FINANCE-ASIA: Warnings on East Asian Crisis

By Farhan Haq Reprint | | Print |

NEW YORK, May 10 1998 (IPS) - Although East Asia’s financial crisis is “more serious and sustained than anyone first thought,” the ailing economies must push ahead with deregulations, cuts in government spending and banking reforms, a new study argues.

The New York-based Asia Society, in a report titled ‘Asia at a Crossroads: The Path Ahead’, urges Thailand, Indonesia and South Korea to push ahead with adjustment plans recommended by the International Monetary Fund (IMF).

The report, written by a six-person group, also urges Japan to use tax cuts and deregulation to boost its sluggish economy, rather than to consider “exporting its way out of its current difficulties.”

Most crucially, the conservative Asia Society has recognised that the crisis, which began when speculative attacks and bank failures hit first Thailand, and then the other East Asian economies last summer, will continue to cause severe economic and political fallout.

The group cites government projections that 1.3 million people may be out of work in South Korea this year, with unemployment affecting an estimated 1.5 million people in Thailand and between 10 million and 20 million in Indonesia. “Of the 1.3 million South Koreans likely to be unemployed this year, only 24 percent are expected to receive unemployment benefits – and that in what was, before the crisis, the world’s 11th-largest economy,” the report notes.

The crisis could lead in some countries to democratic reforms, the group contends, noting the post-crisis ascension of Prime Minister Chuan Leekpai in Thailand and President Kim Dae Jung in South Korea. The latter, the report notes, has spoken of a “new social contract” in his country to replace the faltering ‘chaebol’-based system that existed prior to the crisis.

However, the report adds, “resurgence of authoritarianism and a destructive fragmentation and dispersion of power are also plausible alternatives.” Indonesia, under the Suharto dictatorship, has sent “mixed signals” on banking reforms, and Suharto’s grip may remain unsteady amid a lack of confidence by the IMF and investors, Asia Society says.

The report also warns of the possibility that ethnic minorities may be used as scapegoats for the crisis. The Asia Society study cites reports of the burning and looting of Chinese-owned stores in Muslim parts of Indonesia and similar attacks on Muslim Buginese traders in predominantly Christian parts of eastern Indonesia.

Throughout East Asia, it adds, migrant workers have faced increased harassment. The plight of the Sino-Indonesians may become a larger security threat as the “spectre of new waves of boat people heading for their shores has caused serious concerns not only in Singapore and Malaysia but also in Australia and China.”

The violence accompanying Suharto’s 1965 coup in Indonesia came at a time of attacks which killed more than 100,000 ethnic Chinese and disrupted relations between Jakarta and Beijing until 1990, the report notes. As such, another attack on Sino-Indonesians could “jeopardise relations between the states of the Association of Southeast Asian Nations (ASEAN) and China.”

Similarly, the crisis could erupt into a security problem if North Korea “misread(s) South Korea’s economic crisis as providing an opportunity for military action,” says the Asia Society.

Another just-released report from the New York-based Council on Economic Priorities (CEP), however, offers a silver lining to some of those security woes: the financial crisis has actually “halted, at least temporarily, a destabilising regional arms race.”

Before the crisis began, military spending in East Asia for 1997 was a “staggering” 165 billion dollars, argue the CEP report’s authors, disarmament experts Jordana Friedman and Jim Wurst. By contrast, the authors say, South Korea in 1998 plans to reduce its military budget by about 70 percent, to 9 billion dollars, and adds that it might have to reschedule 1.1 billion dollars in payments for other weapons.

Malaysia intends to cut its 1998 military budget by about 100 million dollars (or 10 percent of its previous expenditure), Thailand by 1.5 billion dollars (or 25 percent) and Indonesia by as much as 20 billion dollars.

For the United States, which exports about 4 billion dollars of military hardware to the region annually, those reductions could be bad news – so much so that U.S. Defense Secretary Willian Cohen has lobbied the governments to maintain their high levels of military spending despite the crisis.

“I believe that any reduction at this time would send the wrong signal and enhance and escalate tension on the Korean peninsula,” Cohen argued during a January trip to South Korea following the first indications of steep military budget cuts there.

Friedman and Wurst, in their report, counter that even after a 70 percent cut in its defense budget, South Korea still outspends the Stalinist North by a factor of three to two in military outlays.

“The U.S. should encourage reductions in military imports to Asia through the establishment of a regional arms control mechanism similar to those being developed in Latin America and West Africa,” rather than urging continued weapons sales, the CEP report argues.