How U.S. Can End Up As the Good Guy

When Asia reemerges as a dynamic part of the world, it is critical that the United States be perceived as a friend that gave constructive advice and assistance in the common interest, not as a bully determined to impose bitter social and economic medicine to serve largely U.S. interests.

That danger is real. The emergency measures of Secretary of Treasury Robert Rubin and Deputy Secretary Larry Summers have, so far, prevented a panic capable of threatening the global economic system. But with the arrival of economic turmoil, latent anti-Americanism has resurfaced.

The erstwhile claim of the Asian “tigers” that they found the key to rapid growth in a mixture of market economics and authoritarianism is challenged by the U.S. message that remedies for their current ills can be found solely in the nearly immediate adoption of U.S. models of globalism and pluralistic democracy. The fact is, no defender of either model in Southeast Asia or in the world’s financial centers foresaw the current crisis.

Since 1980, there have been recurrent crises--in Latin America in the 1980s, in Mexico in 1994, in Southeast Asia starting in 1997. Each has been more severe than its predecessor; each has involved a higher risk of contagion. Each had three common features: inadequate economic policies by the debtor countries; excessive availability of credit, and a sudden change in U.S. policies or markets beyond the control of the debtor country. In 1980 and 1994, increases in U.S. interest rates precipitated crises in Latin America; an unexpected rise in the value of the U.S. dollar sparked the Southeast Asian crisis in 1997. Cumulatively, these crises portend the risk that, sooner or later, one of them will run out of control.

No more important challenge confronts the heads of state of the industrial democracies (the G-7) than to examine the three ways in which the global financial system has contributed to the Southeast Asian crisis: 1) by the excessive availability of short-term credits that can be too easily withdrawn; 2) by the ease with which speculators can profit from a downward cycle, driving adjustment into panic; 3) by the methods of the typical International Monetary Fund rescue package that tend to turn an economic crisis into a political one.

In fairness, it must be emphasized that by the time the IMF is called in, the situation is too often already desperate. Especially in the crises of Southeast Asia, the IMF has been the only institution that has prevented a total meltdown.

At the same time, the typical IMF rescue program is in urgent need of reevaluation. Its pattern was developed in the Latin American debt crisis of the 1980s, when most of the debt was governmental. The remedy had been to shrink government services, devalue the currency and push exports. The purpose was to make the countries credit-worthy by accumulating surpluses and to permit the resumption of commercial lending.

Even though these remedies were relevant to the causes of the crisis in Latin America, they generated severe political problems by imposing additional austerity on already hard-pressed countries. But in Southeast Asia, these programs are not even relevant to most of the key problems, because most governments had respectable budgets and the debt was largely private. Economic remedies, such as an immediate end to subsidies, must be balanced against the political risk of social and political upheaval and the introduction of an element of political uncertainty that vitiates the economic remedy. The IMF must not drive the economic crisis into a political crisis lest it produce nationalist ideological reaction against the very global market system it is seeking to defend.

As the chief economist of the Deutsche Bank in Tokyo pointed out, the IMF acts like a doctor specializing in measles and tries to cure every illness with one remedy. It is dealing with a banking crisis caused by a brutal and unexpected outflow of funds that has turned into panic, as if the immediate challenge were to overcome the weakness and corruption of the governmental structure and the destruction of decades-old institutions in a matter of months. In some countries of Southeast Asia, the IMF program of austerity has virtually stopped basic commerce. Viable companies in viable industries are being driven into bankruptcy by the complete crippling of the domestic banking system due to IMF strictures, and this in societies that have no social safety net.

The crisis is, in essence, political. If Indonesia, for example, falls into chaos, we will pay for it with decades of Southeast Asian instability. Similarly, democracy in Thailand will be threatened if IMF conditions there are not eased. The international financial structure is in urgent need of revision, lest one of the crises it now generates turns into a global collapse. I do not pretend to have the technical competence to offer solutions. But it is clear that world leaders need a better understanding of global capital flows and their potential impact on the economies of both industrialized and developing countries. And they must become more aware of the potential international impact of decisions often taken largely for domestic reasons. The United States could make no more important contribution to a better world financial order than to call an emergency meeting of the heads of government of the G-7 to deal with the following challenges:

* an early-warning system with sanctions to oblige both lenders and borrowers to prevent crises and to make setbacks more manageable.

* some mechanism to discourage reckless conduct by both lenders and borrowers, and to encourage greater transparency of capital flows.

* a crisis-management mechanism that relates economic remedies to political and social conditions.

With military action in Iraq looming, the Clinton administration must not neglect the equally important crisis in Asia. For its outcome can crucially affect the shape of the future and of the global market system.