Bailouts Show It’s a Small World Economy

Less than a generation ago, the only financial crises that really mattered to Americans were those close at hand.

In the 1970s, Congress fretted for weeks before approving a $750-million rescue of Lockheed Aircraft Corp., and a similar debate gripped the country before President Carter agreed to put up $1.2 billion in taxpayer money to save Chrysler Corp. and its 130,000 jobs.

At the same time, the International Monetary Fund was pulling Britain and Italy back from the financial brink. But few Americans cared; those countries were an ocean away.

Two decades later, shock waves from crises in the much smaller and more distant economies of Thailand, Indonesia and South Korea rumble through California and the rest of the United States as if they were right next door.

The reason is simple: They are. In the financial world of 1998, there are no more oceans. There is only next door.

And it isn’t just American banks and investment houses--whose bad loans in Latin America in the 1980s propelled the U.S. into the lead in bailing out such troubled economies as Brazil and Argentina--that stand to come out losers in Asia’s financial debacle.

The American worker’s 401(k) pension money is also in play.

In the world of finance, distance has been obliterated by technologies that can propel huge sums of money halfway around the world in seconds. Contributing to this environment has been the sweeping deregulation of financial markets in leading industrial nations since the 1970s, which has played a major part in breaking down walls that once hemmed in capital flows.

The demise of distance carries some clear, if unsettling, implications.

It means that U.S. taxpayer money will probably be needed to underwrite future Asia-style bailouts involving distant nations that lurch into trouble in the years ahead.

As international investors find new opportunities elsewhere, such as the new, largely untested markets of the post-Communist states of Eastern Europe, some observers question whether this region will be immune to such turmoil.

And what about the Caspian Sea basin nations of Azerbaijan, Kazakhstan and Turkmenistan, where newly discovered oil and natural gas reserves are attracting enormous investments from Western oil companies? At the start of the decade, these countries were Soviet Union republics; they have had less than 10 years to establish modern financial practices.

Global investment strategists are convinced that new technological advances will only further shrink their world in the years ahead and thus heighten the impact of future financial crises.

“A decade ago, no one would have cared about Thailand’s problems,” said James Montier, a global investment strategist at NatWest Markets in London. “They would have washed back through the banking system, and that would have been it.”

Few experts doubt the inevitability of financial crises.

“It’s nature, it’s human nature, it’s going to happen,” said David Roche, president of Independent Strategies, a London-based investment research company. Roche said he believes that Asia’s problems were both predictable and avoidable, yet they happened anyway, mainly because of age-old human foibles.

“There was nothing obscure about any of this,” he said. “It stems from the arrogance of success, cheap money and the stupidity of bankers. The cure is for lenders to get intelligent and borrowers to get wise, but that’ll be the day.

“These crises are spaced about eight to 10 years apart. That’s about the time required to fire one generation of stupid bankers and hire another.”

For Americans, who historically have enjoyed the luxury of distance from world trouble spots, one of the clearest lessons to emerge from the Asian financial crisis is that “globalization” is no cliche. It is an accurate description of a world that has become so tightly interconnected that the financial security of an Angeleno today may be linked to the performance of a Thai pulp and paper company in much the same way his parents’ was to the survival of businesses like Chrysler.

The number of U.S.-based investment funds made up solely of the stocks of Asian companies--funds in which Americans placed a small but growing part of their savings through much of the 1990s--has quadrupled over the last five years from 45 in 1993 to 168 at the end of last year.

Before the first signs of trouble last summer, the net assets of these funds had reached $19 billion, according to Chicago-based Morningstar Inc., which tracks mutual funds. Morningstar also estimates that Americans have an additional $59 billion invested in Asian equities through more broadly based mutual funds.

*

The pace of more traditional U.S. economic integration with Asia in recent years has also been startling. Annual two-way trade rose from $236 billion to more than $500 billion during the decade ending in 1996, while direct capital investment jumped from $87 billion to $275 billion over the same period, according to U.S. government figures.

In California, roughly one-third of the 281,000 jobs created in 1996 were linked directly to trade with Pacific Rim nations, according to the office of Sen. Dianne Feinstein (D-Calif.). And economists believe that an undetermined number of other jobs have been generated by the price stability resulting from low-cost products and components imported from Asia.

“This may hurt some [workers], but it helps others and it’s a net plus for the economy,” said Adam Posen, an economist at the Institute for International Economics in Washington. “It means we can employ more people without running into inflationary pressures.”

Such realities not only assure American interest in rescuing nations whose economies hit hard times, but they also raise more fundamental, politically touchy questions about the rights of those in the United States and other investor countries to become more deeply involved during routine times in the economies of emerging nations, some of which protect entire economic sectors from foreign competition.

“There has to be greater openness of these systems,” said Norbert Walter, the Frankfurt-based chief economist of the Deutsche Bank Group. “Part of the answer is allowing international participation in sectors such as financial services that are closed to foreigners in a country like Korea.”

Equally sensitive is how the West should deal with the prevalence of special privilege and so-called crony capitalism in cultures where nepotism is considered a virtue even as it acts as a serious financial drag.

*

A 1996 article in Business Week magazine listed the personal financial assets of five of Indonesian President Suharto’s six children at $3.6 billion and noted, “It is well-nigh impossible to get a [business] deal done without a Suharto clan member as ally, agent or partner.” The IMF rescue package for Indonesia takes aim at some of the Suharto family’s most lucrative business ventures.

Some Americans demand to burrow even deeper into the economic practices of countries with which the United States does business. At a meeting in Washington on Thursday, nongovernmental organizations urged members of Congress to condition future international bailout money for Asian countries on improvements in such areas as worker rights and the environment.

“We want to stop the replenishment [of U.S. funds] to the IMF until the link to worker rights is recognized,” said Terry Collingsworth, general counsel for the International Labor Rights Fund. Collingsworth said his organization had tried but failed to withhold Indonesia’s $40-billion bailout package until that country released from prison its most prominent independent union leader, Mucktar Pakpahan.

Policymakers in Washington must also rethink how to prepare themselves to deal with new and tough political questions inherent in an unstable world in which financial misdeeds in Jakarta can cast shadows over security in the American workplace.

Clinton administration trade officials are already bracing for a backlash from labor unions when Asia tries to restart its stalled economies by flooding the United States with cheaper-than-ever imports--goods that could threaten American jobs.

“I’m worried about the political implications of this,” admitted Frank Kittredge, president of the Foreign Trade Council. He and others agree that a quantum leap in the U.S. trade deficit will provide political ammunition for influential advocates of high tariffs and restrictive trade measures, such as conservative political commentator Patrick J. Buchanan and House Minority Leader Richard A. Gephardt of Missouri.

“There’s no question the administration is concerned about the fallout of an increased trade deficit in Asia,” conceded one U.S. trade official. “We will press hard for our trading partners to meet their [market-opening] obligations and work for new access in other markets. We can’t afford a protectionist wave in this country.”

Others worry that the Asian financial crisis may have placed the U.S. national economic interest on a collision course with its political interests.

“We know that a stable Indonesia, Korea and Thailand are in our interest and that this financial crisis at least threatens this stability,” said Alan Stoga, president of Zemi Communications, a media and investment research company in New York. “But imposing financial discipline can mean economic dislocation, recession and unemployment. It’s not easy to define the national interest and how you go about imposing it.”

Despite the problems, those who follow America’s economic ties with the Pacific Rim are convinced they have been good for the United States--and for Asia--and will continue to be so.

*

“Right now there may be a downturn in Asia, but over the long term, we’re getting better returns on our capital by having investment opportunities out there,” Posen said. “The stable investment, growth and low unemployment we enjoy weren’t created by what goes on in Asia, but it certainly has helped.”

Many economists also view the present crisis as a pause, not an end, to strong Asian growth.

“When I first went to Indonesia 30 years ago, per capita income was $10 a year and the prevailing sound was rain bouncing off corrugated metal roofs,” Roche said. “Today, incomes average $1,000 [a year] and the prevailing sound is canvas flapping on empty skyscrapers. It may not be perfect, but it’s progress, and we have to take the long view.”