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March 1998 (Volume 49, Number 10)

Notes from the Editors

A striking feature of the mountain of talk about the Asian crisis is that its root cause is all too often ignored The focus of the media and the pundits is on weak banks, bad management, corrupt officials, heavy indebtedness, excess speculation, and the fragility of the financial markets. Typically, the disaster is viewed as a regional affair. A rare exception is the statement of Eisuke Sakakibara, Japan’s vice-minister for international finance: “This isn’t an Asian crisis. It is a crisis of global capitalism.” (Business Week, January 26, 1998) But he too was apparently thinking of financial markets, concerned with effects, not causes.

It is true, of course, that there are many weak links in the chain of international finance where an outbreak of plague can originate. But major financial crises generally have deep roots, though one would hardly think so if one listened to the glowing remarks of IMF officials, finance ministers, central bank governors, representatives of private industry, and academics at a conference in Jakarta convened in November 1996 to discuss the affairs of the member countries of the Association of South East Asian Nations (ASEAN). The conclusions arrived at were summarized in an IMF release: “ASEAN’s sound fundamentals bode well for sustained growth…. ASEAN’s economic success remains alive and well.” Less than two months after this celebration, Hambo Steel, a large Korean chaebol, went bankrupt. Thereafter, month by month, sometimes week by week, in one ASEAN country after another, omens of impending disaster showed up: service payments on foreign debt couldn’t be paid, bankruptcies of industrial firms and banks spread, stock markets went berserk, currencies seemed to be in free fall.

Why the contrast between the assurance of prosperity and what happened so soon thereafter? It can reasonably be argued that unalloyed optimism was itself part of the process. The relentless drive of capital accumulation is spurred not only by competition but also by faith in the continuation of prosperity. Equally characteristic of capitalism’s ways is that the underlying reality of overexpansion becomes evident in a glut of one market after another.

The much touted rapid accumulation of capital in the ASEAN nations, combined with investment in other parts of the globalized economy, ended in a vast excess of capacity in a number of key industries. Long before the celebration at the Jakarta conference, overcapacity was reflected in price declines of many of the region’s important export products. According to the Financial Times (January 15, 1998): “Prices for computer memory chips, Korea’s largest export, collapsed in a glutted global market. Earnings of chipmakers fell by 90 percent.” Excess capacity on a world scale showed up in glutted markets for cars, petrochemicals, many electronic components, steel, and shipbuilding. The president of Ford estimated that the world car industry’s production capacity is about 40 percent greater than demand.

The periodic surge of capital investment to the point where capacity far exceeds effective demand is an innate characteristic of capitalism. It is in fact at the heart of the system’s recurrent economic crises and is especially threatening in a period of stagnation, such as that which began in the 1970s. The impact of glutted markets is particularly severe in countries on the periphery of the imperialist network. This is so not only because so much of their economic performance depends on exports to the rich countries, but also because the expansion of their productive capacity is typically funded by direct investment of multinational corporations or loans from foreign banks. Payment of profits on investment and debt service has to be made in dollars, yen, marks or other strong international currencies which are obtained by a surplus of exports over imports. If the market for exports shrinks or fails to expand in line with growing capacity, the peripheral country has only one recourse after exhausting its reserve of foreign currencies. And that is to increase its foreign debt or attract more investment from abroad. If this way out works for a while, it can only lead to more trouble in the longer run, as debt service obligations and payment of profits to foreign capital keep on increasing. Debt peonage is usually the final outcome.

This pattern of excess capacity, sluggish export markets in which the nations of the region compete, growing indebtedness, and then debt peonage came rather early to the ASEAN countries because they had become favorite playgrounds for Western capital. The spurt of unusually rapid growth rates in the region opened new horizons for speculation in stock markets, real estate, and other financial outlets. Japanese, German, and U.S. banks loaded the countries up with debt at handsome interest rates. Pension funds and emerging-market mutual funds contributed to a flow of money far in excess of what could be used for long-term profitable investment in productive activities. The signs of an impending debacle were not difficult to detect, just as had happened in the period prior to the widespread debt crisis of the early 1980s and the more recent one in Mexico. Foreign reserves kept on shrinking and the deficits in balance-of-current accounts kept on growing throughout the region. But what difference did that likely future make for the financiers whose eyes were fixed on the huge profits of the present? And what difference did it make to the IMF whose statisticians reported the ominous data at the same time as the top officials were brashly trumpeting assurance that all was well? Meanwhile, the bankers of the West were confident that the IMF and their own governments would rescue them, and IMF officials reckoned that, whatever the scenario, the international financial markets of the center could be protected by shifting the costs of the rescue to the backs of the masses by enforcement of all-too-familar austerity programs.

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1998, Volume 49, Issue 10 (March)
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