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Article : 1998.1

Date: 1 January 1998.

A YEAR OF SHOCKS AND TURBULENCE: REVIEW OF 1997. 


1997 will be remembered as the most shocking of years,
when all of a sudden the high-growth economies of East Asia got
caught in a vicious cycle of an outgoing stampede of foreign funds,
currency and stock market collapse, and corporate and banking woes.
The debate on whether the Asian countries got trapped on the
downside of financial globalisation, or whether their wrong
policies and inefficient institutions are to blame will continue to
rage to next year. This article reviews the economic and
environmental highlights of the past year. 


By Martin Khor 



What an astounding year it has been. Who would have imagined, a year or even six months ago, the difference 1997 would make. One moment, the East and Southeast Asian countries were spurting along at eight percent growth a year, a sub-region envied by the world, held up as an economic model (THE model, in fact) to be emulated. Next moment, here they landed up, with the currency and stock market levels down, the fickle short-term foreign investors having largely scooted off, the local corporate giants grappling desperately with the new dynamics of today's cash-flow and tomorrow's survival, the banks having to pore carefully over their existing loan portfolios and ponder over who's safer to give future loans to. And the man and woman in the street are, at year's end, still confused over what hit the region, dazed at the reality of rising prices of essentials and luxuries alike, anxious over what else will come, now that "economic recession" has been added to "financial crunch" in the region's economic agenda. Members of the public should not blame themselves for feeling confused, for the policy makers, the academics, even the so-called "market analysts" and world experts, are still puzzled by how the 1990s Asian Miracle got transformed in a few months to the 1997 Economic Crisis. For example, the professionals who should have known best, the two international credit ratings agencies, Moodys and Standard & Poor, were last week criticised in the international media, for having downgraded the ratings of several Asian countries only after (and not before) the crisis had taken place. Even they had missed the impending crash. The unpredictability, and suddenness, of it all gave credence to the charge by some of the region's policy makers and analysts, that a large part of the problem lies not with the affected countries' economies, but with external factors such as the nature and volatility of global financial markets. In particular, there is the role of currency speculation, especially the highly-leveraged hedge funds that together have trillions of dollars under their control, operate in secret, and have humbled powerful Central Banks (like the Bank of England in 1992) even before the Asian episode. In contrast, Western governments and most journals put the blame squarely on Asian governments. Many of these critics are in barely- disguised smirking delight at the plight of their Asian rivals that weeks ago were feared as a threat to their economic superiority. The International Monetary Fund joined in the "I-told-you-so" league, pointing at the lack of transparency and the political- business collusion in Asian countries (traits it had not found fault with in its previous fulsome praise for the same economies). But some eminent economists and business papers launched a spirited defence of Asia, pointing to the hypocrisy of the critics who only a while ago had held Asia on a pedestal. They put the blame on financial panic caused by herd instinct and the fickleness of ignorant investors and their gurus, and on the IMF for making a bad situation worse. Even the investor king George Soros, who had been criticised by Prime Minister Datuk Seri Dr Mahathir Mohamad for having manipulated the Southeast Asian currencies, himself told the BBC Radio in October that financial speculators had gone out of control and had to be regulated to prevent global instability. As the year came to a close, we witnessed the dramatic crumbling of South Korea's finances, its humiliating surrender to the IMF and its continuing meltdown. For the rich creditor countries, it was an opportunity to impose an increasing list of concessions, to realise their long-cherished objective of prising open the Korean markets and financial sector to their companies, and to curb the power of their rivals, the Korean chaebol conglomerates. For their Asian neighbours, like ourselves, Korea was a fast- unfolding tragic drama, like a motion picture of an epic disaster, held up as an object lesson, of what we need to avoid, and why. The Korea story shows up how merciless are the markets, the international banks, and the major countries that stand behind the IMF: once a country is reduced to beggar status, the foreign creditors demand their last ounce of flesh, and the major economic powers extract all the policy changes they ever desired, taking advantage of your present troubles to win long-term control for themselves. With the neighbours in shambles, and the currency and stock market under unrelenting pressure, Malaysia responded with its own tough measures to clean up its act, aimed at reducing the current account deficit, strengthening the banking system and preventing more corporate deals that would be unfavourably received by the market. The year is thus ending in more and more sombre mood as increasing numbers of people are feeling the pinch. It started with the rich and middle-class whose stock-market assets collapsed and whose children's overseas education suddenly cost 50 percent more. Then, housewives are finding prices of practically everything jumping. As interest rates rise and financial institutions become more cautious giving out loans, buyers of cars and houses find it hard or impossible to start or continue paying. Workers are worried their pay packets will be frozen or won't match inflation rates. After enjoying for so many years the upside of globalisation (with Malaysia getting a large share of growth of world trade, investments and capital flows), Malaysians are also now tasting its downside. The poorer countries, especially in Africa, complain about "marginalisation", getting too little from international capital flows. East Asian countries had the opposite problem: getting too much capital flowing in, becoming too dependent on it, not being aware enough of its double-edged nature, unable to manage its use productively enough, subjected to the speculation that sometimes accompanies it, and subjected too to its sudden flowing out, leaving behind a trail of debts to be paid. If 1997 taught the lesson of the dangers of playing with the fire of international capital (particularly of the short-term speculative or loan varieties) then a top priority for the immediate future should be to learn up the lessons how to manage the fire properly so that safety precautions can be taken and it can in the end be used for good. Although the economic crisis dominated the region's concerns, 1997 was also notable for environmental and health issues. There was the incredible haze (induced by raging Indonesian forest fires) that this time lasted more than two months and in several states reached very hazardous-plus levels. Indeed, at its worst in September and October, Malaysians in affected areas could think of little else than the smoky pollutants; it even eclipsed the currency and stock market slide. Fortunately the haze vanished in the last two months of the year. It had caused enough damage to health, work, the region's ecological image, and many millions in tourist dollars forgone. The depression of having both haze and economic crisis at the same time would have been too much for many to bear. The second Earth Summit was held in New York in June, five years after the Rio original. Presiding over it was Malaysia's permanent representative to the United Nations, Tan Sri Razali Ismail. Earth Summit Two failed to give a new and much-needed boost to rich countries' failures to implement their commitments to either environment or development, and the South as a group responded by also refusing to take new global environment initiatives seriously. The saving grace, if one can call it that, was the determination of Razali to "call a spade a spade." He stopped negotiations for a political statement, called the meeting a failure of the governments, and said it was now up to the non-governmental organisations (NGOs) to take the environmental fight to the people. And so 1997 yielded this sad but valuable message: Without enough public pressure, there wouldn't be any environmental improvement, as governments had placed top priority on economic competition and on finding their place in the globalisation race, and the environment didn't matter much to them. In December, the Kyoto Conference on the Climate Change Convention showed up the truth of this. Even though the European Union was prepared to help make a serious breakthrough, a handful of developed countries (led by the US, Canada, Australia and New Zealand) refused to give commitments to any significant reduction of Greenhouse Gas emissions. At the very end a weak protocol was agreed to, but its targets were so inadequate and the loopholes were so numerous that the NGOs and many governments themselves (especially those from developing countries) considered Kyoto a dismal failure. Nevertheless, we now have a protocol. The question is whether it can ever be revised and much improved on to have any meaningful effect. Or whether the already weak protocol will never even be ratified because of objections by the United States Congress, many of whose members do not believe there is even a real climate change problem. On the health front, the year was marked by scares about new, deadly and little understood diseases. In Malaysia, there was the entero-virus causing heart ailment and many deaths among infants and young children, particularly in Sarawak. After being initially diagnosed as a new and virulent strain of Coxsackie virus, experts admitted there was no conclusive evidence what it was. The dreaded Mad Cow Disease took a new turn when the British government announced it could be passed on through the bone parts of beef, and banned the sale of beef attached to the bone, thus dashing not only sales but the appetite of those relishing T-bone steak. And finally, health authorities and the public are preoccupied by the strange case of "bird flu" in Hong Kong, a deadly form of influenza that hitherto had been thought to exist only in birds. With cases and deaths still rising, scientists are debating whether this will be another "isolated case" or the start of a global epidemic of yet another "new and emerging disease." Altogether, then, not at all a cheerful 1997. But the events of the past year, especially the unexpected problems, are a good guide for what to expect for the rest of the century, and for what needs to be cleared up in the next millennium. Martin Khor is the Director of Third World Network.

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