John Seiler
Important questions have been asked about the still-unresolved collapse of most major Pacific Rim financial markets and economies, but the common conclusion is flawed: that the Asian governments involved, and by extension this and other African governments, have a minimal role to play in dealing with the complex mix of economic and political problems that repeatedly threaten stable economic development.
One assumption is overt: financial markets and the role of foreign investors in these markets are crucial determinants in these collapses. Another is tacit: if certain missteps had not been taken, the “tigers’ roar” could have continued unabated.
Taking the latter first: even in the best of circumstances, economic boom brings bust. This should have been self-evident in the Asian case. The growing lack of real value in the proliferation of urban business property in Bangkok, Kuala Lumpur, Tokyo and other centres was obvious to observers, but not to investors (whose short-sighted focus on maximising immediate profit is understandable), nor to the governments involved.
The role of foreign investment withdrawals and the outward flow of funds from currency and stock markets has been considerably overrated. It is far more plausible — and at least partially provable — that, to start with, domestic investors pulled out of property and industrial involvement as they realised that income was sharply reduced, that loans against foreign banks would be very difficult to repay and that the local currency would lose value as a result and, in turn, make foreign loan repayment even more difficult. Of course, foreign investments followed and added to the economic downturn.
One commentator blames Asian governments for economies “relying almost exclusively on cheap labour slavishly producing what the government said it should produce”, but it was these interventions (more incentives than requirements) that produced the growth in international trade common to the region during the 1980s. Of course, cheaper labour and equipment would pull production away from Japan to South Korea and onward in the region, whatever effort a dinosaur-like government might make to “protect” its major industries.
Governments did contribute to the regional bust. Japan’s complacency grew as its export trade surplus mushroomed. Its domestic banking structure has yet to face up to the cruel dilemma of massive unpayable domestic debts, mostly related to the collapsed urban property boom. Now publicly labelled as the Asian government with the least effective set of economic policies (as recently as at this week’s Davos World Economic Forum), even with little in the way of foreign bank loans, Japan will share in the bust as defaulted loans from companies in Rim states pile up in its banking system, adding to the enormous strain of domestic defaults.
China may be the only regime involved relatively buffered against bust, given its growing domestic market, its trade surplus, and its absence of foreign bank debt, and assuming that its government takes on the burden of massive failures in state-run or state-backed corporations, many of which have probably made large foreign loans to bolster their short-term “boom” projects.
How can the present bust be mitigated and its inevitable recurrences dampened in intensity? Domestic initiatives would be more productive than international ones, but they are unlikely. Japan and China, with their massive trade surpluses, ought to permit their trade-deficit neighbours easy access to their own domestic markets.
The trade-deficit states (all the “bust” states are in this category) should avoid feckless competition to sell their goods in Europe and North America at cut-throat prices, damaging each other immediately and the buyer nations in the longer term.
Of course, international constraint on the free-wheeling movement of funds into and out of financial markets would have at least symbolic value, but betting that the upcoming G7 meeting will do this would be naive.
In addition, some more or less dispassionate international body (apart from prospective multi-lateral and national funders) should take a hard public look at the major banks and corporations in the Asian mess — including Japan and China — to determine which ones should get a share of any potential short-term propping up. Such help ought not to rest on decisions made by the governments involved, given the cosy, ambiguous relations between these governments and major businesses throughout Asia. Criticisms of the International Monetary Fund (IMF) and the World Bank for promoting approaches friendly to the United States and European Union interests are true in the sense that encouraging foreign companies and banks to compete in presently sheltered economies is a sine qua non for any prospective turnaround.
That said, the IMF’s reflexive dosage of austerity measures makes little sense in countries like South Korea and (potentially) Japan, where savings are already high.
The policy crux should be a shift away from export-oriented production to a competitive involvement in building domestic economic production. Only the Asian governments themselves can give genuine direction to this revamped approach. Within this refocused policy framework, both domestic and foreign business should be encouraged to take an active part in longer-term investment and be free to take out whatever profits it can make (after taxes). Of course, governments must provide the basic elements of effective governance, minimal corruption, and low levels of crime. But they must also provide a sense of direction, something which cannot be expected of business, whether domestic or international.
The negative consequences for South African trade with these Asian states will soon become apparent. If EU and North American exporters make strenuous arguments for temporary protection in markets where they will compete with diminishing success, the modest South African industrial sector may be able to buy some short-term protection against agonisingly cheap Asian imports.
In the longer term, especially as the Euro- currency competes with the dollar from 1999, no country will be immune to the impact of international boom and bust cycles. It is probably asking too much that business exercises more self restraint, but the role of governments in constraining the negative impact of such cycles will be crucial.
Dr John Seiler writes about political transition in South Africa