The World After the Asian Currency Crisis
Address to the American Chamber of Commerce
by Dr. Allan E. Goodman
President and CEO, Institute of International Education
24 March 1999, Bangkok
This year is different. We meet amidst predictions that the Asia miracle will be succeeded by an Asian meltdown.
--Secretary of State Madeleine K. Albright
Address to the APEC Ministerial Meeting
1 December 1997 Some events leave the world changed forever.
Many start out as regional crises and most contemporary analysts fail to grasp their global significance. The Athenian campaign against Sicily in the Peloponnesian Wars, the agricultural effects on the Roman Republic of its war against Hannibal, the "Black Death" plague in medieval Europe, and the discovery of the Americas by sea-faring Europeans are all examples of world-changing events that were regarded at the time of their occurrence as regional in scope and catastrophic only for those who were immediately affected.
The events which began in Bangkok in July of 1997 will also be seen as a "world-changer." And what I plan to do is both sketch out the causes of the crisis and then the contours and dynamics of what may lie ahead for the system of international relations as we know it. In doing so, I recognize that it is still somewhat unusual for political scientists to want to speak about economic and financial matters. But increasingly we have to do so, because many of the main driving forces in world politics are being generated by markets and the actions that states and banks must now take because of them. "It's the economy, stupid" is, in essence, the answer to the question of what will govern international relations in the post-Cold War era.
And at the outset, I also have to admit that the Asian currency crisis might well be a world class event merely because size matters. Asia is big in demographic terms; nearly two out of every three persons on the face of the earth consider themselves Asian. The volume of Asian countries' trade with themselves is greater than most countries' trade with the entire world. A decade before the crisis hit, Americans were already trading more with Asia on an annual basis than with Europe. And while over a two hundred year period the philosophers and capitalists of the West transformed wealth into the strength of their nations, in just ten years the leaders of Asian countries lifted more human beings out of poverty than all governments in all of human history.
A Funny Thing Happened on the Way to the Asian Century
Prior to 1997, one of the most hotly-debated topics in academic as well as governmental circles in America as well as Asia was the issue of the "clash of civilizations," a thesis advanced by Professor Samuel P. Huntington. He was looking for a way to make sense out of the post-Cold War era and to predict its disorders. He ran into a maelstrom of reactions -- largely from Asian scholars and leaders -- to his characterization of their value systems. His critics in the region saw Huntington's stress on Confucian and other anti-individual values as evidence of a plot to deny Asia nothing less than the future. The perceived U.S. government policies that flowed from Huntington's approach, moreover, were seen as the equivalent of a form of economic containment aimed at thwarting the so-called Asian miracle and a last-ditch effort by a jealous West to deny Asia its rightful place as owner of the 21st century.
You don't hear much talk about the Asian century these days and recently the feature story in Business Week (8 February) was entitled "The Atlantic Century?"
The Asian currency crisis has left no one untouched. Its effects have been felt by a wide variety of countries, ranging from the very wealthy (e.g., Japan and America) to the poorest, as well as from those deeply integrated into the global monetary system (e.g. South Korea) to those which have so far managed to keep their currencies from being exchanged world markets (e.g. China and Vietnam). Extraordinary short-term measures to shore up entire economies had to be taken, and virtually every government dealing with the crisis had to change its preferred policies as soon as the magnitude of the problem became clear.
The starting point for understanding the crisis lies in grasping just how much money there is in the global marketplace and who controls its flow.
Every twenty-four hours, the equivalent of some $1.5 trillion worth of currency and other financial instruments is exchanged on global currency markets. If this amount were converted into single dollar bills and one placed on top of another, the stack would reach from here to the moon and back. There would, in fact, be enough for three round trips. Within a week, world markets deal with more than the annual GNPs of the United States and Japan combined.
That is a great deal of money and most of it is not within the control of any sovereign state. When countries seek to defend their currency (i.e., prevent others from exchanging it at rates and in amounts that are considered worrisome), no government appears to have enough money or regulations to influence this global market for more than a few hours. "The market" rules this world and the crisis showed that it does so with surprisingly simple rules. In today's system, money is worth only what traders are willing to pay for it and thanks to modern communications, traders exchange views and process information about governments, politicians, and the impact of their intentions and policy declarations on investments constantly.
By the beginning of the summer of 1997, they did not like what they were hearing.
The first bad news was talk of an interest rate increase in Japan and to a lesser extent the United States. These two are the main sources of the world's cheap-but-reliable money. A group of specialized traders regularly went to these two countries to borrow money at low interest rates in order to take the funds to other countries -- mainly in East Asia -- where two things were true. First, the local banks there offered short-term, high-yielding certificates of deposit and other forms of bonds. And second, these banks were in countries whose currencies had traded for more than a decade at the same rate to the dollar. The aim was to make money (and not foreign policy), using the funds loaned by Japanese and American banks to earn high rates of return in places where the local currency could easily be converted back into dollars or yen before the original loans had to be repaid.
When government officials in Japan and the chairman of the Federal Reserve in America began talking about the need to raise interest rates, the traders concluded that it was time to liquidate their investments in Asia. This created very high and unanticipated demands on East Asian banks to convert their currencies into dollars or yen. We now know they did not have the money on hand to do so. Part of the money needed to cope was lost due to corruption and the rest was tied up in loans to businesses whose assets were not very liquid. Because so much of the commercial activity in Asia is financed by bank lending rather than through sales of stocks on equity markets -- which, it turns out are much harder critics of a business performance and potential, the banks had to begin calling in the loans they had made to businesses which were not doing well in order to raise cash. The traders knew what was happening in a matter of minutes and stepped-up the rush out of their local investments.
A crisis over cash led to a panic. Markets re-evaluated the worth of the local currencies and throughout the region, exchange rates plunged.
The second source of bad news were the pronouncements of Malaysian Prime Minister Mahathir blaming prominent forces (hedge funds) and personalities (financier George Soros) in international financial markets for Asia's troubles and his outspoken view that "Jews are not happy to see Muslims prosper." Currency traders did not like the sentiments but liked even less Dr. Mahathir's prescription: regulate global currency trading. The unspoken assumption was that Dr. Mahathir was speaking about the private thoughts of many in the region. If so, Malaysia and probably the rest of Southeast Asia were no longer going to defend the stability of their exchange rates, especially to the dollar. So, to a currency trader, no matter how sound Malaysia might appear as a country -- and it did have low inflation, a budget surplus, and well-run government -- there were enough other places to invest where leaders acted and spoke in ways that were less offensive and showed greater sophistication.
At the same time that these events were unfolding, investors around the world were learning that the U.S. stock market was headed toward another year of record gains and that the interest rates being paid on Asian bank bonds was only slightly higher than U.S. Treasury bonds. The value of investments on average in the stocks listed on the New York exchange rose nearly 23 percent in 1997. More than $300 billion of new money was invested in stocks in the United States and the Treasury did a brisk business in T-bills. Much of this money had been destined for Asia. But investors were finding that with much less risk and no corruption, they could purchase stocks in such familiar companies already doing business all over the world such as AT&T, IBM and General Electric. The value of these companies' stock rose in 1997 49 percent, 48 percent, and 30 percent, respectively. These rates of return looked even higher before the currency crisis struck, which increased the attractiveness of investing in them compared to the risk and hassles involved in continuing to do business the Asian way.
The point of recounting some of this history is to indicate that markets are listening and making political as well as economic judgments all the time about countries as well as businesses as a destination for investment. Traders do not have to wait for new elections or for the results of quiet diplomacy by emissaries from the IMF or the World Bank to figure out where their money will bring the highest returns.
None of this should have come as a surprise.
What We Should Have Expected
The ingredients of the so-called "East Asian miracle" were as well-known as the accomplishments. Governments throughout the region made policies and created business communities and enterprises where a premium was placed on growth. The underlying assumption was that as long as economic growth continued at high levels (e.g., 7-10 percent), it did not matter so much how it was financed.
East Asia turned out to be unique in one other respect. Between 1990 and 1995, most of its enterprises were financed by bank lending and not through the sale of stocks. Stock markets are far sharper judges of company worth and performance than are bankers, as we in the U.S. learned during the Savings and Loan crisis. Stock buyers do not think they are making loans and they do not stay long with companies that do not perform. Bankers are different. And they are especially forgiving of bad business performance and shoddy or fabricated records if they are told by government officials to make loans or if they are used to receiving substantial up-front payments for disbursing cash to local businesses. Whether this is called cronyism, complacency, or corruption -- all three terms have been used in the region's media -- the result is the same: bad loans.
Banking reform is the key word in most analyses now appearing on how East Asia must deal with the causes of the currency crisis. It is a synonym for greater transparency in all dimensions of financial activities and, especially the separation of banking from politics. It also means that markets will not settle for a return to the status quo. Asia after the currency crisis has to be a different place in which to do business and make investments.
What this means, consequently, is that the crisis is still with us. And this, in turn, suggests that the situation will take much longer and be far harder to solve than financial experts currently think. At the heart of what needs to be fixed is politics as much as economics. This is why, in part, American officials press so hard for the creation of a robust and pluralistic civil society in Asian countries. Only when politics and business are separate, and political leaders are held accountable for the actions they take which undermines markets can investors be reasonably assured that the risks of leaving the New York Stock Exchange are worth taking. And even when the politics are right -- or at least when leaders are better and wiser than they are today -- there is nothing to prevent currency traders from acting overnight to re-direct investments to other regions where, for however brief a time, the deals looks sweeter and the short-term returns higher.
For what we have all been reminded of watching the Asian currency crisis is that while what is good for business may not always be good for a particular country, making business decisions based on what appears good for politics almost always results in something bad for both.
There is also a lesson in this crisis about the United States. During 1997, Asian leaders increasingly questioned the depth of the American government's concern about and commitment to stability in Asia. In the aftermath of the currency crisis, there should be no doubt about how closely American interests are connected to what happens in this region. What was particularly striking is the speed with which the U.S. government reversed a long-standing tradition of maintaining a hands-off approach and intervened to solve the debt-repayment problems of the countries most seriously affected. As President Clinton moved to help South Korea and the countries of Southeast Asia, it was also striking that there was no prolonged debate in Congress over what was right to do, as there had been when our neighbor Mexico faced currency crises in the 1980s and the 1990s.
Foreign trade still constitutes a relatively small portion of the U.S. gross national product compared to many other nations. But by acting the way the U.S. government has in the present crisis, Americans are demonstrating they understand that economic and financial matters do tie us together. Indeed, the recent crisis has shown that the most appropriate role for the U.S. to play is precisely one that involves maintaining the social and political stability so essential to peace in the region. But as the crisis has also shown, sustained growth will not occur without fundamental political changes. Those who invest in Asia after the currency crisis may, consequently, play a far more important role than human rights policies and advocacy organizations in shaping the changes that lie ahead.
The Emerging Structure of World Politics
The motto of the building where I used to work on the Georgetown University campus is taken from an essay by the French paleontologist and priest Teilhard de Chardin. It reads:
The Age of Nations is past. It remains for us, if we do not wish to perish, to set aside the ancient prejudices and build the earth.
Teilhard wrote this in March of 1931. Every time I passed it, I thought that only a Jesuit would be so sure. The world of 1931, in fact, was becoming a very dangerous place, and at the center of all the trouble brewing then were some very ancient prejudices that had taken hold of nations whose actions were key to security in Asia and Europe.
Clearly we are not yet living in the kind of world to which Teilhard's vision summoned us. Sometime between the fall of the Berlin Wall and the onset of the Asian currency crisis, we entered what Vaclav Havel calls the "post-modern era." This is an age in which everything is possible and nothing is certain. These conditions prevail primarily because power is being dispersed not only across nations but also across cultures. If present trends continue, the structure of world politics is going to be based on the globality of companies, currencies, and culture as well as countries.
Globality is about the reach and impact -- whether intended or not -- of each of these non-governmental forces. Their power is based on things that countries no longer control: the Internet and fax, 24-hour currency markets, and CNN. Their reach is already creating a borderless world for many people who, on a daily basis, exchange products, money, and, most importantly, ideas.
Understanding the extent of globality and the degree to which it is not dependent on the traditional measures of power are as important for those studying world politics as knowledge of any particular nation's foreign policy.
This is not the conventional wisdom. The political scientists and historians who study diplomacy still look at the world in terms of which countries prevail. What is new is that money matters the way military power used to determine who influenced whom and, in my view, is transforming the structure of world politics. Today, in fact, two-thirds of the 150 biggest entities are no longer sovereign states.
We are also living in a world in which an alarmingly large number of governments simply do not work or work very well. This is not necessarily a new phenomenon. But, as it turns out, an international system dominated by globalization rather than ideology is proving far less forgiving of states with bad government. According to the World Bank, some 89 countries are worse off today than they were ten years ago. And there is a whole tier of countries (primarily in the Arab Middle East and North Africa, the rest of Africa, plus India, Indonesia, Brazil) where the Bank estimates that more than half of all persons now under the age of 20 may never have a full-time job.
That world is, thus, still a dangerous place.
There is precious little connection, it seems, between what is happening today and tomorrow's headlines. It is genuinely hard for diplomats as well as business people, consequently, to make sense out of what is going on in international affairs. And no wonder that academics seem more resistant than ever to leaving the sanctuary of ivory towers. We are currently in between world orders: communism is essentially dead and the bipolarity of the Cold War is over, but progress towards freer markets and political systems seems stalled. And while democratization movements are sweeping the globe, the governments produced by them have not lived up to the high expectations they generated.
In the emerging international system, moreover, the state system is increasingly characterized by the declining power of governments to control events -- especially in the economic and social arenas. Even the so-called great powers will no longer possess the certain ability to project policies and values that they enjoyed during most of the century. Consequently, most states are becoming part of an ever-expanding web of commercial and cultural networks that enhance the ability of individual citizens to exchange goods and information with an ever-widening circle of relationships. This is giving rise, especially in Asia, to "region states" where the links between some cities and city-states are more significant than the relationships such urban areas have with national capitals.
World politics, as a result, is coming to be shaped far less by ideological rivalries than by such key global issues as the ability of the world trading system to generate resources for the provision of basic human needs in poor countries and to the poor people in rich countries, the need to conserve the environment, and disputes over the degree to which the embrace of free markets ought to coincide with the expansion of political participation and individual freedom.
The challenge for the diplomat and businessperson alike (and those who study what both do) will be to provide early warning of where there will be trouble. Political reporting and analyses, for example, will especially have to take account of the dynamics mentioned above by focussing more effectively on the following:
--the "inter-mestic" issues (e.g. migration pushes and pulls and controversies over human rights) and problems (such as the impact of trade policy on job creation or of environmental protection measures on industrial development) where domestic needs and forces drive international relationships;
--the way in which governments deal with societal change and contradictions (e.g. between national creeds stressing equality and the existence of racial discrimination, between free markets which expand greatly the size of the middle class but do not result in their greater political participation or representation in politics, and between methods for preserving order and stability that infringe on human rights);
--the impact of developments in science, technology, and the environment on domestic political trends and forces; and,
--the secular trend toward devolution of national authority to regional and local bodies and their growing preference and ability to conduct international relations on their own.
Given these dynamics, monitoring globalization will be more essential than ever before to national security as well as the bottom line.
The balance of power system that has both sustained long periods of peace as well as spawned world wars is also unlikely to persist. But instead of a clash of civilizations, we are going to see a new map of the post-modern world emerge as the international system "right-sizes." In just ten years, the international system has increased the number of countries in it by 20; population is growing at the rate of 90 million a year, more than twice what the growth rate was just a decade ago, suggesting that even more new countries may lie ahead. In the process, what constitutes a country and how it is held together is changing. And ideas flow so readily across borders, languages, regions, and cultures that regions of many countries conduct foreign political and commercial relationships with regions of other countries in ways that the central government can barely monitor and no longer effectively control.
Like a bolt of lightening that suddenly illuminates a summer evening, the Asian currency crisis revealed much about the landscape of the future. It is considerably larger, different, and more global than we thought.
"So what does this tell us about the future?" writes Jack Welch in his latest report to GE stockholders. "It tells us that what's as important as predicting trends is a company's ability to cope with any trend." This will place a very high requirement for the inclusion of non-traditional subjects in the curriculum on those who are responsible for the intellectual and professional formation of corporate as well as governmental leaders. Many schools in the United States and Europe, for example, are adding substantially to the curriculum in the fields of international business and finance, intercultural studies, and regional law and organization. The foreign service academies with which I am familiar, moreover, are now finding themselves with as much need for economists and specialists able to teach the folkways of such organizations as ASEAN, APEC, and the WTO as they have for linguists.
The most critical success factor for nations as they enter the 21st century, thus, is people whose minds are open to the world. This can only happen, as the late Senator Fulbright observed, through international education because "it can turn nations into people and contribute as no other form of communication can to the humanizing of international relations." Would there have been an Asian currency crisis if there had been more Fulbright alumni among the bankers and politicians? With so many opportunities for interaction especially among the elite who lead governments and businesses in Asia, you would think that the need for such exchange programs would, in fact, be receding.
I do not think this is the case.
The universality of the dollar, the English language, and the Internet make us all think we are closer and more secure than we are. But in the century ahead, virtual exchange will be no substitute for what those of us who are in the business of internationalizing higher education are working to achieve: namely, the broadening of a young person's cultural and intellectual horizons and the increasing of their capacity to think and work globally. In my view, this is the surest way of making the world after the Asian currency crisis a less dangerous place.
|
