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The silver lining in Asia's economic crisis

Diane Francis March 16 1998
Columns

The silver lining in Asia's economic crisis

Diane Francis March 16 1998

The silver lining in Asia's economic crisis

Diane Francis

The annual World Economic Forum in Davos, Switzerland, is where the elite meet. This year, some 45 heads of state mingled with business leaders, academics and artists for a week last month in an alpine setting as beautiful as any on earth. The forum is like a graduate-school seminar with one-hour panel discussions involving high-level participants such as Nobel Prize winners Elie Wiesel and Archbishop Desmond Tutu or business big shots like Microsoft’s founder, billionaire Bill Gates.

Amusing at this year’s gathering were several dozen panels on the Asian economic crisis and its effects on the rest of us. It was amusing because most of the participants had appeared on several dozen panels last year about the Asian miracle and its effects on the rest of us.

The point is that the “experts” cannot foretell the future this year any better than last year’s bunch foresaw the currency collapses.

While discussions mostly centred on the negatives, I believe there is a silver living in the Asian cloud. The Asian currency crisis is a healthy, and needed, correction for the global economy and may also help move the affected countries more quickly along the desired path towards transparency, economic meritocracy and, in some cases, democracy. Take the case of Indonesia. Last year, its delegates held a gala cocktail party to wine and dine foreign investors and to crow about its incredible economic growth. Back in early 1997, Indonesia, with about 200 million people, was an Asian Tiger with an average of sixper-cent growth per year compounded for two decades. It also boasted of more foreign direct investment in 1995 and 1996 than mainland China, with six times the population. At the same time it was toasting its successes, its

dictator, President Suharto, was plotting with family and friends the wholesale theft of half of a 200-million-ounce gold mother lode allegedly discovered by Canadian mining explorer Bre-X Minerals Ltd. of Calgary.

Never mind that the mother lode turned out to be a complete hoax. The Bre-X controversy set the stage for Indonesia’s rapid collapse because the confiscation made world headlines. It underscored to investors and traders that while Indonesia may have experienced record economic growth, Suharto’s “first family” of six children were thieves who routinely took 10 per cent to 20 per cent of investment deals, projects and corporations.

Such nepotism, cronyism and deceit also characterized the political elite in Malaysia, South Korea, Thailand and Japan. In response, Malaysian leaders blamed their currency woes on a “Zionist” conspiracy led by currency guru George Soros. In Thailand and South Korea, the government eventually revealed that rogue traders had blown their brains out in the foreign exchange derivatives market, contributing to their currencies’ collapses. In Korea, the govern-

Inefficient and corrupt economies ultimately could lead to more openness, more democracy and more fairness

ment first told the International Monetary Fund that the country had $71.5 billion in foreign debts, then admitted it was more than $143 billion.

Likewise, Japan’s problems forced its government to confess and rectify problems. There have been multiple arrests of political, governmental and business leaders, as well as bankruptcies. And finally, the government conceded that its banks had big problems with bad and non-performing loans totalling more than $800 billion, an amount equal to the value of the Canadian economy.

Pressure from the IMF, and local politicians, has brought about such disclosures and, eventually, reforms. In Indonesia’s case, Suharto initially balked at IMF requirements, but was forced to capitulate. His reluctance was hardly surprising because it meant few-

er subsidies and tariff protections for businesses benefiting his family and friends. It also meant the scrapping of expensive fuel and food subsidies for ordinary citizens.

While unpleasant, reforms and unrest are the only hope for Indonesians in the long run. The former subsidies, to both rich and poor alike, never led to long-term sustainable development. That’s because under a corrupt system like Suharto’s, the poor get no pieces of the economic pie, while the wealth is sliced up among friends and relatives, regardless of merit or economic efficiency. Eventually, such inefficient and corrupt systems implode, and riots in the streets occur. Hopefully, though far from certain, such protests will result in a greater voice for the people, more openness, more democracy and more fairness. However, this may take time. After all, it took our ancestors centuries of class warfare to turn our societies into democratic meritocracies.

Still, crises such as these represent a healthy correction because they result in the removal of inefficient economic managers and, sometimes, corrupt politicians. Take the case of Mexico’s 1994 currency crisis, similar to Asia’s. Mexico’s central bank had misled foreign investors and traders for months by hiding the fact that it was blowing Mexico’s foreign reserves in order to artificially prop up the peso to get Ernesto Zedillo and his ruling party re-elected. The election strategy worked, but the peso took a nose dive once reserves figures were published.

Reforms were imposed by the IMF and these have restored economic growth to Mexico on a sounder footing. But the biggest benefit of the crisis was non-monetary when voters punished Zedillo and his party for its mismanagement. In August, for the first time in the 70-year history of Mexico’s ruling party, the opposition took control of the country’s congress.

Its significance cannot be overstated. The voter backlash against the crisis and government translated into a major step in Mexico’s slow climb towards becoming a mature democracy. One can only hope that these latest crises point to the same progress in Asia.