ECONOMY-ARGENTINA: Lessons from the Asian Crisis

By Marcela Valente Reprint | | Print |

Marcela Valente

BUENOS AIRES, May 19 1998 (IPS) - A prominent U.S. economist told a group of bankers in the Argentine capital that the economies of southeast Asia could stage a surprise recovery, as occurred in Argentina and Mexico in 1995.

U.S. economist Paul Krugman of the Massachusetts Institute of Technology (MIT) said that meant Asia represented a major investment opportunity today, with the potential for more than 50 percent growth.

“If the countries of southeast Asia demonstrate that they’re not going to collapse, that capital is slowly returning and their interest rates are dropping,” they could recover better than expected, as Argentina and Mexico did after the December 1994 crash of the Mexican peso, which unleashed a crisis of global dimensions.

That is “a reasonably strong possibility, although not a certainty,” said Krugman, one of the keynote speakers at a three- day convention of bankers that opened Monday in Buenos Aires.

In his address on “Lessons from the Asian Crisis”, the economist warned of poor bank management, pointing out that the basic problem in Asia was that banking systems operated without state supervision until the bubble burst and the ensuing crisis was exacerbated by the growing lack of confidence.

Krugman also warned of the risks posed by short-term capital. “No one believes restrictions like Chile’s are the perfect response,” but it is a strong bet that if the banks work well there will be no crisis, he said, recommending restrictions on short-term capital to prevent speculative strikes.

In Krugman’s view, another lesson left by Asia’s financial crisis is that “solid money is not always a good idea.” After years of fighting inflation, “we tend to believe that if there is no inflation and interest rates are low there are no risks,” but Japan today is showing us that that is not so, he added.

Japan frightens us because it is a rich, complex society, without inflation and with low interest rates. But demand is low, and failure to revert that tendency in its savings could lead to a crisis like the Great Depression, Krugman warned.

Expansive monetary policies do not work in Japan, he maintained, due to the growing number of pensioners and shrinking pool of active workers, which means savings rates are very high.

“Japan has a problem of adverse credibility.” By contrast with what happened in Argentina, “no one believes they’re going to have inflation,” he said, arguing that authorities are mistaken in generating fears of inflation.

“Democracy is the best guarantee against crisis,” Krugman added, citing North Korea and Thailand, where recently elected authorities are successfully implementing recovery programmes.

By contrast he mentioned the case of Indonesia, in the grips of a major social and political crisis this month in which looting, protests and the action of security forces has left more than 500 dead and 30,000 buildings damaged by demonstrators demanding President Ali Suharto’s resignation.

Lastly, Krugman told his listeners that in his view the International Monetary Fund (IMF) committed several errors in its approach to the Asian crisis.

In first place, it demanded that the government apply the traditional structural adjustments, which he said was wrong. Secondly, it failed in its management of the crisis, he said, because by demanding the closure of banks it failed to anticipate the runs on banks by account-holders, which further accentuated the problem. And finally, he remarked, the IMF was mistaken if it believed that the crisis was a problem of “Asian values.”

Krugman said Asia’s woes, understood only as a problem of banks operating without supervision, could occur in other countries, and in fact was already seen in 1981 in Chile and the U.S. state of Texas, as well as in Sweden in the 1980s.

The crisis in the emerging economies of Asia was more explosive than that of Japan, which is developing slowly. But he warned of the danger that the Japanese economy could end up triggering a crisis of the magnitude of the Great Depression of the 1930s.