Looking Back, Looking Ahead:
Two Decades after the Asian Financial Earthquake
(Keynote address at the 11th Congress of the Asia Pacific International Studies Association [APISA], Phitsanulok, Thailand, Oct 20, 2017).
By Walden Bello*
First of all, I would like to thank the College of ASEAN Community Studies of Naresuan University and the Asian Political and International Studies Association (APISA) for inviting me to deliver this year’s keynote address. I would especially like to thank the following colleagues: Dr. Napisa Witoolkiat, Dr. Paul Chambers, Dr. Brendan Howe, and Dr. Julio Teehankee, my compatriot, for their wonderful hospitality.
This year we mark the 20th anniversary of the outbreak of the Asian Financial Crisis. What I’d like to do is to offer some reflections on some aspects of this economic earthquake and its aftermath derived from a study on global finance that I am currently doing for the Transnational Institute.
Like climate change, financial crises have become the new normal, something that crashes through the artificial disciplinary barriers within which many try to contain it. Thus taking the advice given earlier by Dr. Howe, I would like to approach the subject not simply from the standpoint of economics as a discipline, which is probably the least helpful way to grasp it, but from an international-relations, interdisciplinary perspective.
Financialization and Overproduction
The first thing that I’d like to say is that the Asian Financial Crisis was one of the key moments of the process of financialization that has been the main feature of global capitalism over the last 35 years. Financialization stems fromthe crisis of overproduction that has plagued the global economy since the 1970’s, as investment in productive activity has become less and less profitable, resulting in more and more capital being channeled to speculative activity, or making money out of money.
There is this great insight of Marx in Vol 3 of Capital that captures today’s spirit of capitalism, and it is anything but Weberian: “‘[To the possessor of money capital] the process of production appears merely as an unavoidable intermediate link, as a necessary evil for the sake of money-making. All nations with a capitalist mode of production are therefore seized periodically by a feverish attempt to make money without the intervention of the process of production.”[1] Escaping the realm of production and making money out of money has been the great capitalist dream. So much intellectual effort has been expended over the last 30 years to make this dream a reality by making speculation risk-free. But inspite of all the efforts of financial engineers to make the speculation riskless, the capitalist beast has with increasing frequency broken its cyberchains and plunged countries, regions, and the globe into periodic financial crises, followed inevitably by deep recessions. Nowhere is the irrationality of the capitalist system in fuller display than during financial crises.
Linkages between Crises
The second point I would like to make is that major financial crises are linked. One cannot fully grasp the origins and dynamics of the Asian Financial Crisis without taking into account the Japanese bubble economy in the eighties and early nineties. Overproduction and overinvestment in Japan led Japanese capital into two paths. One was to channel money from productive to speculative activity like real estate speculation. The magnitude of the bubble that resulted is indicated by the fact that in the late eighties, the Imperial Palace Garden alone in Tokyo was valued as much as all the property in the state of California.[2] The second channel was for Japan to export its productive capacity to East and Southeast Asia in the late eighties and early nineties. The revaluation of the yen by the Plaza Accord is often viewed as a development that forced Japanese capital to move their many of their productive facilities to East and Southeast Asia to take advantage of cheap labor. Actually, the so-called endaka or revaluation also provided an opportunity for absorbing surplus Japanese capital that could no longer be profitably invested at home in the early 1990’s, even in speculative activity since the bubble economy had burst. As analyst Kirsten Nordhaug notes: ‘Japan’s loose post-bubble monetary policies also created surplus liquidity which ‘leaked out’ to East Asia. Japanese banks lent large amounts of money to the region at a low interest rate, both to Japanese subsidiaries and to locally owned firms.”[3]
Japanese foreign direct investment and lending in Southeast Asia, particularly in Indonesia, Malaysia, Singapore, and Thailand, built formidable national export machines. But it also created the conditions for the emergence of speculative bubbles in the so-called tiger economies. When Japanese direct investment began to taper down in the early 1990’s, these export platforms began to look elsewhere to slake their hunger for capital, and the solution they found was to invite speculative capital from other financial centers in the North that was already knocking at the door to have a piece of the Asian economic miracle. Some $400 billion in portfolio investments and bank loans from the US, Europe, and Japan entered the East Asian tiger economies in the three years before the 1997 crisis. The problem was that instead of going into industry and agriculture, as the East Asian technocrats had wanted, the bulk of these funds went to high-profit areas with a quick-turnaround-time such as the stock market and real estate. Not surprisingly, we saw the quick inflation of massive bubbles that burst in 1997 and brought the region into deep recession over the next two years, dragging some 22 million Indonesians and one million Thais below the poverty line. In short, Japan’s efforts to deal with its speculative bubble had, as one of its consequences, the inflation of speculative bubbles in its neighboring economies.
Likewise, the efforts of the East and Southeast Asian economies to prevent a recurrence of their financial crises made a major contribution to the Global Financial Crisis of 2008-2009. To insulate themselves from the currency speculators that broke them in 1997, the Asian economies launched massive export drives that brought them tremendous capital surpluses that were more than enough to thwart the speculators, with the result that trillions of dollars of these surpluses were lent to the US government and private financial institutions. These trillions of dollars of Asian money helped fuel the US consumption and real estate booms that imploded in 2008 and ushered in an era of global stagnation that continues today.
Like firecrackers that are tied together, one financial crisis helps spark the next one down the line.
Similarities and Divergences
The third point I would like to make is that while the underlying dynamics of financial crises are similar, they also have their own unique features. The Asian financial crisis in 1997-98 was similar to the 2008 global financial crisis in that it was also the product of speculative bubbles in real estate and the stock market created by the search for high profits by finance capital. The difference was the role of currency speculators and hedge fund operators in hastening the bursting of the bubble and the collapse of the real economy in the Asian case; these actors played a negligible role in the 2008 crisis. These speculators, led by George Soros’ Quantum Fund, targeted the overvalued currencies of the Asian economies, particularly the Thai baht, betting on the probability that they would be devalued relative to the dollar owing to investor fears that the bubbles would burst, thus accelerating the devaluation of the currencies and making tremendous profits once the Asian currencies were devalued.[4] Had the speculators not been active, the bubbles would still have burst and the real economy would still have entered into severe crisis, but the “landing” would have probably been less rough.
Currency speculators played a minor part in the global financial crisis. Where the uniqueness of the 2008-2009 crisis lay was in the fatal marriage of a real estate bubble with financial engineering. Tremendous amounts of cash flowed into real estate that were plowed into loans, a great many of them of dubious quality because the debtors’ capacity to repay the loans was questionable– thus the term subprime loans. Financial engineering allowed mortgage originators to slice, dice, and package these loans into securities that were then sold to banks and other financial institutions, which then resold them to other banks and financial institutions. When the mortgage holders could no longer service their mortgages, the quality of the loans was drastically impaired. But billions of dollars of these now toxic securities were circulating in the global financial system, upending the balance sheets of the US and foreign banks and institutions that held them and driving many, like Lehman Brothers, to bankruptcy.
To return to the main point, speculative crises have the same underlying dynamics but the ways they unfold—including the actors that serve as the triggers of the speculative crash--exhibit some features unique to each crisis.
Neoliberalizing Asia: The Mixed Record
The fourth point I would like to make is that while the key political managers of global capital like the US Treasury Department and the International Monetary Fund sought to use the financial crisis to transform the East Asian economies in a neoliberal direction, the results of their efforts have been mixed. Some countries managed to slow down, if not stop, liberalization through strategies of what Andrew Walter has called “mock compliance” as in Indonesia,[5]or, as in the case of Malaysia under Mahathir, by directly resisting liberalization measures pushed by the Fund.
In Thailand, the post-crisis hegemony of full-scale neoliberalism was short-lived. In 2001, the pro-IMF governing coalition was ousted with the election of a parliamentary contingent dominated by the Thai Rak Thai Party (TRT) led by Thaksin Shinawatra. Thaksin promptly paid off Thailand’s debt to the Fund and declared Thailand’s ‘independence’ from the institution. After three stagnant years under governments faithfully complying with the IMF’s neoliberal prescriptions, Thaksin propelled countercyclical, demand-stimulating neo-Keynesian policies to get the economy back on track. The Thai government provided low-interest loans, instituted government- financed universal health care, and gave each village 1 million baht ($40,000) to spend on a special project. Despite dire predictions from neoliberal economists, these measures contributed to propelling the economy onto a moderate growth path.[6]
(Incidentally, they also created a permanent electoral majority for Thaksin, but that is another story, perhaps one that is more interesting to most of you than the one I am now speaking on.)
Among all the East Asian economies, Korea was probably the most transformed by the neoliberal push from external powers. While the chaebol and the banks did put up strong resistance and were able to slow down some reforms, for the most part the neoliberal push was successful. Perhaps the most salient indicators are in the financial system. A decade after the crisis, foreign investors had majority stakes in six out of seven nationwide commercial banks, gaining control of three. Some 33 to 50 per cent of bank assets in the country today are accounted for by the foreign-controlled banks. Liberalization of the capital market has led to the share of equity-market capitalization by foreigners reaching 43.3 per cent.[7] Foreign institutional investors have also built up considerable stakes in the bulk of listed Korean blue-chip companies, though they do not yet control them.
Indeed, one can even say that in some instances the Korean government has been more lenient with foreign-owned institutions than with domestic ones. In one notorious instance this almost led to another financial disaster: while the government pressured domestic banks to offset their debts with foreign currency denominated assets so as to square their foreign exchange positions, it did not require foreign banks to do the same. As a consequence, the short-term debts of foreign banks piled up very rapidly, exceeding those of domestic banks by 2006. When the 2008 financial crisis hit, the Korean won depreciated by almost 30 per cent, leading to a situation where the ratio of international reserves to short-term debt fell rapidly from 200 per cent in 2006 to 126.4 per cent in the third quarter of 2008. What saved Korea from plunging into its second financial crisis in 10 years was a $30 billion currency swap approved by the US Federal Reserve Board in October 2008. The roots of the near disaster, according to analyst Yasonobu Okabe, lay in the post- Asian financial crisis policy of the Korean government, which was ‘highly permissive to the entry of foreign capital’, leading to ‘highly optimistic’ government expectations that ‘were disappointed by the large capital flight by foreign banks’.[8]
Why was post-Asian financial crisis liberalization so successful in Korea but so limited in its impact elsewhere in East Asia? Part of the answer lies in the strong support from the population that the crisis-era reform government of Kim Dae Jung enjoyed owing to the widespread perception that the reckless borrowing from the international lenders by the chaebol or conglomerates created the crisis. But another part of the answer lies in geopolitics. The Korean economy could not be allowed to go under by the US, which saw Korea as its front-line military protectorate. Thus, the US government was directly involved in the rescue program, not leaving this to the IMF to manage alone. It was pressure from the US Treasury Department in 1997 that got international banks to roll over their loans to Korea at a crucial juncture in the crisis. The quid pro quo was government action to carry out the neoliberal reorganization of labor, the disciplining of the chaebol, and the opening up the financial sector to US and other foreign firms. Despite labor protest and resistance from the chaebol and the banks, the Kim Dae Jung government and its successorsfulfilled their part of the deal. At the end of one decade of reform, the vaunted Korean developmental state had been replaced by a neoliberal state. No longer was Korea the most difficult place in the world to do business in, as US firms were wont to complain before the Asian financial crisis.
The Failure of Reform and its Consequences
The fifth point I would like to make is that despite a succession of financial crises, there has been little reform of the global financial system. The trading of those financially engineered exotic products called derivatives remains uncontrolled, with the market now estimated to total $707 trillion, or significantly higher than the $548 billion in 2008.[9] Former US Securities and Exchange Commission Chairman Arthur Levitt has said that none of the post-2008 reforms has “significantly diminished the likelihood of financial crises.”[10]Big banks continue to make reckless investments and loans since governments see them as being too big to fail. Except in the case of Iceland, practically no big finance executive in the US, the UK, and Europe has been jailed for bringing about the world’s biggest economic crisis since the Great Depression. The explanation is simple: Finance capital is extremely powerful, and perhaps the greatest source of its power lies in its ideological capture of those who are supposed to regulate or tame it. Thus, we should not be surprised if bubbles periodically form then implode, each creating a bigger disaster than the last one.
I would like to add the qualification that Asian banks apparently continue to be largely conservative when it comes to embracing the products of financial engineering, though that is apparently changing in Japan. Mesmerized by mathematical equations that their top management most likely do not understand, Japanese banks are now engaged in trading in derivatives and other financially engineered products – something that formerly cautious banking experts now support in the name of “financial upgrading.” Moreover, banks have plunged into Fintech, or the innovative consolidation via the internet of financial services for corporate and individual consumers formerly handled by diverse financial intermediaries. As the noted economist Noriko Hama asserted, the Fintech craze may bring Japanese banking to uncharted, dangerous waters.[11] One suspects that the world may not have heard the last of the troubles of Japan’s financial system.
Trouble Brewing in China?
The final point I would like to make is that we in Asia should carefully monitor the situation in China for it is a good candidate to be the epicenter of the next financial crisis. China’s system involves financial repression on the side of depositors and financial largesse on the side of big corporate debtors. One consequence is that speculation in real estate and the stock market has been a favored activity among people who feel they are getting very little interest from their savings in the banks owing to the policy of limiting interest to depositors in order to subsidize the influential export-oriented manufacturing lobby. The Shanghai stock market cratered in the summer of 2015, losing 40 per cent of its value and bankrupting thousands of small investors. That event led many to shift to real estate speculation, with the property sector now overheating in key Chinese cities, like Beijing, which has also translated into a social problem since housing for workers are becoming less and less affordable. Though many local governments are said to be taking measures to dampen housing prices, the speculative fever continues and prices continue to rise.