American-inspired remedies are not medicine Asia needs for its problems

January 12, 1998|By William Pfaff

PARIS -- Currency collapse in Indonesia has outstripped the economic remedies proposed by the International Monetary Fund. This could likely become the case for Thailand and South Korea as well. A new initiative is needed, which means new thinking.

The economic crisis in Asia is a crisis of the American model for a globalized economy. Asia's implosion has resulted from the conflict between that American model and an Asian growth model that originated in Japan and was imitated elsewhere.

The IMF's proposed remedies are also American in inspiration. They were developed by the IMF in close cooperation with the Clinton administration Treasury Department and reflect mainstream U.S. economic views.

Deflating tools

Those measures, at least in their initial application, have failed to halt the fall of Asian markets, banks and currencies. They are, additionally, criticized in principle not only in Asia but also by influential American economists, such as Jeffrey Sachs of Harvard and Joseph Stiglitz, chief World Bank economist, as actually making the situation worse by imposing further deflation on economies already suffering from deflation.

However, no international actor with the power to influence the situation is offering an alternative. It is generally acknowledged that the crisis is worsened by a contagious lack of confidence and by what George Soros politely describes as the tendency of market players to ''move in a herd-like fashion.'' The IMF itself acknowledges that Russia and Brazil now risk being drawn into the crisis -- thus moving economic disruption toward Eastern Europe and into the Americas.

With the United States and its policies at the heart of the problem, it is difficult for Washington, or Washington-based international agencies, to restore confidence without reversing policy (which would itself be no confidence-builder).

If Japan were capable of international initiative, one might imagine an Asian-based international consultation, and regional cooperation on remedial action, that might halt or slow the crisis. But Japan, for bureaucratic as well as political reasons, is unable to act independently.

If Europe had the central economic directorate it promises to bestow upon itself when it acquires a single currency next year, it might be capable of a constructive initiative. German and French banks have greater loan exposure in Asia than American banks. But the Europeans renounced an independent role in world economic affairs 50 years ago.

However, is it imaginable that Japan and the European Community might work jointly to develop proposals for stopping what could eventually become global deflation, if they could do VTC so under respectably neutral auspices? Could they do so in terms that Washington could endorse without dominating?

The World Economic Forum, which convenes in Switzerland next month, will bring together representatives of nearly all the most influential public and private actors in the world economy.

This meeting might be made the occasion for a new examination of the nature and sources of the Asian crisis, and for the start of an open-minded reappraisal of economic and institutional measures to slow it or reverse it.

As David Hale of Zurich Kemper Research has said, it is evident that the market alone has a record of persistent miscalculation of risk and misallocation of resources. There is an essential role for governments in dealing with what Mr. Hale calls the most important case of transnational financial contagion since the 1931 collapse of Austria's Creditanstalt Bank.

As matters stand, the contagion continues to spread, with China, spared until now because its economy is not deregulated.

If the Hong Kong stock market fails -- it dropped 13 percent during the first four days of last week, and is down by more than a third since the high that followed its takeover by China -- pressure on the dollar-linked but China-supported Hong Kong dollar could force devaluation of China's own currency. That would explosively enlarge the crisis, which then almost certainly could no longer be confined to Asia.

Pulling together

The Asian growth model originated in Japan and produced rapid industrialization and export-led growth through a state-influenced system of close cooperation between bankers and industrialists. It could sustain higher debt levels than Western systems because industry, banks and government were collaborating in what was viewed as a national enterprise.

The United States has for years attempted to destroy this Asian model because of its protectionist and statist features. Mr. Hale writes of what now has happened to Korea: ''The shattering of this economic model as a result of foreign banks suddenly withdrawing their funding . . . is going to produce a legacy of distrust and resentment which will have long-term political implications.''

This is why American-inspired remedies to the problems of Asia no longer possess the credibility they had before Thailand's finances collapsed. That provided the first falling domino in a sequence which has yet to be interrupted, whose political consequences could prove more dangerous than the economic ones.

William Pfaff is a syndicated columnist.

Pub Date: 1/12/98

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