FINANCE: New Global Turmoil Raises Same Old Questions

By IPS Correspondents Reprint | | Print |

Analysis - Johanna Son

MANILA, Aug 31 1998 (IPS) - Those who are wringing their hands at the sight of Russia teetering on the brink of economic mayhem can be forgiven for their pessimism.

After all, they have only to peek over the edge to get a view of Asia’s atrophied economies, more than a year into an economic crisis that began as currency shakedown. Asia’s malaise seems to be getting deeper, spreading even to economies thought to be safe from it.

The Asian “crisis” has become a full-blown recession and now analysts are worried about the prospect of a “depression”.

And as currencies and confidence tumbled in the wake of uncertainty over Russia, the trouble that roiled the region is feeding a new clamour for some form of intervention before financial and economic instability afflicts the world economy.

Even authorities in Hong Kong — the closest model to a free- market economy in Asia — intervened starting Aug 14 to prop up the stock market and defend the Hong Kong dollar against speculators.

As of last week, Hong Kong had spent more than 10 percent of its 100 billion dollar foreign reserves, the third biggest in the world after Japan and China, in buying to prop up share prices.

Officials like Joseph Yam, chief executive of the Hong Hong Monetary Authority, wondered aloud whether the market was always right, even as critics said Hong Kong had dented its reputation through its continuing intervention.

In what he said was “blasphemy” for the free-market gospel, Yam asked: “If the market cannot be wrong and governments are generally wrong, why are we witnessing the emerging markets shaking themselves to bits?”

“Even speaking as an official of the freest economy in the world, I think there is now a need to get a message to the G-7 that abstaining from intervention to maintain global financial stability, particularly currency stability, may no longer be a viable option,” he said.

In recession, the Hong Kong economy contracted by 5 percent as of the second quarter and unemployment hit a record 4.5 percent.

Elsewhere, Singapore, another bastion of the free market, is sliding toward its first recession in 14 years by 1999. “We are in for some very tough times,” Prime Minister Goh Chok Tong said last week. “Matters are likely to get worse before they get better.”

Apart from Hong Kong and Singapore, supposed to be among the sturdiest economies in the region, other parts of Asia continue to suffer more pain.

Malaysia, which has been railing against the excesses of the free market, says it might go as far as using the state-run ‘Tabung Haji’, the fund that invests the savings of Malaysian Muslims aiming to make the pilgrimage to Mecca, to boost the stock market.

The remarks by Malaysian Prime Minister Mahathir Mohamad came amid figures showing that the economy is sicker than earlier thought. It shrank by 6.8 percent in the second quarter — a bigger contraction than South Korea’s 6.6 percent.

Mahathir says he expects more instability with the Russian crisis: “I’m worried that if the attacks on developing nations’ currencies continue, that pressure will spread to other countries that could have prevented it.”

“The currency attack is now at dangerous and irresponsible levels” he said earlier in the month.

Indeed, as Goh said, there is little respite for Asia from the ‘tom yum’ effect, using the native Thai spicy soup to describe the crisis that spread with the July 1997 devaluation of the baht.

Russia’s problems, of course, carry the dimension of an economy moving from a centrally planned to a market economy. In contrast, the Asian economies’ woes have been described by some experts as having had too much of the free market.

Still, the effects of economic dislocation on ordinary people would be similar. This raises some of the old questions that emerged earlier in the Asian crisis, about the perils of open markets and cross-border links that in good times are a boon.

A philosophical debate has also been revived about psychological factors like “international confidence” and how, if it is possible, to inoculate or treat an economy against excessive speculation.

Hong Kong officials said they “agonised” but could not stand idle while currency manipulators wreaked havoc and feed uncertainty about the Hong Kong dollar’s peg to the U.S. dollar.

“The question is whether it is in the best interest of Hong Kong to continue to leave it to the free play of market forces and risk markets overshooting, with the pain of economic adjustment exacerbated and confidence in our currency undermined,” Yam said. “Clearly it is not.”

The costs of continued currency devaluation by emerging markets would be borne either through massive deflation in the developing world or bubbles in the developed markets, or both, he warned.

“Success or bubble, call it what you will, built upon the collapse of emerging markets, cannot be fundamentally sound,” he added.

Over the past year, Asia’s problems have muted some of the staunchest defenses of the free market, and have led to some changes in positions even by the International Monetary Fund (IMF), leader of the bail-out packages for Asia and Russia.

For instance, the latest economic programme agreed upon by the IMF and the government of Thai premier Chuan Leekpai provides for increased spending. Earlier, the Fund had come under fire for prescribing old medicine — high interest rates, tight credit and sharply reduced spending for a different ailment.

In Indonesia, Fund officials have agreed to ease their much- criticised insistence that it post a budget surplus. In July, the IMF allowed Jakarta leeway to post a budget deficit of up to 10 percent.

In the end, Yam said, the economy and the markets are not just about figures, but about the people’s lives. He argued: “Whether we like it or not, governments have a role in protecting the level of income and employment of their people.”

He added that Hong Kong’s instability shows up the risks for other, more vulnerable economies. “If Hong Kong’s strongest fundamentals can be threatened by such speculation, what hope is there for the rest of the non-industrial and emerging markets?”

If anything, the damaging economic consequences set into motion by the devaluation of the baht last year and the rouble on Aug 17 — the result of rational, if painful, economic logic — would likely strengthen the resolve of China and Hong Kong to hold off any similar step in the future.