Pesek: Asia is de-coupling
On Monday, I mentioned that the Asian Development Bank Fund was a clear sign that Asia was cutting loose from the west and looking to take care of things domestically. WIlliam Pesek of Bloomberg News put out a piece this morning echoing those sentiments, but also adding a lot more background regarding the events leading up to the Asian Crisis in the late 1990s, which I think is relevant. Below, are some relevant excerpts from the Pesek post with a link in the sources at the footer. Afterwards, I will follow that with a 2005 piece from Marshall Auerback that runs on similar lines.
Pesek starts off:
The International Monetary Fund’s 1997 meeting has a special place in the hearts of many journalists.
There we were in Hong Kong, Asia’s economies crashing around us, watching George Soros duke it out with Malaysia’s prime minister. The billionaire described Mahathir Mohamad as a “menace to his own economy.” Mahathir labeled Soros, one of the speculators blamed for attacking Malaysia, a “moron.”
That brawl comes to mind as another big story out of the event comes full-circle. It involves an Asia-only bailout fund, Lawrence Summers and Timothy Geithner. Its implications will travel far and wide in the fastest-growing economic region.
The “Asian Monetary Fund,” so passionately derided by Summers and Geithner at the time, is back. There is little a crisis-plagued U.S. can do to stop Asia’s $120 billion foreign- exchange reserve pool. Its creation is the clearest sign yet that Asia is getting serious about combating the global crisis. Done right, it will bode well for the region’s outlook.
There is still a role for Soros and Mahathir in this story more than a decade later, and I’ll get back to them shortly.
In September 1997, Summers was deputy U.S. Treasury secretary and Geithner was just being sworn in as assistant secretary for international affairs. Today, they are director of the White House National Economic Council and Treasury secretary, respectively. Back then, Summers, Geithner and their boss, Robert Rubin, objected to Asia having a bailout fund.
Eclipsing the IMF
Their concern was that it would eclipse the IMF in the region and, by extension, the U.S.’s say in how Asia retooled economies. They feared doling out billions of dollars in aid with few policy-change strings attached would prove dangerous. And they got their way. That changed this week.
From 1997 to 1998, the IMF arranged about $100 billion of loans to Indonesia, South Korea and Thailand as currencies collapsed. In return, governments had to cut spending, raise interest rates and sell state-owned companies. The IMF’s policies needlessly deepened the turmoil.
During this global crisis, nations sought help from neighbors instead of borrowing from the IMF. Indonesia, for example, raised $5.5 billion of standby loans from the Asian Development Bank, World Bank, Australia and Japan, and increased the size of its currency-swap arrangements with China and Japan to bolster access to foreign exchange.
A quick re-cap then? In 1997, Asia blew up. The IMF got involved. At the time, Tim Geithner and Larry Summers had prominent roles in making sure it was the IMF and not the ADB which was central to the process. Now, in 2009, it is the U.S. which has blown up spectacularly and the U.S., with Geithner and Summers again in positions of authority, is in no position to dictate terms. Hence the ADB monies. The U.S. may have forgotten the Asian Crisis, but the Asians have not. Marshall Auerback wrote a post 4 years ago reminding us that an Asian Monetary Fund was in development. Here is what he had to say with my highlighting for emphasis:
Even prior to the Asian financial crisis of 1997, the Japanese had begun to sell the idea of creating an Asian monetary fund to provide regional liquidity. Almost as soon as the trial balloon was launched, Washington shot it down with great force, sending Lawrence Summers, then Deputy Secretary of the Treasury to the region to make sure the message was not misunderstood. In spite of the subsequent travails experienced by the region, the idea apparently died a quick death.
Or did it? When Haruhiko Kuroda, former Japanese Deputy Minister of Finance for International Affairs, took over the helm of the ADB on February 1st of this year, he quietly began to promote the idea again. Kuroda has long been a strong advocate of an Asian Monetary Fund, an idea whose time may have come, given the increasingly low esteem with which the International Monetary Fund is held, particularly in emerging Asia, which has long been the world’s major savings repository.
It’s worthwhile looking again at the history of this venture: in the spring of 1997, before the onset of the Asian financial crisis, Japan and Taiwan had offered to put up $100 billion to help their fellow Asians cope with any potential fallout which might arise in the event of a precipitous withdrawal of short-term portfolio capital from their respective economies. The idea was killed by then-Treasury Secretary Robert Rubin and Deputy Secretary Summers, both of whom saw the idea as a threat to the monopoly of the IMF over international financial crises. The US Treasury in particular did not want Japan taking the lead in this area because Japan would not have imposed the IMF’s conditions on the Asian recipients, and as a policy objective for Washington, this almost superseded the importance of restoring the region to full economic health.
We all know what happened subsequently. Instead of forestalling global economic instability, the Treasury/IMF proposals helped make further instability inevitable. Ironically, the emerging markets’ crisis that ensued led to American policymakers developing a proposal very similar to that suggested by the Japanese in the first place. By November 1998, the Brazilian economy was so destabilised by volatile capital flows, that Secretary Rubin put together a $42 billion “precautionary package” to shore up Brazil, which had been the ostensible rationale underlying the initial Japanese proposal for the AMF.
Which does lead one to question the motives underlying Washington’s opposition to the original Japanese proposal. By killing off the idea of a competing Asian Monetary Fund, Rubin/Summers enabled the IMF to continue in its guise as an ostensibly “neutral” agency, thereby facilitating the implementation of the Treasury’s agenda whenever a financial crisis which required the IMF’s intervention arose. Of course, the “medicine” the IMF proffered had the ultimate effect of weakening pre-existing financial structures by imposing Western measures of financial restructuring, thereby giving Wall Street a huge stake in the subsequent “reform” agenda introduced: Basle capital adequacy ratios were to be applied. Highly indebted banks and firms were to be closed. Labour laws were to be changed to make it easier to fire workers, facilitating the closures. Regulations on foreign ownership were to be lifted in order to allow foreign banks and firms to buy domestic banks and firms, injecting needed capital and skills. All of which required lots of western style restructuring and “reform”, and who better to offer this than America’s finest investment bankers?
Somewhat similar measures were applied in a much narrower setting to solve the American savings and loan crisis in the late 1980s and early 1990s, and they worked. But it is one thing to undertake such reforms where real interest rates are very low and indebtedness not high (as in the United States in the late 1980s), and another to undertake them where both real interest rates and indebtedness are high. In these conditions such restructuring leads to closures and layoffs, with deflationary knock-on effects and more investor pullout. In short, the Fund’s initial insistence on fiscal contraction, cuts in aggregate demand, and large-scale institutional reform accelerated debt deflation.
This is why the IMF’s strategy for Asia ultimately failed in spite of widespread attempts revisionist attempts to take credit for the region’s subsequent economic recovery. In fact, in spite of the introduction of refinancing to the tune of US$110 billion, almost three times Mexico’s US$40 billion package of 1994–95 (the biggest in the imf’s history to that date), the crisis continued unabated: Asia’s currencies went into freefall by early 1998, leading to the Fund to call for even more interest rate hikes to arrest this process. Yet by May the deepening economic contraction, the rising unemployment and the fear of social unrest combined to produce a second wave of capital outflows and renewed falls in currencies and stock markets.
The Japanese themselves had long expressed disquiet with the IMF/Treasury measures forced on the afflicted economies in return for a financial bailout, fearing – rightly, as it transpired – that an overly conservative approach would push them into a full-blown recession. The financial mandarins in Tokyo wanted fiscal pumping and low interest rates so Asian exporters could trade their way out of the quagmire – and protect billions of dollars worth of Japanese investments in the region. Unfortunately, given the state of their own economy, Tokyo’s mandarins had comparatively little leverage and credibility to push their proposals more forcefully. It was the resumption of the collapse in May 1998 which finally forced Asian governments to begin to turn away from the initial imf strategy. They began to follow Japan’s remedies: bringing down interest rates and turning fiscal restriction into fiscal expansion.
In retrospect, it is clear that the Fund’s most serious error in policy was its failure to see the danger of calling for high real interest rates for Asian economies with high levels of private indebtedness. Unlike the Japanese, mandarins at the Fund failed to understand that high real interest rates, which are fairly well tolerated in Latin American countries where debt has historically been kept low by the 1970s legacy of hyperinflation, would be disastrously deflationary in Asian economies, characterised by a high savings/high debt structure.
Seen within this historic context, therefore, Mr Kuroda’s appointment as head of the Asian Development Bank is very significant, since he, along with his predecessor at the Japanese Ministry of Finance, Eisuke Sakakibara, was one of the major architects devising the original Asian Monetary Fund proposal, which was largely predicated on these Japanese policy prescriptions. Additionally, Kuroda is on record as expressing the Asian countries’ frustration that they lacked the proper voting power on the IMF to reflect their economic development over the past two decades. When he succeeded Sakakibara at the MOF, he noted: “The voting share and board representation of the Asian countries have been extremely limited. On the other hand, 37 per cent of the voting power in the IMF belongs to executive directors from Europe.” His comments largely reflected Asian frustration over the IMF as a “white man’s club” whose interests were increasingly at variance with those of the Far East. That the Japanese nevertheless openly put forward Sakakibara as a potential IMF President after Michel Camdessus’s retirement, knowing full well that his chances for acceptance were virtually nil, suggests that the country had an ulterior diplomatic motive: to demonstrate to the rest of Asia that it was best to disengage themselves from institutions which paid scant heed to the interests of the world’s largest savings bloc and thereby smooth the obstacles for the reintroduction of a regional lending facility like an Asian Monetary Fund.
Whilst the AMF proposal itself has ostensibly failed to gain any further traction in spite of the many manifest failures of the IMF since the Asian Financial crisis, the Asia Times has recently noted that in substance, if not in form, a less direct route toward the same objective has steadily been gain steam over the past several years:
“The AMF was generally greeted with scepticism and just as quickly vanished. But its legacy was felt in other ways. Despite US resistance, the 10 members of the Association of Southeast Asian Nations (ASEAN) linked their international reserves with Japan, China and South Korea in May 2000 as part of a currency swap framework that became known as the Chiang Mai Initiative. An Asian Clearing Union (ACU) has been functioning since 1975 to settle intraregional trade transactions in local currencies, and ASEAN has had a currency swaps arrangement since 1977 to deal with temporary international liquidity problems.
At a surveillance level, the Executives’ Meeting of East Asia and Pacific Central Banks (EMEAP) was set up in 1991 to monitor financial market developments and exchange information on perceived threats. More recently, Thailand has instigated an Asian Bond Fund as a part of the Asian Cooperation Dialogue, with the objective of developing domestic capital markets and reducing reliance upon speculative inflows from abroad…"
In the meantime, Japan has been polishing up the AMF formula and, reverting to its traditionally more pragmatic approach, has shifted the battleground to the diplomatic front. Two years ago, the ADB launched a scathing attack on the IMF’s role in the global financial architecture by floating the idea of ‘credible emergency financing from official sources, with less strings’. In language that clearly was aimed at Asia’s central bankers and monetary chiefs, the institute’s Japanese dean, Masaru Yoshitomi, called for ‘collective measures to restore systemic currency stability, including joint interventions’.
Simultaneously, Kuroda’s predecessor at the ADB, Tadao Chino, began to challenge the World Bank’s function as the final arbiter of global development policy by setting the agency on a more independent footing. ASEAN countries have given warm, if qualified, support for monetary union, even awarding the ADB Institute a contract several years ago to conduct regular surveillance of the members’ economies, in a pointed intrusion into the IMF’s turf.”- (“Asia’s Answer to the IMF”, Alan Boyd, Asia Times, Feb. 19, 2005)
It is understandable why Washington would continue to resist the notion of an Asian Monetary Fund. As things stand right now, in spite of the significant contraction in bond yields since the late 1990s, western investors continue to extract huge risk premiums from the entire emerging markets universe as a quid pro quo for the provision of their capital. This is manifestly perverse, especially when one considers that the ultimate source of much of that liquidity is Asia. All of the nations of Asia continue to run large current account surpluses, the proceeds of which are funnelled back into the US Treasury market, where the savers obtain a yield of less than 5 per cent, in a country which is now the world’s largest debtor nation, suffering the twin diseases of a declining currency and higher inflation (both of which are eroding the real value of the Asian creditors’ respective investments).
By contrast, even leading Asian conglomerates (whose products are readily gobbled up by the American consumer) are forced to pay several hundred basis points above the yield of Treasuries. The Western investor or banker is extracting a wholly unmerited premium, whilst the US continues to trade on its reserve currency and safe haven status to subsidise its over-consumption and perpetuate the country’s growing financial imbalances.
It’s a great deal for Washington and readily explains the Treasury’s violent opposition to an Asian Monetary Fund (or anything else that would disrupt the existing status quo, such as restrictions on capital account mobility). But must the world’s largest creditor bloc continue to act from such a position of weakness, which is more apparent than real? The aggregate net creditor position of Asia dwarfs its indebtedness. The domestic markets are rapidly maturing and will soon be in a position to replace the American consumer (who must surely retrench if the US is ultimately to come to grips with its own debt disease).
The actions by Asia’s leading policy makers suggest an implicit (albeit belated) recognition that they have been getting a raw deal from the existing global financial architecture and are taking incremental steps to redress the current imbalance. To be sure, historic rivalries, notably between China and Japan (manifesting themselves most recently over Taiwan) may slow the development of an AMF. It is also probable that the Bush administration will likely go out of its way to exacerbate this rivalry and thereby frustrate the development of competing multilateral agencies, which would invariably weaken Washington’s influence in the region.
But in spite of these periodic setbacks, the trend appears clear. The day is moving closer where an Asian Monetary Fund will become a reality. It is particularly noteworthy that the idea continues to be pushed by Japan, America’s staunchest ally in the region. Tokyo’s embrace of Washington only goes so far. Ironically, if (as we suggested last week) America ultimately repudiates existing obligations to its (largely) Asian foreign creditors, it will simply catalyse this process and likely ensure the AMF’s swift arrival, in spite of ongoing efforts to render this idea stillborn since 1997. The world is full of such rich ironies: In Iraq, America has long expressed opposition to the formation of Shiite-dominated theocracy, yet the recent elections suggest that this is about to become an impending reality. So too, the inexorable logic of current economic policy making may yet introduce outcomes – such as the introduction of an Asian Monetary Fund – completely at variance with Washington’s oft-expressed preferences to the contrary. In any event, time is definitely not on the side of the existing status quo.
My view here is this: the Great Unravelling has been a blow to every nation in the global economy. The U.S., Europe, Africa, Asia, Latin America, Canada, they have all suffered. But, Asia is de-coupling. Mind you, I am not saying they are literally about to separate from the West and embark on their own growth path. No, the ties are too strong. Nevertheless, the West is weak, particularly the United States. No one from the IMF is dictating terms in Asia today. Nor will they for the foreseeable future. The die is cast. The United States badly overplayed its hand in the 1990s. Asia senses it is weak, overburdened with debt and depression. This is therefore their opportunity to break free and I believe Asia will use it.
(Also see related posts: China warns that the west’s quantitative easing is inflationary and Breaking news: China has been secretly stocking up on gold)