An article found by J. Fred Quinelly:
Asian nations turning away from capitalism
BY MICHAEL ZIELENZIGER
Mercury News Tokyo Bureau
TOKYO -- The sudden meltdown of Russia's currency and the volatile
swings of the U.S. stock markets have triggered a collapse of confidence in
the West's prescription for Asia's economic crisis.
Some Asian nations are closing their borders to currency speculators. Others
are intervening massively in their stock markets to prop up battered prices or
raising tariffs to protect domestic companies. Still others are beginning to defy
International Monetary Fund demands for fiscal austerity by boosting deficit
spending.
Taken together, these moves suggest Asia is losing confidence in the
free-market medicine the IMF and the United States have advised for the
ailing global economy. Asian officials and some Western economists argue
that nations have no choice but to try to defend their economies from currency
speculators and other predators.
But if more Asian nations begin restricting currency trading, intervening in their
markets and tightening foreign trade, foreign investors may grow even more
reluctant to invest in the region and American and other companies will find it
even harder to sell their goods and services in Asia.
''Across the region, the notion of transparent, open financial markets is taking
a real blow,'' said Bill Belchere, a currency and fixed-assets analyst for Merrill
Lynch in Singapore. ''To some extent, it seems we are moving back to the
1970s and a new era of protectionism.''
In Malaysia earlier this week, the government of Prime Minister Mahathir
Mohamad slapped new government controls on foreign exchange and
mandated new rules compelling foreigners to maintain their investments in
Malaysian stocks for at least one year.
On Wednesday, Mahathir went a step further, tying the Malaysian currency,
the ringgit, to the U.S. dollar and sacking Finance Minister and Deputy Prime
Minister Anwar Ibrahim, who had backed an IMF-supported policy of high
interest rates to defend the currency from speculators.
''People can no longer stay with the so-called free market system,'' Mahathir
said in introducing his new measures. ''They need to take some action which
is contrary to the philosophy or the principles of the free market.''
In Hong Kong, once Asia's showplace of no-holds-barred, laissez faire
capitalism, the government's Monetary Authority has spent an estimated $15
billion of its capital reserves since mid-August to buy stocks and defend the
currency from foreign speculators.
One indication of the massive extent of the government's intervention: The
city, now a Special Administrative Region of China, has become the largest
single shareholder in HSBC Holdings, owner of the Hongkong Midland Bank,
controlling more than $4.7 billion of the bank's stock.
''The fact that a government as wedded to free-market orthodoxy as Hong
Kong would intervene in the equity market represents a potentially important
turning point in the Asia crisis,'' wrote economist David Hale of the Zurich
Insurance Group in Chicago in an Aug. 19 paper.
In Japan, where efforts at bank reform and economic stimulus are stalled in
parliamentary bickering, the government appears to have been quietly using
government pension funds to buy up shares in the market, effectively boosting
the Nikkei stock exchange.
Without a rise in the beleaguered stock market, many Japanese banks would
be forced to liquidate even more of their assets to help boost slumping
balance sheets. Such sales, in turn, could promote another round of falling
stock prices, triggering yet more asset sales.
In South Korea, where President Kim Dae Jung has publicly supported
IMF reform plans in exchange for more than $58 billion in loans, the
government agreed this week to spend some $4 billion it technically doesn't
have to jump-start domestic investment and create jobs for an estimated 7.6
million unemployed workers.
''It is clear that we now need a more aggressive fiscal policy to stimulate
domestic demand,'' You Jong Keun, economic adviser to Kim, said during a
visit to Tokyo this week. ''The amount of Japanese foreign direct investment
into our country has been shameful, and no matter what we do, this year is
going to be very, very painful.''
Thailand has raised tariffs slightly on steel products and delayed a planned
liberalization of trade in auto parts.
The Philippines has raised tariffs on 22 products so far this year, according
to Hale's paper.
Analysts say the sometimes desperate actions some Asian governments are
undertaking reflect how poorly the cures promoted by the United States and
the IMF have worked.
''There's a frustration with the slowness of the progress here in Asia, because
we've broken through all the firebreaks that are supposed to contain the next
global recession,'' said Belchere, who once worked for the Bank of
Indonesia. ''We've blown through Southeast Asia and South Korea; we've
blown through Japan. Now Russia has fallen apart.
''What we really have now is a crisis of IQ. Nobody knows where it is going
next.''
The orthodox approach advocated by the IMF and endorsed by the Clinton
administration promised that fiscal austerity, floating exchange rates and
dramatic financial reforms to clean up ailing banks would help Asian countries
regenerate growth by kick-starting their ability to export and restoring the
confidence of foreign investors. A cheaper currency, economics textbooks
say, makes it easier to sell goods abroad, earning Asian nations much-needed
foreign currency.
Although many of the region's currencies have dropped dramatically, export
growth in East Asia has been modest, however, and most of the trade
surpluses Asian nations are generating have come not from rising exports but
from the collapse of imports.
''Everybody around the region is crunching imports,'' Belchere said. ''They're
not buying.''
South Korea's statistics demonstrate this most vividly. Although the Korean
currency, the won, has fallen nearly 50 percent against the dollar in the past
year, exports of Korean-made goods have declined 1 percent for the first
eight months of 1998.
The only reason South Korea has recorded a $25.39 billion trade surplus so
far this year is that imports into Korea have fallen 37.3 percent. Koreans have
simply stopped spending for foreign-made goods. If this trend holds, officials
said, South Korea's exports will decline in 1998 for the first time in 40 years.
This same pattern is evident in Malaysia, Thailand and Japan, and contracting
imports mean slower growth throughout East Asia, which has long depended
on exports to fuel its economies. American manufacturers that had counted on
expanded sales to Asia in their rosy profit forecasts for 1999 also are feeling
the squeeze.
Now a series of economic reverses has left Asian governments with little
choice but to re-evaluate their survival strategies amid rising fears of a global
economic meltdown.
In particular, other Asian leaders had counted on Japan, by far Asia's largest
economy, to help bail them out of difficult economic straits by importing
goods from other Asian nations. But Tokyo so far has proven unable to
deliver because of its home-grown economic debacle.
Then they hoped for continued strong growth from Europe and the United
States to boost demand for Asian exports and to cushion the blow of
currency devaluations and rising unemployment.
But Wall Street's monthlong nose dive, culminating in Monday's more than
512-point swoon in the Dow Jones industrial average, highlights that
America's robust growth is slowing. The collapse of Russia's ruble has not
eased any fears, nor has the refusal of the U.S. Congress to provide new
funds to the IMF.
''If the Wall Street panic cuts American growth, there is a danger that
American and European imports may shrink significantly,'' said South Korea's
You, an American-trained economist. ''If that happens, we are in for a very,
very serious situation.
''If foreign demand collapses, we may be falling through a bottomless pit.''
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