Sunday, October 05, 2008
What A Difference 10 Years Make
Asia Times / Shawn Crispin - A decade ago, Western-led free marketeers derided Asia's lightly regulated economic and financial models for being riddled with corruption, cronyism and overall mismanagement. The only way out of the financial crisis, they argued, and on what the IMF predicated its bailout packages, was greater foreign participation and management in their economies through asset sales and privatizations.
Governments in the region resisting IMF neo-liberal orthodox prescriptions and market-determined asset fire sales to foreigners were widely derided in the Western press. Many rang the "moral hazard" alarm bell, warning that unpunished profligate borrowers would be prone to return to their risky behavior on the expectation of future government bailouts.
Thailand's (and Malaysia) interventionist move in 2001 to establish a state-led rescue facility for non-performing assets held at banks, known as the Thailand Asset Management Company (and Danaharta), was likewise derided for being too little, too late, and ultimately a doomed-to-fail interventionist attempt to put off market-led asset price clearing.
And when Asian countries raised the idea of establishing an Asian Monetary Fund, to rival the IMF and stave off future regional financial crises without the perceived pro-Western conditions imposed by IMF-led bailouts, the US balked at the concept and lobbied against it until it was finally scrapped.
Ultimately Southeast Asia emerged stronger from its financial collapse, seen today in its low sovereign and corporate debt profiles, high levels of foreign reserves and reformed and recapitalized banks. That restoration was led mainly through market-driven depreciated currencies, improved terms of trade and eventually renewed capital inflows.
Now many of the same pro-market stalwarts who criticized Asia's half-market, half-interventionist response to the 1997-98 financial crisis are among the strongest proponents of the US government's proposed US$900 billion Wall Street bailout package. Rather than advocating for a market-price clearing of distressed assets and foreign buyouts of homegrown assets, as they did for Asia, many Western commentators have taken Wall Street's side in its plea for a government bailout of banks and bankers on the grounds that the US is simply to large too fail and without government intervention the entire US - if not global - economy is at risk.
The hard truth America is now so desperately trying to avoid is that US economic, financial and human resources - once considered the cream of the global capitalist crop - are in the new market reality worth a fraction of what they were previously priced. US policymakers deliberating the proposed interventionist bailout would be wise to revisit their economics text books and the historically overlooked but now highly relevant factor-price equalization (FPE) theorem.
Simply put, as the world economy becomes more integrated, free trade and capital flows tend to equalize relative prices and real wages across the world. Astronomically high US asset prices and wage levels have long represented the biggest pricing distortion in the global economy, one that until now has allowed Americans to consume a far greater percentage of the world's resources than their Asian counterparts.
Financial services were perhaps the US economy's chief value-added comparative advantage in the global economy and with their demise the US's overall terms of trade will inexorably decline. Regardless of how much good money the US Congress eventually throws after bad to restore confidence, Wall Street's debt-driven meltdown will inevitably lead to a lower US standard of living. That spiral will intensify if and when Asian and Arab investors opt for suddenly safer investment options closer to home rather than committing their capital to underwrite US government-propped, artificially high-priced US assets. A debt-ridden US can also expect to lose out to cash-rich China and others in the mounting global competition for the scarce natural resources and commodities needed to fuel and feed their domestic economies.
Others, reflecting on past Western criticism of Asian crony capitalism, wonder why the US media has not asked harder questions about a potential conflict of interest in former Goldman Sachs investment banker turned US Treasury Secretary Henry Paulson's lead role in devising a bailout package for his former Wall Street associates. They suspect it could be partially explained by much of the US media's reliance on investment banks for their advertising revenues.
With Wall Street's collapse, the global capitalist order has reached a watershed moment, one that will fundamentally affect how the US engages with Asia. US trade policies that previously promoted, above all else, opening markets for US banks and financial institutions in Asia's developing markets will now shift in a new and potentially more protectionist direction. That the US is opting to bail out its bankers rather than allowing the market forces it championed during the Asian financial crisis to determine the value of its debt-ridden assets represents more than an extreme case of moral hazard. Rather, it undermines global faith in the capitalist model the US once promoted, and from a Southeast Asian perspective, marks the end of what now seems a highly hypocritical US-led era.
p/s photos: Sonja Kwok Sin Ney