IMF Sledgehammer Is Wrong Tool for Asia
Just recently, Asia was flying so high on its vaunted economic “miracle” that it seemed it could do no wrong. Now people are saying Asia can’t do anything right, that it can’t even be relied on to claw its way out of its woes responsibly. In truth, both positions were and are products of Asia’s own overblown PR and of Western media oversimplification. But now there is a new danger that the West, believing the worst of Asia and the best of itself, will force a Western perspective on the current economic downturn, prolonging the crisis by bigfooting all over it.
Asia’s currency, stock, banking and real estate markets are contracting with breathtaking speed. Mr. and Mrs. America haven’t yet felt the impact, but they will if Japan loses its balance. Korea, the world’s 11th largest economy, has already taken a fall, and last week crawled to the doorstep of the International Monetary Fund. This is the world’s lender of last resort for those on the brink of defaulting on their worldwide obligations. Korea is a big problem, but Japan, the second largest economy, is a potentially gigantic one. It is the world’s largest creditor, lending money to many nations, including the United States, in the form of its purchases of U.S. Treasury bills.
Over the weekend its fourth largest brokerage house went under, Japan’s largest corporate failure in half a century. Let’s hope Tokyo doesn’t panic and suddenly cash in its investments. A very alarmed Clinton administration proposes to Tokyo that it stimulate its domestic economy to ride out the storm. That’s good advice. But until very recently, it looked as if there was no chance that the Hashimoto government would follow a program of lowered taxes, government stimulation of the economy and rapid deregulation. Perhaps Tokyo is now having second thoughts. “Sometimes you have to hit Japan over the head to get its attention,” says USC finance professor Aris Protopapadakis. Actually, it’s not so much Western politicians, but the world markets that are doing just that to Japan right now.”
And the proposed U.S. remedy for Japan is good advice for most Asian finance ministers as well. But they are getting much harsher medicine from the IMF. As one Asian country after another requests IMF aid, it is hit with mandatory belt-tightening measures that, while aimed at reforming bad financial practices, could unintentionally stifle recovery. Steven Radelet of Harvard’s Institute for Economic Development is concerned: “The IMF puts conditions on these countries that are sometimes too onerous.” Asia is not plagued by government budgets out of control but by antiquated banking and financial systems that just can’t weather the competitive pressures of the world economy. What they need is more nuanced, moderate IMF programs that effectively put the truly rotten banks and firms out of their misery but also permit others that deserve to survive more time to get back on their feet. That prescription is also a way of minimizing severe domestic unrest inside Asia.
But isn’t the IMF dealing with some hopelessly corrupt nations? Sure, there’s a lot of backroom dealing, nepotism and favoritism. But remember, despite the corruption of the past three decades, many Asian nations managed to lift average incomes between 400% and 700%. “It’s just crazy saying that the Asian economic miracle was a fraud,” says Radelet. Serious though its problems are, Asia must not be dealt with as if it were some unruly schoolboy who requires the West, acting as the sturdy disciplinarian, to bring order to the classroom. The worry is not that Asia won’t recover; it’s that Asia will derive the wrong lessons during the recovery, taking from this unpleasant experience the desire to retreat from an open economy.
China, which so far has escaped the worst of the market meltdown but is looking the storm right in the face now, may, as U.S. Trade Representative Charlene Barshefsky notes, be “tempted to use the current crisis as evidence it shouldn’t open up.” Others in Asia are thinking that, too. And, given Congress’ recent unwillingness to allow fast-track trade negotiating authority for the president, America itself seems to be having doubts about true free trade, doesn’t it?
More than ever now, Asia and the West need each other. The West needs Asian leaders who will wake up, stop denying reality and set their nations on the course of reform and restoration. And Asia needs Western publics that understand the need to help out because their own economic future lies in a fully recovered region. Asia also needs Western leaders who are tough enough to insist that they undertake reform but are wise enough to realize that the iron glove of the IMF does not always fit all. This is where the personal intervention of President Clinton to encourage the IMF to tailor its programs as carefully as possible might go a long way toward saving Asia’s bacon. If this economic crisis is to be faced courageously and well, East and West will need to engineer an unprecedentedly nimble meeting of the minds.