Of bailouts and slowdowns
Monday, July 13, 1998
By Peter Cook
Brussels
Brussels -- In the front lines of the global economy, it is a good time to keep your head down and your helmet on.
European financial markets spent the tail-end of last week contemplating Russia's demand for a $15-billion (U.S.) package from the International Monetary Fund, a sum that has become the latest agreed price for rescuing the country from its government's incompetence. The figure having been arbitrarily set in Moscow, everything -- including the health of the German mark -- was held hostage to the amount being delivered.
Apparently, players in financial markets saw nothing strange about this. Indeed, by Friday, the argument had widened to the point where it had turned into an exercise to defend the mark as much as the ruble.
Yet, the IMF is supposed to be an institution that lends only what it can recover, and Russia's economy is a sinkhole. Yes, the Sergei Kiriyenko administration in Moscow may join past ones in saying that Russia, given enough money, will change. But behind that promise stands only an erratic president who fires governments at will, a hostile Duma, a bunch of previous promises -- and no record of change.
Russia, the pundits say, must be helped because it has nuclear warheads. But what, then, can be said of Asia, which needs help, gets it, then pursues its own quirky path to salvation?
In yesterday's election for the Diet's upper house in Japan, a Clinton administration that so recently and overtly came to the aid of Prime Minister Ryutaro Hashimoto had almost as much at stake as the ruling Liberal Democrats. The basis on which Washington intervened to support the yen was that Mr. Hashimoto would act vigorously to clean up bank lending, force corporate bankruptcies and permanently cut taxes. Yet, the view taken by the electorate is that for a Japanese government to kowtow to the Americans in this fashion was not good. Forget that the result of doing what the Americans want would be beneficial. The polls show Mr. Hashimoto will be lucky to get his majority.
A similar quirkiness emanates from East Asia where governments have decided that the usual IMF-prescribed regimen of austerity that goes with costly balance-of-payment bailouts is not for them.
South Korea intends to cut taxes and raise public spending by a massive amount. Malaysia has put so much money into housing and social projects that its currency is coming under pressure, and rates will have to rise. Indonesia is watching Malaysia with interest but, with a budget deficit of 8.5 per cent of gross domestic product, does not dare follow yet. In both Malaysia and Indonesia, a switch in policy is easy to make because the crisis is widely seen as a foreign conspiracy; if western currency speculators did it, why the need for local austerity and pain?
Plainly, it is difficult for countries that have known rapid growth to get used to the idea that they cannot grow their way out of a financial crisis. At some point, a measure of fiscal and monetary rigour is required. The IMF knows whereof it speaks. It is expansionist policies that got Asia into a mess in the first place.
Compared with the risks being run in Russia and Asia, the notion of an impending slowdown in the West may appear a small matter. Yet, it is an essential part of any solution that demand in the West should stay strong enough to accommodate a shift in Asia from a $55-billion (U.S.) payments deficit this year to a $40-billion-to-$60-billion surplus next year. Without that, or if restraints are put on it, Asia's return to solvency will take longer. Nor is this process just a matter of book-keeping. It represents a real transfer of economic activity and jobs, from West to East.
The politics of such a transfer are difficult enough when economies are doing well. They are likely to become more complicated if, as forecasts are showing, a reduction in manufacturing activity and a buildup in stocks in the West are followed by poorer profits and lower consumer spending.
There are various gradations of risk. In Europe, Britain has high interest rates and a manufacturing sector already in recession, while activity is slowing in Germany, France and Italy. In the case of the U.S. economy, a survey by the National Association of Purchasing Managers suggests the first stage, a manufacturing slowdown, has arrived. This has yet to hurt domestic demand or the stock market unduly. But there are increasing numbers of economists who say that it will, and that an expansion that has lasted for seven years is set to slow dramatically.
Economists at Chase Manhattan Bank in New York think that by the fourth quarter, the year-over-year growth rate will be down to 1.5 per cent (from 3.7 per cent last year). The reasoning behind it is not that the United States will experience rising inflation and a credit squeeze, like Britain. It will come instead from a decline in external demand producing a fall in goods output (which it already has), then in asset prices and personal consumption (still to come). To be sure, a slowdown is not a recession. But with the rest of the world putting so much faith in a continued U.S. expansion, it will be felt.
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