The Asian economic crisis: an opportunity

for change or business as usual?

Nicola Bullard^*

Today I would like to talk about the environment in Asia – not the physical environment, about which you already know a great deal, but the economic and political environment because this is where the battle lines are drawn, this is where the conflict between sustainable and equitable use of resources and the voracious appetite of growth must be resolved.

It is only through radical political and economic change that we can shift the balance in favour of a future for the planet and it is the job of educators such as you to help people identify not only the physical problems, but the structural causes of these problems, and through this to come up with solutions.

Two superficially unrelated, but profoundly important events of the past year -- the financial crisis in Southeast Asia and the Kyoto meeting on the Climate Change Convention – exemplify the critical relationship between politics and economics, on the one hand, and environment and democracy on the other. By looking at each of these in some detail and the global political and economic context in which they occur, the challenges are evident, but there is also cause for some optimism.

The financial crisis in Asia has exposed the weaknesses of export-oriented growth driven development and raised international debate about the impact of rapid trade and investment liberalisation on emerging economies. It has also precipitated major political shifts and highlighted the democracy deficit in many countries of the region.

And in Kyoto, despite a dismal beginning and meagre optimism about the final outcome, the Climate Change talks did make a small step towards setting binding targets for reducing greenhouse gas emissions, in spite of intense lobbying from vested interests and a deep divide between the North and the South.

Death of the Asian Tiger

So, the good news of 1997 is that the Asian tiger - the gung-ho name given to those countries in the region who have followed an export-oriented, rapid growth development strategy, relying largely on exploitation of natural resources and human labour – is dead, or at least mortally wounded. We should not weep.

The bad news is that the carrion which has descended to pick over the remains (euphemistically called a ‘rescue’) may pose an even greater threat to the environment, democracy and equity. These predators go by the benign names of globalisation, free trade and liberalisation and function according to a kind of capitalist Darwinism where the market determines the survival of the fittest. They are accountable to no man (let alone woman). Their real names are the International Monetary Fund, the US Secretary for Trade, the World Trade Organisation and the hundreds of transnational corporations whose interests they represent.

Who killed the tiger?

Almost every day in the past six months international and regional newspapers have carried front page headlines on the financial crisis ‘contagiously’ spreading throughout Southeast Asia. On alternate days you can read that the fundamental are sound, or that the fundamentals are flawed, that the Asian tigers are heading for a quick recovery, or that it will take years for them to regain lost ground. It’s almost as reliable as reading your horoscope, but less amusing.

And there is also a great deal of confusion about the causes of the crisis: was it pegging the currency to a strengthening dollar, sinking too much money into non-productive investments and consumer credit, too much control or too little control over investment, too much or too little bank regulation, the end of the property bubble, too much state intervention, too much state control?

What is clear, though, amidst all the contradictory analysis is that some fundamental economic assumptions are being challenged, along with the political elites that oversaw and benefited from the ‘Asian miracle’. This alone is cause for optimism.

How the tiger tumbled

The figures which measure the domino-like fall from grace of the Asian tigers are staggering. In the past six months the Thai baht has lost almost 54per cent of its value, plunging from 25 to the dollar to a previously unimaginable 52 to the dollar. Other currencies in the region have been similarly hit: since July 1997 the Philippine peso has dropped almost 42 per cent in value and the Malaysian ringitt 44.8 per cent.

In early January, the Indonesian rupiah plummeted to more than 10,000 to the dollar (in July it was 2,400) as the market reacted to President Suharto’s budget, which was heavily criticised for not following IMF conditions to the letter (although the more profound underlying cause is the ongoing political crisis which, linked to an economic collapse, could bring about wrenching tectonic changes in the next few months). Ironically, it is the economic crisis which may finally force the ‘powers that be’ to withdraw their support for the aging dictator (the cover banner on the latest issue of The Economist exclaims ‘Stand down Suharto!’).

Even the seemingly invincible Singapore dollar has lost 18.4 per cent, and in a much shorter period, the Korean won plunged 49.1 per cent. In fact, it was only the trading floor regulation to keep currency fluctuations within a 10 per cent band that slowed the fall. In early December, currency trading was suspended for the day when the won dropped 10 per cent in just four minutes.

And as these currencies devalue in relation to the US dollar, so the foreign debt rises: Thailand’s July estimate of its external debt was $US 90 billion – or about 2,250 billion baht. If those early estimates are still accurate, then the debt has blown out to 4,500 billion baht. South Korea’s debt is conservatively put at US$100 billion translates into an almost unpronounceable 174,550 billion won!

The social and environmental implications of this are daunting because countries will have little choice but to trade their way out of debt, putting further pressure on the environment and pushing down wages as countries compete against each other for a share in the glutted global market.

The scale of the IMF managed bailout packages is no less dramatic – almost US $18 billion to Thailand, US $40 billion to Indonesia and US$57 billion to South Korea: a total of US $145 making Mexico’s 1994 US $54 million bailout seem like small beer.

Who will pay the bill?

What is not yet easy to measure is the social and environmental impact of the economic crisis and the tough medicine prescribed by the IMF.

People are losing their jobs. The first sector to be hit is construction as investment dries up, firms default on loans and shut down, and the whole industry grinds to a halt. But the effects are spreading quickly as the economies slow down, government spending is tightened, investment confidence dwindles and manufacturing, especially those dependent on importing components, become less competitive and unable to cover costs.

In Thailand, the scale and extent of unemployment is not clear: the papers are filled with stories of failed businessmen and financiers becoming sandwich-makers or taxi drivers and the public perception seems to be that these are the only people hurting. So far there is no good information about the impact on the rural and urban poor or where the unemployment is hitting, yet the Thai government has announced plans to send back up to one million migrant workers. Most are from Burma. No one dares predict what will happen to them when they return although it is bound to be miserable as the Burma is virtually bankrupt and the government bloody and despotic.

A joke in a recent International Herald Tribune bleakly sums up the situation in Thailand: a man jumps off a thirty storey building and as he is falling someone on the footpath below shouts up ‘How is it?’. The falling man replies ‘Fine, so far’.

Early estimates from Indonesia are disturbing: a Ministry of Labour source estimates that 1.4 million workers have lost their jobs, mainly in the property sector, pushing the 1996 unemployment rate of 7.7 per cent to 10 per cent at the end of 1997.

It is also difficult to speculate about the impact of the IMF conditions: certainly there are sensible requirements to improve transparency and tighten banking regulations. But the IMF has also trotted out some of the old remedies, designed in the 1980s to deal with countries on the verge of collapse due to unserviceable public debts, such as cutting government expenditure, removing subsidies, privatising state enterprises, devaluing the currency and promoting export-led growth.

For almost 30 years the Indonesian government has provided subsidies on food, transport and education as a means of maintaining stability and promoting development. Already, there has been panic buying spurred by fears of food shortages and escalating prices. Rising unemployment linked with rising prices and withdrawal of government subsidies will be a volatile mix, and every effort must be made to defuse the situation – even if it means going against IMF conditions.

Does the IMF have the right medicine?

In the past few weeks, IMF policies have been coming under fire from predictable and unpredictable sources. In the US, where the Asian financial crisis is finally getting political and public attention, an unholy alliance between the left and right has formed on the question of whether Congress should approve a $20 billion payment to the Fund. According to Marijke Torfs, a director of Friends of the Earth, ``the left and the right are together'' in opposing IMF bailouts. ``The right says bailouts interfere with the market. The left says taxpayers should not pay for them because they cause job losses in countries receiving them and over-exploitation of natural resources.''

In the countries effected, the debate centres on two issues: whether the cure is the right one and who should pay for it.

Thailand’s Finance Minister Tarrin Nimmanahaeminda has criticised the IMF medicine as being too strong, with some officials arguing that expansion, rather than contraction, is needed to lift the almost stagnant economy and renew investor confidence. Political commentators, economists and civil society groups are also questioning whether the public should assume the full burden of debts run up by private creditors and lenders: after all, capitalism is about risk in the pursuit of gain. This highlights important differences difference the situation in Latin America and Africa in the 1980s when the IMF perfected its art and the present crisis.

First, the level of public debt in these countries is relatively low. In Thailand the vast majority of external debt is private – 85 per cent , while just 15 per cent is public. In Indonesia 60 per cent is private and 40 per cent public.

The director ABN AMRO’s Indonesian operations wrote recently in the Jakarta Post that Indonesia’s public debt was well managed, serviceable and not a cause for concern. Private debt, in contrast, he analysed as being poorly managed and a threat to recovery, and recommended that all private debtors get together to argue the case for rescheduling loans and deferring repayments.

In South Korea this has already happened to some extent: European and North American banks have eased terms on private debts – no doubt spurred by the prospects of going down with the ship unless they share the lifeboat with their debtors.

Second, and perhaps most tellingly, the global economy has changed dramatically since the mid-1980s. The world economy is deeply interconnected, trade barriers are falling and international financial movements – predominantly speculative investments -- have reached an astonishing one trillion dollars a day as portfolio managers shuffle money from exchange to exchange in response to rumours and seeking marginal percentage profits.

Economic sovereignty under threat

The corollary of economic globalisation is the loss of economic sovereignty: no longer are national governments able to make economic decisions which run up against GATT rules, the WTO, the interests of the world’s most powerful economy – the US -- and the sweeping tide of liberalisation. At a recent Gorbachev Foundation funded seminar on globalisation, economists noted that: "a loss of economic sovereignty by national governments has not been offset by greater cooperation at the international level." Greater collusion, perhaps, but not cooperation.

The economic crisis in Asia has set the scene for the ‘liberal free traders’ to make a conclusive stand against their arch enemies ‘nationalism and protectionism’. As James Tobin, Nobel laureate and proponent of a global tax on currency transactions, commented: "It is hard to escape the conclusion that the countries’ currency distress is serving as the opportunity for an unrelated agenda – including the obtaining of trade concessions for US corporations and expansion of investment possibilities."

Trade and investment rule, OK

And here is the real challenge for environmentalists: trade and investment are now the de facto determiners of social and environmental policy, and in turn, international trade and investment policy is set by powerful business interests, backed by bodies such as the World Trade Organisation and the Organisation for Economic Cooperation and Development.

All sorts of decisions -- from the kind of food we eat and how it is grown to who owns ideas – are made by supra-national institutions and transnational corporations which are overwhelmingly dominated by the world’s great economic powers and far removed from public scrutiny or criticism.

These organisations are not democratic: transnational corporations have loyalty only to investors and profit and the power relations between the member states of international bodies are distorted and unequal. As activists and educators we need to understand how these organisations work: small might be beautiful, but big is powerful.

Turtles caught in the crossfire

The World Trade Organisation (WTO) is one of the most powerful international institutions. Established in 1995 as a follow-up the completion of the Uruguay General Agreement of Tariffs and Trade (GATT), the WTO has a sweeping mandate which includes everything from agriculture to intellectual property rights.

Environmental and social concerns are dealt with in discussions about social clauses, green guarantees, production and processing standards, codes of conduct and so on. Many developing countries, though, are suspicious, and see these measures as protectionism by another name: the industrialised countries continually moving the goal posts to maintain their advantage over the South. The other side to the debate is that trade and investment are a legitimate way of implementing progressive social and environmental policies.

For example, in late 1996 the US imposed a unilateral ban on importing wild shrimps from 50 countries after a losing a court case against the US environment organisation, Earth Island Institute. Earth Island Institute had argued to the US domestic trade court that the government was breaching trade policy by discriminating against Caribbean wild shrimps caught without the use of turtle excluder devices, and that the ban should either be lifted (not what they wanted) or extended to all countries supplying wild shrimps to the US markets.

The NGOs intentions were sound: there appears to be a link between deep sea shrimp fishing and declining turtle populations, because the turtles get caught in the nets and drown. However, through its actions the NGO has achieved none of its objectives: First, there is no clear evidence that the situation in the Caribbean is the same as, for example, Southeast Asia.

Second, the US ban has caused six Asian countries to take the case to the WTO Tribunal, arguing that the US action breaches the GATT because it discriminates against like products. Now that this has happened, the case will be dealt with solely on the basis of trade rules, rather than addressing the broader environmental concerns which motivated the case in the first place.

Finally, unilateral action on the part of the US NGO and the US government has effectively forestalled any alternative, multilateral and locally sensitive response to what is a genuine matter for concern – the protection of deep sea turtles.

It seems impossible to separate good intentions from vested interests, and the only solution is to separate environmental and social objectives from trade and investment agreements. Social policy and environmental management and protection should be objectives in their own right, which are served by trade and investment, not the other way around. Also, doable solutions must address local realities and be shaped with the involvement of local communities – not only is the WTO incapable of responding to issues at this level, but it goes against the fundamental democratic principle that people should have control over decisions which effect their lives and in the use their natural and human resources.

Another nasty creature

Here I would like to digress, to issue a warning about a new and insidious treaty which may soon set the benchmark for international investment agreements, and which could have profound implications for environmental and social policy.

For more than two years, the OECD has been quietly negotiating a Multilateral Agreement on Investment (MAI), a wide-ranging treaty designed to liberalise all forms of investment and which could well provide a global blueprint for all future investment agreements. Liberalising investment is seen as the logical and necessary twin to trade liberalisation to achieve a completely open and free global economy. A mechanism to liberalise and regularise investment regimes seems like a good idea to those who believe in a global free market, however the MAI raises important questions, not the least being who will benefit.

These questions are all the more trenchant in Southeast Asia as the financial crisis deepens, given that many of its economic woes can be traced to uncontrolled finance and investment flows into non-productive and unsustainable sectors of the economy.

The MAI has an all-encompassing definition of investment to include, in addition to foreign direct investment, stocks, bonds, intellectual property rights, concessions and ‘any other tangible or intangible, movable and immovable property, and any related property rights such as leases, mortgages, liens and pledges.’ In short, anything and everything.

It is based on the principles of non-discrimination and most favoured nation (MFN) treatment. In effect foreign investors will be treated as if they were domestic investors and will get the same, or better, deal than other investors in the same enterprise. This means that governments will no longer be able to use policy or laws to protect domestic investors or enterprises against bigger and richer transnational corporations and that agreements will incrementally swing in favour of foreign investors as they build their bargaining power based on the MFN principle.

While no-one argues the benefits of foreign investment in developing and expanding economies, there are concerns that the MAI as presently drafted will increase the power of foreign investors – predominantly transnational corporations - to such an extent that governments will lose control over key economic policy instruments which enable them to protect and promote national interests. Critics also fear that the competition to attract foreign investors will dilute or even undermine laws designed to promote social, cultural and environmental objectives.

In addition, the MAI proposes radical expropriation and compensation provisions heavily biased in favour of the investor, even when governments act in the national interest.

A recent case in Canada provides a stunning example of the abuse of this provision. Under the North American Free Trade Area agreement (NAFTA), a US company is suing for lost profits because the Canadian Government banned the use of a toxic substance produced exclusively by that company. Put simply, a law enacted to protect Canadians from a proven toxic chemical has been challenged by an investor on the grounds that they would no longer be able to manufacture and sell that chemical on the Canadian market.

The Canadian government has the resources to challenge the case, but how many small and developing nations could afford to mount a legal defence against a foreign corporation, risking not only scare public funds in the courts but also jeopardising future investment? More importantly, what effect it would have on the willingness of governments to enact new legislation clearly in the public interest?

Further, the ‘protection from strife’ clause ensures that states assume total liability for investment losses due to war, conflict, civil disturbance or ‘any other similar event’. The good old days when investment was about weighing risks against returns are over: the state assumes the risk and investors reap the profit.

The OECD’s MAI is a stand-alone treaty, meaning that once it is finalised any one can sign up. Non-OECD countries will doubtless be persuaded to sign on to maximise their chances of attracting investment. In fact OECD teams have already visited Africa, Asia and Latin America selling the virtues of the MAI. The problem is that they will be signing on to agreement which was negotiated without them and to which they will inevitably be a junior partner.

Pressure for an international investment treaty to liberalise and regularise investment regimes is coming from transnational corporations who would much prefer to operate in a so-called predictable and transparent environment. But this language is misleading. What they really want is the freedom to move their investments wherever and whenever they want while seeking maximum profits and to enhance their rights vis-เ-vis the state. In short, they want a ‘level playing field’ for a game where they not only decide the rules but also own the football, have bought off the umpire and decide when the game is over.

There are many reasons to be concerned about any multilateral agreement on investment which does nothing to regulate the activities of investors themselves.

In fact, what is desperately needed is a mechanism to regulate investment. Governments need to look at ways of attracting long term investment and slowing down finance investment flows. There are ways of doing this. For example the Chilean Government requires all investors to make an interest free deposit into the national bank equivalent to 30 per cent of their investment, which is non-refundable if the investment is moved within months. This has not had the predicated effect of scaring away money, but has attracted genuine investments into long term and productive enterprises. The much talked about Tobin tax on all international finance movements is another tool to slow down the break-neck movement of finance and portfolio investments which do so much to destabilise stock-markets and currencies. If the technology can keep pace with the transactions, it can surely calculate the tiny .1per cent tax on these same money movements.

There are signs that the MAI may well be defeated in the OECD: the business lobby is unhappy with the concessions made to labour and environmental concerns by establishing minimum standards; the labour and environmental organisations, for their part, feel that they don’t go far enough. Either way, member governments are becoming increasingly wary about the impact of the MAI, especially now that the newest member – South Korea – has the inglorious honour of being the first OECD country to get bailed out by the IMF.

A load of hot air?

The Kyoto talks -- officially known as the Third Conference of Parties (COP-3) at the United Nations Framework Convention on Climate Change -- started inauspiciously.

The US arrived at the table with empty hands and a bad attitude, the European Union put in a safe bid for 15 per cent cut for industrialised countries (knowing that no one would agree, but that it would force the bidding) and the G-77 was determined not to sign anything until the North agreed to concrete action to reduce greenhouse gasses.

Powerful lobby groups from all points of the spectrum also played a key role in shaping the final outcome.

Broadly, the main interest groups are the business community, which believed that the market and not government regulations should decide on solutions. The insurance industry became a surprising ally of the environmental groups, because it believes that global warming is already underway, and that they will continue to be faced with massive pay outs unless some immediate steps are taken to reduce emissions. The industry is already carrying billion dollar losses after climate-related disasters in the US and Europe and with annual revenues of more than two trillion US dollars, its a lobby hard to ignore.

The environmental organisations arrived at Kyoto, arguing for strong and binding targets, stiff penalties and significant commitments from the North to reduce its consumption patters. In this they made a strange, but powerful alliance with the G-77, which argued that they would not sign on to anything unless the North showed their commitment. However, this alliance is tenuous, because the G-77 also argues that their right to development should not be sacrificed because of the over-consumption of the North.

On present projections, major developing countries such as India, Brazil, Indonesia and China will become major emitters of greenhouse gases early in the next century, and certain privileged pockets of these countries are already emitting greenhouse gases at a level comparable with the North.

Unless G-77 countries, environmentalists and the renewable energy industry can come up with a common position -- the industrialised countries can exploit this contradiction and split the alliance of G-77 and environmental groups of the North. This is a direct challenge for South NGOs: to avoid the North-South trap and to build alliances on the basis of global sustainability and the need for all governments to take responsible action.

The final agreement calls for an average 5.2 percent in greenhouse emissions by industrialised countries by the year 2012 and no formal commitments for developing nations. While the protocol does not please everyone – there is cautious if muted optimism from some environmental groups because, if nothing else, it signals that it will no longer be ''business as usual''. Emission cuts will be mandatory, renewable energy will be promoted, and developing nations will be dealt with more leniently than the over-consuming and over-polluting North.

The real interest now is to see whether the vague agreements of Kyoto can be translated into binding enforceable protocols.

Enter the activist-educator…

What is the connection between all these elements: the economic crisis in Asia, the IMF, the WTO, the MAI and the Kyoto protocol?

First, it seems that the development model which has been in ascendancy for the past decade or more is beginning to show the cracks. For many of us, the Emperor has never worn clothes, but finally it seems that the economists, politicians and international bureaucrats who were convinced by the illusion are beginning to be challenged from within their own ranks.

Critics of export oriented growth may feel vindicated, but this does not undo the high social and environmental price of rapid growth, nor does it ensure that politicians and policy makers will act on wisdom and experience. Self interest usually wins.

However, the opportunity does exist for governments and people to choose an alternative path. The obstacles are formidable – the IMF, the WTO, the economic dominance of the US, transnational corporations, the power of globalisation, lack of imagination and self-interest.

In South Korea, Thailand and Indonesia the collapse of these economies has triggered a wide-ranging public debate about the impact of globalisation and challenged long established economic and political interests. It has also shown the extent to which the interests of capital are protected by international institutions and powerful governments. The nature of democracy itself is at the centre of these discussions and this is inextricably linked with sustainable and equitable development.

The issues which we care are starting to be seriously debated: even the icon of liberalism – The Economist – is questioning the efficacy of the IMF. The debate has been going on amongst ourselves for years, but now is the time to exploit the strategic moment. We must push governments to consider alternatives which reassert pluralism and democracy, driven by social and environmental, rather than trade and investment concerns. To do this, we need to understand the political and economic interests that are stacked against us.

Education, in the long term, is the only solution. Activism is needed now.

If our planet has a future, you are it.

Bangkok

18 January, 1998