KUALA LUMPUR/SEOUL (Reuters) – A decade ago, Federal Reserve Chairman Alan Greenspan declared that Asia would realize that “market capitalism, as practiced in the West, especially in the United States, is the superior model.”
Asia never quite saw it that way. Now the region’s policymakers can feel that the collapse of Wall Street investment banks and Washington’s planned $700 billion bailout vindicated their suspicion of freewheeling capitalism.
The implications for investors in the region are enormous, if not immediately obvious. Governments may slow deregulation, rush to rescue of troubled companies or clampdown more quickly on market ructions.
Greenspan made his comments to U.S. lawmakers to justify a bailout for Asia’s collapsing economies during the 1997/1998 crisis. He is now in the dock, charged by some economists with pursuing a lax monetary policy and loose regulation that helped create the bubble that led to Wall Street’s financial implosion.
Asian policymakers have not forgotten the hectoring they got from the United States and the International Monetary Fund, which dispensed cash in exchange for hiking interest rates, closing banks, slashing spending and opening markets.
“At that time, (IMF and U.S. officials) behaved as if they were treating an owner of a small business just about to go bankrupt,” said Chung Duck-koo, chief South Korean negotiator with the IMF in 1997, when he was a deputy finance minister.
Malaysia, which spurned both the cash and the IMF advice by fixing the value of its ringgit currency and imposing capital controls back in 1998, sees Washington’s rescue efforts as proof it had converted to its way of thinking.
“We are now seeing the West, particularly the U.S., ignoring the standard IMF prescriptions and implementing the same measures that Malaysia had done during the 1997 crisis,” said Nor Mohamed Yackop, a top Malaysian finance ministry official, who in 1998 helped impose capital controls.
Ten years ago Asia was on its knees as a financial meltdown rocked the region after a series of crises in Latin America that later bankrupted Russia. Despite high growth and low inflation, Asia’s tiger economies succumbed due to overvalued exchange rates, persistent current account deficits, speculation in financial markets and dependence on short term capital.
Most countries applied the IMF’s bitter medicine and consequently South Korea’s economy shrank 7 percent in 1998, Indonesia contracted by 13 percent and Thailand by 10.5 percent, according to the Fund’s data.
But the region recovered quickly, amassing in the process trillions of dollars in foreign currency reserves, first as defense against another crisis and later thanks to windfall profits from the global commodity boom.
Ironically, much of those reserves are invested in U.S. Treasury bonds, bankrolling Washington’s efforts to contain today’s crisis, with the latest plan to buy toxic debt alone earmarked at $700 billion and the total cost estimated at up to $1.8 trillion.
The irony is not lost on nations that took draconian steps in return for $35 billion the IMF initially offered in 1997 to rescue Indonesia, South Korea and Thailand and later topped it up with extra $77 billion.
Critics say the “Washington Consensus,” a term referring to the market liberalization pursued by the IMF and the U.S. administration, has led to today’s meltdown.
“It was so patronizing, first it was the lazy Latinos, then it was the corrupt Asians and their crony capitalists,” said Professor Stephany Griffith-Jones, a leading authority on capital flows and developing economies.
“The lesson is you need to regulate everything. Any deregulated market in developed and developing countries leads to these results,” said Griffith-Jones, Executive Director of the Initiative for Policy Dialogue at New York’s Columbia University.
BUBBLES TO STAY
Others, however, say the IMF-bashing goes too far and that the crises that rocked Latin America and Asia were largely of their own making.
They also argue that it is impossible to staunch the capital flows that finance growth in many developing economies.
“No doubt capital markets have plenty of problems, often they generate these bubbles. The bubble explodes and then there is a financial crisis,” said Domingo Cavallo who was Argentina’s finance minister from 1991-1996.
“So far there has been no recipe for avoiding these problems,” said Cavallo, who was the architect of Argentina’s plan that fixed the dollar-peso exchange rate at parity, crushing inflation and boosting growth and investment.
“We thought it was good for Latin America, it was not an imposition of Washington.”
South Korea’s Chung says rich nations may tighten regulation and see more government intervention, but developing countries can ill-afford to reverse to pre-1997 policies.
“In developing or underdeveloped countries, in which each government has the mission to improve overall welfare and overall income level, there is no choice for them but to continue to accept and pursue globalization.”
Paul Luke, an investment banker and fund manager who lived through emerging market crises from Brazil in the 1980s to Russia in 1998, says those who ignored the IMF advice, not those who followed it are now at the center of the global upheaval.
By David Chance and Yoo Choonsik
“A lot of the countries that have followed it are countries that have done rather well,” he said.
“It is two countries in the Organization for Economic Co-Operation and Development, the U.S. and Britain, who haven’t been following the Washington Consensus.”
(Writing by David Chance, editing by Tomasz Janowski)