Economic meltdown
* A halt to trade liberalisation, privati- the entire neo-liberal policies of the
* Philippines Capitalist governments have no solution to end the economic crisis in South East Asia. Sonny Melencio and Reihana Mohideen prepared this report for use by the Philippine group Sankalas.
The economic upheaval in 1997 can be transformed into a political upheaval in 1998. This can happen if the people in general, the different sectors and the various political groups, unite to carry out a fierce campaign against the perpetrators of the economic crisis-the big foreign banks, the multinational corporations, and the local governments which collude with them in the name of the mighty dollar. They, and not the people, should be made to pay for the crisis of their capitalist system. What is the nature of the crisis?
The government and the monetary authorities have been blaming currency speculation for the crash. But behind the currency crisis is the unrestricted outward flow of foreign capital in the form of portfolio investments (around $12 billion out of South Korea, Indonesia, Malaysia, Thailand and the Philippines in 1997) which put pressure on local currencies leading to the crash.
Portfolio investments are short-term investment in the form of stocks, shares, bonds and treasury bills that bring high yields to the investor.
This is pooled capital coming from vast amounts of personal savings, pension funds, government funds, corporate savings, and other funds deposited in banks and investment houses. This capital is usually managed by fund managers experienced in spotting investment opportunities combining high yields with a quick turnaround time.
Portfolio investments differ from foreign direct investments (FDI) which are long-term capital investments used for industrial expansion. Portfolio investments are pure speculative capital.
Almost 80% of total capital that entered Southeast Asia in the 1990s took the form of portfolio investments. Fifty percent of this came from the United States. The bulk of this capital (in the form of treasury bonds and shares) is denominated in dollars. Why did portofolio investments flow into Southeast Asia in particular?
This capital has been on the constant lookout for profitable investment. In the early 1990s, according to an Asian Development Bank report, "the declining returns in the stock markets of industrial countries and the low real interest rates compelled investors to seek higher returns on their capital elsewhere." They recognised Southeast Asian economies as ready markets for their operation.
Governments in Southeast Asia have evolved a three-prong strategy to attract portfolio capital. These are financial liberalisation, high interest rates and a "fixed" exchange rate system. These strategies originated from the structural adjustment plans designed by the International Monetary Fund
The liberalisation of financial markets is a security measure for foreign investors for the free inflow and outflow of their capital. It includes the elimination of restrictions in foreign exchange and use of foreign currency; the opening up of the banking sector to foreign banks; and the opening up of the money market, the stock exchange and even the insurance industry to foreign participation. The Philippines now has one of the most liberalised finan-
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cial markets in the region as it opened up the banking sector to foreign banks in 1995. It is estimated that 20 banks and financial institutions in the country now have foreign shareholders.
The maintenance of high interest rates is designed to attract foreign capital through assurance of higher profits. Inves tors can borrow money at 5-6% interest rates in the U.S. and reinvest it in Southeast Asia, where average interest rates have been 12-15%. In the Philippines the high interest rate is a policy pursued by the central bank!
Fixing the exchange rate between the local currency and the dollar is a guarantee for investors against risks stemming from fluctuations in the value of the highly elastic local currency. Fixing the rate was not a formal policy; it was done through what is called a "dirty float", i.e., allowing the local currency to float within a narrow band (eg between 25.25 and 25.75 pesos to the dollar). Movement outside of this
Nationalise the banks! Create jobs! The Philippino organisation Sankalas has responded to the crisis with this set of immediate and transitional demands:
* An immediate debt moratorium on public and private debts. The government should not use its resources - the people's money - to bail out ailing companies. Instead, it should use the debt repayment money to support displaced workers and to create employment.
* Rejection of he IMF rescue package
* Immediate lowering of interest rates for industrial loans. sation and deregulation of the economy: 8 International Viewpoint #298
* Ailing private enterprises should open their books to the public, so we know the real score, as branches of foreign banks and multinational corporations usually report capital transter as corporate debts
* Nationalise the finance and banking industry. State control of these industries is the only way to stop speculative activity and to direct investment in to productive economic activity.
A campaign on these demands should aim to build a broad anti-imperialist people's movement that challenges governments of the region. * [SM/RM] band would be countered by the central bank selling or buying dollars to keep the exchange rate within the band. What has been the impact of portfolio investments?
Portfolio investments financed the expansion of speculative activity. Most of it was channelled into various short-term investments, especially property and real estate development that commands quick profits in Asian countries.
Thirty to fifty per cent of Thailand's GDP growth, for instance, came from activities related to real estate speculation. By 1995, there was already a real estate glut in the country, with vacant properties
are sound", even while the peso is tum- conference. [MRo/GLW] * estimated at some $20 billion. The financial crisis in Thailand was signalled by two major finance companies, with high exposure on real estate loans, defaulting on their interest payments to the banks.
The entry of portfolio investments explains the high growth rates in the region. But massive borrowings or private debts fuelled these growth rates. The increasing growth rates in Southeast Asia were propped up by an ever-increasing
Compounding the problem is the fact that most of the debts are short-term or due for payment before the end of the year. The short-term debt of the Philippines accounts for 19% of the total foreign debt of $46 billion. What form does the flight of portfolio investment take?
Massive pullout of portfolio investments took the form of extensive selling by the investment houses of their bonds and stocks to convert the local currency into dollars.
It was estimated that around $24 billion of "hot money" from portfolio inflows left Bangkok in 1996. It brought down the value of share prices by about 65%. The rush to convert the baht into dollar led to the local currency's devaluation.
Foreign equity inflows from the Philippine banks during the first quarter of 1997 fell by 97% compared to 1996. Foreign investors started to be bothered by the ongoing property crisis, rising private debts and the falling stock markets and began to demand dollars for their pesos, so that they could begin to move out of the Philippine market. Who are the speculators?
Finance speculators geared up their activity when there was already an outward movement of foreign capital. The speculation was based on the expected devaluation of the local currency. These speculators earn their money by the timely buying and selling of the dollar and the local currency.
The speculators are mostly big international banks that have vast amounts of money capital for trading. In the case of the Philippines, the July 11 currency crash was brought about by foreign exchange speculation of the six "universal banks" and investment houses: Citibank, JP Morgan, Solomon Brothers, Merrill Lynch, ING Barrings, and Morgan Stanley. What is the extent of the crisis?
The crash is leading to escalating inflation and massive unemployment in the region. Half a million workers lost their jobs in Thailand, two millions were thrown out of the factories in Indonesia, hundreds of thousands of workers will be laid-off in the Philippines in the next few months.
But even more puzzling is the persistence of higher interest rates in the region, which discourage further local investment.
This translates into a full economic meltdown: a halt to industrial expansion and closure of more and more local enterprises.
Maintaining high (doubling from 15% to 30% in the Philip pines) constitutes a foolish attempt on the part of Asian governments to keep speculative capital from leaving. Can the crisis be solved by the IMF?
The IMF bailout only means additional debts for Southeast Asian economies. The bail-out is ridden with conditionalities which only give an opportunity to advanced capitalist countries, the US in particular, to enter the economies of Southeast Asia, and for big foreign banks to take over the local financial sector.
In the Philippines, the $3 billion IMF fund is the 24th structural adjustment programme to be managed by the agency Part of the loan conditionalities is the passage of the oil deregulation bill that will allow the three foreign oil monopolies in the country (Shell, Caltex, Petron) to increase their petrol prices without limit.
The IMF is also using the bail-out to ensure that the external loans contracted from international banks be repaid in full -with the government assuming responsibi-
Citizens' Action Party
Around 300 delegates representing some 10,900 members launched Akbayan (Citizen's Action Party) on January 17. The Philippines left is gearing up for national elections in May.
Marxist academic and nationa executive member of BISIG (Union for Socialist Ideas and Action) Francisco Nemenzo gave the opening keynote address. He described Akbayan as "a party built around a program, a party that stands on definite principles, a party oriented towards a distinct vision",
Referring to the undemocratic and sectarian Stalinist and Maoist heritage that has plagued the Philippines left, Nemenzo said: "Many of us, including myself, have had unpleasant experiences in underground parties that insist on a uniformity of views... We who came to
Akbayan from such a suffocating framework, value inner party democracy. We regard differences of opinions within the party and the ensuing debates as healthy and necessary.. although as a party we shall ultimately stand united behind our program and resolutions of the national council."
Outlining Akbayan's approach to the economic crisis plaguing the country, Nemenzo said: "We do not retreat from a radical solution if the problem is
To take a radical stance in the midst of a grave crisis is more responsible than the stance of [President
Fidel] Ramos and his technocrats who tell us that "our economic fundamentals lity for the private sector's foreign loans if need be. The IMF's role in Asia is increasingly seen as chief debt collector for international banks.
While favouring international banks and multinational corporations, the IMF bailout and its conditionalities can only aggravate the Southeast Asian crisis. The IMF conditionalities will be a big burden to the people, will exterminate local industries and will cause an even deeper economic mess. What is the real cause of the crisis?
The crisis of the Southeast Asian economies is related to the overall economic crisis of overproduction that is endemic to the long wave of capitalist economic decline which started in the early 1970s.
The economic slowdown of the Japanese economy is crucial to understanding the Southeast Asian crisis.
In the 1980s, Japanese foreign direct investments (FDI) played a major role in the partial industrialisation of Asia. In 1985-1990, $15 billion worth of Japan's FDI flowed into Southeast Asia.
This investment strategy has not only targeted Southeast Asia as an export platform for third countries. It also bling down and thousands are losing their jobs. A radical departure from neoliberalism makes more sense than their proposal to hasten liberalisation, deregulation and privatisation."
Akbayan describes itself as a party of political and electoral reform. Its objectives include: to engage in elections at every level possible; to run government, particularly at the local executive level; and "to bring the concerns and issues of marginalised sectors to the agenda of the government and the general public with the end view of making government more accessible, genuinely accountable and truly responsive to the people".
Akbayan's chairperson is economist Walden Bello. Its secretary general is Etta Rosales, a leader of the anti-Stalinist tendency Siglaya, which broke away from the old Maoist Communist Party of the Philippines (CPP). Its president is Ronald Llamas from BISIG, a left movement that developed outside the influence of the Stalinist forces.
The party's national executive includes Joel Rocamora from the Institute for Popular Democracy; Ric Reyes from Siglaya; Benjie de Vera from Mindanao; feminist activist Anna Maria Nemenzo; and Pamela Celares, representing the recently split faction of the Manila Rizal regional committee of the CPP, aligned with the Revolutionary Workers Party.
Sanlakas progressive democratic front and the BMP militant workers' centre did not participate in the