The Asian crisis and global financial instability
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Jesus Albarracín & Pedro Montes For some strange reason, capitalism tends to choose the month of October to unleash stock exchange crashes. It happened in October 1929, and again in 1987. Not suprisingly, as the third week of October 1997 approached, a certain edginess took over the financial sector.
The economic press had echoed the anniversaries of these crises. But to most experts and analysts, there were no reasons to be concerned because, they argued, "the economic expansion is built on firm foundations," "the financial markets are more solid than in 1929," "the safety mechanisms introduced in the aftermath of the crash of 1987 will kick in," and so on.
But, on Friday October 24, the anniversary of the beginning of the 1929 crash, the New York Stock Exchange closed with heavy losses. The following Monday it fell so fast that it had to be closed down before the normal closing time, to prevent an uncontrolled collapse.
Nevertheless, the events of the last six months cannot be compared to the sharp and generalised drops in stock prices in 1987, and much less with the collapse of stock prices and the onset of the Great Depression which followed "Black Tuesday" in 1929.
Alongside the "Asian crisis," most western stock exchanges have taken off in a bullish drive which is as nonsensical as it is unstoppable, as if the forced closing of Wall Street on October 27 had been a bad dream, a passing moment. These contradictory phenomena underscore the abnormality of the situation and the speculative and whimsical traits which capitalism has acquired. In the last instance, they show that the enormous root problems derived from the enormous financial instability which underpin the system continue Financial hypertrophy
In long waves of recession such as the present one, which began in the early 1970s, capital moves towards foreign exchange and stock markets, due to a lack of sufficient profitability in the productive sphere. This turns speculation into one of the most profitable activities and generates a financial economy ever more separated and alienated from the real economy.
This is not a characteristic specific to the present recessive long wave. It happened during the crisis of the last third of the last century and, above all, during the 1930s. However, nowadays, as a consequence of the evolution of the capitalist system, of technological advances, and of the hegemony of neoliberalism with its defence of the absolute freedom of move24 International Viewpoint #300
180172 ment for capital, this phenomenon has acquired unprecedented proportions.
In recent years, high government deficits have produced a rise in public debt without precedent in the history of capitalism. Capital markets have been swollen by assets issued by the states surpassing 10 trillion dollars.
In only 16 years, the public debt of the 21 countries of the OECD has risen trom 41.7% to 70.7% of GDP in 1997. Borrowing by domestic enterprises and individuals has also risen, building an enormous financial edifice, constructed through the multiplication of credit: the states issue debt, the enterprises and investment funds buy it, financing it with their own debt, and so on and so forth in an endless chain. New intermediaries emerge, new types of instruments are developed, new methods of financing appear, new operations, giving rise to a process of innovation and financial engineering which broadens without limit the edifice (the house of cards) and opens endless possibilities for speculation. The result is that an enormous mountain of paper, of fictitious capital, has been created over directly productive capital. This mountain has cracks, faults and slides which have introduced a great instability into the functioning of global capitalism.
In the context of absolute freedom of movement for international capital, financial hypertrophy is also reflected in foreign exchange accounts. The upsurge of free trade and the capacity to finance important deficits in balance of payments over prolonged periods augment the foreign debt of many countries, until the moment arrives when payments must be suspended or bankruptcy declared. Between 1982 and 1997 the foreign debt of
189324 the countries of the Third World has increased threefold, approaching at present 1.8 trillion dollars. This is the context behind the great 1982 foreign debt crisis, which affected most countries of the Third World, as well as the 1995 crisis in Mexico, and the current crisis of the Asian countries.
On the other hand, financial expansion favours the rise of stock prices. These high prices translate into low profitability for finance capital, which can no longer count on the dividends paid to shareholders, but must seek to make a profit from the rising stock prices. Stock prices diverge ever more from the real situation of enterprises, and what increasingly drives the owners of finance capital into investing is not real profitability nor the structure of the enterprises, but unbridled speculation. The result is an increasing overvaluation in the capital markets, which leaves them at the mercy of any event which might unleash
What is more, advances in communications make it possible to speculate 24 hours a day (in the morning in the European exchanges, in the afternoon in New York, and in the evening in Japan or Hong Kong). It may be said that we have reached an absolute financial "globa-
An enormous volume of speculative funds moves through the international markets searching for profitability, in the capital markets, and in the foreign exchange markets. This contributes to a great instability of currency exchange rates. These no longer necessarily correspond to the real situation of the economies, nor even to the real evolution of the balance of payments. And this creates increasing dill ficulties for government control of en
change rates, given the magnitude of the funds which move between economies, which become insurmountable when speculative waves are unleashed. Bear in mind that more than $1.3 trillion are negotiated in currency markets every day. This amounts to 85% of the reserves of all central banks or 2.5 times the GDP of a country like Spain.
The fact that practically the entire world has become one great financial market has great implications. Speculative movements have acquired such considerable volume that they escape the control of any country, no matter how large. At the same time, speculation takes place in all markets (in the stock exchanges, foreign exchange markets, in real estate, etc.) so that any disturbance in one market ends up affecting the others, like balls on a billiards table. The conditions are set for any accidental spark to light the powder keg. The latest warning comes from South The crisis of the "Asian Dragons."
The current crisis of the so called " Asian Dragons" (Korea, Indonesia, Thailand, the Philippines, Hong Kong, Singapore, Taiwan and Malaysia) started in the summer of 1997 in the foreign exchange markets. On July 2nd, Thailand, which was submerged in a deep recession, was forced to abandon the fixed exchange rate between the Thai baht and the US dollar. The baht lost 18% of its value in one day.
The currencies of the remaining dragons began to collapse like a set of dominoes: the Philippine Peso on July 11, the Malaysian Ringgit on July 26, the Singapore dollar on August 12, the Indonesian Rupee on September 26, the Vietnamese Dong on October 14 and, on the 17th of October the New Taiwan dollar.
The speculative bubble which had developed in all those countries during recent years caused the crisis to spill over very quickly to the real estate and stock markets, with repercussions on the internal and international financial systems. Interest rates were raised sharply to protect the currencies and prevent capital flight, But this provoked a slump in stock and other asset prices, creating a dangerous gap between the new, higher levels of loan and mortgage repayments, and the new, lower value of the property and assets which 'guaranteed' those loans. All this undermined the balance of the local financial institutions and of "trapped international
The crisis takes place after several decades of considerable dynamism among the "Asian Dragons." Since the end of the sixties, per capita GDP has multiplied fivefold in Thailand, fourfold in Malaysia, and twofold in South Korea, Per capita GDP in Hong Kong and Singapore is greater than in many industrial nations. In recent years, Asia has attracted more than half the capital flows destined for developing countries and its exports have continued to grow, representing at present more than 13% of world exports, compared to only 7.6% in 1985. The manufacturing sector has been outstanding in this growth
This dynamism and the consequent increase of the participation of the "Dragons" in the world economy led many authors to speak of a "triad" in capitalism, with one nucleus formed by Japan and a constellation of Asian countries, another made up of the United
States, with its control of the Americas, and Europe, with its periphery, as the third corner of this triangular power system.
fact, the dynamism of the "Dragons" was based on a highly unbalanced model of development. These economies are oriented towards foreign markets, because internal demand cannot constitute the motor of economic activity. They depend excessively on exports, the growth of which has been possible thanks to an intense process of accumulation and assimilation of new technologies, on the competitive edge provided by low wages, and the lack of social safety networks: This super-exploitation of the labour force, which has placed some of those countries, like South Korea, in a situation of preca-
Foreign dependence is not limited to exports. It is also reflected in the massive importation of commodities - technology, raw materials and foreign capital, which has sustained the strong levels of investment. The financial systems are in general very limited and fragile. Which is exactly what one would expect, in countries where economic growth has been intense, disorderly, inflationary and speculative. The result of this fragile situation is that an external disturbance can unleash a crisis, and, in a country like South Korea, bring the whole model of development crashing Exports threatened
Exports from these countries have been reduced by three factors in recent years. The entrance of China into the world market represented a dramatic increase in commercial competition for these countries, particularly after the devaluation of the Chinese Yuan in 1994. Secondly, the long recession in Japan reduced demand for exports from the region, affected in the first place by the effective appreciation of the dollar since 1995. And, finally, the decision of the Asian Dragons to peg' their currency to the US dollar, which had been a central element of their sustained growth in former years, meant that they lost competitivity as the dollar rose in value against the Japanese Yen and west European cur-
All these factors have translated into high inflation, degradation of trade balances, and considerable deficits in current account balances (in 1996, 8% of GDP in Thailand, 3.5% in Indonesia, 4.3 % in the Philippines, 5.2% in Malaysia, and 4.9% in Korea. The countries of the region face high (and rising) foreign debt, and must cope with the breakdown of the cover feature * spectacular process of growth which they had experienced in the past.
Faced with this situation, speculative capital wants to seek some distance, before re-investing in the region. But this capital flight makes it more difficult for these countries to meet their financing needs and defend their exchange rates.
In western countries, initially, nobody thought the impact of this monetary crisis would have any importance for the global
In fact, the situation did not reach a climax until the crisis affected Hong Kong. The parity of the Hong Kong currency to the US dollar was legally established through a currency board system, and financial authorities were determined to preserve this cornerstone of the citystate's economy. Rather than devalue the HK dollar, in response to the flight of capital and investments which followed the territory's return to Chinese sovereignty, Hong Kong authorities increased interest rates massively.
On October 23, the Hong Kong Exchange, the second largest in Asia, after Tokyo, dropped 10.4%, the greatest fall in its history, and the following Monday. another 5.8%, dragging down all other capital markets. Since then, the fall in stock prices has been considerable: the Hong Kong Stock Exchange index has lost 50% of its value since September 1997.
The uncertainties of the Asian crisis have not hampered the unprecedented rise of the western exchanges in the last months of 1997 and the first months of this year. The exchanges behave as if as if they were trying to stay ahead of the curve and flee forward, trying to escape forward from a situation which seems dangerous, not only because of what happened to the "dragons" but also because the crisis has had a profound effect on Japan for a long Japan's financial instability
Japanese financial instability has deep roots. In fact, prices on the Tokyo stock exchange have been declining for the last
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10 years. But, in the last few years, and particularly in 1997, the crisis threatened to liquidate a number of insurance companies, trading firms, and investment banks. which makes the present financial situation extremely delicate.
We must take into account the sharp decrease in growth produced in the Japanese economy since the beginning of the economic crisis and the tendency towards stagnation which it suffers at present. Japan had grown at high rates during the decades of expansion which followed World War II (an average of 9.6% from 1960 to 1973). Since the beginning of the long wave of stagnation, growth rates dropped, but they still averaged 3.6% of GDP between 1974 and
At present the growth of the Japanese economy is practically zero and at some points in the last few years, growth has been negative, justifying the idea that Japan has entered into a new phase, different from the situation facing its world competitors, the U.S. and the European Union. Japan's economy is very exposed and subordinated to exports and it has difficulties turning internal demand into a motor of economic growth. In recent years, the weight of exports in GDP has dropped (from 10.2% of GDP in 1986 to 9.3% in 1996), with the consequent negative effect on the growth of the economy. In this context, the depreciation of the currencies of South East Asia and the consequent reduction in purchasing power there has had an important adverse effect on Japanese exports, which comprise 44% of imports into that region, compared to 20% from the United States and 7% from Europe. In an economy like Japan's, accustomed to constant growth, this stagnation has had strong repercussions on industry and, as a result, on the financial
Secondly, the continuous descent in the Tokyo Stock Exchange, above all in comparison to the record increases on capital markets in the other industrial countries, has also had negative repercussions on Japanese financial institutions. While the Dow Jones index of the New York Stock Exchange has grown by a factor of 4.3 since 1987, the Nikkei index of the Tokyo Stock Exchange has dropped
Finally, the accelerated depreciation of the currencies of the Asian Dragons provoked disinvestment in the stock exchanges of those countries, as foreign operators pull out, rather than risk exchange rate losses. This obviously caused considerable drops in stock prices. The losses incurred by Japanese investors in the area weakened Japan's financial institutions, which hold 118.000 million dollars out of a total of 750,000 million dollars in loans in the
This has had an impact on the fragile and deteriorated situation in Japan's domestic financial system. Some "obese" Japanese banks have for a few years now camouflaged accumulated losses, by trans26 International Viewpoint #300
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HENS INTER S RATE ferring them to specially-created subsidiary companies, out of reach of the financial authorities. All this has been uncovered by the current crisis, the gravity of which nobody doubts, but to which there is no obvious solution. The full internal and international repercussions are still Overvalued exchanges
Most financial analysts have tried to downplay the importance of the financial crisis of the Asian Dragons and Japan. It is as if we were in the presence of an "Asian
La foreign disease, which will pass and, if the necessary measures are taken, will not leave damages.
On the surface, this seems to be confirmed by the evolution of the stock exchanges after the initial Asian crisis. The New York Stock Exchange Dow Jones index reached a high point of 8,545 points in February 1998, almost 15% higher than in October 1997, and 25% higher than in February 1997. Most exchanges in the industrial countries have risen similarly, or even more drastically, as in the case of Spain. So why worry?
But the striking thing is that those experts who, just before the Asian crisis, warned of a new "crash" on Wall Street were basing their arguments solely on the situation of the western exchanges, without regard to the Asian situation. Even Alan Greenspan, head of the U.S. Federal Reserve bank believes that the New York Stock Exchange is seriously overvalued.
Financial analysts measure this phenomenon using the Price Earnings Ratio (the ratio of the price of a stock to the dividends it produces). The higher the Price Earnings Ratio of a stock, that is, the greater its price relative to the benefits it yields, the higher the risk of buying it, and the greater the probability that its price will fall in the future. A return to the median PER of the last century (12 x
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ATES earnings), while keeping profits constant, would require a 40% drop in current New York Stock Exchange prices!
Overvaluation becomes evident in a simpler form: between 1987 and 1997 GDP has grown by 70% in monetary terms and by 26% in real terms, while prices in the New York Stock Exchange have multiplied fourfold. The Tokyo Stock Exchange, as we said earlier, dropped 26% in the same period.
In most European exchanges, the overvaluation accumulated in the last few years is not significantly lower than that of Wall Street. It is enough to look as an example to the Spanish stock exchange in 1992, the PER of the Madrid Exchange was 10, that is, stock prices represented 10 times the dividends (profits) they generated. At the end of 1997, the Madrid PER had risen to 29.8, and continues to rise in 1998. During the first two months of this year, stocks rose an incredible 23%, the highest rise in all the western exchanges In some sectors, such as banks and finance, the PER has risen from 7.7 in 1992 to 34.1 in 1997. In construction, the PER has risen from 6.9 to 48.0.
Only a small part of the increase in stock prices is the result of the fall in interest rates. Western stock market prices have increased dramatically in the first months of 1998, even though there is now little room for further reductions in interest rates, which are at historically very low levels.
It is clear that the current rises in stock market prices are propelled by the simple force of speculation. or by spurious factors alien to the real value of the enterprises - expectations, black money, fusions, cosmetic changes and share splits - because in moments like these, investors play an anything that will continue the rising trend, since they cannot expect highe profits from dividends, or from fixed yiel assets like government bonds or fixed
term bank deposits.
Overvaluation is a dominant trait in all the western stock exchanges, more extreme in some cases than in others. The anomaly of the situation in the western exchanges is striking: one must remember that stock exchanges in other parts of the world are being shaken by violent movements. The IMF enters the scene
The fact that the severity of the situation is not homogeneously reflected in the markets does not mean that the there is no awareness of the dangers in the strategic decision making centres of the system. On the contrary, the declarations of the governor of the US Federal Reserve, and the attention and resources devoted by in unemployment, closure of enterprises and decrease of productive capacity. The "Asian Dragons" their force, and will suffer the inevitable social consequences. In Korea, Thailand and Indonesia, social instability has already begun.
In the short term, the effects on the world economy as a whole will not be dramatic, although the international organisations have lowered their predictions for growth in 1998. The IMF estimates a 0.8% reduction in the rate of world growth during 1998 as a result of the Asian crisis.
cover feature *
But, besides the immediate repercussions, the most outstanding feature of the new crisis is that it has been notably worse and its resolution on the medium term more uncertain than the previous crisis in Mexico and Argentina. Where will the next spark jump? It is hard to make predictions. The worse moments of the crisis seem to have been overcome, but the overvaluation of the stock exchanges and financial instability continue to worsen. The atmosphere is charged with electricity, as before a storm.. * Written in March 1998. Translation by C. Ayala.
Into a new and better century!
world finance capital, headed by the IMF, aim at containing and dampening the
"Asian crisis." This poorly studied and even more poorly predicted crisis could
The International Institute for Research and Education in Amsterdam is a research and prove to be a spark that ignites the powder training centre that is meeting the challenges of the neo-liberal world order by renewing and keg of the world economy re-founding an alternative perspective. Fields under study at
Even the Latin American markets have the IRE include economic globalisation, 20th-century felt the commotion, because its economies have many of the traits which have been moted as the source of the crisis in South
East Asia: strong foreign deficits, very history, ecology, feminism, ethnicity, racism and radical movement strategy.
The results of our work are made available to a larger public mainly through our publication series, high foreign debt, fragile and speculative financial systems.
This is the reason why, once the crisis burst out, an enormous volume of funds was directed to the "Asian Dragons" mainly, to Korea and Indonesia, with the objective of restoring confidence in these economies, and attracting private capital. In Korea alone, the IMF will channel bans amounting to 57,000 million dollars, which is the greatest salvage operation in he entire history of capitalism. The IMF tas participated in the operation, together with 13 important industrialised nations and a group of leading commercial and investment banks from the richest bountries. The funds channelled to Indonea, Thailand and the remaining countries ave been smaller than the sum devoted to South Korea, but, altogether, the magninude of the financial assistance to the "Asian Dragons" has no precedent, not even the Mexican rescue operation of 995. And this is possibly only the beginning.
This massive financial intervention has intributed immensely to stopping the isis and, above all, has prevented its m spreading to the markets of the dustrialised countries.
Of course, international aid comes with certain conditions. The counterpart of I these tunds is the imposition by the MF of "programmes of structural and financial reform," that is, a hardening a scal policy, a substantial rise in interest rates, the liquidation of an important number of banks, the privatisation of certain public enterprises, and the opening of previously protected markets and sectors of the economy.
The consequences of such plans will soon be felt in the form of a substantial reduction in the rate of growth, increases the Notebooks for Study and Research. No.1 The Place of Marxism in History. Ernest Mandel (40 pp. E2, $3.50, 20 FF) No. 2 The Chinese Revolution - I: The Second Chinese Revolution and the Shaping of the Maoist Outlook. Pierre Rousset (32 pp. £2, $3.50, 20 FF) No. 3 The Chinese Revolution - II: The Maoist Project Tested in the Struggle for Power. Pierre Rousset (48 pp. £2.50, $4, 25 FF) No. 4 Revolutionary Strategy Today. Daniel Bensaid (36 pp. £2, $3.50, 20 FF) No. 5 Class Struggle and Technological Change in Japan since 1945. Muto Ichiyo (48 pp. £2.50, $4, 25 FF) No. 6 Populism in Latin America. Adolfo Gilly, Helena Hirata, Carlos M. Vilas, and the PRT (Argentina), introduced by Michael Löwy (40 pp. £2, $3.50, 20 FF) No. 7/8 Market, Plan and Democracy: the Experience of the So-Called Socialist Countries. Catherine Samary (64pp. £3, $5, 30FF) No. 9 The Formative Years of the Fourth International (1933-1938). Daniel Bensaïd (48 pp. £2.50, S4, 25 FF) No. 10 Marxism and Liberation Theology. Michael Löwy (40pp E2, $3.50, 20 FF) No.11/12 The Bourgeois Revolutions. Robert Lochhead (72pp. £4, $6, 40FF) No. 13 The Spanish Civil War in Euzkadi and Catalonia 1936-39. Miguel Romero (48pp. £2.50, $4, 25 FF) No. 14 The Gulf War and the New World Order. André Gunder Frank and Salah Jaber (72pp. E2, $3, 15 FF) No. 15 From the PCI to the PDS. Livio Maitan (48pp. E2.50, $4, 25 FF) No. 16 Do the Workers Have a Country?,
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