>The attached appeared in the Indian newspaper, _The Hindu_ on
Dec. 12th.
A lost decade for Asia?
Date: 12-12-1997
By Ravi Arvind Palat
Just as the 1982 debt crisis showed the exhaustion of an
inward looking, import substitution industrialisation strategy, the 1997
meltdown signals the unviability of the vaunted Asian models.
WRITING in the Financial Times on November 27, Mr.
Stephen Fidler, the paper's editor for Latin America, wondered whether
the current crisis of the Asian economies denoted the beginning of a
``lost
decade'' of development for the region much as the 1980s were widely
held a lost decade for Latin America.
The parallels between the contemporary fiscal crisis
afflicting the ``miracle'' economies of Asia and the Latin American
debt crisis of the 1980s are indeed striking. In the 1960s and 1970s,
Argentina, Brazil and Mexico were the models held up to be emulated
by other developing countries. Larger than any of the economies that
would later be called the ``Four Dragons'' (Hong Kong, Singapore,
South Korea and Taiwan), and fuelled by cheap loans from international
currency markets, these Latin American economies posted impressive
rates of growth. Encouraged by the World Bank and the International
Monetary Fund, their Governments invested borrowed funds in massive
``Think Big'' investments in steel and heavy industries, in armaments
and resource extraction, in automobiles and other consumer goods.
On the assumption that they could increase exports based
on their lower wage and raw materials costs, it was envisaged that they
could repay the loans with their export earnings. Expanding industrial
employment also enabled them to offer good jobs to their subject
populations and hence win popular support for military dictatorships
and one-party regimes. Flush with petro- dollars, major Western banks
were also eager to lend to these newly-industrialising countries as
they soaked up their excess currency reserves and sovereign bankruptcies
were unthinkable at the time.
Once these cheap sources of loans dried up, these
economies crumbled like a house of cards. Beginning with the Mexican
debt crisis of 1982, one after another, the Latin American ``miracles''
experienced deepening balance of payments crises, falling foreign
investments, collapse of their export markets and industrial decline.
Similarly, beginning with the fiscal crisis of Thailand
on July 2, stock and currency markets in Malaysia, Indonesia, the
Philippines, South Korea and Hong Kong have taken a battering as
investors scramble to rid themselves of assets in currencies
depreciating
rapidly. Aggravating situation, continent-sized clouds from the fires
raging out of control on the islands of Borneo, Java, Sulawesi and
Sumatra have plunged Kuala Lumpur and Singapore into semi-darkness
and contributed to the crash of an Airbus, killing 234 people.
And matching the popular revolts against the
authoritarian regimes in Latin America, the Asian Governments
have begun to tumble. The ability of many governments in Asia to
ride roughshod over their domestic opponents was based in part
on their ability to deliver material prosperity.
As this ability is eroded by the current crises, popular
protests will increasingly challenge authoritarian rulers. In Thailand,
the Yongchaiyudh Government has already fallen. The ruling party in
Taiwan has suffered its worst-ever showing in the municipal elections
and the crisis has inserted an unusual degree of uncertainty to the
December 18 South Korean presidential elections.
Even a temporary deceleration in rates of growth in
countries which have not known an economic depression for 20-30 years
will also surely heighten ethnic tensions, between indigenous
Indonesians and Malays, on the one hand, and the ethnic Chinese who
control a disproportionate share of the national income, on the other.
Already in Indonesia, the murder of a girl by a half-Chinese man in
September has led to the burning of Chinese temples, looting of their
shops and several deaths.
Despite these parallels, comparisons between the current
crisis in Asia and the crisis of the 1980s in Latin America are
superficial.
Though both the Latin American states and the Asian ``miracle''
economies
were dependent on foreign capital to generate high rates of investment,
loans were incurred by governments in Latin America and by banks and
private
companies in Asia. This makes it much harder to impose discipline on
the Asian economies as it is easier to rein in or punish a handful
of governments than a myriad of corporations.
More importantly, because of the inward-looking, import-
substituting nature of the Latin American economies, their industrial
structures were relatively autonomous and firewalls could quickly be
instituted to prevent the contagion from spreading. No such remedy is
possible for the highly interdependent economies along Asia's Pacific
Rim.
Production operations may be located in Thailand, Indonesia or Malaysia,
but these are invariably controlled by Japanese, South Korean or
American
companies through their extensive subcontracting networks. A Thai
company
may make radiators for Toyota cars, but it has neither the market
intelligence nor the expertise to change its production lines and is
hence
dependent on Toyota.
Even if seven of the 30 largest South Korean
conglomerates have sought bankruptcy protection since the beginning of
this year, no one is even suggesting that Hyundai, Daewoo or Lucky
Goldstar would collapse. These conglomerates with their highly
diversified
interests also have large production facilities in Western Europe,
North America, Latin America and elsewhere.
Whereas the Latin American miracles were launched with
foreign loans, inflows of foreign capital into the miracle economies of
Asia increased only after the mid-Eighties, after their
industrialisation
drive had been well under way. As overseas investors sought to cash in
on the
growth of these economies, they borrowed at low rates in international
currency markets as loans taken out at two per cent in New York or Tokyo
can
typically earn eight to 10 per cent in Thailand or Malaysia. Even if
large chunks of this money were chanelled into speculative activities,
Mr.
David Hale, chief economist for the Zurich Insurance Group, estimates
that
Thailand, South Korea, Indonesia, Malaysia and the Philippines have
accounted for almost half the growth in world manufacturing output since
1991.
Given this extraordinary expansion in industrial
capacity, it is a mistake to treat the great 1997 meltdown as a
fiscal crisis brought about by badly run and poorly supervised
banking systems and overvalued exchange rates as the IMF and most
analysts do. Undoubtedly, there was a lack of fiscal probity:
lending based on political connections of entrepreneurs rather than
on the credit-worthiness of their projects and downright illegal
practices
such as risky loans being kept off the books.
A much bigger problem, though, is that the lowering of
tariffs and regulations across the globe makes it imperative for
every major company to maintain a presence in every market. Every
automobile manufacturer, for instance, tries to produce and sell
cars in every major market and as factories produce more cars than
people can buy, prices fall. It leads to falling profits and plant
closings which in turn reduce demand even further and a chain reaction
sets in.
Nowhere is this truer than in the miracle economies of
Asia. With the rapid growth of these economies, major American, European
and Japanese corporations competed fiercely to capture a share of
their growing markets. If the current crisis has led to sharp declines
in sales and idle factories, their capacities remain intact.
As the currencies of the ailing Asian economies
depreciate under the IMF-receivership, their products will become
cheaper
and will not only make Asian exports more competitive in the world
market
but also sharply curtail their imports of foreign goods.
Hence, far from being a ``lost decade,'' the next few
years could more reasonably be expected to lead to a further boom in
industrialisation in East and Southeast Asia and to a corresponding
growth
in unemployment in Australasia, North America and Western Europe as
companies shift their manufacturing operations to take advantage of
lower
wages in Asia. But this does not mean that there will not be fundamental
changes in the Asian economies. As the price of the IMF-led bailout is
surely
structural reform, governments in the region will no longer be able to
practise ``crony capitalism.'' Increasing control by global corporations
of large sectors of their economies will preclude governments from
formulating and implementing a coordinated national development strategy
and undermine the role of agencies such as Japan's Ministry of
International Trade and Industry and South Korea's Economic Planning
Board.
In this sense, and in this sense only, the comparison
with the Latin American debt crisis is on the mark. Just as the debt
crisis of 1982 finally showed the exhaustion of an inward-looking,
import-substitution industrialisation strategy, the 1997 meltdown
signals the unviability of the vaunted ``Asian model.''
(The writer is Senior Lecturer, Sociology Department,
University of Auckland, New Zealand.)