A decade later, we are all looking east, but not in envy, and not in awe. Shock, disbelief and mounting fear are more like it. Consider the images coming out of East Asia last week alone: On Tuesday Thai police bludgeoned demonstrating autoworkers, whose company had denied them an annual bonus. On Wednesday International Monetary Fund Director Michel Camdessus gave a “what, me worry?” speech in Brussels, saying that the ongoing crisis in Asia would shave but a sliver off global economic growth this year; by the year 2000 most of the nations in the region would be back on their feet. Unfortunately, his soothing remarks coincided with a devastating run on Indonesia’s currency that unsettled anew markets all over the region. On Thursday in Hong Kong angry investors beseeched Chief Executive Tung Chee-hwa to make good on their investments with another failed local brokerage house.
IN THOSE IMAGES, THERE WAS A MESSAGE: THE EAST ASIAN economic crisis is not going away. Not this year, not next year, not any time soon. More than likely, it is going to be the central economic fact of life right into the next millennium. The Pacific Century, indeed. Some equity and currency markets in the region may have bottomed; some countries–South Korea most prominently–have taken the first, halting steps toward salvation. If it is contained–and If is still the operative word–the devastation in Asia, as most economists have argued, need not take healthy American and European economies down with it. That’s certainly the hope of the globe’s economic custodians, most of whom gather this week in Davos, Switzerland, for the annual World Economic Forum. But even so, the aftereffects–both economic and political–of the great East Asian bust have only begun to be felt, and they still carry enormous risks. “Don’t kid yourself,” Andy Xie, vice president and economist at Morgan Stanley in Hong Kong, said last week. “There are still scenarios in which Asia could take down the world. We are nowhere near out of the woods on this.”
Those risks, for now, remain fairly low. But they are there, and in the United States and Europe, they are still not widely understood. In Europe, inward looking and preoccupied with its plans for monetary union, Asia’s crash is distant–and to some, a sort of vindication of all those snooty comments about “transistor-radio salesmen” that Europeans have been making for decades. That sense of Schadenfreude, to the extent that it exists, should be resisted. As one British banker in Hong Kong puts it, “other people’s misery is no fun when it could easily become your misery, too.”
For most Americans, the Asian crisis still exists mainly in, as one U.S. banker in Tokyo put it last week, “CNBC-land,” that place where “you wake up in the morning and see whether the Hang Seng index is going to put a crimp in your mutual fund that day. Then you go to work and try to forget about it.” To its credit, the Clinton administration, which was slow to recognize the gravity of the crisis when it erupted last summer, now plainly gets it, and is trying to get the message into CNBC-land. Last week Treasury Secretary Robert Rubin delivered a long, sober speech at Georgetown University in which he declared straightforwardly: “Asian financial instability [is still a threat] to economies all over the world.”
Rubin’s timing was awful. History may one day record his speech as one of the late 20th century’s most important messages, delivered at the worst moment imaginable: on the very day the scandal that could bring down President Clinton exploded in Washington. In its actions since the beginning of the year, the Clinton administration had signaled that it understands both how easily the Asian crisis could slip out of control and where, precisely, the two major fault lines reside. One is Indonesia. In mid-January a delegation of senior officials, including Defense Secretary William Cohen, visited Jakarta. Their message to Indonesian President Suharto–reinforced by a blunt phone call from Clinton–was simple: stability in Indonesia, a nation of 198 million people, was a critical U.S. priority, and that stability was dependent on Suharto’s following the IMF’s harsh prescriptions as if they had come from the hand of God.
Suharto had agreed. But five days later the 76-year-old Indonesian president, who will stand effectively unchallenged for a seventh five-year term in March, made a decision that profoundly transformed the nature of his country’s crisis. He let it be known that a man Western-currency traders refer to caustically as B. J. (Fly Me to the Moon) Habibie might be his designated successor.
The world just now did not need another lesson in what a “globalized” place it had become. It got one anyway. The mere possibility that Suharto’s eventual successor could be an obscure bureaucrat known mainly for his love of publicly funded boondoggles–including the country’s aerospace program–destroyed Jakarta’s currency and rocked markets around the world. It turned what had been an economic crisis arguably containable by the IMF’s repairmen into a political crisis that could end very badly for everyone.
The markets have now voted no confidence in Suharto’s government. Some foreign banks are so despairing about ever getting their massive dollar debts repaid that they are actually accepting payment in Indonesian rupiah because, as one banker said bitterly last week, “it’s almost better than nothing.” By Jakarta’s own estimate, at least 1 million Indonesians will lose their jobs this year in an economy that has effectively stopped functioning; meanwhile, an election whose outcome is a foregone conclusion is just two months away. It is, as William Overholt of Bankers Trust in Hong Kong says, “a potentially poisonous cocktail.” Political chaos in Indonesia would destroy any hope of an expeditious recovery in Southeast Asia–possibly for years.
Crises can, of course, be constructive. They concentrate minds and force some leaders to make decisions that they otherwise would never go near. South Korean President-elect Kim Dae Jung has already begun to convince both the international capital markets and his own people that he will not shirk the grim duty of overhauling the world’s 11th largest economy.
He has yet to take office formally, but his evident resolve has moved markets in the right direction. Seoul’s stock market has risen by 35 percent since the beginning of the year; its currency, the won, has been stable for about four weeks now, and rising Korean exports are beginning to generate the foreign exchange the country so desperately needs. The lesson, says Morgan Stanley’s Xie, is obvious. “In situations like this, nothing matters more than leadership.”
Except, perhaps, its absence. It is no coincidence that the second and bigger potential breach in East Asia’s fire wall is Japan and that no developed country in the last decade has been less well served by its leaders. No country bears more responsibility for East Asia’s current economic plight than Japan, and no country has more at stake in the region’s avoiding the depression that looms; Japanese Prime Minister Ryutaro Hashimoto has repeatedly vowed that his country will not be responsible for tipping the world into a global recession. But for most of the last six years, Japan has been a dead weight on the global economy, unwilling to take the painful steps needed to shake off the effects of the stock- and real-estate-market crashes of the early ’90s.
More than anything else, the world needs Japan to snap out of it. Rubin last week could not have been more blunt: “It is absolutely critical that Japan take the steps necessary to deal with the issues in its financial system, to generate solid domestic demand and to open its markets.” How critical? Japan in 1997 bought nearly $200 billion in imports from the rest of Asia. With the sharp currency devaluations among its neighbors, that amount should, everything else being equal, rise sharply this year. “These countries desperately need to be able to export their goods to someone other than the United States,” says Overholt. “Japan should be an engine of growth.”
BUT EVERYTHING ELSE IS not equal. The Bank of Japan conceded last week that Tokyo’s economy was again “stagnant”; in response, Hashimoto hinted that additional tax cuts–he’d already announced a package worth about 2 trillion yen–may be announced next month. The risk of not delivering now can hardly be overstated. But given Tokyo’s track record, deliverance can’t be assumed, never mind the rise in Tokyo’s stock market last week. “Japan’s the ball game right now,” says Morgan Stanley’s Xie. “The possibility of an outright recession there and chaos in Indonesia is the script for this whole thing spinning out of control.”
That prospect is troubling–particularly because since this crisis began, nothing has arrested its spread within the region. Everything that could have gone wrong, it seems, has. Given that, what’s remarkable is that the damage outside Asia has so far been relatively limited. To understand why, look west. The extraordinarily healthy American economy continues to roll. Its budget is balanced, interest rates are low and falling, consumers are flush. Rarely has the United States been better equipped to deal with such an unexpected shock to the global economy.
But the United States isn’t the world’s only source of strength now. To the extent that its exports are weakening in Asia–and they are–for many companies a surprisingly healthy backstop has emerged: Europe. Yes, unemployment remains absurdly high, and government efforts to cut a bloated social-welfare system are unpopular (the unemployed who protested in France for more benefits actually won wide public sympathy). But for all that, the drive for the euro has lowered interest rates continent-wide, and that has begun to boost growth rates, particularly outside Germany and France. European companies, in the midst of a historic merger wave, are increasingly competitive. And even the continent’s fabled technophobia is beginning to fade: last week American powerhouses Compaq and Intel both said they are looking to Europe for increased sales as East Asia buckles.
Still, particularly for the United States, the sense of blissful insulation from Asia’s turmoil may not last much longer. The very strength of the U.S. economy now contains in it the seeds of future pain. The expected surge of imports from East Asia has started and will only accelerate. The U.S. trade deficit is likely to rise massively in 1998, particularly if the Japanese yen weakens further. According to a study released last week by the Economic Policy Institute, the rise in imports may cost up to 1 million American jobs in 1998 alone. “The competitive pressure from East Asia will be more intense than anything a lot of U.S. companies have ever felt before,” says Kenneth Courtis, chief economist at Deutsche Bank in Tokyo. “All the talk about how re-engineering and restructuring had made U.S. companies so competitive was all true. Now guess what? They’re going to have to do it all over again.”
The politics of that could be ominous. Already in Washington, a vocal minority in Congress is resisting increased funding for the IMF, arguing that private bankers should take their lumps. If East Asian “bailouts” now become associated with a loss of American jobs, the protectionist mood could increase in an election year.
The consequences in the West, though, will pall compared with those likely to come in Asia. Since 1990, East Asia has generated half of the world’s economic growth. Hundreds of millions of people became middle class, and they were on a ladder that they thought went in only one direction: up. Now millions are going to fall back into poverty, not knowing what hit them. The political fallout from that is “not likely to be benign for rulers in the region,” says Bankers Trust’s Overholt.
And as economies in Asia contract further, as they inevitably will, and more protesters hit the streets in Bangkok, Seoul and Jakarta, the IMF–already unpopular–will come increasingly under attack. So, too, will the United States, seen as the IMF’s prime political sponsor. There is going to be an urgent need for levelheaded leadership everywhere, but particularly in Washington. Up until last week the Clinton administration was doing a reasonable job of providing that.
By the end of last week there was only one question on the minds of East Asia’s leaders: can it now? By Friday, as news of the political scandal engulfing the president of the United States coursed through the region’s press, a senior U.S. diplomat recounted a conversation he had with a leading Asian politician. “He said, “You know, the last thing we can afford at this point is an incapacitated president and Washington taking its eye off the ball out here. But that’s what we have now, isn’t it?’ " And then the politician turned and abruptly walked away, not waiting for an answer that he believed he already knew.
