History of the world economy|
Date: Mon, 12 Jan 98 19:27:43 CST
From: Sid Shniad <email@example.com>
Subject: All is not well in 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:
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.
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
"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,
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"
[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
[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,
Clearly what is happening in the global economy shows that it shows that
not all is well. We will have to await further developments.