However, in the wake of the Plaza Accord, many newly developing Southeast Asian economies had by then “pegged” their currencies to the low dollar, establishing official rates at which businesses and countries around the world could exchange Southeast Asian currencies for dollars. So long as the dollar remained cheap, this gave them a price advantage over competitors, including Japan, and made the region very attractive to foreign investors because of its rapidly expanding exports. It also encouraged reckless lending by domestic banks, since pegged exchange rates seemed to protect them from the unpredictability of currency fluctuations. During the early 1990s, all of the East Asian countries other than Japan grew at explosive rates. Then the “reverse Plaza Accord” brought disaster. Suddenly, their exports became far more expensive than Japan’s. Export growth in second-tier countries like South Korea, Thailand, Indonesia, Malaysia, and the Philippines went from 30 percent a year in early 1995 to zero by mid-1996.7
Certain developments in the advanced industrial democracies only compounded these problems. Some of their capitalists had spent the post–Plaza Accord decade developing “financial instruments” that enabled them to bet on whether global currencies would rise or fall. They had also accumulated huge pools of capital, partly because aging populations led to the exceptional growth of pension funds, which had to be invested somewhere. Mutual funds within the United States alone grew from about $1 trillion in the early 1980s to $4.5 trillion by the mid-1990s. These massive pools of capital could have catastrophic effects on the value of a foreign currency if transferred in and then suddenly out of a target country. Fast-developing computer and telecommunications technologies radically lowered transaction costs while increasing the speed and precision with which finance capitalists could transfer money and manipulate currencies on a global scale. The managers who controlled these funds began to encourage investment anywhere on earth under the rubric of “globalization,” an esoteric term for what in the nineteenth century was simply called imperialism. They argued that excess capital should be allowed to flow freely in and out of any and all countries. Some economists argued that the free flow of capital was the same thing as the free flow of goods, despite mountainous evidence to the contrary.
Capital flows to developing nations in Asia and Latin America jumped from about $50 billion a year before the end of the Cold War to $300 billion a year by the mid-1990s. From 1992 to 1996, Indonesia, Malaysia, Thailand, and the Philippines experienced money and credit growth rates of 25 percent to 30 percent a year. During this same period South Korea, Thailand, and Indonesia invested nearly 40 percent of their gross domestic product in new productive capacity as well as in hotels and office buildings; the comparable figure for European nations was only 20 percent and even less for the United States. In 1996, Asia was the destination for half of all global foreign investment, European and Japanese as well as American. On the American side, by 1997 Citibank held about $22 billion in local currency loans in East Asia, about $20 billion in securities, and $8 billion in dollar loans; Morgan Bank had $19 billion in Asian securities and $6 billion in dollar loans; and Chase had $4 billion in local currency loans, $15 billion in Asian securities, and $6 billion in dollar loans.8
Although they did not speak out at the time, a number of famous financiers and economists have since pointed out the dangers of what is called “hot money” or “gypsy capital.” George Soros, one of the world’s richest financiers and head of a large “hedge fund” located in the Netherlands Antilles, asserted that “financial markets, far from tending toward equilibrium, are inherently unstable,” and he warned against the folly of continuing down the path of deregulating the financial services industry.9 Jagdish Bhagwati, one of free trade’s most passionate supporters and a former adviser to the director-general of the General Agreement on Tariffs and Trade, argued that the idea of free trade had been “hijacked by the proponents of capital mobility.” He claimed that there was a new “Wall Street–Treasury complex,” comparable to the military-industrial complex, which contributes little to the global economy but profits enormously from pretending that it does. The East Asian economies did not really need hot money from abroad, since in most cases they saved enough themselves to finance their own growth. Bhagwati has also pointed out that an unregulated financial system can with relative ease become divorced from the productive system it is supposed to serve and so be unnaturally predisposed to “panics and manias.”10
There was as well a less financial ingredient in the disaster-in-the-making. Without particularly thinking about it or sponsoring any public debate on the subject, the U.S. government built its future global policies on the main military elements of its Cold War policies. It expanded NATO to include the former Soviet satellites of the Czech Republic, Hungary, and Poland; it reinforced its East Asian alliances; and it committed itself to ensuring access to Persian Gulf oil for itself and its allies. The Gulf War of 1991 was the first demonstration of this commitment. Eschewing a “peace dividend,” which it might have directed toward its own industrial and social infrastructure, the United States also kept its Cold War–sized defense budgets in the $270 billion range while seeking to reorient its military focus from the possibility of war with a more or less equivalent enemy to imperial policing chores everywhere on earth.
With hegemony established on military terms and the American public more or less unaware of what its government was doing, government officials, economic theorists, and members of the Wall Street–Treasury complex launched an astonishingly ambitious, even megalomaniacal attempt to make the rest of the world adopt American economic institutions and norms. One could argue that the project reflected the last great expression of eighteenth-century Enlightenment rationalism, as idealistic and utopian as the paradise of pure communism that Marx envisioned; or one could conclude that having defeated the Fascists and the Communists, the United States now sought to defeat its last remaining rivals for global dominance: the nations of East Asia that had used the conditions of the Cold War to enrich themselves. In the latter view, U.S. interests lay not in globalization but in bringing increasingly self-confident competitors to their knees.
In any event, buoyed by what the apologist for America Francis Fukuyama has called the “end of history”—the belief that with the end of the Cold War all alternatives to the American economic system had been discredited—American leaders became hubristic. Although there is no evidence that Washington hatched a conspiracy to extend the scope of its global hegemony, a sense of moral superiority on the part of some and of opportunism on the part of others more than sufficed to create a similar effect.
Their efforts came in two strategic phases. From about 1992 to 1997, the United States led an ideological campaign to open up the economies of the world to free trade and the free flow of capital across national borders. Concretely this meant attempting to curb governmental influence, particularly any supervisory role over commerce in all “free-market democracies.” Where this effort was successful (notably in South Korea), it had the effect of softening up the former developmental states, leaving them significantly more defenseless in the international marketplace.
Beginning in July 1997, the United States then brought the massive weight of unconstrained global capital to bear on them. Whether the U.S. government did this by inadvertence or design is at present impossible to say. But at least no one can claim that America’s leadership did not know about the size and strength of the hedge funds located in offshore tax havens and about the incredible profits they were making from speculative attacks on vulnerable currencies. In 1994, for example, David W. Mullins, former Harvard Business School professor and vice chairman of the Federal Reserve Board, went from being a deputy of Reserve Board chairman Alan Greenspan to a position as a director of Long-Term Capital Management (LTCM), a huge hedge fund with its headquarters in Greenwich, Connecticut, but its money safely stashed in the Cayman Islands, beyond the reach of tax authorities. In 1998, after the conditions it helped bring about had almost
bankrupted the fund, the New York Federal Reserve Bank arranged a $3.65 billion cash bailout to save the company—as good an example of pure “crony capitalism” as any ever attributed to the high-growth economies of East Asia. In fact, when the bailout came to light, a number of Asian publications cynically recalled how the New York Times had editorialized only months earlier that in Asia “collusive practices were not only tolerated, they were encouraged” and that “the United States needs to reiterate the importance of full transparency by companies and financial institutions.”11 After the LTCM bailout, Martin Mayer, one of the most respected writers on the American financial system, observed that “the Fed [Federal Reserve Board] for all its talk of ‘transparency’ has made the fastest growing area of banking totally opaque, even to the supervisors themselves.”12
In order to make it intellectually respectable for the smaller Asian economies to swallow all the money the United States, Japan, and other advanced countries were offering them, the U.S. government threw its weight behind the Asia-Pacific Economic Cooperation forum (APEC), an organization the Australians had launched at a meeting of trade ministers in Canberra in November 1989. The forum did not, however, take off until November 1993, when President Clinton decided to attend an APEC meeting in Seattle and turned it into an Asia-Pacific summit of leaders from all the major East Asian nations. The Seattle meeting also produced APEC’s first “Economic Vision Statement”: “The progressive development of a community of Asia-Pacific economies with free and open trade and investment [italics added].” Under American leadership, APEC became the leading organization promoting globalization in East Asia. At annual meetings in different Pacific Rim countries, it insistently propagandized that the Asian “tiger economies” open up to global market forces, in accordance with the most advanced (American) theorizing about capitalist economies and in order to not be left behind as mere developmental states.
The November 1994 APEC meeting in Bogor, Indonesia, committed the participants to free trade and investment in the Pacific by 2010 for developed countries and by 2020 for developing countries, such as China and Indonesia. In 1995, at Osaka, APEC members agreed to unilaterally open their economies rather than attempt to negotiate a treaty like the North American Free Trade Agreement, which would have generated too much resistance in many of the member nations. Nothing much happened at Manila in 1996—except for a visit by the leaders to the old U.S. naval base at Subic Bay, now cleaned up of its prostitutes and turned into a free-trade and development zone. At Vancouver in November 1997, with the Asian financial crisis already under way, the United States pushed for the rapid removal of tariffs and nontariff barriers to trade in fifteen different sectors of economic activity. At Kuala Lumpur in November 1998, APEC finally came unglued. The prime minister of Malaysia, Mahathir Mohamad, had only a few months earlier reimposed capital controls over his economy to insulate it from gypsy capital, for which Vice President Al Gore openly denounced him, encouraging the people of Malaysia to overthrow him. The meeting ended in rancor, with Japan taking the lead in scuttling any further market-opening schemes for the time being. Its Ministry of Foreign Affairs declared that the United States was possessed by an “evil spirit” and accused it of endangering the region’s fragile economic condition by pushing market-opening measures down the throats of countries too weak to open their borders further.13 Malaysia and the United States did not even bother to attend the 1999 APEC meeting of trade ministers in Auckland, New Zealand.
The shock that brought this edifice crashing to the ground started in the summer of 1997, when some foreign financiers discovered that they had lent huge sums to companies in East Asia with unimaginably large debts and, by Western standards, very low levels of shareholder investment. They feared that other lenders, particularly the hedge funds, would make or had already made the same discovery. They knew that if all of them started to reduce their risks, the aggregate effect would be to force local governments to de-peg their currencies from the dollar and devalue them. Since this would raise the loan burdens of even the most expertly managed companies, they too would have to rush to buy dollars before the price went out of sight, thereby helping to drive the value of any domestic currency even lower.
The countries that had followed recent American economic advice most closely were most seriously devastated. They had opened up their economies to unrestricted capital flows without understanding the need to regulate the exposure of their own banks and firms. They did not ensure that borrowers in their countries invested the money they acquired from abroad in projects that would pay adequate returns or that actually constituted collateral for the loans. The foreign economists who advised them did not stress the institutional and legal structures needed to operate in the world of American-style laissez faire. No one warned them that if they raised their interest rates in order to slow inflation, foreign money would pour into their countries, attracted by high returns, whereas if they lowered interest rates in order to prevent a recession, it would provoke an immediate flight of foreign capital. They did not know that unrestricted capital flows had put them in an impossible position. What took place in East Asia was a clash between two forms of capitalism: the American system, disciplined by the need to produce profits, and the Asian form, disciplined by the need to produce growth through export sales.
The International Monetary Fund entered this picture and turned a financial panic into a crisis of the underlying economic systems. As already mentioned, the Bretton Woods conference of 1944 had created the IMF to service the system of fixed exchange rates that lasted until the “Nixon shocks” of 1971. It survived its loss of mission in 1971 to become, in the economist Robert Kuttner’s words, “the premier instrument of deflation, as well as the most powerful unaccountable institution in the world.”14 The IMF is essentially a covert arm of the U.S. Treasury, yet beyond congressional oversight because it is formally an international organization. Its voting rules ensure that it is dominated by the United States and its allies. India and China have fewer votes in the IMF, for example, than the Netherlands. As the prominent Harvard economist Jeffrey Sachs puts its, “Not unlike the days when the British Empire placed senior officials directly into the Egyptian and Ottoman [and also the Chinese] financial ministries, the IMF is insinuated into the inner sanctums of nearly 75 developing country governments around the world—countries with a combined population of some 1.4 billion.”15
In 1997, the IMF roared into a panic-stricken Asia, promising to supply $17 billion to Bangkok, $40 billion to Jakarta, and $57 billion to Seoul. In return, however, it demanded the imposition of austerity budgets and high interest rates, as well as fire sales of debt-ridden local businesses to foreign bargain hunters. It claimed that these measures would restore economic health to the “Asian tigers” and also turn them into “open” Anglo-American-type capitalist economies. At an earlier meeting at Manila in November 1997 called to deal with the crisis, Japan and Taiwan had offered to put up $100 billion to help their fellow Asians, but the U.S. Treasury’s assistant secretary, Lawrence Summers, denounced the idea as a threat to the monopoly of the IMF over international financial crises, and it was killed. He did not want Japan taking the lead, because Japan would not have imposed the IMF’s conditions on the Asian recipients and that was as important to the U.S. government as restoring them to economic health.16
In Indonesia, when the government ended its dollar peg and let the currency float, the rupiah fell from about 2,300 to 3,000 to the dollar but then stabilized. At that point, with almost no empirical knowledge of Indonesia itself, the IMF ordered the closure of several banks in a system that has no deposit insurance. This elicited runs on deposits at all other banks. The wealthy Chinese community began to move its money out of Indonesia to Singapore and beyond, and the country was politically destabilized, leading ultimately to the overthrow of President Suharto. All Indonesian companies with dollar liabilities rushed to sell rupiahs and buy dollars. Equities instantly lost 55 percent of their value and the cu
rrency, 60 percent. The rupiah ended up trading at 15,000 to one U.S. dollar. David Hale, chief economist of the Zurich Insurance Group, wrote at the time, “It is difficult, if not impossible, to find examples of real exchange rate depreciations comparable to the one which has overtaken the rupiah since mid-1997.” He suggested that a proper comparison might be with the hyperinflation that hit the German mark in 1923.17
By the time the IMF was finished with Indonesia, over a thousand shopkeepers were dead (most of them Chinese), 20 percent of the population was unemployed, and a hundred million people—half the population—were living on less than one dollar a day. William Pfaff characterized the IMF’s actions as “an episode in a reckless attempt to remake the world economy, with destructive cultural and social consequences that could prove as momentous as those of 19th-century colonialism.”18 Only Japan, China, and Taiwan escaped the IMF juggernaut in East Asia. Japan kept aloof even when the Americans publicly rebuked it for failing to absorb more exports from the stricken countries, for the Japanese knew that the Americans would not actually do anything as long as the marines were still comfortably housed in Okinawa. China remained largely untouched because its currency is not freely convertible and it had paid no attention to APEC calls for deregulation of capital flows. And Taiwan survived because it had been slow in removing its financial barriers. It also maintains a relatively low ratio of investment to gross domestic product, is shifting further toward a service economy whose capital needs are less, and has maintained export diversity—unlike, for example, Korea’s overconcentration in products such as semiconductors destined for the American market. Foreign holdings of Taiwanese currency are negligible because its peculiar political status makes it unattractive to the hedge funds. Thus, it has been able to offer some of its own huge foreign currency holdings to help bail out countries in Southeast Asia.
Blowback, Second Edition: The Costs and Consequences of American Empire Page 27
