Crisis as Conquest: Learning from East Asia by Jayati Ghosh and C.P. Chandrasekhar; Orient Longman, Tracts for the Times No. 12, 2001; pages 137, Rs.150.
THE International Monetary Fund (IMF) has declared that the East Asian crisis is over; they fixed it. Many people in the affected countries feel differently. Economies are still fragile, politics is turbulent, and the social fallout is all too evident. A lthough an enormous amount has been written on the crisis, its origins are still controversial and its consequences not yet clear. Jayati Ghosh and C.P. Chandrasekhar have written a concise and elegant account, designed to highlight the important lessons for India. It concentrates on Korea and to a lesser extent on Thailand, and sets the whole event in a global and historical context.
The theme is announced by the title and by an opening cameo. In the wake of the crisis, the United States auto giants are gobbling up the Korean car-makers who had offered one of the few successful challenges to Western multinationals over the last quart er century. "To revise a famous phrase, a spectre is haunting Asia: the spectre of imperialism."
The authors first set the crisis into its global background. They argue that the key features of the globalisation of the past two decades were not rising levels of cross-border trade and investment, but the concentration of capital on a world scale in t he hands of a few multinationals and the outrageous growth of speculative finance. The financial markets are now massive, unregulated, entangled and obscure. They have a frightening capacity to generate vulnerability ('sentiment') and to transmit it acro ss the world ('contagion').
The authors then turn to the countries affected by the crisis. The crisis began, they argue, with the dramatic fall in export growth rates in 1996. This fall happened because too many Asian countries were pursuing export-oriented industrialisation in the same range of export goods (mainly electronics). The export slow-down triggered rising current-account deficits which spooked the international financial markets, leading to capital withdrawals and attacks on the currencies.
This capital flight had a devastating impact because the levels of private corporate debt were so high. The authors relate this back to the export-orientation strategy, which had a built-in tendency towards trade and current account deficits. The electro nics industry and other boom industries required high levels of component imports. Increasing levels of foreign ownership meant rising outflows of profits. Trade liberalisation restricted the government's ability to choke consumer imports. So countries w hich went for the export-industrialisation strategy found that they needed capital inflows and were all too easily tempted by the World Bank/IMF's encouragement to liberalise their financial markets. Policy-makers saw financial liberalisation as a means to cover the widening current account deficit, without fully appreciating the fact that they were making the economy more vulnerable to currency attack, capital flight and crisis.
Finally, the IMF converted a handful of loosely related national crises into a full-blooded international mess. It applied its old-fashioned recipe of severe deflation (involving tax increases, budget surplus, tight money), and dogmatically resisted any suggestion that financial liberalisation should be compromised in order to moderate panic capital flight. It also offered only half-hearted help because, in contrast to Mexico, the countries involved were not central to U.S. global economic thinking. Cap ital flight accelerated and became self-sustaining. The affected economies went into sharp reverse. Unemployment soared and bankruptcies multiplied. Companies were gutted of capital, making them easy prey to foreign buy-out. More 'mergers and acquisition s' (smooth talk for expropriation) took place in crisis-hit Asia in 1998-99 than ever before.
The authors then make three main points about the aftermath. First, the IMF bail-outs have left these countries with huge public debts and a great vulnerability to fiscal crisis, which in turn makes them easily tempted by new offers of fast money and in time to new possibilities of financial panic. Second, such crises have now become the normal state of affairs in the world. Mexico had one before the Asian event. Russia and Brazil have had them since. And after the authors sent this book off to the publ isher, Turkey and Argentina have been added to this dreary list. Third, financial instability has contributed to a decline in world economic growth, but international finance has beaten back the pressure for controls. So "financial volatility and subsequ ent real economic decline have become typical features of the world economy in the current phase".
THE authors trace the meaning of the crisis for development economics. In the era of anti-imperialist reaction, development economists argued that countries would have to insulate themselves from big country domination in order to create the space to gro w. The apparent success of East Asian industrialisation with open markets punctured that idea. The 'Miracle' was trumpeted as a replicable model. But, the authors argue, the crisis must puncture this enthusiasm. First, because if everyone tries to export the same industrial goods then it will result in saturation. Second, because the strategy creates an illusion of independent industrialisation, when the reality is a highly dependent, possibly temporary phase of industrial relocation. Third, because the export strategy leads countries down a slippery slope to financial liberalisation and extreme vulnerability. Fourth, because reality sets in when the crisis hits, capital flees, and the baddies arrive to buy up the debris with beads. This chapter is the high point of the book and worth reading by those who think there is nothing left to know about this over-written event.
The authors' analysis has the great strength of concentrating on the economics of the crisis. We agree with them in the main. But we wonder if their approach does not miss some of the political economy of the event.
Take the issue of the origins of the crisis. Academics in East Asia and South East Asia have divided themselves into two camps. Members of the first camp draw from theory about finance capitalism and argue that Asian countries made the fatal mistake of l iberalising their financial markets at a time when there was excess liquidity in the advanced markets. Members of the second camp adapt theory about overproduction crises and argue that the Asian countries were simply the weakest link in a typical capita list downturn on a world scale.
The authors want to link these two into one argument. The Asian countries' pursuit of export-led growth led both to a (regional) overproduction crisis and to the decision to open up financial markets. We suspect this is a bit too neat. The question why t hese countries adopted financial liberalisation is being properly researched only now. We agree with the authors that you cannot simply blame it on World Bank/IMF advocacy. We also agree that the pursuit of export-led growth predisposed countries to acce pt financial liberalisation to counter current account strain. But we suspect that there was more behind the decisions. Why did Korea opt for financial liberalisation some 20 years after adopting export-led growth, while in Thailand the lead time was onl y three years? Why were the decisions taken in the late 1980s, when economies were growing at miracle rates? The really bad current account deficits only emerged after financial liberalisation had subjected these economies to 'shock' capital inflows five to ten times higher than previous levels. We think you have to look at the political coalitions driving policy change. In the Thailand case, there was a coalition of technocrats and rising new businessmen who saw financial liberalisation as a way to cir cumvent old business oligopolies. Ha-joon Chang's analysis of Korea runs along the same lines. These policy coalitions were not just the handmaids of economic forces lurking in the national accounts.
In looking at the IMF stabilisation programmes, the authors concentrate on the macroeconomic part. But one important element of this crisis was that the IMF went far beyond its usual macroeconomic measures. It attempted to push through changes in financi al systems, legal systems, labour practice and social welfare. In other words, political engineering. These 'reforms' constituted another form of shock. In the case of Thailand and Indonesia, this pressure converted turmoil in the banking systems into to tal collapse of the credit market. This has had as much of a role in delaying recovery as the enlarged public debt on which the authors concentrate. The point is that these extra IMF conditions were mandated by the Washington policy establishment (Rubin, Summers, Greenspan, Barshevsky). This establishment saw the crisis as an opportunity to re-establish U.S. political influence in a region which the Americans had 'lost' to the Japanese after the Vietnam war defeat in 1975. They also saw the crisis as an opportunity to open up the highly dynamic Asian economies to much greater involvement by U.S. companies. These interventions were motivated by a naive perception of Asian economies and a total faith in U.S. power to re-engineer economic, political and l egal systems. The authors draw attention to the concentration of capital on a world scale and the imperialistic consequences of the process. But there is also a concentration of political power on a world scale, with similar results. Although the two pro cesses are clearly related, it is not a simple identity. The U.S. policy establishment's actions are framed by ideology and by perceptions of national self-interest.
THIS brings us to the main issue. The climax of this book is the final chapter entitled 'Policy implications for India'. We fondly remember that in late 1997 one of the authors contacted us and conveyed India's thanks to Thailand for crashing so badly th at the World Bank had reluctantly tempered its pressure on India to liberalise its capital account. Now the World Bank/IMF has proclaimed that the Asian crisis is over, it was not really so bad after all, and they fixed it beautifully. The authors have r ightly started to get worried that the pro-liberalisation pressure on India will re-emerge both inside and outside the country.
So what can India do? The current slow growth rate provides the pro-liberalisers with a strong argument for change. Earlier, the authors suggested that India should devote more attention to industrial exports, if only to push India's industrialists to ad opt world-standard technology. Here again they emphasise that "Successful capitalist industrialisation cannot occur in a context 'insulated' from world markets". They want to find a path through the liberalisation minefield which reaches the promised lan d of sustained growth without being blown up first.
Their solution has three parts. First, India should replicate the mercantilist export strategy of Korea and Taiwan - picking export sectors and then concentrating resources so that Indian firms become world-competitive. This must be done through some va riant of East Asia's guided capital markets, and so financial liberalisation must be delayed. It will require a strong state to discipline and direct the industrialists. Second, India also needs to copy Taiwan-Korea's land reforms which will destroy the political support for old policies, ensure that the benefits of export growth are not all captured by a minority, and deliver savings growth so that India can avoid the dangerous dependence on international capital. Third, India needs to retain much of i ts command economy (especially import controls and public distribution) to ease the strains of transition.
This model is partly inspired by China, and the authors take a wistful glance at China's recent growth rates. This strategy is only imaginable for countries that have a huge internal market, a strong state, and most of their defences against globalisatio n still in place.
The question is: where is the political coalition to support such a strategy? At present, there seems to be a polarisation. Political and industrial elites are gathering inside Fortress India, and throwing up nationalistic walls. Outside, the liberal ref ormers are massing to lay siege with fancy weapons acquired from the economic arms trade - the heavy artillery stamped with the initials of the World Bank, the World Trade Organisation and the IMF, the small-arms fire of business school textbooks, and th e missiles of international finance. The Trojan horse on the inside is likely to be much the same policy coalition which supported liberalisation in East and South East Asia - the technocrats with U.S. degrees, the new businessmen attracted by cheap capi tal and decontrol, and political opportunists. How to stop them?
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