THE JOURNAL OF COMMERCE
February 6, 1998
Wrong Medicine for Asian Flu
Just as many analysts thought the Asian crisis was over, the word from Seoul is that the Korean government wants to renegotiate parts of its IMF bailout package.
Like Thailand and Indonesia before it, Korea had agreed to the standard IMF formula: tighter monetary policy, higher taxes, lower government spending, and banking reforms. These are much like the terms imposed on Mexico in 1995, yet none of these economies achieved the quick return to exchange rate stability Mexico enjoyed after accepting IMF disciplines.
Unfortunately, the problems Asian governments face today are radically different from those Mexico circa 1995, and they require much different solutions.
In 1994, Mexico initiated a free trade agreement with the United States. Mexico eschewed the Asian model of creating national champions in industries like automobiles and high-tech electronics, and exposed its industrial giants to global competition. Foreign capital underwrote sound new ventures.
In contrast, much of Asia has pursued variants of the Japanese development model, which includes a heavy dose of state direction in choosing industrial investments, limits on foreign participation in banking and finance, export promotion, and mercurial barriers to imports.
This approach requires clubby relationships between bureaucrats, businessmen and bankers to funnel domestic savings and foreign capital into favored projects, and has inspired cronyism, corruption and commercially unsound investments. The end product is a pile of short-term debt owed by Asian businesses to foreign lenders.
Paying the interest on mounting debt required dramatic growth in exports to industrialized countries who supplied the credit. From 1989 to 1995, Asian exports to industrialized countries expanded 15 percent a year but expecting this pace to continue was a fools journey. In 1996, the Asian tigers hit the wall. Exports to industrialized countries expanded only 1.5 percent, and preliminary data indicates these sales were flat through the first half of 1997.
For any one country, the combination of currency devaluation and IMF-enforced austerity could bolster exports enough to save ailing enterprises and restore the confidence of foreign creditors.
However, the devaluations sweeping the region are having the same effect as cut throat pricing among competitors in an overcrowded market. Similarly, austere macroeconomic policies, if pursued regionwide, would thrust Asia into a deep recession.
Financial markets are not behaving irrationally. Many businesses borrowed heavily in dollars to build new capacity, based on optimistic assessments of market growth and without much regard to scope of competing projects elsewhere. The resulting glut of capacity has reduced the value of many enterprises below their outstanding debt.
The IMF has failed to restore investor confidence in Asia, because it is treating troubled economies as if they faced liquidity and sovereign debt crises, when in fact, they are facing private-sector insolvency and the specter of national bankruptcy.
A credible program to stabilize Asian economies must focus on raising the value of Asian enterprises by increasing demand for the products they make and facilitating the conversion of their short-term debt into long-term debt and equity investment. This would entail three elements.
Any program should require Japan to increase substantially its purchases in the region. This would require an economic stimulus package significantly larger than the one announced in December, opening its markets to imports, abandoning its own pursuit of export-led growth, and coming to terms with its banking problems. Critics may say this smacks of managed trade. However, the IMF is already setting targets for the current accounts of Thailand, Indonesia and Korea. Why not do the same for their role model?
Additional official assistance from the industrialized nations should be premised on aggressive efforts to attract private long-term equity financing, and rely less on short-term loans from the IMF and industrial-country governments. The United States, Japan and European Union should not expose their taxpayers, either directly or through the IMF, to commercial risks that private investors are better able to assess and bear.