Tiger Economies in Crisis

Michael Roberts, ecomics editor of Socialist Appeal, explains the immediate causes of the present crash of the markets: the currency crisis in South East Asia and how these economies, which were supposed to be models of capitalist development suddenly collapsed.

It started in Hong Kong. The screens went red as the price quotes for the company shares on the Hong Kong stock market index, the Hang Seng, started to fall like a stone. On 'black Monday', the value of Hong Kong stocks had lost $60bn, as the big investing institutions sold out.

That sent shock waves across the international financial cybernet. As the Hong Kong market began to close, the European markets opened up and immediately began to plummet, and Wall Street then followed, falling over 550pts, the biggest fall since 1987 &endash; so bad that the market was closed early.. And then another round on Tuesday as Hong Kong took its cue from New York and took an even bigger plunge, down nearly 14%. Again Europe started to fall again. Was this the big crash?

Extremely worried the Latin American stock exchanges of Brazil, Argentina and Mexico announced that they would not open at the usual times, but would wait for Wall St. The leading investment gurus in the US announced that there was nothing to worry about. This was an opportunity to buy now prices were lower. President Clinton stated that the 'fundamentals of the US economy were sound with growth good, inflation down, the budget deficit at an all-time low'. So there was no need for the stock market to plunge. Then the big companies announced that they would buy back their shares at the new low prices.

When it opened, at first the market plunged again. Then as it hit 7000, down over 1500 pts from its peak in August, it turned. The bulls started to win again. By the end of the day, the US market was back up to 7500. That was all Hong Kong needed on Wednesday. It jumped back nearly 19%. The crisis was over.

But is it? For what started the whole thing off anyway?

It started back in July in Bangkok. The Thai government suddenly announced that after decades of keeping its currency, the Thai baht, fixed to the US dollar at around Bht25/$, it was going to let its currency 'float'. Float it did not! Immediately the baht's value drowned. It fell below Bht30/$ and continued to fall. Its' now near Bht40/$, or down 60% on the old level! Before long, other Asian tiger currencies followed the baht down. The Malaysian ringgit dropped from M$2.50/US$ to $3.40/$ now. The Indonesian rupiah and the Philippine peso also collapsed. It was not long before the Taiwanese dollar and the Korean won hit the bucket too.

The Thai government also announced that it was seeking financial support from the IMF so that it could make its payments for foreign imports and debts in foreign currency. It revealed that it had spent nearly all its foreign currency reserves trying to keep up the value of the baht. The government was broke! More than that, most of the banks and the finance houses were bust too, because they had such huge debts owed to foreign banks that they could no longer pay and because the loans they had made, mainly to property companies and other speculative ventures had gone 'absent without leave'.

How could this have happened? After all, the great Asian miracle was based on the idea that these handful of countries spread between Australia and China could continue expand at 8-10% a year, as their populations saved and invested 35-40% of their national income, and foreign capital, attracted by their success, delivered extra capital for investment worth another 5-7% of national income in the region. When the world went into recession in 1990, East Asia did not follow. It seemed impregnable to vagaries of the capitalist cycle of boom and slump.

The capitalists argued that this was because the Asian were trading nations that thrived on the 'free market' principles of capitalism. Hong Kong and Singapore were supposed examples of pure capitalism that had produced modern successful economies at the top of the capitalist league of excellence. And this was presented to us at a time when 'communism' in Eastern Europe was in ruins, proving that the planned economy could not work.

We know that this the image of Asia was a fake. Far from most Asian economies being examples of free market capitalism, they were really testaments to state-directed monopoly capitalist planning, complete with national five-year plans (Malaysia, Taiwan, Korea, Singapore) and products of military-backed finance from the west (Korea, Taiwan, Thailand), and examples of cheap labour exploited under the boot of dictatorship, military regimes or one-party states (Korea, Taiwan, Singapore, Indonesia and even Malaysia).

The irony was that once the ruling class in these countries were finally persuaded to break with trade protectionism and lower taxes on foreign imports, were persuaded to open up their markets to foreign capital, and to drop planning and controls by the state, as they were in the 1990s by the proponents of globalisation (the imperialist powers of the West), they started to flounder.

For a while the Asian economies grew fast in the 1990s. But then came their nemesis in the form of the US dollar. It had been good policy to tie their currencies to the dollar. It meant that foreign capitalists could be sure that if they invested in Malaysia or Thailand, their profits could be turned into US dollars with some degree of certainty. And while the US dollar was weak compared to the Japanese yen and European currencies, then Asian exports would be cheap as well. And during the early 1990s, the dollar was very weak and the yen was strong.

But from April 1995, the US dollar began to strengthen sharply. The failure of the Japanese economy to recover from the world recession and the stronger US economy meant that the Japanese devalued their currency in order to increase their exports into the US. But the Asian economies suffered. Their currencies strengthened with the dollar. Their exports began to fall off, and huge debts that they had in US dollars became more difficult to service. Their trade balance between exports and imports went into big deficits. Increasingly they could not pay their way and continue to grow at 7-9% a year.

Interest rates

Foreign lenders became worried. Their loans may not be repaid. They began to demand higher interest rates to lend more or to keep their money in Asia. As they began to withdraw their money and capital, they sold the Asian currency to buy US dollars. The pressure was on the Asian currencies. As the groundswell built up during 1997, there was only one result. The currencies collapsed.

The golden days are over. Now all the Asian governments are raising taxes and cutting spending to pay off these debts. Interest rates have rocketed. Investment and spending is falling off. Economic growth in Thailand next year could be zero. Other economies will grow at half previous rates.

The ruling classes in these countries are now running scared. The Thai government, composed of old military generals and business tycoons does not know what to do. It has had four finance ministers and three prime ministers in one year. It has been forced to accept a new constitution designed to stop corruption and election fiddling (we shall see!). It won't last the year.

Malaysia's prime minister Mahathir bin Mohamad has looked for scapegoats. It was 'international speculators' like George Soros (the man who brought the British pound down under John Major during the ERM crash of September 1992). Now Soros was trying to do the same thing to Malaysia, up to then a great success under Mahathir's leadership. The irony was that while Mahathir was blaming the 'Jewish-Capitalist conspiracy' in speeches for Malaysia's demise, his close friends, the big Malaysian tycoons, were quietly selling their currency and Malaysian shares and buying dollars. The truth was that Malaysian companies had to buy dollars to pay their debts and get imports as their currency fell. So patriotism went out of the window!

Then there was Indonesia's corrupt old anti-communist ex-general President Suharto, the butcher of millions during the military coup of 1965 and the proponent of genocide in East Timor, one of the remote islands that make up the hugely populated Indonesian state. Suharto and his family rule this country like it was their own personal household. Suharto's wife and sons own most of the industry that is not foreign-owned. They run most of the plantations that have cut so much precious timber and palms down that this summer they caused huge forest fires that left most of Singapore and Malaysia under a dense and suffocating fog.

Suharto and his gang tried to do what the foreign investors wanted. They devalued the rupiah, they lowered their import taxes, they taxed the people more, and finally, they asked for money from the IMF just like Thailand. But there was one thing they would not do. That was end the Suharto family's monopoly of industry. Suharto's son still owns the national car industry and refuses to allow foreign car manufacturers to compete on level terms. The economy remains in deep crisis.

And it's a crisis that now threatens the rule of the old elite. Mahathir makes populist attacks on foreigners to protect himself. Suharto trembles that popular revolt may surge up as he applies more austerity on his people. Korea and Taiwan's presidents have lost tremendous popular support and are likely to be defeated in coming elections, as are the ruling party in the Philippines.

And the people of the Asian tigers are going to suffer sharp falls in their living standards to several years as the Tigers slow down to pussy-cat pace.

But at least they have devalued their currencies. That will make their exports cheaper in world markets. Only one Asian tiger has not done so &endash; Hong Kong. But then Hong Kong was special, so the argument went.

Business as usual

When the British colonial regime finally handed back the territory to the Chinese stalinist regime last July, Tory governor Chris Patten (and his lovely daughters) shed a tear or two. But he also said that it would be business as usual. By that he meant that Hong Kong would continue to be a beacon of free market capitalism. It would continue to be a gateway for goods into and out of China, and the major conduit for foreign capitalists (many of them Chinese in Asia) to invest into the mainland. The Chines regime would change nothing and the great boom would continue.

How the mighty have fallen. The collapse of the other Asian currencies exposed the sham that was Hong Kong. Far from being a great example of free capitalism, Hong Kong had always been a state-run economy. The government strictly controls what the banks can do, it allows no democracy and the tycoons rule without opposition. And above all, it controls the land. Most of the land in Hong Kong nationalised. The government sells bits of it off to raise revenues for grandiose projects and to provide housing for its workers. And it has restricted its sales for years.

Suddenly the new Chinese chief executive announces that the government will now sell more land and build more cheap housing. The property monopolies are alarmed, as astronomic property values could start to fall. It costs nearly $1m for a small flat to buy in Hong Kong! So high are the prices that the cost of doing business is now way above that of even Singapore and certainly the rest of Asia. And with the other Asian economies becoming suddenly cheaper by devaluing, Hong Kong stuck out like a sore thumb.

The Hong Kong dollar was fixed like Prometheus to the rock of the US dollar. The Hong Kong dollar peg, as it is called, was the cornerstone of the territory's success. It ensured that foreign investor and Hong Kong citizen alike could change their money at a moment's notice from Hong Kong to US dollars. But they did not have to because the HK$ was as good as the US$ because the government guaranteed it. But now the US dollar was expensive and so was Hong Kong. It had lost most of its industry across the border into the sweat shops of Shenzhen. Now it could lose its positions as financial centre for China to cheaper rivals.

Investors decided that the currency peg needed to be devalued to cuts costs. But the Hong Kong authorities could not allow that because if all Hong Kong citizens switched their cash into US dollars because they feared a devaluation of the Hong Kong dollar, then all the banks would go belly up. So the authorities put interest rates up, at one stage to 1000% for keeping money in HK$ for one night!

But higher interest rates mean higher mortgage rates for Hong Kong citizens, lower profits for business and falling property prices. The stock market plummeted.

But what has the Asian crisis to do with the rest of the world? After all, less than 10% world output comes from the Asian tigers. Even if their economic growth was to slow to zero over the next year, that would only take 10% off expansion in the West, now growing at the rate of 3.0-3.5%. In other words perhaps one-quarter of 1% a year. Important, but not decisive.

But international capital was worried by the Hong Kong stock market collapse. For over two years, the world's stock markets have rocketed up, fuelled by low interest rates, lots of money capital and a recovery in economic growth and company profits. But share prices have shot up much faster than company profits to back them up. The US stock market was up over 50% in two years, while company profits rose 20%. As the Chairman of the US Federal Reserve bank, Alan Greenspan, put it, financial markets were suffering from 'excessive exuberance', and he feared a 'correction'.

When Asia's markets collapsed in July, Wall St was unimpressed. But when Hong Kong had a meltdown, nervous investors in Europe and the US decided it was time to take their profits and run. Fear triumphed over greed.

As I write, the market have recovered most of their losses in the big fall. It appears that it was all just a bad dream and investors have been comforted by the experts, government and bankers that all is now well.

But the stock markets are still too highly priced in relation to future profits. Investors are living in a dream world all right. In a recent survey, it was found that US investors (and they are now 40% of all US households!) thought that they would make 30% a year on their shares! As any horse race better or Las Vegas gambler could tell them, that's a pipedream. Markets are heading for further falls.

Share prices cannot keep going up with no relation to the real economy, and in particular, with no relation to profitability of the companies being bet on. And the great boom on US corporate profits is coming to an end. Once profits start to slow, and that looks likely next year, and companies report less favourable results to their shareholders in their reports, then there will be a big sell-off.

The danger for capitalism is that if people's wealth is drastically reduced by a stock market collapse, or that people begin to worry about their prosperity, they will stop spending. And as companies see their share capital fall and profits slow down, then they will stop investing in production. The result is a slowdown, then a recession and even full-scale slump. That's what happened in 1929-32. It did not happen in 1987, the last great crash.

In 1987, when the stock market crashed, the central banks of the big countries immediately cut their interest rates to make it cheaper to borrow and reduce the cost of company debts. And they began to cut taxes and boost public spending. That stretched the boom for another three years before the inevitable capitalist cycle of boom and slump reasserted itself.

This time there is less room to manoeuvre. Interest rates are already near rock bottom levels. In Japan, the government is already running a huge 7% of GDP deficit on its finances. In Europe, every government is desperately cutting back on spending and raising taxes to keep within the 3% of GDP deficit target to entering the European single currency. To save growth and stop a slump, European government would have to sacrifice monetary union.

The stock market crash may just be a blip on the trading screen this time, or it could be the signal of the coming economic crash. But what is certain is that the Asian bubble has burst. The Tigers have entered an era of austerity and social collision. And also, that capitalism will enter another recession worldwide within a few years whatever investors in shares do today.