What follows is the text of a talk delivered at the "The Politics of Globalization/s" Conference held at Cornell University, Ithaca, New York, 6 November, 1998
I would like, first of all, to thank Philip McMichael and his colleagues for flying me some thirteen thousand miles to be with you today, though I am not sure that that was the most efficient use of Cornell University's resources. I am sure that there are many, especially from the economics department, who would argue that, in terms of opportunity cost, the money could have been better spent bringing in the IMF's Michel Camdessus or Stanley Fischer. On the other hand, the title might offend our friends from the left, since it is seems to be making light of people's misery. I am sorry if this is the way it comes through, though that was not the intention. Indeed, Americans who have not gone through massive human suffering since the Great Depression might find it difficult to comprehend the scale and depths of the misery in many parts of East Asia today. In Korea, what are called IMF suicides are on the increase, in which male workers who kill themselves take their wives and children with them, a crime that Emile Durkheim would probably call altruistic homicide. And can any of you really imagine what it means on the ground to have your poverty rate rise, in slightly over six months, from 11.2 per cent of the population to over 60.6 per cent, as it has in Indonesia?
So instead of touching on the victims, a task which demands a whole speech to itself to be dealt with with the sensitivity and care it deserves, I would simply ask all of you to take it from me that what we have had in Asia is the social equivalent of a nuclear explosion, and many of those who have not gone under are going about like the walking wounded. Some of these wounded are people you might not expect to be suffering, like Indonesian President B.J. Habibie. But that Habibie is definitely suffering from a head wound is evident from his prescription last July that fasting was the way out of Indonesia's crisis. If one hundred and fifty million people fast, it will save the same amount that we would otherwise have to import this year, he said. He went on to say that it is a datum of science that fasting will make the blood circulating in the brain fresher and flow smoothly. Many great people, such as composers, painters, and scientists, who did not care so much for food made great discoveries. Let me assure you that these remarks were not meant to be tongue-in-cheek. So let me amend the title of my talk then to "Asian Financial Crisis: The Movie - Villains and Accomplices".
Villain of the Piece: Crony Capitalists or Foreign Speculative Investors?
Taking our cues from the US press, let us take the practices and institutions that are usually presented to the public as the villains of the piece. Let me quote a person that some of us in Asia consider to be B.J. Habibie's counterpart in the US, your Treasury Secretary Robert Rubin, who, to my horror, struck my younger daughter as 'cute' when she saw him on CNN the other night. In assigning the blame for the financial crisis, Mr. Rubin assigned pride of place to lack of information on the part of investors. In a speech he gave at the Brookings Institution last April, Rubin said:
[T]here are obstacles to getting good information about economic and financial matters. One is the temptation in the private sector and in government to avoid disclosing problems. But sooner or later, as we have seen in Asia, the problems will make themselves known. In many cases, lack of data meant that no one had a true understanding of this build-up or of these economies vulnerabilities.
This lack of transparency on the part of financial institutions went hand-in-hand with distorted incentives, lack of supervision, and the absence of so-called prudential regulation. All this is, in turn, part of a witches' brew of unsound and corrupt practices known as crony capitalism, which Larry Summers, who plays the Sundance Kid to Rubin's Butch Cassidy on nightly television these days.
Before going on, one might also briefly note here that this is a massive reversal of the view that held sway at the World Bank when Summers was that institution's chief economist in the late eighties and early nineties. For those of us who are too young to remember what the orthodoxy was then, let me cite the Bank's famous East Asian Miracle published in 1993:
"In each HPAE [high-performing Asian economy], a technocratic elite insulated to a degree from excessive political pressure supervised macroeconomic management. The insulation mechanisms ranged from legislation, such as balanced budget laws in Indonesia, Singapore, and Thailand, to custom and practice in Japan and Korea. All protected essentially conservative macroeconomic policies by limiting the scope for politicians and interest groups to derail those policies."
To repeat, economic policy making by Asian technocrats was largely insulated from political and business pressures, and this was a large part of the explanation for the so-called Asian miracle. Every mortal is, of course, entitled to an about face. But the problem with the latest intellectual fashion from the Summers' salon is that the practices of 'crony capitalism' were very much part of economic life in the three decades that East Asian countries led the world in the rate of growth of GNP. If, indeed crony capitalism was the chief cause of the Asian collapse, why did it not bring it about much, much sooner? How could economies dominated by these practices of rent-seeking that supposedly suffocate the dynamism of the market including Japan and South Korea even take off in the first place? Moreover, 'crony capitalism' has, in recent months, become so elastic in its connotations - which range from corruption to any kind of government activism in economic policymaking - as to become useless as an explanatory construct. It is one thing to say that corruption has pervaded relations between government and business in East Asia. It has, as it has in Italy or in the United States, where it is legalized through such mechanisms as 'political action committees' (PACs) that make politicians' electoral fortunes dependent on favorable treatment of corporate interests. It is quite another thing to say that corruption and its companions, lack of regulation and lack of transparency, constitute the principal reason for the downfall of the East Asian economies.
Now, in the light of the developments of the last two months, criticizing the crony capitalist thesis might strike those of you who have followed recent events closely as beating a dead horse. It is, but this dead horse deserves to be beaten and buried because it has a way of resurrecting in Dracula fashion periodically. Nevertheless, after the Russian crash two months ago and the collapse and bail-out of the hedge fund Long-Term Capital by the US Federal Reserve a few weeks ago, there is now little doubt that the central cause of the financial crisis was the quick, massive flow of speculative capital and bank capital into East Asia in the early 1990s and its even more massive and even swifter exit in 1997. And there seems to be little doubt as well that the multilateral institutions, in particular, the International Monetary Fund, played a key facilitating role by pressing the Asian governments incessantly to liberalize their capital accounts, in order precisely to encourage massive foreign capital inflows into their economies in the belief that foreign capital was the strategic factor in development.
Now, these funds came to Asia not because they were conned by crafty and dishonest Asian financial operators. Don't get me wrong, there are many dishonest financial operators in Asia. But that these western investors were conned or fooled? No, speculative investors came into Asia because they perceived the opportunities to gain greater margins of profit on financial investments here to be greater than in the northern money centers in the early 1990's, owing to the much higher interest rates, the low stock prices, and--not to be underestimated--the incredible hype created around the so-called Asian economic miracle.
The fact is, money was very eager to get into Asian capital markets in the early nineties, and whether or not the information was available, investors and fund managers were quite nondiscriminating in their moves into these markets. As Rubin himself admitted in a speech to us at Chulalongkorn University five months ago:
One of the things that has most struck us about the Asian crisis, is that after the problems began to develop and we spoke to the institutions that had extended credit or invested in the region, so often we found these institutions had engaged in relatively little analysis and relatively little weighting of the risks that were appropriate to the decisions.
The fund managers were going to see what they wanted to see. Not only did many not assess their investments and local partners or borrowers, but they actually made their moves mainly by keeping an eagle eye on the moves of other investors especially those with great reputations for canny investing like George Soros or Long-Term Capital's John Merriwether. But if there was little room or desire for serious analysis of markets in the entry phase, there was even less in the exit phase, as the rush of investment leaders communicated panic to one an all. Indeed, in the first months of the crisis, Stanley Fischer, the American deputy managing director of the IMF, was attributing the crisis, not to politicians or to lack of transparency or to crony capitalism but to the investors' herd behavior:
'[M]arkets are not always right,' he said. 'Sometimes inflows are excessive, and sometimes they may be sustained too long. Markets tend to react late; but they tend to react fast, sometimes excessively.'
Bangkok, for instance, was a debtor's rather than a creditor's market in the early 1990's, with so any foreign banks and funds falling over themselves to lend to Thai enterprises, banks, and finance companies, and they were willing to forego the rigorous checks on borrowers that western banks and financial institutions are supposedly famous for. The bad, indeed, shady financial history of the Thai finance companies was no secret.
In the 1970s and 1980s, many finance companies resorted to questionable business practices to raise capital, including widespread speculation and manipulation of stock prices, leading to the closure of some of them. Any neophyte in Bangkok's financial club knew this history. Yet, the finance companies were flush with foreign cash, oftentimes urged on to them by foreign lenders unwilling to forego what could turn out to be a goldmine. Throughout Asia, American Chambers of Commerce, foreign correspondents' clubs and expatriate circles were replete with stories of rigged bids, double or sometimes triple-accounting, false statistics, cronyism in high places, but everyone accepted that these were the risks of doing business in Asia; you had to live with them if you were going to have your share of the bonanza. In the end, what really serve as the ultimate collateral or guarantee for the investments foreign operators made in Asian enterprises and banks was the 6-10 per cent growth rates that they expected to go on far into the future. Now you might end up with some duds, but if you spread your investments around in this region of limitless growth, you were likely to come out a winner.
This brings up the role of strategic expectations and the role of certain players and institutions that encouraged and maintained those expectations. In other words, there was a whole set of actors that played a supporting but critical role, and the speculative investors were operating in a context where they were locked into mutually reinforcing psychology of permanent boom with these other players.
A key player here is much of the business press. Business publications proliferated in the region beginning in the mid-eighties. But proliferation alone is not adequate to convey the dynamics of the business press, since there was a also a process of monopolization at work. The Asian prosperity started attracting the big players, and among the more momentous deals was the purchase of the famous Far Eastern Economic Review by Dow Jones, of Asiaweek by Times-Warner, and of Star Television in Hong Kong by Rupert Murdoch. CNN, another Time Warner subsidiary, and CNBC also moved in, with much their programming devoted to business news.
Now, for the most part, these publications, whether they were independent or part of the big chains, highlighted the boom, glorified the high growth rates, and reported uncritically on so called success stories, mainly because their own success as publications was tied to the perpetuation of the psychology of boom. A number of writers writing critical stories on questionable business practices, alarming developments, or failed enterprises complained that they could not place their stories, or that their editors told them to accentuate the positive. Parachute journalism, a phrase applied to writers who flew in, became instant experts on the Vietnam War or the Philippines under Marcos, then left after filing their big stories, became a practice as well in economic journalism in the 1990's, with Fortune, Business Week, Newsweek, and Time setting the pace. It was parachute journalist Dorinda Elliot of the Newsweek staff, for instance, who, more than anybody else sanctified the Philippines' status as Asia's newest tiger during the Subic APEC Summit of November 1996: a status that lasted less than eight months, until the collapse of the peso in July 1997. Many of these business publications, in turn, developed an unwholesome reliance on a character type that proliferated in the region in the early nineties, the investment adviser or strategist--an 'expert' connected with the research arms of banks, investment houses, brokerage houses, mutual funds, and hedge funds. Indeed, in many instances, notes Philip Bowring, former editor of Far Eastern Economic Review, economic journalism degenerated into just stringing along quotes from different investment authorities.
Interestingly enough, many of these people were expatriates, some of them refugees from the collapse of stock markets in New York and London in the late 1980's. Some of them were Generation X or pre-Generation X types who had been too young to participate in the junk bond frenzy in Wall Street in the Reagan years but discovered similar highs in the East. Many of these people were as young as Nick Leeson, the 26 year old broker who brought down the venerable Baring Brothers, but to the reporters in the business press, their advice on going underweight or overweight in certain countries or taking short or long positions in dollars or moving into equities and out of bonds and vice versa were dispensed to readers as gospel truth. Now, this is not to say that all of these actors dispensed uniformly optimistic advice to investors playing the region. It did mean, however, that they could not afford to paint too pessimistic picture of any country in the region since after all their bread and butter came from bringing global capital into Asia.
Let me give you an example of how one of these expat experts, who was widely cited in the Economist, Far Eastern Economic Review, Financial Times, Reuters, and the Asian Wall Street Journal as the last word on the Asian investment scene, assessed Thailand in December 1996, when it was becoming clear to the rest of us mortals in Bangkok that the economy was in real deep trouble:
"We believe that current pessimism about the Thai economy is based on a number of key misconceptions. We do not believe any of the following:
- Thailand is entering a recession.
- Investment is collapsing.
- Export growth is collapsing.
- The Bank of Thailand has lost control.
- Current account deficit is unsustainable.
- Thailand faces a debt crisis.
- There is a chance that the Baht will devalue.
Economic prospects for 1997: expect a rebound."
Now, the reason that I quote Neil Saker of Singapore's SocGen Crosby Securities is that he is one of the best examples of the way markets operate in our part of the world. One would have expected that after such a massive misreading of the situation, he would have been run out of Asia by irate investors. But lo and behold, Saker was able to transform himself from the prophet of permanent boom into the prophet of doom after the financial collapse of 1997, this time issuing statements about how investors would be wise to go underweight in their investments in the region for a long time to come. Lately, he has again reinvented himself, this time as the prophet of the 'Asian recovery' advising investors to go 'overweight' in Thailand and Singapore, which so happened to move into recession on the day he issued his recommendation.
And, worse, he is quoted just as frequently today in the Financial Times, the Far Eastern Economic Review, Asiaweek, and the Asian Wall Street Journal. The market has such a short memory that it rewards charlatans instead of punishing them.
Academics: Bystanders or Accomplices?
But to lay the blame only on the business press and the investment advisers for the creation of an atmosphere of inflated expectations would not be fair. For the academic world played a key role. Indeed, it was economists and political scientists in the West, who when seeking to explain the high growth rates of the Asian countries from the 1960 on, formulated the interrelated propositions that an economic miracle had come about in Asia, that high growth was likely to mark the region in the foreseeable future, and that Asia would be the engine of the world economy far into the 21st century. What is even more amazing is that there was a remarkable consensus between the left and the right in the academic world that Asian growth was exceptional, though for diametrically opposite reasons. The right insisted that it was because of free markets, the left because of the role of the interventionist state.
Writing on why and how the tigers evolved and why Asia would be the center of the world economy in the coming century became big business, and here the most thriving business were those books that sought to equip Uncle Sam with insights on how to deal with those formidable Asians, like James Fallows' Looking at the Sun. Not to be left out of the boom, the security experts sought to cash in on the Asian miracle mania by writing on how Asian prosperity could produce either peace or war, with the most crass pop analysts writing on "The coming war with Japan", or 'The coming war with China', or, like Harvard's Samuel Huntington, on the long twilight struggle against the 'Islamic Confucian Connection'.
But whether they liked Asia or saw it as a threat, most academics and policy analysts believed in the long Asian boom. Now how Cornell fit into all this, I leave up to you to discuss and debate.
The few of us who dissented from this consensus were attacked by both sides. Our critique of the increasing stresses of the NIC growth model on account of collateral damage in the form of environmental devastation, the subjugation of agriculture to industry, the growing income disparities, and the growing technological dependency that was behind the creation of structurally determined trade deficits was dismissed by the right as well as the academic liberals center of as a case of 'sour grapes'. Indeed, I still remember how in 1994, during a debate at the Australian National University, Hal Hill, a prominent consultant to the Indonesian government did not meet the substance of my arguments but chose to attribute my pessimism to my supposedly looking at the NICs' experience through the prism of the failed Philippine development experience. But we were also dismissed by the academic left, who saw us as adhering to old-fashioned dependency theory or to obsolete variants of Marxism. Indeed, the most savage criticisms sometimes came from the left. To cite one example, a reviewer of Dragons in Distress in a progressive journal said that our prediction in 1990 that Korea's problem in a few years' time would not be how to enter the First World but how to avoid being hurled back into the Third World was simply laughable. I wish I could give you the name, but I've forgotten the reference.
In any event, the World Bank stepped in to serve as arbiter between the left and right interpretations in the early l990's and found merit on both sides of the argument--though more merits resided on the right than on the left. But what is particularly significant for our purposes here is that the Bank declared that, despite slight deviations here and there, the Asian tigers had the economic fundamentals right and were thus geared to enter a period of even greater prosperity. Since the World Bank is the equivalent in development circles of the papacy in the Roman Catholic Church, the World Bank book The East Asian Miracle, which came out in 1993, became a kind of bible, not only in the academic world but in financial and corporate circles, and the rush into Asia of speculative capital in the next few years must certainly at least partly tied to its thesis of Asian exceptionalism, to Asia as the land of the never ending bonanza.
So let me conclude by recapitulating my main points:
Crony capitalist practices pervaded Asian capitalism, but they were definitely not the cause of the financial collapse.
Northern finance capital was not conned into coming into investing in the region by dishonest Asian banks and enterprises that concealed the actual state of their finances. I mean they cooked their books but they fooled nobody. Portfolio investors and banks moved vast quantities in and out of the region, oftentimes without any real effort to arrive at an assessment of local conditions and borrowers and largely as a result of herd behavior.
The fundamentals of borrowers were often ignored in favor of what many investors and lenders saw as the real collateral or guarantee that they would eventually get a high rate of return from their investments, which was the 8-10 per cent growth rate of the country and the that was expected to extend far into the future. Now with such a perspective, you should expect to end up with some bad eggs among your debtors, but if you spread your investment around in this region of everlasting prosperity, you were likely to come out ahead in the end.
Also playing a critical role as accomplices in the Asian financial crisis were three institutional actors: the business press, the investment analysts, and, last but not least, the majority of academic specialists on the East Asian economies and political systems.
Let me end by saying that investors, journalists, investment analysts, and academics were locked into a psychology of boom, where growth rates, expectations, analysis, advice, and reporting interacted in a mutually reinforcing inflationary fashion characteristic of manic situations. Just as in the case of the Cold War lobby in the US, there was a whole set of actors that--perhaps half consciously, one must concede--developed an institutional interest in the maintenance of the illusion of a never-ending Asian bonanza so that, whether in the press, in the boardroom, or in the academy, alternative viewpoints were given short shrift.
But not to worry, many of the prophets of boom quickly adjusted and became prophets of doom or sanctimonious exponents of the crony capitalist explanation for Asia's problems. Many are coming through with their reputations intact and some are realizing that books on why Asia collapsed can be just as profitable as books on why Asia was going to be the driver of the 21st century during the boom. But, friends, I just realized that this only brings the story to July 1997, the day the floating of the Thai baht triggered the crisis. The screenplay to the sequel, from July 1997 up till today, still needs to be written, but for this part the story line is much clearer, with the IMF and the US Treasury, Japan, and Prime Minister Mahathir serving as protagonists. And how will the story conclude? That remains to be written by the peoples of East and Southeast Asia. I certainly hope that the ending of this film will see this whole sorry lot of speculators, crony capitalists, journalistic cheerleaders, charlatans masking as investment strategists, and wrongheaded academics get their just desserts.
[Walden Bello is professor of sociology and public administration at the University of the Philippines, and co-director of Focus on the Global South, a research and analysis institute in Bangkok, Thailand. He is the author or co-author of numerous articles and 10 books on Asian political and economic issues, including the Dragons in Distress: Asia's Miracle Economies in Crisis (London: Penguin, 1991) and the recently published A Siamese Tragedy: Development and Disintegration in Modern Thailand (London: Zed,1998).]
Figures from Faisal Basri, "Indonesia's Economic Crisis and Its Social Implications", paper presented at the Asia-Europe Summit NGO Conference, London, March 31-April 1, 1998.
Other references for this talk include "Praginanto, Poverty Spreads in Indonesia as Crisis Pummels Country", The Nikkei Weekly, July 1998, p. 20; Robert Rubin, "Strengthening the Architecture of the International Financial System", Speech delivered at the Brookings Institution, Washington, DC, April 14,1998; The World Bank, The East Asian Miracle (New York: Oxford University Press, 1993), pp. 348-349; Robert Rubin, "Remarks at the Sasin Institute of Business Administration", Chulalongkorn University, Bangkok, June 30, 1998; Stanley Fischer, "Capital Account Liberalization and the Role of the IMF", paper presented at the Asia and the IMF Seminar, Hong Kong, Sept. 19, 1997; Pakorn Vichyanond, Thailand's Financial System: Structure and Liberalization (Bangkok: Thailand Development Research Institute , 1994); Philip Bowring, comments at Seminar on Improving the Flow of Information in a Time of Crisis: The Challenge to the Southeast Asian Media, Subic, Philippines, October 29-31, 1998; Neil Saker, "Guest Viewpoint: Thailand Update: Market Pessimism is Over" Investment Review, December 31, 1996; "Confidence Returning to Asia, Says Report", Reuters, November 11, 1998. For Rightist analysis, see Anne Krueger, "East Asia: Lessons for Growth Theory", Paper presented at the Fourth Annual East Asian Seminar on Economics, National Bureau of Economic Research, San Francisco, California, June 17-19, 1993; Ian D. Little, Economic Development (New York: Basic Books, 1982); Helen Hughes, "East Asian Export Success", Research School of Pacific Studies, Australian National University, Canberra, 1992. For Leftist analysis, see Robert Wade, Governing the Market: Economic Theory and the Role of Government in East Asian Industrialization (Princeton: Princeton University Press 990); and Alice Amsden, Asia's Next Giant: South Korea and Late Industrialization (New York: Oxford University Press, 1989).