Will Singapore's economy collapse

Asian crisis? Global Capitalism Crisis!


Peter Franke
Editor of the Southeast Asia Information

"This is not an Asian crisis. This is a crisis of global capitalism"
[Eisuke Sakakibara, senior official in the Japanese Ministry of Finance (Spiegel 4/98, p.77)]

Since the beginning of this year, the "Asian crisis", which has ravaged Thailand, Malaysia, Singapore, Indonesia, Hong Kong and South Korea, generally referred to as the "tiger states", has been described as a threat to the global economy in the German media Year the German public viewed the sustained economic growth of these countries averaging five to ten percent since the mid-1980s as an "Asian economic miracle" and presented as a model for countries in the so-called Third World and even for stagnant Europe.

Just as one could not speak of an "Asian economic miracle" so far, the cause is an "Asian crisis," but a crisis of global capitalism in Asia. The affected countries bear the consequences of adopting the capitalist growth model and, in particular, their successful integration as global actors in the international financial markets. These markets in particular have developed into a global economic risk in the last ten years and plunged the affected East and Southeast Asian countries into a financial chaos that threatens to paralyze their economies.

The crisis is far from over. Despite the largest support activities to date by the International Monetary Fund (IMF), the effects on the global economy cannot yet be foreseen. Scientists and politicians alike argue about why it could happen. At the moment, we can only provide clues for an explanation and assessment of the causes of the success and failure of the Southeast Asian growth economies and their possible further developments.

What happened?

During the sustained boom in economic growth that began in the second half of the 1980s, companies and private individuals in the affected countries took out huge sums of credit, mostly in US dollars, because they cost less interest than loans in local currency. The exchange rate was firmly pegged to the US dollar, so no difficulty was seen in repaying loans through profits made in local currency. As long as the economy was booming, that wasn't a problem. But when the exchange rate of the US dollar against most other currencies rose in mid-1995, the exchange rates of the Asian currencies pegged to the US dollar rose accordingly. This made the goods of these countries increasingly expensive on the world market. The devaluation of the Chinese yuan by a third at the beginning of 1994 already reduced their international competitiveness compared to cheaper Chinese products.

Since the beginning of 1997, the international banks and currency dealers have become increasingly convinced that the Asian currencies concerned are overvalued and that they have to give up the peg to the US dollar in order to improve the export conditions of their goods on the world market. The governments resisted such a devaluation, because it was clear to them that a devaluation would make the interest and repayment of debts made in US dollars in local currency much more difficult and many companies could collapse as a result. Even so, there was a gradual trend towards exchanging local currencies for US dollars.

That was the hour of the currency speculators. They signed futures contracts promising to pay off large sums of the Thai baht after a month or more. They bet that when they were due they could buy the baht far cheaper than they had already sold it and expected a quick profit.

The governments of the affected countries tried to counter this through the national banks by selling US dollars from their reserves. But their reserves were also limited. First, in early July 1997, the Thai government had to give up the fight and decouple the baht from the US dollar. Malaysia followed just under 2 weeks later, followed by Indonesia after a month. This put many banks and commercial enterprises at risk and share prices in Bangkok, Kuala Lumpur, Jakarta and later even Hong Kong and Seoul plummeted.

Thailand, Indonesia and South Korea no longer saw themselves in a position to cope with the crisis on their own and have called on the IMF for help. In order to obtain loans totaling tens of billions of US dollars to stabilize their currencies and regain international confidence in their economy, they must now, more or less, have their economic policy dictated by the IMF: higher interest rates against the collapse of the currency, reform of the banking system , Liberalization and opening of the domestic markets, discontinuation of inefficient government subsidies and projects as well as economical budget management.

For this year, economic growth forecasts look bleak for most of the East and Southeast Asian countries. Growth rates of less than 4 percent are expected for Thailand and Indonesia, even with a decline in growth.

Capital surplus on the world market: blessing and fate

As early as the mid-1980s, a capital surplus had accumulated in the "developed" industrialized countries (Europe, America and especially Japan), which was looking for profitable investment opportunities that it found only to a limited extent in its own country.

In the 1980s, the exported surplus capital was mainly invested directly in productive areas (manufacturing industry, raw material extraction) in order to be able to produce more cheaply for the world market or to have better market access conditions for products. Japanese and US companies in particular, but also increasingly European, Korean and Taiwanese companies by the end of the 1980s, invested primarily in Thailand, Malaysia, Singapore and Indonesia.

The introduction of the system of flexible exchange rates as early as the mid-1970s and the global liberalization of cross-border capital transactions since then, along with the development of communication technology, enabled an immense expansion and growth of the international financial markets. At the same time, new forms of short-term investments have developed.

The sum of over 1 trillion US dollars that is turned over every day in foreign exchange transactions worldwide is now only offset by real transactions in goods and services in around two percent of cases. Speculative operations on the international financial markets are increasingly taking the place of possible investments and thus impairing real economic development.

Also, and especially in the so successful growth economies of Southeast Asia, more and more (short-term) funds flowed to the stock exchanges in Bangkok, Kuala Lumpurs, Singapore, Jakartas and Manilas. Loans were granted to private financial institutions but also directly to consumers, especially for the purchase of real estate, often without detailed research into the creditworthiness of borrowers and the general economic conditions. Sustained economic growth was assumed, which until the mid-1990s brought capital investors and speculators - especially from abroad - substantial profits. But with the growing balance of payments deficit since the beginning of the 90s due to less investment in the productive sector and stagnating exports, as well as the competitive disadvantage of exports due to the rise in the dollar, a general skepticism towards the economies of all "tiger states" of Southeast Asia developed. Once this "skepticism" has established itself among speculators internationally, they react in panic with massive withdrawals of their money from the entire region, although the economic situation in the individual countries is very different and does not justify such panic.

The "wonderful" success of the tiger states

There is no doubt that the governments of the Southeast Asian states of Thailand, Malaysia, Singapore and Indonesia were successful in different ways and to different degrees with their modernization policies geared towards economic growth. In the 1970s, the possibility of "catching up industrialization" was hardly considered possible by so-called developing countries. The export shares of these countries on the world market were already growing in the 1980s. It was less about raw materials and more about processed products, first in the area of ​​the clothing industry and later in electronics. In the second half of the 1980s, the huge Chinese market became a major growth engine for the Southeast Asian export industries.

Explanations of this "Asian miracle" in some East Asian countries - as the World Bank euphorically called it a few years ago - are varied and often very contradicting. On the one hand, the conditions in city-states such as Hong Kong and Singapore differ from those in large-area states. On the other hand, the starting conditions of the resource-rich countries in Southeast Asia (Thailand, Malaysia and Indonesia) were different from those of the resource-poor countries of Korea and Taiwan.

For the advocates of the free (capitalist) market economy, the opening of these economies to foreign capital and their orientation towards the world market, as opposed to the "socialist" countries, is the decisive reason for their success. However, in the sense of the market economy in the successful Southeast Asian countries, this did not automatically mean extensive entrepreneurial freedoms (not to mention political freedoms).

The role of the state with its industrialization policy is one of the decisive factors responsible for "growth success". With the enormous wealth of natural resources, Thailand, Malaysia and Indonesia were able to create a high share of their own capital. The savings rates were high and the money, however acquired, remained predominantly in the country in the 1980s and was available as capital. Economic growth was only partially dependent on foreign capital. In the various countries, with the possible exception of Singapore, "companies" have developed, the success of which can often be attributed less to economic skill and more to relationships. Economic power is concentrated in the hands of those who have the right connections to the political rulers, namely former high-ranking military officials, state officials or politicians and their relatives, long-established entrepreneurs of Chinese descent who had carefully cultivated relationships with the politically powerful, as well as the administrators semi-public company.

A basic requirement for successful capitalist industrialization was the adaptation of a larger group of people to the required discipline of industrial work and the dependence on wage labor as the only means of survival. This was not achieved through democracy, for example, but through centralized, authoritarian domination of living and working spaces and their integration into the (world) market.

The economic development of the countries went hand in hand with an authoritarian and repressive form of rule of a small layer of the military - in Korea, Taiwan, Thailand and Indonesia - or elites from colonial rule - in Hong Kong, Singapore and Malaysia. At best, the population was liberated from direct foreign or colonial rule. It was denied any kind of right to self-determination and democratic participation in the development process. In the Southeast Asian "successful countries" Thailand, Malaysia, Singapore and Indonesia, it was only a brutal suppression of any form of democratic participation in the 1950s to 1970s that brought about centralized power and government that unreservedly allowed modernization and integration into the world market, according to the motto, "Free market, but unfree people". As part of the containment policy towards the "communist bloc" in the post-war period, they received the support they needed from the USA and Western Europe.

So far, the Philippines have not been part of the Southeast Asian "tigers", even though they were one of the few former US colonies that were economically closely aligned with the USA. Between 1983 and 1993 they experienced practically zero economic growth. In those years it was about repaying the foreign debts made under Marcos, which made up about seven to ten percent of the annual gross national product. In addition, the Philippines do not have such large resources of raw materials that can be sold lucratively on the world market, such as Thailand, Malaysia or Indonesia. Thus, less capital could be formed in the country. In contrast to its other Southeast Asian neighbors, the government in the Philippines was oriented towards a free market policy based on the recipes of the World Bank and the IMF, with minimal governmental influence on economic development. A growth rate of 4-6 percent has only set in since 1994, although this is now falling again with the economic crisis in neighboring countries.

The downsides of the rise of the "tigers"

The dubious capitalist "miracle" in Southeast Asia had its downsides even before the economic crisis. The stability of the economic foundation was recognizably problematic before, and there has always been a lack of transparency and overall economic responsibility in economic life. Local critics were not taken very seriously as long as they were Institutions such as the World Bank and the IMF presented the economic foundations of the countries that are badly affected today as exemplary.

Today many astute observers suddenly realize what scandalous entanglements exist between business and politics and "reveal" these facts, which have long been known but have always been accepted as "peculiarities". You criticize the nepotism in the affected countries, the lack of requirements for the banks and the inadequate checks by the banks when granting loans. This is a "quirk" that
is also more or less pronounced in all developed capitalist industrial countries. In Germany one only has to think of the loans to the building contractor Schneider by Deutsche Bank, of the misuse of EU funds by Bremer Vulkan, or of the "rehabilitation" of the former GDR economy.

Not to mention the "usual" effects of capitalist economic growth:

  • The aggravation of the urban-rural contrast, which is symbolized on the one hand by the growth of megacities (not only) in Southeast Asia, on the other hand in the destruction of the livelihoods of small farmers and their impoverishment. The latter is a consequence of the capitalization of agriculture through extensification (plantation economy and large farms) and intensification (use of machines, artificial fertilizers and pesticides) as well as the destruction of the natural environment.

  • The growth of an army of poorly paid workers who are recruited or (as now) deported from rural regions in their own country or across borders as required.

  • Ruthless destruction of the environment through uncontrolled exploitation of natural resources such as forests, ores and water as well as pollution of air and water through industrialization and "modern" agriculture.

This development consciously accepts a marginalization of parts of the population through direct oppression and impoverishment due to structural violence and inequality. The growing income disparities can be observed not only between nations around the world, but also in the more or less independent new industrial nations.

Who are the main victims?

One reads some touching accounts of bankrupt entrepreneurs and unemployed managers, but it is the masses of people who, as wage workers from home and abroad, streamed into the urban regions because of the increased standard of living in urban life to participate in growing prosperity. Their ability to survive in agriculture had previously been systematically destroyed. Now they have to expect unemployment, but without social security and rights.

In Thailand, a large part of the construction industry is paralyzed and the industry had already seen production declines between ten and 20 percent in 1997 due to the decline in domestic demand. By the end of 1997, it is estimated that around one million people will have become unemployed.

In Indonesia, several million workers and employees are expected to be laid off this year. The Ministry of Labor estimates that the number of unemployed will rise from 4.4 million in 1997 to six million in 1998. Other estimates put nine million unemployed at the end of the year.

The trade unions in the affected countries are weak and have been systematically hindered, if not smashed, by repressive legislation over the past 20 years in order not to disrupt peaceful economic development.

The migrant workers are completely without rights. In Thailand, their number is estimated at over a million (legal and illegal) - mostly from Burma - many of whom have already been deported. In Malaysia there are more than 2 million, mostly from Indonesia, but also from Thailand, Bangladesh and India. Here, layoffs in the construction sector are to be expected, and the deportation of migrant workers has already been announced, in the hope that their place could be taken by expected and already existing local unemployed. The migrant workers also have to deal with persistent deterioration in living conditions
anticipate an increase in the existing discrimination on the part of the local population.

An increase in the cost of living, especially the prices of staple foods, e.g. Some of the things that could be kept low in Indonesia through state subsidies basically hit everyone together, but those who are already at the bottom of the subsistence level are particularly hard hit.

Possible impact on the world economy

Last but not least, the global financial system has also allowed foreign exchange dealers and banks from Europe and the USA to earn money from the growth of the Asian economies. Now, however, there is an increasing risk, in reverse, that the financial crises of individual Asian countries, especially Japan's economy, which has been stagnating for years, will affect it even more. If the Japanese economy falls into a crisis despite government support, the sale of US government bonds in the hands of Japanese banks to finance deficits could seriously affect the entire global economy and lead to a global recession.

With a total credit volume of US $ 365 billion, European banks are the largest foreign lenders to companies and banks in the so-called tiger states, ahead of Japan and the USA. German banks have the largest share with over 100 billion US dollars. Deutsche Bank announced at the end of January that it would build up DM 1.4 billion more reserves for possible losses in the Asian business this year. At Commerzbank it is one billion DM and at Bayerische Landesbank 500 million DM.

The German taxpayer could also be asked to pay for losses by German companies, especially in the Indonesia business, due to the default guarantees from Hermes loans from the federal government. The total amount of Hermes guarantees granted for the Southeast Asian region is DM 25 billion, of which 14 billion for Indonesia alone. Billions in payment defaults in the federal budget are feared for the coming years.

But one hears not only complaints about possible losses of the banks, but also exultation, because now there is also the possibility of buying up financially ruined, but economically viable companies in the countries affected by the crisis and thus in the long term your own position on the Asian markets to strengthen.

Do IMF Activities Help?

Despite the loan commitments made by the IMF with the corresponding drastic economic policy conditions for Thailand, Indonesia and South Korea, the crisis cannot yet be overcome. With its blanket "rescue methods", the IMF has now met with massive criticism even from the ranks of the World Bank. The programs are aimed at the debt crisis in Latin America, where immense government external debt was the problem and not private debt. It is feared that the measures will worsen the economic situation and lead to political instability.

For example, economically sound industrial companies can no longer continue to produce because the usual short-term loans to maintain production are much too expensive due to the rise in interest rates or because their banks are ruined. The withdrawal of state investments in order to relieve the public budgets led to a further weakening of the local economy. In addition, the withdrawal of government subsidies could e.g. For example, stabilizing food prices can lead to dangerous social and political problems. Both measures were only necessary to a very limited extent due to the low national debt and largely balanced budgets.

Henry Kissinger warned at the beginning of February that the IMF must not turn the economic crisis into a political crisis through its undifferentiated measures and thus provoke nationalist reactions that are directed against the world economic system which it is trying to defend.

Opportunities for a new beginning or the beginning of decline

What are the consequences for the affected countries? The economic crisis could have a cleansing effect in the interests of the market, in that really unprofitable companies have to close and senseless mega-projects have to be discontinued. The demands for transparency in the economy and more overall economic responsibility also promote democratic structures.

In Thailand, for example, the apparent inability of the corrupt political system, which is partly responsible for the economic crisis, facilitated the adoption of a new, more democratic constitution last year, which gives hope for a more democratic election this summer.

In Indonesia, President Suharto's rule, which has apparently been inviolable for over 30 years, with his crony and favoritism is being massively questioned. Many of his family members and favorites, who have been able to set up commercial enterprises in the last 20 years and expand them to become the most important in the country, can expect considerable losses and, in some cases, closings if the IMF's requirements are complied with. Unlike in the past, all circles of Indonesian society are expressing open criticism and calling for Suharto's departure. However, there is as yet no discernible political alternative to Suharto.

But it must also be clearly seen that such possibly positive opportunities for change are at the expense of the majority of the population. Since the end of last year there have been reports of riots and looting, especially from Indonesia. Additional savings in social areas that are already very sparsely equipped will fuel social tensions along with a resurgence of old, ethnic-cultural conflicts Were sometimes bloody. Chaotic conditions in Indonesia, the most populous country in Southeast Asia with 200 million people, could seriously impair the political stability of the region for years to come, with unforeseeable consequences for the people there and for the global economy.

The economic crisis has not been resolved in the individual countries, and the political effects have not yet taken full effect. Decisive for the further economic development in Southeast and East Asia will not only be the measures in the affected countries, but above all also the economic development China and Japan. The dangers that the financial markets with their speculative capital can continue to cause globally have not yet been banned. Here, however, there is primarily a need for action by the so-called G7 countries.

(Source: Southeast Asia 1-98, p.4-9)

Status: October 15, 1998, © Asia House Essen / Asia House Essen
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