Davos 2000: Has Asia Really Rebounded?

By Walden Bello

(The author made the following presentation at the World Economic Forum Summit in Davos, Switzerland, on Monday, January 31. The panel on "Sustaining the Asian Economic Rebound" also included Dr. Gene Sperling, Director of President Bill Clinton's National Economic Council; Manu Bhaskaran, Managing Director and Group Head of Research, SG Securities Singapore; Heizo Takenaka, president of the Tokyo Foundation; and Urban Lehner, publisher and editor in chief of the Asian Wall Street Journal.)

I would be very sceptical about how solid the so-called Asian recovery really is. True, GDP figures are up, but the rest of the picture does not bode well.

In Thailand, we have a growth that is largely consumption-driven, not investment driven, one that is likely to flounder as the banking system remains paralysed, with over 47 per cent of commercial bank loans being non-performing.

In Indonesia, economic recovery is largely a function of political stability and that, unfortunately, is nowhere in sight.

In the Philippines, the banks are still not lending and the old pre-financial crisis structural problems— such as a small market owing to profound income inequalities--are reasserting themselves. But both local and foreign investors in the Philippines are also deterred by the perception---valid, in my view-- of massive corruption and the return of cronyism to Marcos-era levels under President Joseph Estrada, and the shocking absence of basic skills in governance.

Korea seems to be experiencing the most comprehensive recovery, but the banks are still in a mess and further progress is dangerously dependent on external factors, such as the movement of the yen and continuing expansion in the US, which may stumble anytime soon.

The upturn is nevertheless real, if fragile, and one of the main reasons for this across the board was the adoption after a few months into the crisis of expansionary policies of lower interest rates and deficit spending. Also critical in the case of Malaysia was the implementation of a comprehensive set of capital controls. Capital controls severed the link between high interest rates and exchange rate stability, providing a stable framework for the expansionary fiscal and monetary policies that have powered the most solid recovery in Southeast Asia. As even the International Monetary Fund now admits, capital controls can and have worked.

Future of the IMF

Which brings us to the Fund. What role is there for the IMF in the Asian recovery? In answering this question, we have to take into consideration several facts:

- the Fund played a central role in provoking the crisis because of its prescription of indiscriminate capital account liberalisation that was followed by its Asian clients;

- the Fund turned the initial financial shock into a deep recession by forcing the imposition of tight monetary and fiscal policies that acted to accelerate rather than check the collapse of the private sector;

- the IMF, acting in concert with the US Treasury Department, vetoed the creation of the Asian Monetary Fund (AMF)--a Japanese proposal supported by other Asian countries--which could have stabilised currencies under speculative attack in 1997 and led to a very different outcome for the region.

In short, the recovery has come about in spite of rather than because of the IMF, and it is rather disingenuous for the Fund's defenders to give some credit for the recovery to the IMF because it allegedly changed tack and allowed its Asian client governments to take expansionary measures demanded by their peoples when the tight policies it prescribed were not working in the first months of the crisis.

Instead of talking about a role for the Fund in the Asian recovery, we should really be discussing the transformation of the IMF, which is now suffering from what the Financial Times characterises as a profound crisis of legitimacy not only in Asia but in the rest of the world. In this connection, I have proposed three measures: immediate dismantling of the IMF's structural adjustment and stabilisation programs in Asia and throughout the developing world; immediate reduction of the IMF staff from 1000 to 200; and the creation of a Global Commission on the Future of the IMF, which would decide whether to radically transform the institution or, as I would prefer, decommission it.

Lessons from the Crisis

But to return to the main issue, what lessons have we in Asia learned that we can put to good use to sustain the recovery? A key lesson is the use of capital controls, such as the inflow controls deployed by Chile and the outflow measures used by Malaysia, to deter speculative attacks on the currency, deflate financial bubbles before they get serious, and stabilise an economy in financial turmoil.

Capital controls, many now realise, must also be integrated into a broader, long-term development policy. They can be used to discriminate against speculative capital interested only in coming in to make a quick profit in the stock or real estate markets then leave, and in favour of foreign direct investment that has a strategic commitment to the economy.

But the lessons go beyond capital controls, and one of the things I would like to point out is that many people in the streets of Seattle in December last year, during the WTO ministerial, were NGOs from Asia. Representing the peoples throughout the region who were suffering from the financial crisis, these organisations are now actively thinking beyond the traditional paradigm. They are now pushing to expand discussion of and decision-making in economic issues beyond the closed circles of technocratic and business elites.

What are some of the lessons that they are pushing to translate into policy?

One is a greater reliance on local financial sources instead of world capital markets to protect our economies from global volatility. Now, when one follows this line of moving toward greater financial independence, the concrete policy measure is more effective taxation to generate capital resources, especially of our elites who have made massive tax evasion into a way of life. The recourse to global financial markets for development capital in pre-crisis Asia was, in a way, a confession of the inability to generate capital via taxation and other redistributive measures.

Second is the integration of policy on financial flows and foreign investment into a broader discussion of what development model must be followed. There is now growing disillusion with a pre-crisis model marked by high growth rates, massive dependence on foreign capital, export orientation, and indiscriminate integration into the global economy. There is now a more active effort to operationalize balanced development, one that does not overemphasise growth but pursues it in the context of the priority put on the achievement of equity and environmental sustainability and with a strategy of discriminate, selective integration into the global economy.