NURTURING ASIAN RECOVERY
Pragmatism, not free-market ideology, should shape Crisis remedies
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THE SECOND WEEK OF September 1998 is one for the history books. Japan, the world's second-largest economy, confirmed it is in deep recession, shrinking 3.3% annualized from April to June. Finance ministers of the G7 nations huddled in London to discuss the Russian economic collapse, which, along with Asia's woes, bedeviled Western bourses. And U.S. Federal Reserve Chairman Alan Greenspan warned early this month: "It is just not credible that the United States can remain an oasis of prosperity unaffected by a world experiencing greatly increased stress." Yet amid looming conflagrations in the global economy, America is fiddling with an independent counsel's report full of presidential indiscretions, which should be of little consequence to most people on the planet - except that it is distracting the most powerful nation on earth from concerns that are of such import.
Thankfully, U.S. President Bill Clinton still found time to call for concerted international action against the Asian Economic Crisis and its repercussions across the world. "There is a stark challenge to economic freedom which, left unaddressed, could stem the rising tide of political liberty as well," he told the Council on Foreign Relations. Indeed, as mass hardship escalates across the globe, so will the temptation to impose economic controls and authoritarian rule, as was done in the Great Depression of the 1930s. The American leader called for long-overdue initiatives to stimulate global growth, fund Asian debt restructuring, alleviate mounting social distress from the Crisis, and boost the resources of the International Monetary Fund, which Congress is still holding up.
Clinton played the right tune in noting how the Crisis threatens freedom - possibly the only way to get Americans focusing on the global slump amid their sixth year of growth. However, his call to safeguard democracy and laissez-faire orthodoxy smacks of a fixation on ideological purity which may in fact have worsened, if not precipitated, the Asian and Russian crises. Governments in both places have often been criticized for a lack of zeal for reform; they have in fact implemented pretty sweeping and excruciating programs. And with recession, if not chaos, afflicting economy after economy over the past year, the question now is whether Crisis-hit authorities and their advisers had adopted textbook capitalist remedies without due regard for practical realities and social costs.
Last year Harvard professor Jeffrey Sachs, among other critics, argued that the Fund's prescriptions for tight money and severe austerity were more suited to Latin America than Asia. Hereabouts it is banks and companies, not governments, carrying the heavy debt burden underlying the Crisis. Thus, sharply squeezing credit and domestic demand, while unlikely to bankrupt governments, triggered mass collapse among the region's businesses - crushing the productive sector of the economy. Throwing tens of millions of Asians out of work and into destitution further deepened the downturn and eroded investor confidence and social stability, making reform and recovery doubly difficult. By the time interest rates came down in recent months, there was little appetite to lend or invest in Asia's bankruptcy-blasted corporate landscape.
The IMF's Asia-Pacific director Hubert Neiss concedes that it does not have all the answers. But he maintains there was no way out of the currency turmoil other than the Fund's plan: tighten belts, restructure shaky banks and industries, and hope that cheap asset prices and commitment to free and open markets would lure global capital. However, Malaysia's exchange controls and the unilateral debt moratorium by Russia point to other ways of shoring up reserves and exchange rates. Neiss himself admits the Fund is watching to see if Kuala Lumpur's "experiment" will work. He pointed to "other experiments" in Korea and Thailand, seeming to suggest that they are not the sure-fire remedies they were once touted to be.
If Harvard's Sachs seemed prescient on the need for pragmatism in Asia, he may on the other hand have been guilty of laying the groundwork for Russia's collapse. He was a leading architect of "shock-therapy" programs to create instant market economies in the former Soviet Union and its satellites. Rushing reforms in spite of daunting difficulties was intended to make change irreversible. Sachs did not care to emulate successful but step-by-step liberalization in China. But while countries in Eastern Europe did well, the sheer scale of Russia's economic malaise and the suppression of capitalism there for seven decades made the crash program a bad idea. Now, with a communist in charge of economic policy in Moscow, Sachs's plan looks anything but irreversible.
Plainly, the need to set aside ideological strictures and devise workable policies is key to sustainable reform. Having lost $2 billion in Russia, even financier George Soros now sees the need for financial discipline in the markets. Others should also learn to let pragmatism, not ideology, shape solutions. If there is new Western aid for Crisis-hit economies, it should be disbursed without conditions that limit their policy options. And the Fund should honestly assess its programs and open its mind to alternatives, even those that temporarily restrain market forces. If it works, don't nix it.
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