> ASIA: Economy recovers, bound and gagged
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> East Asia used to be the Fred Astaire of the world economy until, on a dark night in 1997, it was mugged by the combined crunch of Wall Street currency speculators and the International Monetary Fund. Now, it's back on its feet. But if it ever dances again, it will be to a very different tune -- the one played by the very institutions that knee-capped it.
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> Official forecasts for the East Asian economies are now rosy, even for the “crisis economies” of Malaysia, Thailand, Indonesia and South Korea.
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> “East Asia is once again the world's fastest-growing region”, stated a June World Bank report, East Asia: Recovery and Beyond, while the United Nations' World Economic and Social Prospects 2000 estimated that aggregate gross domestic product for the region (excluding China) in 1999 grew by 5.5%. It said that the region's economies are now officially out of recession.
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> The stand-out performer has been South Korea, which grew by 10.7% in 1999 after shrinking 5.8% the year before. Even the worst-hit country, Indonesia, experienced 2% growth in 1999. The recovery is a result of a rebound in export income and considerable government pump-priming through large budget deficits (between 4% of GDP in Indonesia to 7% in Thailand).
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> As a result of massive currency depreciation, the four crisis economies are enjoying considerable trade surpluses with the rest of the world (ranging from US$7.7 billion for Thailand in 1999 to US$29.9 billion in Indonesia). However, their currencies are trading at only 60% of pre-crisis levels (Indonesia's is at 25%). Depreciation has suppressed demand for imports and lowered the price of exports, which have boomed. Export income has also been helped by heavy world demand for semiconductors and other technologies manufactured in Asian.
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> The countries' foreign exchange reserves are now back above pre-crisis levels. The currencies, while shaky, have gained a measure of stability (with the exception of the Indonesian rupiah). The stock market declines have levelled (although only Korea's has recovered). Foreign direct investment has begun to return.
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> Disaster
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> Despite the forecasts and the figures, the economic recovery has made little impact on the steep decline in the region's peoples' living standards. Unless productive investment picks up dramatically, it is unlikely to do so.
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> By the World Bank's (conservative) estimates, the crisis threw 10 million East Asians into “extreme poverty” (under US$1 a day) and an extra 23.8 million into “poverty” (under US$2 a day). In Indonesia, the number of poor households grew from 11.3% to 20.3%; in Korea, it doubled to 19.2%.
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> In Thailand, real wage levels in construction, commerce, services and agriculture (which together account for 82% of the work force) continue to spiral downwards. In Indonesia, food prices are 30-40% higher than they were before the crisis. In South Korea, the gap between the rich and poor is the highest in decades; the richest 10% now earn 10 times as much as the poorest 10%, compared to seven times as much before the crisis.
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> Bubble
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> The crisis and the recovery have drastically rearranged East Asia's interaction with the outside world and with Western capital markets in particular. East Asia's is now far more dependent shape before.
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> The US Treasury, through the IMF, has pressed its advantage. Its official diagnosis is that the crisis was caused by domestic factors -- “crony capitalism”. The “cure” is to further open these economies to “non-crony” Western capital, up to and including a complete liberalisation of East Asia's capital accounts.
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> Such policies caused East Asia's financial bubble in the first place. In the mid-1990s, US pressure forced a partial opening of target economies' capital accounts, into which speculative “hot money” from Western banks surged. Portfolio investment increased from US$0.9 billion in 1990 to $20.1 billion in 1996, primarily in short-term corporate debt.
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> Made vulnerable by the bubble, from May 1997 onwards, the Thai baht, the Indonesian rupiah, the Malaysian ringgit, the Korean won all came under successive, speculative attack from the giant US hedge funds, led by investment bankers JP Morgan, Goldman Sachs and George Soros' Quantum Group. These countries' central banks were forced to sell US$78 billion of foreign exchange reserves to Wall Street, in a doomed attempt to save the currencies from catastrophic devaluation.
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> The near-collapse of the East Asian currencies sparked a US$100 billion panic flight back across the Pacific, which in turn starved Asian banks and corporations of the cash flow with which to pay off their short-term debts. Between 17.9% (of Korean) and 41.1% (of Thai) loans were declared non-performing; more than 300 banks and finance companies were forced to close.
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> The only source of recapitalisation was massive bailout packages administered by the IMF: US$80 billion to Indonesia, US$58 billion to Korea, and US$17.2 billion to Thailand (Malaysia refused such “assistance” and was least damaged).
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> The IMF's condition was simple: the three economies get on its operating table.
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> Surgery
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> The first thing to be excised was whatever remained of controls on foreign direct investment. Restrictions on foreign ownership have largely been lifted, conglomerates have been forced to break up (in Korea, especially), bankruptcy laws have been redrafted to allow easier control of assets by non-managerial institutional investors and “creditors' rights” have been legally expanded.
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> Burdened by massive debt, a loss of productivity and market share and a consequent inability to invest in new technology, even the more profitable sectors of the East Asian economies have been forced to sell up to Western competitors, often at “fire sale” prices.
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> The South Korean car industry, arguably the most productive sector in the region, is passing into Western hands. The country's second-largest car manufacturer, Daewoo, which collapsed in 1999, began merger talks with Ford in late June. France's Renault bought Samsung in April and, in early June, Korea's largest, Hyundai, signed a “strategic alliance” with Daimler-Chrysler. The two other pre-crisis car manufacturers, Kia and Ssangyong, had already been bought by domestic rivals.
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> Lend Lease announced on August 16 its formation of a US$1 billion fund, dubbed the “vulture of all vultures”, to buy up heavily marked-down companies, strip them and sell them. The company expects annual returns of at least 25%. Goldman Sachs, JP Morgan and Soros Funds Management have also bought similar-sized portfolios, with similar intentions.
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> Mergers and acquisitions accounted for more than half of all foreign direct investment into the crisis economies in 1998, some US$9 billion, a fivefold increase since 1996. This will increase again this year, as IMF pressure is placed on governments to sell non-performing loans they nationalised after the crisis.
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> Another limb to go was East Asia's remaining controls on its capital accounts, which have been further liberalised.
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> While the bailout was sufficient to indemnify the Western banks from bad debts, it wasn't sufficient to recapitalise the East Asian banks -- it was not designed to. The crisis economies' finance sectors are still drowning in non-performing loans, even after the governments nationalised the worst ones.
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> According to the World Bank, East Asian banks require a further US$80 billion to get back into shape. Such a sum is nowhere in sight. Only the best-placed and most marked-down banks (such as Korea One) have been targeted by Western competitors; for the others, they must absorb each other or die.
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> Starved of capital, the future of the domestic banks looks bleak. Liberalised capital accounts have made it easier for Asian firms to bypass the formerly dominant domestic banks and tap directly into highly liquid Western, especially US, stock and bond markets.
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> Stock market-financed investment in South Korea in 1998, for example, was four times what it was in 1996, while bank-financed investment was 11% of its 1996 figure; their relative importance has been reversed. According to Institute of International Finance figures, total portfolio investment will be higher this year than in 1996, but commercial bank loans are still negative.
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> This switch has reduced the risk to Western investors, who no longer have to tie their futures to a particular company's ability to repay debt and now have a quick way out if things go bad.
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> The weakened East Asian economies are now on a permanent drip. The bailout and budget deficits have put them deeply in debt. Government debt, chiefly to the IMF, has quadrupled in Indonesia (to 91.5% of GDP), more than tripled in Thailand (to 50.3% of GDP), more than doubled in Korea (to 29.5% of GDP), and added half again in Malaysia (to 52% of GDP).
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> Interest repayments have shot up dramatically (to 30% of tax revenue in Indonesia), forcing down expenditure on health and education in all the crisis countries. Much of the debt falls due in two years' time, which is also when industry analysts expect the world market for semiconductors and other electronic goods to crash.
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> Politically, the debt has handed policy decision-making to the IMF, just as it does across Africa and Latin America.
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> The bailouts haven't reduced total debt -- they've just transferred them from the corporate sector to the public sector, where they're being paid for by the working class and the poor.
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> In the hands of IMF surgeons and Wall Street anaesthetists, East Asia, once the star performer, has become a beggar at the stage door, pleading for scraps of capital.
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> BY SEAN HEALY
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