By Walden Bello, July 23, 1998


As the Asian financial crisis enters its second year with the anniversary of the floating of the Thai baht on July 2 and of the Philippine peso on July 11, the deepening desperation and despair assumes many forms in the battered region:

o What Koreans call “IMF suicides” are said to be on the increase in Seoul these days. This phenomenon refers to males who are laid off taking not only their own lives but also those of their wives and children, presumably out of a belief that no one will be left to care for them in this life.

o Earlier this year, Thais woke up to television images of workers battling police in the streets, then being herded prisoner-of-war style into police vans. Viewers thought the scenes were from Korea and were surprised to learn that they were from Thailand, a country well known for its non-confrontative culture.

o In Indonesia, the government’s implementation of an IMF directive to end energy subsidies provoked a mass uprising that overthrew the 32-year-old Suharto dictatorship.

Welcome to Asia 1998-a zone of economic collapse, social crisis, IMF suzerainty, and political turbulence.

Living through current events, one experiences a time warp, a throwback to 1968, when East Asia was the world’s prime crisis area. It is hard to imagine that this is the same region that was being touted as recently as 13 months ago as being the “engine of the world economy” far into the twenty first century.

What happened? Why were these economies so fragile after all?

The Collapse

In recent months, “crony capitalism” has become the all-purpose explanation for the Asian economic collapse. Lack of transparency of financial institutions, a government-business relationship permeated with corruption, and the absence of accountability of political and economic authorities are said to be the practices that brought the Asian tigers to their knees.

The problem with this explanation is that the practices of crony capitalism were very much part of economic life in the three decades that East Asian countries led the world in GNP growth.

While not denying that corruption may have contributed to the collapse, many analysts are coming around to the view that a far greater role was played by the unregulated flows of global capital. Like the Mexican financial collapse of 1994, the Asian crisis is essentially a product of the globalization of financial markets.

A close look at the rise and fall of the Southeast Asian “tigers” reveals the central role of a development process sustained not principally by domestic savings and investment but by the huge infusions of foreign capital. In the late eighties, the region’s growth was heavily dependent on Japanese direct investment. When this began to taper off in the early nineties, the region’s financial and technocrat elites sought other sources of foreign capital. These they found in the portfolio investors and big international banks that were scouring the globe at around the same time in search of alternatives to the low real interest rates and declining returns in the stock markets of New York, London, Tokyo.

Mediating the relationship between the banks and investors and what came to be fashionably termed the “big emerging markets” was the International Monetary Fund (IMF), which pushed the Asian financial authorities incessantly to liberalise their capital account and open their financial sector more fully to foreign participation. With the blessings of the Fund, the authorities added two more ingredients: high interest rates and a fixed rate of exchange between the local currency and the dollar to insure investors against the risk of devaluations that could erode the value of their investments.

This formula was wildly successful in bringing in capital: according to Washington’s Institute of International Finance, net private capital flows to Indonesia, Malaysia, the Philippines, Thailand, and Korea shot up from $40.5 billion in 1994 to $77.4 billion in 1995 to $93 billion in 1996.

The problem was that the bulk of these funds was speculative capital seeking high and quick returns. With little regulation of its movements by governments that bought into the IMF’s laissez faire ideology and that had little experience in handling such massive inflows, foreign capital gravitated, not to the productive sectors of the economy like agriculture and manufacturing but to the stock market, consumer financing, and, in particular, real estate.

Not surprisingly, a glut in real estate developed quite rapidly, with Bangkok leading the way with $20 billion worth of new commercial and residential space unsold by 1996. Foreign banks had competed to push loans onto Thai banks, finance companies, and enterprises in the boom years of the early 1990’s. In 1996, it began to sink in that their borrowers were loaded with non-performing loans. By 1997, it was time to get out, and because of the liberalization of the capital account, there were no mechanisms to slow down the exit of funds. With hundreds of billions of baht chasing a limited amount of dollars, the outflow of capital could be highly destabilising. What converted a nervous departure into a catastrophic stampede were the currency speculators who, gambling on the eventual devaluation of the baht, in fact accelerated it by unloading huge quantities of baht in search of dollars. By July 2, 1997, the decade-long peg of the baht to the dollar at 25 baht: $1 was abandoned, and the Thai currency went on to lose over 50 per cent of its value in a few months’ time.

In Jakarta, Manila, and Kuala Lumpur, there occurred the same sequence of property glut, non-performing loans, foreign capital’s departure turned into a panic by currency speculators, the currency crash. Southeast Asia’s other currencies lost 30 to 80 per cent of their value. The scale of destabilisation caused by the panic is indicated by the figures: from a net inflow of $93 billion in 1996, private capital flow into the five most troubled Asian economies turned into a net outflow of $12 billion in 1997.

A Failure of Leadership

The scale, depth, and swiftness of the crisis demanded a decisive leadership to formulate and implement a comprehensive strategic response. But there has only been one government that has behaved in a responsible fashion, and that is China. China contributed money to rescue funds for Thailand, Indonesia, and Korea. It offered to back the proposed Asian Monetary Fund with its reserves. And it has refrained from devaluing its currency, the renmimbi, so as not to stand in the way of an export-led recovery by its neighbours.

But, the behaviour of the Chinese aside, effective leadership has been the most scarce currency in the Asian currency crisis.

Valuable time was lost when instead of acknowledging that volatile capital flows brought about by liberalization of the capital account and financial liberalization were the fundamental cause of the crisis, Washington and the IMF insisted that “crony capitalism” or corrupt relations between the private and public sectors was the main issue and that the solution lay principally in eliminating corruption and achieving greater “transparency.”

Instead of leading an effort to stabilise and reflate the region in a manner akin to the way it revived Western Europe with the Marshall Plan after World War II, Washington opportunistically seized the opportunity to use the IMF to advance its bilateral agenda for the region–that is, to batter down the tariff and investment barriers to US exports and capital.

And instead of standing up to Washington and the IMF to provide an alternative economic program to shore up the regional economy, Japan failed to live up to the rest of Asia’s expectations that it was prepared to take a regional leadership role when it yielded to Washington’s pressure to scrap its plan to set up the $100 billion Asian Monetary Fund (AMF)that would have defended the Asian currencies from investor panic and further speculative attack.

The IMF Worsens the Crisis

Instead of effective leadership, the region got the IMF.

In response to the regional collapse, the IMF assembled rescue packages totalling $120 billion for Korea, Indonesia, and Thailand. But the institution soon found itself under fire from critics in the North and South, from both progressives and conservatives.

A major criticism levelled at the Fund is that, by promoting a policy of indiscriminate capital account liberalization among the East Asian economies, it has been a central cause of the crisis. Not only is this the case, but the IMF stabilisation programs continue to push radical financial liberalization, ignoring the mounting evidence that it is uncontrolled capital movements that triggered the crisis.

Critics also charge that while the bailouts are being billed as a rescue of economies, they are actually geared to providing a guarantee to the international private banks that the debt to them will be repaid by the borrowing countries. Thus the IMF rescue programs, by sparing foreign investors and banks from the penalties of the market, encourage “moral hazard” or continued irresponsible lending in the future.

A third charge levelled against the Fund is that it is being manipulated by its principal and strongest stockholder, the United States, to push trade and investment reforms that would benefit principally US economic interests. In the case of Korea, for instance, the US Treasury Department and the IMF have not concealed their close working relationship. Not surprisingly, the concessions made by the Koreans in the negotiation of the IMF program -including raising the limit on foreign ownership of corporate stocks to 55 per cent and full liberalization of the local capital market-have a one-to-one correspondence with Washington’s bilateral economic policy toward Korea over the last decade.

Perhaps the most powerful criticism of the IMF is that it is imposing the wrong solution on the financially devastated countries. The universal prescription of the Fund consists of the maintenance of high interest rates and significant cuts in government expenditures. Promoted as necessary to bring back foreign investors and stabilise the economy, the adjustment programs are engineering recessions. Expansionary fiscal and monetary policies, say critics like Harvard’s Jeffrey Sachs, are needed to counter the collapse of private investment and prevent the economy from going into a free fall. And if the intention is-as the IMF says it is-to bring back foreign investment into the country, how would this be accomplished by engineering a recession that promises little or nothing in the way of profits?

The view that IMF programs are making a bad situation worse is no longer a fringe view. It is shared by many World Bank technocrats, including reportedly the Bank’s chief economist Joseph Stiglitz, as well as by key members of the US Congress, who have refused so far to approve $18 billion demanded by the Clinton administration to fund a US quota increase on the grounds that it would be throwing good money after bad.

The Social Costs

The resolution to this policy debate on the role of the IMF will have major consequences. In Thailand, it can no longer be denied that the depressive effects of the financial crash have been deepened by the IMF program, resulting in a change from the initial IMF estimate of a 2.5 per cent growth in gross domestic product in 1998 to the latest estimate of a negative 10 per cent growth. Similarly, the Korean economy is contracting much faster than anticipated under the Fund’s stabilisation program, with the IMF revising its early estimate of GDP growth in 1998 from one per cent to a negative one per cent. As for Indonesia, the latest optimistic estimate is that the GNP would contract by 25 per cent this year.

These macroeconomic indicators translate into tremendous suffering on the ground. Already, according to World President James Wolfensohn, some 800,000 workers in Thailand have been thrown out of work by the combination of the financial crisis and IMF-engineered recession. Total unemployment at the end of 1998 is expected to encompass four million workers, or 15 per cent of the work force.

In Indonesia, the recently renegotiated program will certainly accelerate an economic free-fall that has already raised the number of people living under the poverty line from 22.5 million to 118.5 million, or from 11.2 per cent of the population to 60.6 per cent.

In Korea, many observers estimate that the numbers of unemployed will exceed two million by the end of 1998, or 9 per cent of the work force. These bleak prospects will require a great deal of psychological adjustment on the part of a labor force that is accustomed to a system of lifetime employment and has little or nothing in the way of unemployment compensation.

Towards the Depression?

As the Asian financial crisis goes into its second year, it appears that a regional recession might be turned into a regional depression by the unravelling of the area’s linchpin, the Japanese economy. There is no more talk about the situation being a “glitch” on the road to prosperity, to use President Bill Clinton’s memorable misnomer. Like Latin America and Africa in the 1980’s, East Asia faces a debacle that will possibly last a decade, if not more.

The “miracle” is definitely over. The dream of leaving underdevelopment that seemed within reach just a year ago has been replaced by the nightmare of falling back into the Third World. A future of political strength and cultural assertiveness based on growing economic power has been replaced by the fear of a new colonialism. Many people in the devastated region take as impending realities visions such as those of Jeffrey Garten, a senior official at the US Department of Commerce during President Clinton’s first term in office: “Most of these countries are going to go through a deep and dark tunnel…[O]n the other end there is going to be a significantly different Asia in which American firms have achieved much deeper market penetration, much greater access.”

This is not an acceptable future. There is increasing realisation that what has occurred is not just simply a crisis but the collapse of a model built on the principles of globalization, liberalization, and fast track growth. For increasing numbers, there is no going back to that model. The challenge of the coming years, in their view, is not just reviving their moribund economies but their profound restructuring along different principles and priorities.

* Dr. Walden Bello is professor of sociology and public administration at the University of the Philippines and co-director of Focus on the Global South, a program of policy research and analysis of the Chulalongkorn University Social Research Institute. He is the co-author of several books on Asia’s economies, including the prescient Dragons in Distress: Asia’s Miracle Economies in Crisis (London: Penguin, 1991).

Asian Crisis Creates Internet Hot Spot

by Bob Davis, Wall Street Journal, 24 June 1998

How did a 40-year-old economist named Nouriel Roubini become one of the world’s most important publishers on the subject of the Asian economic crisis?

Credit the World Wide Web. His Asia Crisis Homepage ( has become Information Central for government officials, scholars, activists and market traders trying to keep up with the long-running crisis. It posts hundreds of scholarly and journalistic articles on the crisis, helpfully divided into categories such as “Is the Asian Crisis Over?” “Will China be the Next Domino?” and “Has Globalization Gone Too Far”? Mr. Roubini also edits a running chronology of the crisis and links his Website by the Internet to Asian newspapers, ratings agencies, discussion groups and multilateral lending institutions.

Just as the Gulf War showed the power and potential of Cable News Network, the Asian crisis is showcasing the emerging role of the Web in the global economy. It is ideal for disseminating information around the clock and accessible all over the world.

“This is the first time a major economic discussion has been seriously conducted in cyberspace,” says Massachusetts Institute of Technology economist Paul Krugman. He praises the Roubini effort as “the mother of all Asia-crisis pages.”

Mr. Roubini started his site in January to keep his students informed. But largely through computer word-of-mouth, it now gets 50,000 hits a month. Writers besiege him with manuscripts by electronic and regular mail. “Here is my paper, ‘Sustainable and Excessive Current Account Deficits,”’ announced (by e-mail) the head of research at the Organisation for Economic Cooperation and Development, which is based in Paris.

Mr. Roubini figures he will post that paper and another one he recently received from Australia’s central bank, but he rejects about half the submissions from authors whose work he doesn’t know. “The idea is to keep some level of academic standards,” he says.

Although read by prominent intellectuals, the Roubini Web site has a populist flair. It is free. Mr. Roubini publishes writers who rarely reach a wide audience, much less one that includes top dogs at the U.S. Treasury, the International Monetary Fund and central banks world-wide. And he includes commentators from Asia. A columnist for the Manila Standard in the Philippines praised the Roubini Web site as “mind-enriching” and urged his readers to check it out. By contrast, during the Mexican peso crisis of 1995, few Mexicans outside the government participated in the international debate over Mexico’s economic future.

One popular posting is a paper by Walden Bello, a liberal sociologist at the University of the Philippines who castigates the IMF as a pawn of the U.S. Treasury. It was downloaded 408 times in March alone from the Roubini Web site. “I never heard of the guy,” says the New York University economist, who published the Bello paper because he thought it presented an interesting viewpoint.

Mr. Bello, replying to a reporter’s questions by e-mail, writes: “There is a hunger out there for non-mainstream, alternative analysis,” especially because mainstream economists didn’t anticipate the crisis.

World Bank big shots scour the Roubini site, especially for ammunition in their battles with the IMF over Asia policy. The IMF wants developing nations to open their borders to foreign capital. But the World Bank, charged with aiding the world’s poor, says too much short-term borrowing helped spark Asia’s financial panic.

At conference after conference, the World Bank’s chief economist, Joseph Stiglitz, has been brandishing a study his aide discovered on the Asia Crisis Homepage by Harvard economist Dani Rodrik. The paper argues there isn’t any evidence to show that two dozen developing countries that allow foreign capital to flow freely gain economically – so why take the risk?

After a barrage of such criticism, the IMF is revising its plans. “I don’t know where else I would have found the paper,” says Jason Furman, the Stiglitz adviser who downloaded the study for his boss.

The Roubini Web site prominently features papers from World Bank and IMF officials and from such academic superstars as MIT’s Mr. Krugman and Harvard’s Jeffrey Sachs. Messrs. Sachs and Krugman also have their own popular Web sites, which journalists comb regularly for insights.

In deciding which submissions to publish, the Asia Crisis Homepage unabashedly favours the well-known over the unsung. “If I have new thoughts, a couple of hundred people who are influential will see it,” says Mr. Krugman. “If you’re a newly minted assistant professor at the university of some Midwestern state, you aren’t going to get picked up. You have to go through an academic journal, which can take two years from submission to publication.”

The popularity of Mr. Roubini’s Web site has turned its creator, once little-known outside academia, into an A-list commentator. One of his papers on causes of the Asian crisis was downloaded 17,811 times in March. He says he turns down lucrative consulting jobs for investment houses, but his career has turned upward in other ways. In July, he is moving to Washington for a year to work as an international economist at the White House’s Council of Economic Advisers.

Federal rules may forbid Mr. Roubini from keeping up his Web site during his stint in the capital, but he figures that others at NYU can fill in for him while he is in Washington.


Everything you ever wanted to know about the Asian economic crisis try Nouriel Roubini’s website (see article above) (

Our report on the IMF: ‘Taming the Tigers: the IMF and the Asian Crisis,’ by Nicola Bullard, Walden Bello and Kamal Malhotra is available via email as an attached file or as a hard copy. Send an email to [email protected]


STOP-IMF is a new moderated listserve that will include clips, essays, updates and urgent actions relating to the International Monetary Fund. It will focus especially on: 1) )the U.S. congressional battle over the request to allocate $18 billion to expand the IMF; 2) NGO positions and campaign activities around capital account liberalization; 3) information about the IMF’s attempt to expand its Articles of Agreement in order to control capital account liberalization programs and country specific positions on the issue; 4) IMF reform proposal or alternative strategies to decrease volatility of international capital flows.