The economic typhoons that swept though Asia in 1997 capsized regional economies, sent the misery index skyrocketing, wiped out colossal amounts of wealth, swept away an aging dictator and exposed the vulnerabilities of the global financial structure. This excellent book is essential reading for anyone wishing both to understand the complex forces that generated this financial implosion and to grasp the regional consequences.
As a reporter for Agence France Presse stationed in Hong Kong in 1997-98, Philippe Ries had ringside seats for the unfolding dramas and excellent access to those involved. His analysis and writing are clear and persuasive, providing a good weekend’s read about the follies of markets and those who would conspire with and against them.
This is not a conventional whodunit because there are so many plausible suspects with plausible alibis. To his credit, Ries eschews the straightforward, easy-to-swallow explanation, surveying a range of factors capable of hatching such a grim scenario. He argues that “the Asian financial turmoil had its origins in the violent meeting of opposing masses — rigid monetary arrangements vs. the chronic instability of the yen against the dollar; the power of international capital flows vs. fragile local banking systems; and the complexities of the market economy vs. the weakness of institutional mechanisms.”
Prime Minister Mohamad Mahathir of Malaysia, the class clown among regional commentators about the origins of the crisis, gets a thorough and well-deserved going over for his intemperate assertion that Jewish speculators had purposely engineered this debacle to put Asians in their place. Mahathir and other leaders were eager to blame speculators, hedge funds or other convenient targets because they wanted to shift attention away from their own responsibility for what were, in many respects, homegrown problems.
Ries suggests that regional governments have a lot to answer for because corrupt and opaque policies and practices, combined with a fragile institutional architecture, created conditions that facilitated the meltdown and impeded international rescue efforts.
Ries persuasively argues that it was not deregulation measures and liberalization of markets per se that caused the collapse, but rather halfhearted and halting measures that bestowed the risks of market forces while minimizing the unwelcome discipline of transparency, prudence and scrutiny. Thus, the lesson of the crisis is not reregulation, but a more sweeping embrace of liberalization that renders governments and financial institutions fully accountable.
He charges that the “governments that denounced markets for being blind and acting like sheep were often the same governments with the biggest clouds swirling around their own economic management. . . . The half-truths and lies tarnished the information policies of those in power. As the crisis deepened, increasing intimidation and even direct threats caused analysts to censor themselves or simply shut up. The victims were, of course, the very governments that maintained a tight lid on information, keeping things dark and obscure and encouraging their people to distrust markets. But international investors were like children — they love to be dazzled but were afraid of the dark.”
Japan played a key role in pumping up and then bursting the regional bubble, replicating the conditions that have undermined the credibility of its financial mandarins and almost caused the collapse of its own banking sector. In the wake of the bubble, and with few promising prospects at home, Japanese banks sought to bolster their profits by aggressively lending in Asia. The same lack of careful credit-risk assessment, scrutiny of business plans or prudence in lending produced the same results. Borrowed money poured into speculation in land and stocks, creating a chimera of growth and prosperity that proved fleeting. The region is still wincing from a thumping hangover of debts, bankruptcies, asset depreciation and joblessness.
The Asian storm was also triggered by the reverse Plaza accord in 1995, when the United States acquiesced in the Japanese government’s efforts to drive down the value of the yen to bolster its anemic economy. This deliberate policy put currencies tied to the dollar, like the Thai baht, at risk because they suddenly became overvalued. In addition, the practice of borrowing cheap yen at low interest rates in Tokyo, converting them to higher-yielding dollars and lending offshore in Asia was an accident waiting to happen. Now the Asian economies know what it feels like to be ants while the elephants dance.
Ries comments, “Amid the smoking ruins of the Asian ‘miracle,’ as hundreds of millions of individuals shifted through the ashes of their dreams of prosperity, economists started to settle scores. East vs. West, markets vs. planning, the American model vs. the Japanese model. After years of polemics and entire shelves full of literature on the subject, one thing had finally become clear — it was no longer a fight between equals. Japan had lost.”
This assessment echoes the opinion expressed by Merton Miller, a Nobel Prize winner, who quipped, “If the current crisis has done nothing more than discredit the Japanese and Korean models and banking practices, then some day we will look back at these days as a blessing.”
The ongoing wave of bankruptcies in Japan has exposed systemic malfeasance and the true costs of undermining good corporate governance, transparency and accountability.
According to Toyoo Gyohten, former financial mandarin and president of the bank of Tokyo, the response to the sharp appreciation of the yen after the 1985 Plaza accord was a missed opportunity to reshape corporate Japan and dodgy financial practices. Rather than using the high yen to push restructuring and further liberalization aimed at rendering the economy more competitive, “bureaucrats and politicians rushed to the rescue without thinking too much.”
Thus, restructuring and the overhaul of fiscal policy were pushed onto the back burner, and the government relied on a lax monetary policy to fatally ease the pressures of a high yen, inadvertently pumping up the bubble. This was the path of least resistance, but — in Gyohten’s view — a tragic error.
The mistakes in creating and deflating the bubble have been compounded by what Ries views as bungled policies in the 1990s. He discusses the scandals that rocked the Ministry of Finance, the folly of “Herbert Hoover” Hashimoto, the collapse of Yamaichi Securities and what he calls the close call in November 1997, when the insolvent financial system teetered on the edge of oblivion. He quotes Kenneth Courtis’ wry observation: “In April 1997, Japanese officials wanted to prove that Herbert Hoover was not wrong by raising taxes during a period of economic crisis.” For international financiers it was like watching a horror movie and wanting to scream at the hapless next victim, “No, don’t go in that room!”
Tokyo has gained some kudos for proposing an Asian Monetary Fund in response to the regional crisis, but not from Washington, the International Monetary Fund or our author. Ries argues that there were good reasons for the international community to cast a jaundiced eye on a plan that seemed to be just what the patient needed. In his view, the AMF disagreement was not just a bilateral spat between Tokyo and Washington over regional influence. He points out that all the other G-7 members were strongly opposed to the plan because it would undermine the IMF and ease pressure on regional governments to adopt financial discipline and overdue reforms. Ries argues that by extending a lifeline of easy money, Japan was perpetuating the problem it had created and postponing painful adjustments.
It is glaringly apparent that, in digging out from the debris left after the storm, regional institutions neither covered themselves in glory nor met the test of leadership. ASEAN? APEC? These acronyms in search of a mission were AWOL during the turmoil and have stood on the sidelines while the IMF did all the heavy lifting. Perhaps Michel Camdessus and the IMF will blush to read their rave reviews in this book, but in the author’s view they helped prevent a worse catastrophe and have promoted the type of reforms needed to prevent a relapse. However, now that the pressure is off and recovery is under way, expedient policies may thwart reform. Japan has dithered for a decade at great cost, but why bite the bullet now when hard choices can be postponed and foisted onto others? The unfinished agenda of realizing greater transparency and accountability hangs in the balance, but the odds on complacency prevailing are awfully tempting.