John hello. An increasingly likely trend....with a chillingly reasoned scenario
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(C) The Financial Times
The cracks begin to show
As the economic crisis in Asia deepens, Peter Montagnon considers the political and social unrest that could be unleashed
"As things stand in September 1998, the possibility of a serious military eruption or shock in Asia cannot be discounted."
A year ago such a statement, from Jean-Pierre Lehmann, professor of international economy at the Swiss Asia Foundation in Lausanne, would have been greeted with derision. Even now, Prof Lehmann points out that he is not actually forecasting war in Asia as a result of the region's intractable and deep recession. He claims only that the probability has increased.
But the fact that he and other Asian experts are now prepared to countenance the possibility is a disturbing reminder of how the dimensions of the Asian crisis are changing. From being a purely financial matter, it is now eating into the region's social and political fabric in ways that may make the basic economic problem harder to solve.
Prof Lehmann is not alone. So deep have the problems become that the main question is now one of political risk, says Hung Tran, the Vietnamese-born chief economist of Rabobank International and a banker with wide experience of Asia. "The analysis is no longer financial."
Behind the gloom is the realisation that the sheer scale of the economic downturn makes lasting social and political consequences inevitable. In Thailand, the middle classes - with their high expectations manifest in newly acquired golfing skills and chattering mobile phones - are being wiped out by the recession. Others countries, such as Indonesia and the Philippines, face an excruciating increase in poverty, which adds to the risk of social disorder.
The raw figures are stark. Indonesia's economy is expected to contract by more than 15 per cent this year, Thailand's by 7 or 8 per cent, and South Korea's by about 5 per cent. Malaysia and Hong Kong have both reported sharply negative growth in the first half.
Even the most stable political regimes would have difficulty coping with such unprecedented and protracted collapse. But in Asia, where democratic traditions are weak and the legitimacy of governments is often connected to their ability to deliver affluence, the pressures are particularly high.
The crisis has already seen the violent removal of President Suharto in Indonesia. Last week it was Malaysia's turn for political turmoil, with the dismissal of Anwar Ibrahim, deputy prime minister and finance minister. Even in China, the position of Zhu Rongji, the prime minister, is "fragile" as he gambles on his ability to maintain growth and pursue economic reform, says Prof Lehmann.
Hong Kong's leaders must be worrying about their own political authority as they struggle to maintain the territory's currency peg. Were it to go, leading figures, including Donald Tsang, financial secretary, and Joseph Yam, Hong Kong Monetary Authority chief, would have to resign. It is far from clear what sort of people China would choose to replace them.
Political analysts say it is still very difficult to predict exactly how the new social and political pressures will spill over in individual countries. But many now argue that the risk of backlash against the west, of internal crisis, or even, as Prof Lehmann suggests, of conflict between nations, has increased markedly across the region.
Malaysia's decision last week to impose strict exchange controls and peg its currency at M$3.80 to the dollar marks a pointed rejection of the western approach to dealing with the economic crisis. Followed as it was by the dismissal of Mr Ibrahim, the move revealed the extent of strains within Malaysia's political system as the crisis deepened.
Until now there has been a surprising lack of hostility towards the west. Many Asians have been more inclined to blame their own governments for the disaster that has befallen them. Particularly in Indonesia, the International Monetary Fund played to the emotions of the people as it insisted on the unwinding of cronyism and the removal of privileges from Mr Suharto's hated family and friends.
Many countries have become more open to foreign investment than before. The type of public patriotic clamour that in July forced Microsoft to withdraw plans to take a stake in Hangul & Computer, the Korean language software company, has been relatively rare, even in a country as notoriously suspicious of foreigners as South Korea.
Similarly, most Asian governments have distanced themselves from the robust denunciation of western markets by Mahathir Mohamad, Malaysia's prime minister. But Malaysia's exchange controls, coupled with Hong Kong's intervention in its equity market, marks a retreat by increasingly desperate governments from free markets which, bankers believe, could find imitators.
"Other countries will start to see the cost-benefit of being integrated with world markets in a different light," says Mr Tran. "In the next six to 12 months people will try that option."
Mr Tran is not optimistic about the ability of governments to make the institutional changes necessary to repair their economies and restore growth. As deflationary forces spread, the recession will deepen, he says. "That will call into question the legitimacy of governments and raise the issue of whether or not the pain is being shared."
The threat of disorder is not confined to Indonesia. Already there have been violent scuffles outside the presidential palace in Manila as voters, who elected their new president Joseph Estrada on an anti-poverty ticket, vent their frustration at his failure to take care of their needs.
"Ethnic and social tensions in general will be on the rise. It's inevitable," says Bruce Gale of the Political and Economic Risk Consultancy in Singapore. The impact will vary from country to country, though, as will the response of governments.
Asia's elite is likely to disappear and be replaced by another, says Mr Gale, as old-guard politicians are forced to withdraw and the businessmen who supported them lose their money and their clout. Governments have changed in Thailand and South Korea as a result of elections, upsetting the old network of relationships between government and business.
Quite how this will play out in the political structures is another matter. Analysts argue that South Korea and Taiwan, where democracy is most deeply entrenched, stand a better chance of handling the strain. Thailand, also a democracy, is bound by the national sense of reverence for its monarchy, which is likely to remain as long as its king survives.
In Indonesia, the initial political consequence of the crisis has been one of liberation after years of dictatorship. "The middle class is discovering a new sense of empowerment that they didn't enjoy for the past 40 years," says Tommy Koh, executive director of the Asia-Europe foundation in Singapore.
But whether this benign phase will last is questionable. In Indonesia the transition from the Suharto regime is only half complete, and other countries are under pressure too. "Government has a huge problem. The instinct in a lot of these countries is going to be repressive," says Gavin Greenwood, analyst with Control Risks, a London-based firm.
From this perspective, Malaysia gave a taste of what could be to come. Not only has Dr Mahathir moved ruthlessly to remove Mr Ibrahim, his principal opponent, from government. There have also been other signs of a crackdown with the jailing of Lim Guan Eng, a prominent opposition figure, and the arrest of four people for spreading false rumours on the internet about demonstrations in the capital, Kuala Lumpur.
And it is in Malaysia, too, that worries about international tensions are surfacing as its relations with neighbouring Singapore sink to their lowest ebb in years, prompting an explosion of popular nationalist fervour on both sides of the Johore Strait. Nationalism and xenophobia are obvious responses to the crisis, says Mr Greenwood. "All the old points of friction, which were obscured by prosperity, have now been exposed."
Similarly worrying is China's protest to Indonesia about atrocities, including cases of gang rape, looting and arson, against ethnic Chinese during the riots there in May. China took a long time to respond, but it did so after an intensive - and sometimes graphic - campaign on the internet.
Experienced Asian diplomats such as Singapore's Mr Koh believe that governments should be able to contain these pressures. Some even argue that nationalism provides a useful safety valve that can help stabilise the internal political situation. But a growing worry is that as the legitimacy of governments is threatened by their inability to overcome the recession they will resort more freely to nationalism and find it harder to control the forces they unleash.
Moreover, pressure is also coming from unexpected quarters. North Korea's latest missile test came without warning and requires a particularly cool response, analysts say. But the shock comes at a time when governments have many other things on their minds. "You're talking about haystacks which could go up in flames at any time," says Prof Lehmann.
Again he is careful to point out that this nightmare is only one among several scenarios. The rosy version is that economic and financial adjustment programmes eventually pay off and pave the way for a resumption of sustainable growth. But this is receding in terms of likelihood, while the prospect of a retreat from civil society and greater international tension is increasing.
Even those who argue against exaggeration know there is a limit to Asia's tolerance of hardship. "Governments can't keep the lid on these pressures for ever," says Mr Koh. "There has to be a credible prospect that the economy will turn the corner. If not, how long can people be expected to keep making sacrifices?"
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