Slouching Toward Disaster (1/98)

Remember the "Asian miracle?" Less than six months ago, it was the main engine pushing stock markets around the world to new records. In the US and parts of Europe, inflation was low and trade was booming. Meanwhile, in Malaysia, Hong Kong, and Indonesia, immense projects that boggled the mind were being pursued. As long as Asia’s growth continued, criticism about pay, working conditions, and environmental damage could be downplayed. Any suggestion that the "miracle" wasn’t what it seemed sounded like paranoid party-pooping.

But then the bills came due. Dependent on a steady stream of foreign investment to finance large trade deficits, Thailand and Malaysia were forced to devalue their currencies last summer, making their exports cheaper in foreign markets. As currencies plummeted, a free fall was set off throughout the region. By the end of October, Asia’s troubles helped trigger a global stock market slide — nearly coinciding with the 10th anniversary of the 1987 crash. "Sell Asia” became the battle cry for fearful investors as speculative attacks on the currencies of the so-called Asian tigers began to wreak global havoc. The party was definitely over.

In the short term, US consumers may benefit from cheaper Asian imports. So may multinationals that use parts made in Asian factories. But businesses here may have to lower their own prices to compete. It’s the same kind of deflationary pressures that set off the Great Depression.

Thailand also was first to turn to the IMF, securing a $17.2 billion rescue deal. It was soon followed by Indonesia and South Korea. But even massive bailouts may not be enough. The contagion now threatens to infect other emerging economies such as Brazil and Russia. Analysts even fear a "domino" effect (analogous to the Vietnam War-era theory of Communist contagion), in which economic collapse breeds political unrest.

"For the most part, the crisis which has engulfed many of the region’s economies is the direct result of years of financial excesses," says Larry Hatheway, chief economist at UBS Securities in Singapore. "In short, much of Asia over-borrowed and over-lent, with too many of the borrowed funds ending up in unproductive assets."

In countries such as Thailand and the Philippines, commercial banks went overseas for cash to aid the corporate sector. In others, such as Korea and Indonesia, companies went direct to foreign lenders. In any case, the cash was sunk into an overblown property sector and over-development of manufacturing as both governments and businesses tried to protect unsustainable growth rates. But overseas markets didn’t absorb the increased supply of exports, leading to downward pressure on currencies. In trying to stave off depreciation, central banks ended up instead wasting foreign exchange reserves. The basic economics, combined with the speculative pressure, was a recipe for disaster.

At first, President Clinton waxed reassuring. Asia’s woes were just "a few little glitches," he announced. However, once Yamaichi Securities, Japan’s fourth-largest brokerage, closed down just before Thanksgiving with $24 billion in debt, the crisis was impossible to ignore. This was the largest corporate failure in Japan since World War II. Within hours, Clinton revised his position, warning that Asia’s "volatility" should be taken "very seriously." But what did he propose? Deregulation, avoiding cheap exports, and stronger government support for the banks.

Pundits initially suggested that Asia’s turmoil actually signaled victory of the US economy over the Asian system. But that optimism quickly faded. The latest prognosis is that US growth certainly will be dampened by Asia’s turmoil. Leading Japanese businesses expect an economic standstill — or worse. And military analysts see instability ahead in Asia if the IMF cure doesn’t take.

Charges that the region built its economic dynamism on a weak foundation — paltry salaries, sweatshops, human rights violations, and environmental disregard — have begun to sound more reasonable. In street demonstrations coinciding with the November Asia-Pacific Economic Cooperation summit in Vancouver, activists also criticized China and Indonesia for their takeovers of Tibet and East Timor. Their main point, however, was that too-rapid industrialization and a lack of democratic freedom in Asia’s "casino" economies created more problems than they solved. But Asian leaders kept such issues off the summit agenda, while most US politicians still argued that it wasn’t anything a few bailouts wouldn’t solve.

More recently, Thai prime minister Chuan Leekpai and financier George Soros, two important players in Asia’s financial drama, warned that the worst is yet to come. In a blunt assessment, Chuan said he expects further contraction and increased unemployment. He came to power in November after Thailand’s government collapsed amidst accusations it failed to deal effectively with the crisis.

Writing in Britain’s Financial Times, financier/philanthropist Soros went much further, suggesting that the international financial system is on the verge of collapse. Ironically, last July, Malaysian Prime Minister Mahathir Mohamad accused Soros, a leading speculator, of being behind the region’s currency crisis. "What started out as a minor imbalance [in Asia] has become a much bigger one that threatens to engulf not only international credit but also international trade,” Soros responded. "We are on the verge of worldwide deflation.”

As the new year began, Asian leaders issued warnings it would be foolish to ignore. For the West, they may suggest the shape of things to come. For example, President-elect Kim Dae-jung of South Korea — one of the countries hit hardest — said 1998 will be the most difficult time since the Korean War, "a crossroads between catastrophe and rebirth” that will see increased unemployment and the collapse of many companies. At the epicenter of the turmoil, South Korea limped into the new year with the help of US, European, and Japanese banks, which pledged to roll over billions of dollars of short-term debt. But even a $60 billion international rescue package, including $21 billion from the IMF — the biggest loan it’s ever issued — is widely viewed as a stop-gap.

True to form, Indonesia’s strongman, President Suharto. called for hard work and national unity to overcome his country’s economic woes. Among those he was willing to admit are high levels of bad debt and the plunge of the rupiah, which lost half its value in 1997. In response, he urged citizens to comply with austerity programs introduced under an IMF-led package that could top $30 billion. But half the country’s 4.3 million day laborers in the construction industry have already lost their jobs, with another 500,000 sure to follow. In general, industry may cut ten percent of its work force.

On New Year’s Day, Thailand’s King Bhumibol Adulyadej called on his subjects to adopt a more spartan lifestyle. Admitting that the economy won’t recover soon, the monarch warned Thais to "prepare yourselves to face possible tougher times — you must lead a life of austerity, be conscious, patient, and work harder for the sake of the nation.” Easy for him to say. The king’s comments came a day after Prime Minister Chuan Leekpai announced that Thailand’s economy, once one of the world’s fastest-growing, will shrink this year. The auto industry alone plans to eliminate 30,000 jobs. Ultimately, the crisis could wipe out the jobs of more than one million Thais. Talk about downsizing.

And, in a speech seasoned with anti-imperialist rhetoric, Mohamad of Malaysia said that if his country fails to act soon, it risks being re- colonized. "The fall in our currency’s value has made us poorer, exposing us to the possibility of being controlled by foreign powers," he argued. "If this happens, we will lose the freedom to run our country’s economy, and with it our political freedom. In short, we will be re-colonized indirectly." It’s a message with deep implications for our corporately "globalized" economy.

Despite years of hype, the true story of Asia’s "miracle" is finally beginning to surface. But the big revelation has yet to be acknowledged — that the "miracle" was actually a mirage, built on misery and promoted here largely to heighten insecurity and scare workers. Even though US unemployment recently has been low, for example, the threat of being replaced by workers in Thailand was more than enough to frighten people into submission. The real miracle is that we were fooled for so long.