis, not on things that make it more difficult to deal with', he is quoted in a Wall Street Journal story as saying. The article continues, 'Mr Stiglitz's critique is a departure from the usual closed-door disagreements between the two institutions. . .An exchange of views "Isn't unhealthy", says IMF Treasurer David Williams, "but we shouldn't have closely related institutions coming out with different macroeconomic analyses".' ('World Bank Questions IMF Plan: Austerity in Asia may Worsen Crisis', Wall Street Journal, 8 January 1998). Stiglitz's views, however, are not the same as those of the operational part of the Bank dealing with Korea, which are closer to the IMF'S.
4. For example, Jeffrey Sachs, 'The Wrong Medicine for Asia', New York Times, 3 November 1997; Alice Amsden and Yoon-Dae Euh, 'Behind Korea's Plunge', New York Times, 29 November 1997, p. A39; Joseph Stiglitz, 'How to Fix the Asian Economies', New York Times, 31 October 1997; Stiglitz, 'More Instruments and Broader Goals: Moving Toward the Post-Washington Consensus', The 1998 WIDER Annual Lecture, Helsinki, Finland. Stiglitz is chief economist at the World Bank. He has not concealed his disagreements with the IMF'S austerity push. 'You don't want to push these countries into severe recession. One ought to focus. . . on things that caused the crisis, not on things that make it more difficult to deal with', he is quoted in a Wall Street Journal story as saying. The article continues, 'Mr Stiglitz's critique is a departure from the usual closed-door disagreements between the two institutions. . .An exchange of views "Isn't unhealthy", says IMF Treasurer David Williams, "but we shouldn't have closely related institutions coming out with different macroeconomic analyses".' ('World Bank Questions IMF Plan: Austerity in Asia may Worsen Crisis', Wall Street Journal, 8 January 1998). Stiglitz's views, however, are not the same as those of the operational part of the Bank dealing with Korea, which are closer to the IMF'S.
5. For example, Jeffrey Sachs, 'The Wrong Medicine for Asia', New York Times, 3 November 1997; Alice Amsden and Yoon-Dae Euh, 'Behind Korea's Plunge', New York Times, 29 November 1997, p. A39; Joseph Stiglitz, 'How to Fix the Asian Economies', New York Times, 31 October 1997; Stiglitz, 'More Instruments and Broader Goals: Moving Toward the Post-Washington Consensus', The 1998 WIDER Annual Lecture, Helsinki, Finland. Stiglitz is chief economist at the World Bank. He has not concealed his disagreements with the IMF'S austerity push. 'You don't want to push these countries into severe recession. One ought to focus. . . on things that caused the crisis, not on things that make it more difficult to deal with', he is quoted in a Wall Street Journal story as saying. The article continues, 'Mr Stiglitz's critique is a departure from the usual closed-door disagreements between the two institutions. . .An exchange of views "Isn't unhealthy", says IMF Treasurer David Williams, "but we shouldn't have closely related institutions coming out with different macroeconomic analyses".' ('World Bank Questions IMF Plan: Austerity in Asia may Worsen Crisis', Wall Street Journal, 8 January 1998). Stiglitz's views, however, are not the same as those of the operational part of the Bank dealing with Korea, which are closer to the IMF'S.
6. On a continuum from illiquidity to insolvency, Korea is towards the illiquidity-with-fringe-of-insolvency end, Indonesia towards the insolvency end.
7. Jeffrey Sachs, 'The IMF and the Asian Flu', The American Prospect, March-April 1998, pp. 16-21, citation at p. 17.
8. Reliable comparative data on corpotate debt/equity ratios are hard to find, and we are still searching.
9. We shall not pursue the question of why household savings are high, except to say that the reasons are not well understood.
10. We are puzzled by World Bank and IMF data that suggests that Korea's bank credit/ liabilities to GDP is relatively low, less than the developing East and Southeast Asian average, and are seeking further information on the figures. See for example, Stijn Claessens and Thomas Glaessner, 'Are Financial Sector Weaknesses Undermining the East Asian Miracle?', Directions in Development, World Bank, September 1997, figure 1.
11. Our argument differs in emphasis from the UNCTAD Trade and Development Report 1997. The report claims to find evidence that 'the exceptional savings-investment performance of East Asian economies has been due not so much to household as to corporate savings' (p. 169), and that East Asia is marked out by a high share of corporate retained earnings that are then reinvested. The report therefore downplays the process of bank intermediation from households to firms and highlights reinvestment from retained earnings. We stress, first, that the statistics on savings and profits in developing countries are especially unreliable. Companies hide profits, inflation is difficult to take account of, savings are calculated as a residual, the profits of the informal sector may be counted as household savings, and East Asian household savings are a function of bonus payments that are directly related to corporate profits. Is it remotely plausible that Peru in 1980-84 had the second highest rate of household savings of the seventeen developing countries plus Japan in the UNCTAD sample (table 44). Second, the UNCTAD data is very old, from the first half of the 1980s or earlier. Third, UNCTAD'S own data suggests that in East and Southeast Asia corporate investment exceeds corporate savings by a margin that roughly corresponds to the excess of household savings over household investment (table 44), consistent with the idea of large-scale bank intermediation from households to firms. Fourth, if corporate savings are unusually high in East and Southeast Asia, as the UNCTAD report says, this is not necessarily inconsistent with unusually high corporate debt/equity ratios and unusually large bank intermediation from households to firms. High corporate savings, high bank intermediation from households to firms, and high corporate debt/equity ratios can all occur together when corporate investment (and 'animal spirits') are high. Take Japan in the 1960s where the corporate sector invested about 23 per cent of GDP while corporate savings were about 15 per cent of GDP. Corporate savings financed less than two-thirds of corporate investment, the rest being financed by household (and/or public or external savings). Compare this with the US where corporate savings (8.5 per cent of GDP) financed over 90 per cent of corporate investment (of 9 per cent of GDP). Both debt/equity leverage and corporate savings are higher in Japan. We thank UNCTAD'S Yilmaz Akyuz for discussions on these issues.
12. Legal contracts between Korean and foreign firms engaged in infrastructure projects commonly use language that implies backing by Korean government agencies or by the Overseas Contractors Association of Korea. In practice the taking and enforcing of collateral assets is largely irrelevant; what matters is the implicit government support. Much the same applies elsewhere in East Asia.
13. See Robert Wade, Governing the Market: Economic Theory and the Role of Government in East Asian Industrialization, Princeton 1990; Chalmers Johnson, MITI and the Japanese Miracle: The Growth of Industrial Policy, 1925-1975, Stanford University Press, 1982; Stephan Haggard, Pathways from the Periphery: The Politics of Growth in the Newly Industrializing Countries, Cornell University Press, 1990; Linda Weiss and John Hobson, States and Economic Development, Cambridge 1995.
14. See Robert Wade, Governing the Market: Economic Theory and the Role of Government in East Asian Industrialization, Princeton 1990; Chalmers Johnson, MITI and the Japanese Miracle: The Growth of Industrial Policy, 1925-1975, Stanford University Press, 1982; Stephan Haggard, Pathways from the Periphery: The Politics of Growth in the Newly Industrializing Countries, Cornell University Press, 1990; Linda Weiss and John Hobson, States and Economic Development, Cambridge 1995.
15. See Robert Wade, Governing the Market: Economic Theory and the Role of Government in East Asian Industrialization, Princeton 1990; Chalmers Johnson, MITI and the Japanese Miracle: The Growth of Industrial Policy, 1925-1975, Stanford University Press, 1982; Stephan Haggard, Pathways from the Periphery: The Politics of Growth in the Newly Industrializing Countries, Cornell University Press, 1990; Linda Weiss and John Hobson, States and Economic Development, Cambridge 1995.
16. See Robert Wade, Governing the Market: Economic Theory and the Role of Government in East Asian Industrialization, Princeton 1990; Chalmers Johnson, MITI and the Japanese Miracle: The Growth of Industrial Policy, 1925-1975, Stanford University Press, 1982; Stephan Haggard, Pathways from the Periphery: The Politics of Growth in the Newly Industrializing Countries, Cornell University Press, 1990; Linda Weiss and John Hobson, States and Economic Development, Cambridge 1995.
17. There were, indeed, serious internal obstacles to the continued fast growth and industrial and service sector upgrading of the South East Asian economies. The economies have continued to engage in the world industrial economy largely as sub-contractors, largely for Japanese firms. They have experienced relatively little technology spill-over from the export-oriented sub-contractors to the rest of the economy, so much so that their industrialization has been characterized as 'technology-less', in the sense that even adaptive technology continues to come from abroad. Shortages of skilled people have grown 'from a crisis to a critical emergency', according to a Thai analyst. Thailand's gross enrolment ratio at secondary school level languished at only 37 per cent in 1992, less than half of Taiwan's in 1978 when Taiwan had the same per capita income as Thailand in 1992. In Malaysia, too, the skills shortage has become so acute that some prominent foreign companies long operating in the country have moved production elsewhere, mainly to China and Indonesia. Throughout the region infrastructure is chronically congested, attested to by electricity blackouts, traffic paralysis and the rising cost of water. In short, serious problems in the 'real' economy have been building up, even if they are problems of success. But the calamity unleashed on the region is hugely disproportional to the severity of the problems in the real economy.
18. See Wade, Governing the Markets, p. 367.
19. Klaus Engelen, 'How Bill Clinton Really Won', The European, 14-20 November 1996; and Chalmers Johnson, 'Cold War Economics Melt Asia', The Nation, 23 February 1998, pp. 16-19.
20. Klaus Engelen, 'How Bill Clinton Really Won', The European, 14-20 November 1996; and Chalmers Johnson, 'Cold War Economics Melt Asia', The Nation, 23 February 1998, pp. 16-19.
21. Every step in our argument should be treated as hypothesis in need of testing, especially against regional variation. The high debt-developmental state model applies more in East than in South East Asia; within the latter, it applies more to Malaysia than to Thailand, and least to Indonesia. In the current crisis, some countries have suffered more of a financial shock than others, and the same sized shock has caused a bigger deterioration in economic performance in some than in others. Our argument emphasizes the debt/equity ratio as an important factor in both the size of the shock and the effect on economic performance. But the effect on performance is also a function of the degree of latent social conflict in the society and the robustness of institutions for conflict management, among other things. Taiwan has been relatively little affected, its currency falling only about 13 per cent in the latter part of 1997 and 20 per cent between the start of 1997 and early 1998, while growth has remained fairly steady at 6 per cent and inflation around 1 per cent. Why? Taiwan has towering foreign exchange reserves, and a very low ratio of short term foreign bank debt to foreign exchange reserves; it has moved counter-cyclically, its property and stock market bubble bursing in the early 1990s and most of the consequences for bank balance sheets having been absorbed by 1997; it has lower savings debt/equity ratio. It is also linguistically and ethnically relatively homogenous, with relatively robust institutions for conflict management. Singapore and Hong Kong provide more regional variation, though we find it hard to treat these city states as equivalent to nation states, as so much of their dynamics comes from their role as regional hubs. Chile is an interesting comparison outside the region: it saves at near East Asian rates (29 per cent of GDP in 1995), its corporate debt/equity ratios are close to 'Western' norms, it has discouraged surges of capital inflows by in effect taxing them, and it has enjoyed fast growth over the past decade. It has been affected by Asian contagion through trade, with pressure on the exchange rate and the current account due to falls in exports and copper prices, but has experienced little financial instability.
22. The IMF requirements are summarized in 'Republic of Korea: IMF Stand-by Arrangement: Summary of the Economic Program, December 5, 1997'.
23. See for example Michael Bruno and William Easterly, 'Inflation Crises and Long-Run Growth', Journal of Monetary Economics, February 1998. They put the threshold above which countries fall into a high inflation/low growth trap at between 30 and 50 per cent per year. Below the threshold, the social costs can be fairly easily mitigated by means of indexing.
24. Jagdish Bhagwati, professor of economics at Columbia University, agrees. '[Capital markets] are very volatile. Suddenly expectations can turn around. You may be very healthy but sudden you can catch pneumonia. And then you may have to do unspeakable things to your economy just to regain that confidence because you are now hooked into the system. Markets may do something when you've done nothing wrong and you may have to do something wrong in order to convince the markets that you are doing something right! I would put off [capital account convertibility] for quite a while' (interview in Times of India, 31 December 1997).
25. Our argument needs to be tested against answers to the following questions: would a low real interest rate hinder a rise in the exchange rate? What would be the impact on firms of continuing to carry the higher principal of foreign debt? Would the costs of more bankruptcies among firms with large dollar debts exceed the costs of the more extensive bankruptcies caused by high real interest rates that hurt all domestic companies? How much would the low real interest rate discourage personal savings? Could domestic demand be sustained by fiscal stimulus (a government deficit) coupled with relatively high real interest rates?
26. Eisuke Sakakibara, quoted by Reuters, 28 December 1997.
27. Martin Feldstein, 'Refocusing the IMF', Foreign Affairs, March/April 1998, pp. 20-33.
28. James Tobin, 'Why We Need Sand in the Market's Gears', Washington Post, 21 December 1997.
29. Interview in Times of India, 31 December 1997.
30. The process of modifying the articles of agreement to require countries to adopt capital account convertibility has been under way for about a year. At the Hong Kong Annual Meetings of the Fund and Bank in September 1997, the Interim Committee agreed in principle that the Fund should adopt an aggressive policy to encourage countries to institute full convertibility.
31. Guy de Jonquières, 'Vision of a Global Market: WTO Members are Hoping to Deregulate Financial Services', The Financial Times, 10 April, 1997, p. 28.
32. See Paul Blustein and Clay Chandler, 'Behind the S. Korean Bailout: Speed, Stealth, Consensus', The Washington Post, 28 December 1998, p. 1. The US Treasury likewise managed to bury Japan's attempt at long-promised but never delivered international leadership, in the form of a summer 1997 proposal to create an Asia fund with which to redeem some of their fellow Asians' debts. Not wanting the Japanese to send their capital to Asia rather than to the US, and not wanting Japan to emerge as the Asian bail-out leader, the Treasury (Deputy Secretary Lawrence Summers, most emphatically) insisted that the cleanup be entrusted to the IMF. The Japanese agreed to desist in a November 1997 meeting in Manila. See Johnson, 'Cold War Economics Melt Asia'.
33. See Paul Blustein and Clay Chandler, 'Behind the S. Korean Bailout: Speed, Stealth, Consensus', The Washington Post, 28 December 1998, p. 1. The US Treasury likewise managed to bury Japan's attempt at long-promised but never delivered international leadership, in the form of a summer 1997 proposal to create an Asia fund with which to redeem some of their fellow Asians' debts. Not wanting the Japanese to send their capital to Asia rather than to the US, and not wanting Japan to emerge as the Asian bail-out leader, the Treasury (Deputy Secretary Lawrence Summers, most emphatically) insisted that the cleanup be entrusted to the IMF. The Japanese agreed to desist in a November 1997 meeting in Manila. See Johnson, 'Cold War Economics Melt Asia'.
34. Clay Harris and John Ridding, 'Asia Provides Golden Buying Opportunities', Financial Times, 26 February 1998, p. 16. See also 'South Korea: Bargains Galore', The Economist, 7 February 1998, pp. 67-8.
35. Clay Harris and John Ridding, 'Asia Provides Golden Buying Opportunities', Financial Times, 26 February 1998, p. 16. See also 'South Korea: Bargains Galore', The Economist, 7 February 1998, pp. 67-8.
36. Henry Kissinger, 'The Asian Collapse: One Fix does not Fit all Economies', The Washington Post, 9 February 1998, Op-Ed, p. A19.
37. Martin Wolf, 'Caging the Bankers' The Financial Times, 20 January 1998.
38. Pieter Bottelier, speaking at World Bank conference on the Asian financial crisis, cited by Reuters, Paris, 2 Febuary 1998.
39. A.C. Pigou, The Veil of Money, London 1949.
40. John Maynard Keynes, Collected Writings of John Maynard Keynes, vol. XXI [1933]. Activities 1931-39, edited by Donald Moggeridge, London 1982, p. 237