Look out, it’s 1929 all over again, write Will Hutton, William Keegan and Ed Vulliamy
The parallels are uncanny and unnerving. A United States where the president’s free- trading authority has been questioned, wave upon wave of devaluations being forced upon Asia and Latin America, and national banking systems in these continents imploding from bad debts and risky lending.
A previously complacent policy-making establishment is now desperately trying to stitch up a rescue operation for the countries which were once meant to constitute ”the Asian miracle”. And Congress itself is holding back the American contribution to American-led International Monetary Fund loans for hard- pressed South-East Asia.
Modern central banks, most notably the United States Federal Reserve, are much more aware of ”systemic risk” than they were in the early 1930s, and Fed chair Alan Greenspan and his central banking colleagues are already on amber alert. Nevertheless, the speed with which the Asian crisis has threatened to spread, and the new mood in Congress, conjure up uncanny memories of the concerns of the 1930s. Similar forces are abroad today.
There is a US Congress that refused the president the ”fast-track” legislation he required to negotiate international trade deals, showing that the political majority for free trade that has existed since the World War II is threatening, in the US at least, to disintegrate – just as a tidal wave of cheap exports from Asia and Latin America threaten to hit the US, with its associated impact on American jobs and wages.
The political consequences in the US promise to be incalculable, with politicians of Right and Left no longer prepared to talk up the benefits to the US of its $800-billion of exports – but rather to accept that the dislocation caused by imports (the price, after all, of being able to export) is no longer acceptable. The traditional escape valve for the world’s developing countries – exporting to the US – is in danger of closing.
But Asia and Latin America need both the job-generating export business and the hard currency it earns urgently. There is the collapse of the Thai banking system, the fears for Indonesia’s and South Korea’s – a fear now spreading to Brazil with its stock market collapsing a full 40% over the past three weeks. The International Monetary Fund (IMF), which has already bailed out Thailand and Indonesia, may need a full $200-billion to replace the private capital flows in Asia alone that are now disappearing as confidence collapses – $200-billion it does not possess. But if it cannot fulfil its duties, what stands between these countries and an implosion of their economies, and between their financial systems and our own? The world economy is facing its most serious challenge since the oil shocks of the 1970s. Globalisation, argued for as an unalloyed advantage, is now showing us its dark side.
The Asians, over the past 10 years, have begun to believe their own propaganda; that the normal rules of capitalism have been suspended for them. They can boost investment to new heights and not worry that it may translate into stock market and property booms that get out of hand; they can peg their currencies to the dollar and sustain high exports however uncompetitive; and they are so attractive as destinations for new investment from abroad that the tap will never get switched off. They have been proved wrong on all counts.
Having gone overboard with ”tiger funds”, some overseas investors have now advised a complete withdrawal from South-East Asia, and the contagion has spread to Latin America, where Brazil, too, has had to institute an austerity programme.
If the Brazilian real is forced into a devaluation along with the South Korean won, and both countries plunge into financial and economic crisis, then there is little doubt the world would stand on the threshold of a potential recession. As Will Ollard of Latin American Economy and Business observes, if Brazil falls into recession it is so large it will bring down Argentina, 50% of whose exports are shipped to the $750-billion Brazilian economy. Already interest rates have doubled while the government wrestles with an austerity package to please the financial markets; car sales have slumped. Ollard’s judgement is that Brazil will hold – just.
But will Japan? Its economy has been stagnating most of this decade under the weight of a high yen and an overhang of debt and excess industrial capacity. Its banking system is precarious, and is closely intertwined with the rest of Asia; already there are fears that its involvement with the fatally disabled South Korean financial system could be the last straw. The government seems incapable of launching an aggressive programme of economic expansion, hamstrung by high public borrowing.
If the situation in Japan breaks, then the world will not face a potential recession – but a certain economic and financial calamity. And, never forget the precariousness of the former Soviet Union if the dam were to break.
While all this turmoil has been mounting, President Bill Clinton lost his ”fast- track” trade negotiating rights. It met resistance from two quarters. The first was within his own Democratic Party, mobilised by America’s newly buoyant and muscular organised labour movement, and articulated by the leader of Clinton’s own party in Congress, Richard Gephardt. Fast track, he said, did not place enough emphasis on seeking environmental and labour improvements while negotiating free-trade treaties – in either the US or the treaty nation.
The second hostile camp was more complex. Republicans are loath to give Clinton a free rein in anything, and are anyway torn between ”America First” inclinations and free-trade commitments. But the House leader and Clinton’s apotheosis on Capitol Hill, Newt Gingrich, decided to back the president and muster Republican support for fast track. It was Gingrich who called the White House to tell his unlikely ally that his effort was 20 votes short, and would stumble and fall if presented for a vote.
Some Republicans joined the populist consensus that America is the victim of unfair international competition; but even the free-trade wing of the party took exception to the very labour and environmental clauses needed to get Democrat support. Senator Phil Gramm, usually a staunch free-trade advocate, was furious that fast track would give the president executive licence to negotiate trade deals which would change US environmental and labour laws. This made the scheme ”absolutely unacceptable”.
But the US is not alone in its growing xenophobic attitudes towards trade and finance, intensified by the experience of the past four months. In Asia the Japanese are leading discussions about establishing a new financial regime for the area which will declare independence from Western rules; they want a $100-billion Asian Monetary Fund to back a new regime in which countries can impose tough capital controls against foreign exchange rate speculation, and still get loans even if they adopt quasi-protectionist policies against American and European exports.
Eisuke Sakakibara, Japan’s vice-minister for international affairs at the Ministry of Finance, who has been touring the region drumming up support for the initiative, spoke of the need to challenge the ”Washington consensus” – that the only route to economic success is some mixture of Thatcherism and Reaganism. Asia must have a financial regime that allows it to declare independence from such thinking, he argued. Western officials are trying to ensure it comes under the umbrella of the IMF.
We may be entering new territory. The US could now find it difficult to impose its commercial and financial hegemony on Asia and Latin America, and leaders around the Pacific understand well the political consequences of the loss of the fast-track legislation – which Clinton had boasted would be the basis of a new Pacific free trade area. Asia teeters on the edge of a full-blown financial crisis, which if Latin America joins will overwhelm the resources of the IMF and so trigger a world financial calamity.
Regional leaders are looking to protect themselves in great regional blocs. Even if the world survives the current shock, the lesson is clear: we need new rules and better institutions urgently. Without them the prosperity that free post-war trade has brought in its train could collapse.