Page 1 of 2 Asia's passing pleasure moment
By R Taggart Murphy
The boardrooms and finance ministries of Seoul, Bangkok, Jakarta and Kuala
Lumpur are today filled with a fair degree of schadenfreude at America's
troubles. Schadenfreude is not a very nice emotion; Theodor Adorno once
defined it as "unanticipated delight in the sufferings of another". But asking
Asia's business and governing elites to repress shivers of pleasure at the
meltdown of the American financial system is probably demanding more than flesh
and blood can bear.
The spectacle of the politicians, pundits and academics of Washington and
Chicago thrashing about in attempts to justify the vast amounts of money being
shoveled at their, um, cronies on Wall Street is just a little too rich. That
is particularly so since much of the money will have to be borrowed from the
very people who a decade ago at the time of the so-called Asian financial
crisis were being pooh-poohed for their "crony capitalism," "opaque" banking
systems, "incestuous" government-business relations, not to mention their
supposed absence of transparent financial reporting, good corporate governance,
or accountable executives and regulators.
But the glee in seeing the United States hoisted by its own petard must surely
be mixed with a good deal of apprehension. Not only because Asia cannot escape
this crisis unmarked, but because the crisis could conceivably force Asia's
elites to engage in the open political discussions they have largely avoided
until now - discussions about the kinds of economies they expect to shape in
the wake of the American debacle; discussions that carry with them all kinds of
risks.
The economic and financial dangers to Asia of the crisis need not detain us
long for they are obvious. The region's stock markets are caught in the global
downdraft. Asia's financial institutions are just as closely linked as those in
every other part of the world to Lehman Brothers, AIG, Merrill Lynch and their
devil's spawn of credit default swaps and "toxic waste" assets. We have already
seen bank runs in Hong Kong and widespread layoffs by some of the regions'
leading financial institutions. We are likely to see more of these troubles in
Asia before the crisis plays itself out.
The United States appears headed into a recession that may be as bad as
anything the country has faced since the 1930s. That in itself will spell
trouble for a region that directly or indirectly relies on the United States as
the final engine of demand. Japan last month, for example, ran its first trade
deficit since 1982, something that is widely attributed to falling demand from
the US.
But while this is all generally understood and prudent business and financial
leaders in the region are already battening down the proverbial hatches, there
is more going on here than simply the shrinking of the region's most important
external market. For what we are seeing strikes at the heart of the entire
process by which the region transformed itself over the past 50 years.
To be sure, Asia had little to do with the "subprime" mortgages, the slicing
and dicing of rotten credits, the heads-I-win, tails-you-lose ethos on Wall
Street that form the immediate causes of this catastrophe. But as Charles
Kindleberger pointed out in his classic Manias, Panics, and Crashes,
manias of the type that have just ended so spectacularly on Wall Street cannot
occur in the absence of rapid credit creation. That credit creation in the
present case stems directly from the ability of the United States to pawn off
on the rest of the world an endless flood of dollar obligations, obligations
that for a good 40 years now have never been presented for redemption with
anything other than more US government paper.
It has been so long now that the United States had to obtain the money to
service its debts by the usual means - selling more goods and services abroad
than are bought; borrowing in a currency controlled by the lender rather than
the borrower - that its politicians no longer have any institutional memory of
what it all implies: the hard trade-offs of falling living standards and forced
savings.
Like an alcoholic's wife who furtively keeps her husband plied with booze while
managing to avoid thinking about exactly what she is doing, Asia has long
facilitated the US addiction to drowning its problems in endless dollar
cocktails. But the current crisis suggests that the days of cirrhosis of the
American liver and delirium tremens are upon us. Without a clear grasp of the
ways in which Asia's economic methods have facilitated American political
pathologies, without a plan to replace Asia's reflexive reliance on exports to
the United States with another economic driver, Asia too will be drawn into the
economic and political maelstrom that now engulfs Washington.
Asia did not set out to become America's pusher; it happened through historical
accident and the logic of the situation rather than any thought-through
strategy. To see this, we have to go back to the circumstances of the late
1940s. The United States had emerged from World War ll with something over half
the intact production capacity of the entire planet. But Washington was haunted
by two fears: that the end of the pumped-up demand of the war years would mean
the return of the Great Depression, and that a militant, monolithic communism
would capitalize on the war's devastation to bring much of the world under its
control. The so-called Iron Curtain had descended to divide Europe and Korea,
Mao Zedong's Communist Party had driven the American-allied Kuomintang out of
mainland China, while communist-led anti-colonialist insurgencies were emerging
in French Indochina and British Malaya.
The US economic response was two-fold. First, at home, the United States
adopted the new-fangled tools of Keynesian demand management to keep the
country from sliding back into Depression. Meanwhile, abroad, the United States
through such measures as the Marshall Plan and aid to occupied Japan,
essentially offered to finance on very easy terms the transfer of production
capacity to war-devastated nations. The US then agreed to accept the exports
manufactured thereby without reciprocal demands for imports of American
products. The notion that places like Japan could ever pose a serious economic
threat to American industry did not occur to anyone on either side of the
Pacific. What Washington cared about was that Japan and Western Europe not
follow China and Poland into what was seen then as Moscow's orbit.
But the Keynesian synthesis that so electrified economists and policy makers of
the time in the United States seemed to have little relevance to the challenges
faced by an Asia emerging from colonialism and war. Keynes had addressed
himself to the problems of a highly developed economy finding itself stuck in a
trough of structural unemployment and idle production capacity; in 1946, Japan
and Korea did not have production capacity to idle. Instead, there were two
alternative models of development on offer. One was the Marxist-Leninist; the
other went under the rubric of import substitution or dependency theory - that
is, that the goal of development ought to be the freeing of a country from
dependence on foreign financing and imported capital equipment. Both called for
state-directed capital accumulation and autarkic development, although the
latter did allow for market mechanisms to function at the local level. Both
boasted an extensive theoretical literature. In early postwar Asia, China would
be the champion of the former, India of the latter.
Japan, however, adopted neither. With the United States providing the initial
wherewithal to rebuild its economy (albeit at the price of aligning its foreign
policy with Washington's and ensuring that leftists were kept away from the
levers of power), Japan chose instead to engineer an economic structure that
focused on the rapid accumulation of dollars so that it could buy the capital
equipment it needed. This meant the deliberate channeling of scarce domestic
savings into externally competitive export industries. It is here that we see
the origins of the distinctive Asian model of export-led growth.
The distinction between this and the import substitution model then being
championed by India's Mahatma Gandhi and, subsequently, Jawaharlal Nehru may
appear a semantic one in that both called for the development of domestic
industry behind protectionist walls. But they differed crucially in their
stance towards the existing global financial order. India sought to eliminate
its dependence on that order; Japan to accumulate sufficient dollars in order
to exploit it for its own domestic needs. Largely for geopolitical reasons, the
architect and designated care-taker of that order - the United States - was
perfectly willing and even happy to see Japan use it to cement postwar recovery
and join the ranks of the non-Communist developed nations.
I wrote above that Japan "chose" its postwar path of development, but this is
not quite correct. It happened not, as in Beijing or New Delhi, through any
deliberate choice of an overarching theoretical model, but because the
pressures and opportunities of the time made it seem inevitable to Japan's
decision makers. The priority of recovery from the war's devastation was so
obvious that it required no political discussion to give it legitimacy. The war
years had left Tokyo with an intact institutional apparatus that could be used
to channel scarce financing into targeted industries - it was easy enough to
redirect the flows from munitions makers to promising export industries. With
the fortuitous (for Japan) outbreak of the Korean War, the United States
suddenly began placing large orders for Japanese goods needed to equip its
military. Thus through a process more akin to biological evolution than
conscious political choice, Japan found itself in a niche that functioned
well-nigh perfectly for the country in the economic ecology of the era.
The results exceeded anyone's expectations. Between 1955 when the final
elements of the postwar Japanese system were put into place and 1969 when its
growth began to alter the global economic ecology which had fostered it, Japan
boasted the highest growth rates that had ever been recorded by any economy in
human history. But the circumstances of its birth - its coming into being
without any real debate on the matter or generally accepted theoretical
foundation - help explain what is happening today.
The late 1960s provided the first evidence that things could not keep on going
as they had without adjustment. The rigid international financial architecture
of the time, labeled the Bretton Woods system for the small New Hampshire
resort town where it had been hammered out in 1944, could not accommodate the
emergence of Japan's export surpluses - joined to a lesser extent by those of
West Germany - and their mirror images, the first substantial trade deficits
run by the United States for a century or more. Attempts to rework the formal
arrangements of the Bretton Woods system collapsed in the political chaos
surrounding the Watergate scandals and the American defeat in Vietnam.
The world economy limped through the rest of the 1970s until Paul Volcker was
appointed chairman of the Federal Reserve in 1979 with a mandate to do what it
took to halt the inflation that threatened to destroy the dollar as a store of
value. Japan's vote of confidence in Volcker's policies - snapping up US dollar
securities - permitted the rebuilding of the organizing principle of Bretton
Woods: the dollar's central role in the international financial system. But
instead of Bretton Wood's formal arrangements that required the United States
to back the dollar with gold while other participants maintained fixed exchange
rates with the dollar, the
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