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It has been our view that the economies of Thailand,
Indonesia, and Korea would
remain in serious trouble until the disastrous deflationary policies of the
IMF and the US Treasury were abandoned. Our reasons for this are spelled out
in our early 1997 piece, "A Long Run Perspective on Asia,"
and in our paper, "The Asian Crisis: The High Debt Model Versus the Wall
Street - Treasury-IMF Complex." Our associate Robert Wade repeated our
arguments in a recent "personal view" column in the June 23
Financial Times entitled "Asian Water Torture". In recent days we
have seen the first moves toward a departure from deflationary IMF policies.
Indonesia is cutting
interest rates despite high inflation and will have a budget deficit of 8.5%
of GDP. Of greater significance has been similar moves in Korea to
lower interest rates and cut taxes, thereby raising the fiscal deficit from
1% to 4% of GDP. SEOUL, July 8 (Bloomberg) - The South Korean government
urged banks to cut lending rates to help stem bankruptcies and encourage
companies to make investments that can revive a shrinking economy. "I
understand many banks already mapped out plans to lower prime lending
rates," said Chung Keun Yong, the head of the
financial policy division of the Finance and Economy Ministry, speaking on
Korean television. The proposal comes as banks have cut the annual interest
they pay on deposits to as low as 12% while maintaining average lending rates
above 17%. To help lower market rates, the Korean government will discuss
ways to expand money supply as well as revise economic policies and targets
during meetings with an International Monetary Fund delegation from today, a
ministry official said. The government cut market rates to as low as 12% by
the end of next month, local newspapers said. The IMF has said it is happy
for rates to come down over time provided this doesn't weaken the currency
and make it harder for Korea
and its companies to repay its debts. The won strengthened 30% against the
dollar in the past six months, prompting speculation the Korean central bank
may sell won for dollars to stem its rise.
Lower rates will help stem a raft of corporate defaults by reducing
the cost of repaying an estimated $600 billion of corporate debt and making
it cheaper for companies to borrow more money for investment. Korea needs
to boost spending to stimulate its economy, which may have contracted at an
annual rate of at least 4% in the first half of the year, its deepest
recession in four decades.
It appears that Korea
has taken these steps without IMF approval. It also appears that the IMF is
acquiescing. The Koreans and the IMF probably both now realize that the IMF
and US Treasury policies have been disastrous. We do not fear that lower
interest rates in Korea
will weaken the Korean won. In a recent conference at the World Bank, chief
economist Joseph Stiglitz argued that there is no
empirical evidence that lower rates weaken a currency. In the case of South East Asia, it is now clear that high real rates,
by creating bankruptcies and depression, have caused foreign capital to flee
the region, thereby weakening local currencies. Interest rates in Korea have
been falling for many months and the won has rallied from 1800 to 1300. The
Koreans cut interest rates yesterday and the won rallied from 1330 to 1300.
Yet lower interest rates in Asia will
strengthen the Asian currencies.
We are surprised that Korea
has made these moves. Kim Dae Jung was following
the US Treasury line more closely than any other Asian leader. To us this
shows that the need for reflationary policies is so
obvious that they will be adopted, and to an increasing degree, in ASEAN and Korea. This
is what is needed to generate a recovery in emerging Asia.
We believe that the steps now being taken in Japan will have a more positive
effect on the Japanese economy than market participants expect. Simon Hunt
reports that China
is now moving to increase its pump priming with the objective of raising
economic growth above an 8% rate by late this year. The regional Asian
economic environment should be more supportive of recovery in ASEAN and Korea as the
year progresses.
There are additional reasons for expecting an abandonment of the
disastrous policies of the IMF and US Treasury in Asia.
We are seeing more and more open discussion in the editorials in Asian newspapers
of the critique of IMF policies made months ago by Jeff Sachs, James Tobin,
Martin Feldstein, Jagdish Bhagwhati
and ourselves. UNCTAD's chief macro economist has
recently published a paper with the same assessment. We have no doubt that,
at the level of policy makers throughout Asia,
this same assessment is being made. Faced with the disastrous consequences of
their actions, the IMF and Treasury are slowly caving to this emerging new
consensus about the Asian crisis.
This assessment was presented to Treasury Secretary Rubin on July 1st
by the Korean Confederation of Trade Unions (KCTU). Their document was not a
mere trade union position paper. It was extremely comprehensive and
intelligently argued. A document of this sophistication could only be the
result of a consensus among Korea's
best minds in economic policy circles in government, universities, and
corporations as well as the labor unions. This
document also demonstrates how this new assessment with its critique of
IMF/Treasury policies now dominates the thinking of grass roots political
organizations that heads of states and policy makers in Asia
are accountable to. When a new consensus runs this deep politically, it wins
the day. We have been concerned that rising unemployment in Korea could create serious civil strife
emanating from Korea's
militant labor unions. The balance and intelligence
of this KCTU document allays our fears over labor
unrest in Korea.
Looking further forward, we expect more dramatic developments. In our
January piece, "A Long Term Perspective On Asia", we argued that
Asians know that the Asian development model works and that they would not
abandon it as a result of pressure from the IMF and the US Treasury.
Ultimately, this would require a regional balance of payments finance
facility that would accommodate Asian financial structures rather than
imposing Western (Basle) parameters of
financial prudence. Last fall the Asian nations under Japanese leadership
moved to create such a facility, only to be met by especially fierce US
opposition.
Lastly, there is a need to recognize the unintended ill-
effects---unforeseen aggravation---of the IMF's
traditional prescription and mode of intervention in the Asian crisis. The
Asian development model, while containing some of the key elements which gave
rise to the current crisis, also contains the very dynamic elements which
made the 'miraculous' growth over such a short period. The effort to
consolidate on the unique positive elements---while making efforts to
eradicate the negative aspects at the same time---can contribute to the
balanced development in the world economy. The IMF policy regime, however,
has overlooked---or it may lie beyond capacity to handle appropriately---the
positive and dynamic elements in its virtual blanket disavowal of the Asian
economy---especially financial---system and practice.
In this light, it may be important for Asian nations and peoples to
develop and construct a basis of cooperation and mutual assistance and
support---both material and spiritual---amongst themselves. It may be
necessary, therefore, for Asian nations to build a body--- an Asian version
of IMF or an Asian regional organization of the Fund which enjoys a
significant level of autonomy---which can serve as an Asian monetary fund. If
the US government supports the idea of a worldwide convergence based on the
respect for cultural and regional differences, and, furthermore, recognizes
that the potential of each member in a community can be maximized on the
basis of the respect for diversity, then, it will be possible for the US to
make a significant contribution---as she has in building up APEC---towards
the creation of an "Asian Monetary Fund".
The Korean labor union confederation made
the following statements on this issue to Rubin on July 1, 1998.
We expect that the issue of an Asian regional balance of payments
finance facility will come up shortly and will eventually become a reality.
When market participants perceive this, there will be a dramatic change in
capital flows to Asia. Western bankers,
fearful of losing the Asian markets to Asia, will fall all over themselves to
lend to Asia once again. Portfolio managers,
seeing an improvement in Asian currencies and financial access will run to
get on board the new Asian recovery bandwagon. A hesitant currency and stock
market recovery based on an economic recovery once the IMF-US Treasury noose
is relaxed could quickly become a run on the part of Western short-term
capital to get back into Asia before Asia
closes its doors.
By : Frank Veneroso
The Gold
Newsletter
www.goldnewsletter.com
Editorials and essays by Frank Veneroso
are available on The Gold Newsletter
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From
1991 to 1994 Frank Veneroso was the partner responsible
for global investment policy formulation at hedge fund Omega Advisors. From
1995 to 2000 and prior to 1991, through his own firm, Mr. Veneroso
was an investment strategy advisor to global money managers and an economic
adviser to institutions and governments around the world in the areas of
money and banking, financial instability and crisis, privatization, and
development and globalization of securities markets. His clients have
included the World Bank, the International Finance Corporation, and The
Organization of American States. He has advised the Governments of Bahrain, Brazil,
Chile, Ecuador, Korea,
Mexico, Peru, Portugal,
Thailand, Venezuela and
the United Arab Emerates. Frank is a graduate from
Harvard and has authored many articles on the subjects of international
finance.
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