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Rubin Prescribes Bitter Medicine for Asia
By Paul Blustein
Washington Post Staff Writer
Thursday, July 2, 1998; Page E01
SEOUL, July 1-Treasury Secretary Robert E.
Rubin boarded a plane for home tonight after a
whirlwind tour of Asian countries ravaged by
financial crisis, at a time when the region's
economic woes have been deepening rather than
abating.
At every stop, Rubin defended the international
bailout packages for Asia that he played a key
role in marshaling, and the accompanying
requirements for countries to adopt painful
measures to restructure their economies.
"The only path that is going to lead countries back to growth and stability --
albeit only after a period of difficulty -- is a path of strong reform," he said
Tuesday at a news conference in Bangkok.
But Rubin departed on the eve of a dismal anniversary: The Asian financial
crisis began a year ago, on July 2, when Thailand devalued its currency, the
baht, under overwhelming selling pressure from foreign exchange traders.
And since then, despite the more than $100 billion in rescue packages
extended to three of Asia's hardest-hit economies, the region has failed to
recover and, by some reckonings, is deteriorating dangerously fast.
Asian stock markets and currencies, which appeared to be rebounding
earlier this year, have plummeted anew over the past couple of months.
Bankruptcies and joblessness have been rising. Many analysts are voicing
fears that the region's economies are worsening under the austerity and
high-interest-rate policies that the International Monetary Fund -- with the
Treasury's blessing -- has demanded in exchange for the rescue packages.
"This isn't a typical cyclical downturn. I'm beginning to think this could be
the kind of event that happens every 40 or 50 years," said Sun Bae Kim,
regional economist at Goldman Sachs & Co. in Hong Kong, who calculates
that the economies of South Korea and Malaysia shrank at staggering
annual rates of 15 percent to 25 percent in the first quarter compared with
the previous three months. "There is an increasing risk that Asia is going to
get into a vicious cycle of higher interest rates, a sharper crunch in the
economy, more bad loans, and banks getting even more cautious about
lending -- so the whole spiral repeats itself."
The concern is one that Rubin found himself confronting often on his trip as
he hopped from one crisis-stricken country to another.
In Malaysia, for example, Rubin met business executives who warned that
although their country is not actually borrowing from the IMF, the
tight-credit policy that the Malaysian government adopted under the fund's
guidance is threatening to strangle the economy by forcing even sound
companies into bankruptcy.
The prime lending rate in Malaysia has soared from single digits to about 17
percent. And although that's lower than many other countries in the region,
few businesses if any can afford to borrow, and banks are afraid to lend for
fear of increasing their bad loans and running afoul of regulators.
"Everything the IMF says sounds fine -- bad companies should go; good
companies should stay," said P.K. Lim, chief executive of Multipurpose
Bhd., a Malaysian banking and construction firm, who participated in a
meeting with Rubin in Kuala Lumpur on Monday. "But after all that,
where's the money? An eco nomic system cannot work without liquidity."
Such complaints, of course, hardly come as news to Rubin, who for some
time now has been fending off critics of the IMF's approach back home in
the States. In the past couple of months, the critics' ranks have been joined
by Martin S. Feldstein, who was chairman of the Council of Economic
Advisers in the Reagan administration. In a recent issue of the journal
Foreign Affairs, Feldstein argued that in Korea in particular, the fund had
made a bad situation worse by imposing a high-interest-rate regime that has
put virtually all Korean firms "at risk of bankruptcy."
But on his plane from Bangkok to Seoul, Rubin said he hadn't heard
anything on his trip to disabuse him of his belief that the policies advanced
by the IMF had been "roughly right."
"I've never known a business person who didn't like interest rates to be
lower, and all of the businesspeople we talked to are troubled by high rates,"
he said. But the fund had to insist that interest rates be kept high for a
reasonable period in countries such as Korea, Thailand and Indonesia, he
contended, because offering investors attractive yields was the only way to
keep those nations' currencies from falling through the floor and money
from flooding out all over again.
"Look, one of the business people we met in Thailand said that one of the
government's greatest accomplishments was achieving stability in the
currency," said David A. Lipton, undersecretary of the treasury for
international affairs, who accompanied Rubin on the trip. "Because without
that, there would be a renewed outflow of capital."
If anyone deserves blame for Asia's darkening outlook, it is Japan, Rubin
suggested often during his trip. In every country he visited -- including
China, where he accompanied President Clinton for the first two days of the
presidential visit -- the treasury secretary emphasized the importance of
Tokyo taking bold steps to end its recession in an economy that is the
region's biggest by far, and the second largest in the world.
But beyond exhorting Japan to get its economy in gear, Rubin told the
Asians he met that their painful reform efforts will have to enter a new
stage if their economies are to revive.
Specifically, he has urged maximum focus on spurring debt rescheduling
agreements between the region's heavily indebted companies and their
banks, with the banks agreeing to write down their loans in exchange for
receiving equity ownership in the firms. Rubin argues that only once
companies reduce their debt burdens will they be able to borrow again, and
only once banks reduce their bad-loan exposure will they begin lending
again.
"Governments must . . . turn toward the activities necessary for the
restructuring of the banking and corporate sector," he said in a speech
Tuesday at Bangkok's Chulalongkorn University.
At a meeting this morning with members of the American Chamber of
Commerce in Korea, Rubin asked numerous questions about how this
process is likely to go in Korea. "There's a lot already going on, a lot of
canceled vacations," said one banker (who, under the rules of the meeting,
could not be identified by name).
The problem is, however, that both companies and banks are reluctant to
move down this path. The bosses of Korea's giant conglomerates, called
chaebols, are strongly resisting downsizing their empires. And banks fear
that if they write down their loans, they too will be exposed as insolvent.
And perhaps most important, Korea's militant labor unions -- already up in
arms over the nation's sharply rising unemployment rate -- are deeply
suspicious that restructuring will mean further erosion of the lifetime
employment system. Indeed, Rubin's arrival in Seoul came on the same day
as a mass protest by furious workers at five ailing banks that were ordered
by the government this week to merge with stronger institutions. Some of
the workers tried to sabotage the government's move by changing
passwords in their computers so that the files would become inaccessible.
"It sounds like you have this enormous iceberg here, and it's now breaking
up -- the whole rigid structure is cracking," Rubin said to the executives
from the American Chamber. "Is that right?"
Members of the group responded affirmatively. But one piped up: "It's going
to be a lot more difficult than they realize."
c Copyright 1998 The Washington Post Company
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