History of the world economy

All is not well in the world economy

By Kim Scipes,
12 January 1998

It is becoming clearer that the economic crisis in Asia is not being controlled by the IMF and, in fact, is getting worse. Please excuse me for a longish message, but having just returned from Europe where this crisis is getting extensive coverage, at least in the English-language press (unfortunately, English is all I speak), I thought I'd pass on some nuggets from press reports there. And for those of you who are not understanding the emphasis on the United States, keep in mind that much of the world economic growth since 1992 has been fueled by the US economy--so changes here will reverberate throughout the world.

The for-public line from US officials and most of the US news media is that this will not effect the US economy, but no one who knows anything about this really believes this horse-hooky. In fact, the IMF itself has changed its official estimation for global economic growth this year: where it predicted in September 1997 that world economic growth would be 4.3% in 1998, it lowered that in December, saying growth would only expand 3.5%; in fact, Vicki Barnett, writing in a front page story in the "Financial Times," says, "...the Fund admitted yesterday that it had previously been too optimistic and that its new estimate COULD TURN OUT TO BE TOO HIGH IF JAPAN'S ECONOMIC SLOWDOWN WORSENED" (emphasis added) (FT, "IMF says Asian Crisis will cut back world growth", December 22, 1997: 1). In the same story, a chart based on IMF data, shows that the IMF now expects the US economy to decline a further .2% below its earlier projection. In another story the same day, Vicki Barnett reports that the US trade deficit is now projected by the IMF to expand by over $50 billion to $230 billion (Vicki Barnett, "IMF World Economic Outlook: Trade patterns set for big shift", FT, Dec 22, 1997: 3).

Another story on the trade problems for the US: "The near certainly that the US trade deficit will be driven sharply higher by the economic crisis sweeping through Asia has profound economic and political implications. [para] Some US workers could lose their jobs, and employers could feel pressure to hold down wages. The profits of multinational corporations have already been put under pressure by the downturn in Asia, unnerving investors and analysts are forecasting more bad earnings news.

[para] The Asian crisis is already altering trade patterns. In South Korea, for example, US goods are nearly twice as expensive, when bought with the country's devalued currency, as they were at the beginning of the year. That is squeezing US exporters ranging from auto-part makers to farmers and could imperil the jobs those exports support. [para] A survey last week by the National Association of Manufacturers found that four out of five manufacturing executives anticipated significantly lower exports next year because of the problems in Asia and the resulting currency fluctuations. Among the industries that the association expects to be particularly hard-hit are electronics, telecommunications equipment and capital goods." Richard W. Stevenson and David E. Sanger, "Ghosts of Deficits Past: America Relives the Fear--Flood of Asian Imports Set to Swell Trade Gap", International Herald Tribune, Dec 22, 1997: 11.

In a story about the US trade deficit in October, there is an interesting paragraph: "But in an ominous sign, the US deficit with Japan soared to the highest level in two and a half years. Analysts are forecasting increased deficits with all Asian countries as the US economy feels the effects of the financial turmoil that has engulfed the region." And further, "Economists are predicting an even bigger deficit for 1998 as Asian imports flood the country, made suddenly cheaper because of the sharp currency devaluations that have occurred in Asia. A rising US trade deficit is expected to be the main adverse impact felt in the United States by the economic turmoil that has forced South Korea, Indonesia and Thailand to run to the International Monetary Fund for huge loan guanantees to stabilize their countries. Forecasters say Asia's problems could cut economic growth in the United States by one-half of a percentage point or more next year." "Record Exports Cuts U.S. Trade Gap: But Deficit With Japan Soars, a Sign That Asia Crisis Hurts America", International Herald Tribune, Dec 19, 1997: 13.

In another story in the International Herald Tribune (IHT), Alan Friedman writes "Hours after releasing its official economic outlook Monday, the Organization for Economic Cooperation and Development changed three of its key 1998 predictions, with officials blaming the instant revisions on the fast changing financial crisis in Asia.

In a published report on Monday, the OECD forecast a 1998 growth rate of 2.9 percent among its 29 member nations. But at a press conference here [Paris-KS] Monday afternoon, the OECD's chief economist revised the forecast down to 2.5 percent." And, note this: "Economists said that the OECD's change of forecasts was a sign that the crisis in South Korea and other Asian nations is moving so rapidly THAT INTERNATIONAL ORGANIZATIONS CANNOT KEEP UP WITH EVENTS" (emphasis added.) Alan Friedman, "OECD Adjusts Figures in '98 Growth Forecast: Asia Meltdown Forces Changes in Predictions," IHT, Dec 16, 1997: 13.

We can see how drastic the economic crisis has both hit various countries, and to see how the IMF has changed its forecasts for economic growth: real Gross Domestic Product (GDP) growth in 1988 for Thailand was projected at 7% in May 1997 and 0% in December; for Indonesia, it was 6.5% in May, but 2% in Dec; for Malaysia, it was 7.8% in May and 2.5% in December; South Korea was 6.2% in May and 2.5% in December; and the Philippines was 6.2% in May and 4.3% in December. Additionally, the IMF's chief economist Michael Mussa said "the IMF forecast could be revised downward again if problems with business confidence and with the financial system persisted." Mussa further admitted that the lower figure for Korea--2.5% growth--"was 'on the optimistic side'." Vicki Barnett, "IMF World Economic Outlook: Trade patterns set for big shift", FT, De- cember 22, 1997: 3.

In an opinion piece, US economist Robert Samuelson sees Japan as a big part of the Asian problem: "All of Asia's economic casualties--South Korea, Thailand, Indonesia, Malaysia and the Philippines--need to export their way to recovery. They have depleted their foreign exchange reserves and accumulated huge overseas debts. To buy imports and service their debts--in other words to keep their economies running--they need to earn more foreign exchange. [para] A healthy Japan would help by providing an expanding market for their exports, but that will not happen. Even optimistic economic forecasts see meager growth for Japan in 1998. The International Monetary Fund , for example, recently predicted only 1 percent. [para]

At best ... Japan will not buy many extra exports from the rest of Asia. The United States and Europe will have to absorb most of the increase. [para] A Japanese recession would make everything worse. Japan would buy less from Asia and try to sell more itself. All countries would have a harder time reviving. [para] This defines the economic menace posed by Japan. Asia's economic downturn might feed on itself: too many sellers chasing too few buyers." Robert J. Samuelson, "Stubborn Japan Is a Big Part of the Asian Problem," IHT, Jan 2, 1998: 6.

"Japan's economy has come to a standstill as higher employment and incomes have not led to increased production, a [Japanese] government report said Monday. [para] The Economic Planning Agency, in an analysis of Japan's economy in 1997, said the economy's cyclical trend toward a recovery had weakened in the latter half of the year.

[para] The agency also mentioned a possible deterioration in Asia's economic crisis as a factor that could put pressure on the Japanese economy." Agence France-Presse, "Japan's Economy Stalled, Agency Says", IHT, Dec 30, 1997: 11.

Two more recent comments from opinion pieces in the International Herald Tribune:

"As a former hedge fund manager enjoying a sleepy sabbatical from the art of speculation, I was shaken by the Asian crisis of 1997. It shattered the whole structure of expectations that had long governed the behavior of global investors. [para] This is a profound moment for the psychological state of the world economy. [para] We can no longer wake up in the morning and say, 'No matter what happens, I know Asia is still growing strong and keeping the system rolling.' Now the myth of Asian invincibility has collapsed. We have lost a foundation stone. [para] Will this lead to global disaster? That is not at all clear, or even likely. Will American stocks decline? I do not know. It depends upon what people come to believe.

[para] From the early 1980s on, it was an article of faith that Asia was a miracle. Savings, investment, education--all of the right ingredients for economic success were present. [para] For years, strong economic performance and rising asset prices inspired investors, commentators and economists to uncover even more good news about Asia wherever they looked. Today, where one everyone saw efficiency and vitality, the image is one of widespread corruption and waste. [para] How could anything so good turn so bad so quickly? IF ASIA'S VIBRANT ECONOMIES CAN COLLAPSE, WHAT OTHER ASSUMPTIONS ABOUT ECONOMIC CONDITIONS ANYWHERE CAN WE COUNT ON?" (emphasis added). Robert A. Johnson, "World Leaders Have to Be Seen to Stimulate Demand", IHT, Dec 29, 1997: 8. (At the end of the article, it identifies Johnson as "chief economist of the [US] Senate Banking Committee in 1987 and 1988, is a former managing director at Soros Fund Management.")

"There has never been a crisis like the one besetting Asian financial markets. It is international in origin and is a crisis of the private sector, not of government finances. Its nature explains why IMF rescue packages have had scant success. [para] The currencies of South Korea, Indonesia and Thailand HAVE ALL FALLEN FASTER AFTER IMF INTERVENTION THAN THEY DID BEFORE IT [emphasis added]. That is not surprising. The IMF is treating the crisis as a series of national events that require draconian local policies, rather than as AN INTERNATIONAL LIQUITY DOMINO EVENT. THIS WRONGHEADED VIEW WILL CAUSE RECESSION AROUND ASIA AND PERHAPS THE WORLD" [emphasis added].

[para] Because of trouble at home or simply because of head office worries about Southeast Asia, the overseas banks reduced their commitment, setting off a replayment credit squeeze hitting at least two Asian countries directly and knocking on to others.

[para] [In South Korea] the won has collapsed not because of trade or even innate corporate problems but because of a sudden withdrawal of dollar liquidity.

[para] [The IMF] has never suggested that its Western members' role in the debacle be studied. Nor has it questioned the wisdom of unfettered money flows. Yet it is obvious that a SUDDEN CHANGE IN PERCEPTIONS OF ASIAN RISK WAS AN IMMEDIATE CAUSE OF THE CRISIS [emphasis added]. [para] Instead of lecturing Asia, IMF Managing Director Michel Camdessus could ask what the Banque de France did to stem the huge rise in French banks' short-term lending to Asia in the 18 months to mid-1997." Philip Bowring, "What About Unwise Lenders?" IHT, Dec 29, 1997: 8.

Now, let's flash forward to this morning's NYT:

"As the United States has focused on rescuing South Korea, the emergency programs to stabilize Thailand and Indonesia have begun to unravel, raising new fears about the effectiveness of the International Monetary Fund's prescriptions for stabilizing large regions of Asia. [para] With investors still stampeding out of Asian markets, the currencies of Thailand and Indonesia have plumeted to new lows, defying months of efforts to restore confidence and making it more costly for companies to repay crushing debts denominated in dollars and Japanese yen. [para] On Monday, Thailand announced that it would ask the IMF to ease the terms of a $17.2 billion bailout package. Indonesia has so far refused to honor several key conditions of its nearly $40 billion rescue package.

[para] 'There's no question that we're in deep trouble again in Southeast Asia,' a senior adviser to President Clinton said today. 'The political problems are getting a lot more complicated. And the markets are having trouble sorting out which countries are tackling their problems, and which are not.' [para] Yet the economic magnitude of Thailand and Indonesia pale by comparison with that of South Korea, and all three pale in size compared with Japan. WASHINGTON'S REAL FEAR IS THAT RENEWED ECONOMIC INSTABILITY AMONG THE RELATIVELY SMALL ASIAN COUNTRIES COULD SPREAD BEYOND CONTROL (emphasis added). [para] Early in July, Thailand's decision to abandon the longtime link between its currency and the dollar set in motion a domino effect that brought down the currencies in Indonesia, Malaysia, the Philippines and eventually South Korea. That cycle can accelerate because each devaluation makes a country's exports less expensive overseas, forcing other nations to devalue to stay competitive.

[para] ...many investors are still fleeing the major Southeast Asia currencies. Now, the Thai baht and the Indonesian rupiah have fallen lower than before the IMF intervened. [para] The IMF's five-month-old economic plan for Thailand assumed that the baht would stabilize to a rate of about 32 to the dollar. IT NOW TRADES AT 52 TO THE DOLLAR" (emphasis added). David E. Sanger, "With the Focus on South Korea, Thai and In- donesian Aid Falters: Currencies Fall, and Strict Reforms Art Put Off", NYT, Jan 7, 1998: A-1, C-2.

And to bring us up to date: "The Indonesia, Malaysian, Thai and Philippine currencies plunged to record lows again yesterday, AS THEY HAVE EACH TRADING DAY OF THE NEW YEAR" (emphasis added). The reports gives the new values: Indonesia rupiah--7,700 to the dollar (the lowest level since it began trading in 1971); Malaysian ringgit--4.3657 to the dollar (the lowest since it was floated in 1973); Thai baht--54.35 to the dollar; and the Philippine peso--44 to the dollar (the lowest ever). Bloomberg News, "4 Asian Currencies Plunge to Record Lows," NYT, Jan 6, 1998: C-2.

Clearly what is happening in the global economy shows that it shows that not all is well. We will have to await further developments.

Kim Scipes