The economics of a crisis

Ulhas Joglekar ulhasj at
Wed Feb 7 17:10:13 MST 2001

Volume 18 - Issue 03, Feb. 03 - 16, 2001

The economics of a crisis


Crisis as Conquest: Learning from East Asia by Jayati Ghosh and C.P.
Chandrasekhar; Orient Longman, Tracts for the Times No. 12, 2001; pages 137,

THE International Monetary Fund (IMF) has declared that the East Asian
crisis is over; they fixed it. Many people in the affected countries feel
differently. Economies are still fragile, politics is turbulent, and the
social fallout is all too evident. Although an enormous amount has been
written on the crisis, its origins are still controversial and its
consequences not yet clear. Jayati Ghosh and C.P. Chandrasekhar have written
a concise and elegant account, designed to highlight the important lessons
for India. It concentrates on Korea and to a lesser extent on Thailand, and
sets the whole event in a global and historical context.
The theme is announced by the title and by an opening cameo. In the wake of
the crisis, the United States auto giants are gobbling up the Korean
car-makers who had offered one of the few successful challenges to Western
multinationals over the last quarter century. "To revise a famous phrase, a
spectre is haunting Asia: the spectre of imperialism."
The authors first set the crisis into its global background. They argue that
the key features of the globalisation of the past two decades were not
rising levels of cross-border trade and investment, but the concentration of
capital on a world scale in the hands of a few multinationals and the
outrageous growth of speculative finance. The financial markets are now
massive, unregulated, entangled and obscure. They have a frightening
capacity to generate vulnerability ('sentiment') and to transmit it across
the world ('contagion').
The authors then turn to the countries affected by the crisis. The crisis
began, they argue, with the dramatic fall in export growth rates in 1996.
This fall happened because too many Asian countries were pursuing
export-oriented industrialisation in the same range of export goods (mainly
electronics). The export slow-down triggered rising current-account deficits
which spooked the international financial markets, leading to capital
withdrawals and attacks on the currencies.
This capital flight had a devastating impact because the levels of private
corporate debt were so high. The authors relate this back to the
export-orientation strategy, which had a built-in tendency towards trade and
current account deficits. The electronics industry and other boom
industries required high levels of component imports. Increasing levels of
foreign ownership meant rising outflows of profits. Trade liberalisation
restricted the government's ability to choke consumer imports. So countries
which went for the export-industrialisation strategy found that they needed
capital inflows and were all too easily tempted by the World Bank/IMF's
encouragement to liberalise their financial markets. Policy-makers saw
financial liberalisation as a means to cover the widening current account
deficit, without fully appreciating the fact that they were making the
economy more vulnerable to currency attack, capital flight and crisis.
Finally, the IMF converted a handful of loosely related national crises into
a full-blooded international mess. It applied its old-fashioned recipe of
severe deflation (involving tax increases, budget surplus, tight money), and
dogmatically resisted any suggestion that financial liberalisation should be
compromised in order to moderate panic capital flight. It also offered only
half-hearted help because, in contrast to Mexico, the countries involved
were not central to U.S. global economic thinking. Capital flight
accelerated and became self-sustaining. The affected economies went into
sharp reverse. Unemployment soared and bankruptcies multiplied. Companies
were gutted of capital, making them easy prey to foreign buy-out. More
'mergers and acquisitions' (smooth talk for expropriation) took place in
crisis-hit Asia in 1998-99 than ever before.
The authors then make three main points about the aftermath. First, the IMF
bail-outs have left these countries with huge public debts and a great
vulnerability to fiscal crisis, which in turn makes them easily tempted by
new offers of fast money and in time to new possibilities of financial
panic. Second, such crises have now become the normal state of affairs in
the world. Mexico had one before the Asian event. Russia and Brazil have had
them since. And after the authors sent this book off to the publisher,
Turkey and Argentina have been added to this dreary list. Third, financial
instability has contributed to a decline in world economic growth, but
international finance has beaten back the pressure for controls. So
"financial volatility and subsequent real economic decline have become
typical features of the world economy in the current phase".
THE authors trace the meaning of the crisis for development economics. In
the era of anti-imperialist reaction, development economists argued that
countries would have to insulate themselves from big country domination in
order to create the space to grow. The apparent success of East Asian
industrialisation with open markets punctured that idea. The 'Miracle' was
trumpeted as a replicable model. But, the authors argue, the crisis must
puncture this enthusiasm. First, because if everyone tries to export the
same industrial goods then it will result in saturation. Second, because the
strategy creates an illusion of independent industrialisation, when the
reality is a highly dependent, possibly temporary phase of industrial
relocation. Third, because the export strategy leads countries down a
slippery slope to financial liberalisation and extreme vulnerability.
Fourth, because reality sets in when the crisis hits, capital flees, and the
baddies arrive to buy up the debris with beads. This chapter is the high
point of the book and worth reading by those who think there is nothing left
to know about this over-written event.
The authors' analysis has the great strength of concentrating on the
economics of the crisis. We agree with them in the main. But we wonder if
their approach does not miss some of the political economy of the event.
Take the issue of the origins of the crisis. Academics in East Asia and
South East Asia have divided themselves into two camps. Members of the first
camp draw from theory about finance capitalism and argue that Asian
countries made the fatal mistake of liberalising their financial markets at
a time when there was excess liquidity in the advanced markets. Members of
the second camp adapt theory about overproduction crises and argue that the
Asian countries were simply the weakest link in a typical capitalist
downturn on a world scale.
The authors want to link these two into one argument. The Asian countries'
pursuit of export-led growth led both to a (regional) overproduction crisis
and to the decision to open up financial markets. We suspect this is a bit
too neat. The question why these countries adopted financial liberalisation
is being properly researched only now. We agree with the authors that you
cannot simply blame it on World Bank/IMF advocacy. We also agree that the
pursuit of export-led growth predisposed countries to accept financial
liberalisation to counter current account strain. But we suspect that there
was more behind the decisions. Why did Korea opt for financial
liberalisation some 20 years after adopting export-led growth, while in
Thailand the lead time was only three years? Why were the decisions taken
in the late 1980s, when economies were growing at miracle rates? The really
bad current account deficits only emerged after financial liberalisation had
subjected these economies to 'shock' capital inflows five to ten times
higher than previous levels. We think you have to look at the political
coalitions driving policy change. In the Thailand case, there was a
coalition of technocrats and rising new businessmen who saw financial
liberalisation as a way to circumvent old business oligopolies. Ha-joon
Chang's analysis of Korea runs along the same lines. These policy coalitions
were not just the handmaids of economic forces lurking in the national
In looking at the IMF stabilisation programmes, the authors concentrate on
the macroeconomic part. But one important element of this crisis was that
the IMF went far beyond its usual macroeconomic measures. It attempted to
push through changes in financial systems, legal systems, labour practice
and social welfare. In other words, political engineering. These 'reforms'
constituted another form of shock. In the case of Thailand and Indonesia,
this pressure converted turmoil in the banking systems into total collapse
of the credit market. This has had as much of a role in delaying recovery as
the enlarged public debt on which the authors concentrate. The point is that
these extra IMF conditions were mandated by the Washington policy
establishment (Rubin, Summers, Greenspan, Barshevsky). This establishment
saw the crisis as an opportunity to re-establish U.S. political influence in
a region which the Americans had 'lost' to the Japanese after the Vietnam
war defeat in 1975. They also saw the crisis as an opportunity to open up
the highly dynamic Asian economies to much greater involvement by U.S.
companies. These interventions were motivated by a naive perception of Asian
economies and a total faith in U.S. power to re-engineer economic, political
and legal systems. The authors draw attention to the concentration of
capital on a world scale and the imperialistic consequences of the process.
But there is also a concentration of political power on a world scale, with
similar results. Although the two processes are clearly related, it is not
a simple identity. The U.S. policy establishment's actions are framed by
ideology and by perceptions of national self-interest.
THIS brings us to the main issue. The climax of this book is the final
chapter entitled 'Policy implications for India'. We fondly remember that in
late 1997 one of the authors contacted us and conveyed India's thanks to
Thailand for crashing so badly that the World Bank had reluctantly tempered
its pressure on India to liberalise its capital account. Now the World
Bank/IMF has proclaimed that the Asian crisis is over, it was not really so
bad after all, and they fixed it beautifully. The authors have rightly
started to get worried that the pro-liberalisation pressure on India will
re-emerge both inside and outside the country.
So what can India do? The current slow growth rate provides the
pro-liberalisers with a strong argument for change. Earlier, the authors
suggested that India should devote more attention to industrial exports, if
only to push India's industrialists to adopt world-standard technology.
Here again they emphasise that "Successful capitalist industrialisation
cannot occur in a context 'insulated' from world markets". They want to find
a path through the liberalisation minefield which reaches the promised land
of sustained growth without being blown up first.
Their solution has three parts. First, India should replicate the
mercantilist export strategy of Korea and Taiwan - picking export sectors
and then concentrating resources so that Indian firms become
world-competitive. This must be done through some variant of East Asia's
guided capital markets, and so financial liberalisation must be delayed. It
will require a strong state to discipline and direct the industrialists.
Second, India also needs to copy Taiwan-Korea's land reforms which will
destroy the political support for old policies, ensure that the benefits of
export growth are not all captured by a minority, and deliver savings growth
so that India can avoid the dangerous dependence on international capital.
Third, India needs to retain much of i ts command economy (especially import
controls and public distribution) to ease the strains of transition.
This model is partly inspired by China, and the authors take a wistful
glance at China's recent growth rates. This strategy is only imaginable for
countries that have a huge internal market, a strong state, and most of
their defences against globalisation still in place.
The question is: where is the political coalition to support such a
strategy? At present, there seems to be a polarisation. Political and
industrial elites are gathering inside Fortress India, and throwing up
nationalistic walls. Outside, the liberal reformers are massing to lay
siege with fancy weapons acquired from the economic arms trade - the heavy
artillery stamped with the initials of the World Bank, the World Trade
Organisation and the IMF, the small-arms fire of business school textbooks,
and th e missiles of international finance. The Trojan horse on the inside
is likely to be much the same policy coalition which supported
liberalisation in East and South East Asia - the technocrats with U.S.
degrees, the new businessmen attracted by cheap capi tal and decontrol, and
political opportunists. How to stop them?

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