The financial tumult that has spread from Thailand to South Korea since July is not, as some claim, the funeral march of the Asian model. Instead, it marks the evolution of the Asian model into a more globalized system where we all play by the same rules and engage in what I call "a single-undertaking."
That would be good news for everyone, including American consumers, workers and companies because it would mean sustained growth over the long term.This is the silver lining that can be culled from the present crisis - as long as the right policies are followed by the administration, the U.S. Congress and our trading partners around the world.
What must be done?
- First, Congress must come to its collective senses. Not only did it reject President Clinton's request for "fast-track" authorization on free trade. Within 48 hours of that vote, Congress also refused to authorize U.S. payments to the United Nations and to the International Monetary Fund - the principal institution building a firewall to prevent the developed world from being burned by the South Korean financial collapse.
This failure to act constitutes a stunning reversal of what has been a very effective American policy over the past few years. It comes at a time when the United States has the most to gain from maintaining an internationalist course - one-third of our growth in gross domestic product now comes from ex-ports - and the rest of the world has the most to lose by the absence of U.S. leadership. It just makes zero sense to withdraw from the world at the very moment when trading partners upon whom we rely more and more for our growth are facing crises at home.
Fortunately, the consequences of this congressional shortsightedness can be overcome if the Clinton administration sticks to its guns in supporting international institutions and persuades our Asian trading partners to engage in the kind of reforms demanded by the IMF as a quid pro quo for shoring up their weakened banks.
- Second, Asia must get serious about reform. Transparent systems of accountability need to be created. By and large, Asian banks and financial institutions from Malaysia to Japan have not been held under sufficient scrutiny for self-dealing and conflicts of interest. Corruption and bribery have been the order of the day for too many Asian countries, undermining foreign investor confidence not only in their financial institutions, but also in their economies as a whole.
Asian banks overextended lending beyond their means, exacerbating the problem by huge investments in inflated real estate. That created a bubble underneath the economy from which the air is now being let out. These banks need to get rid of the bad debts and get their loan-to-value ratios back in balance.
Asians, Japan first among them, have to open their economies to foreign financial institutions. This will make their own financial systems more efficient because of greater competition. And it will draw in additional foreign investment needed to stabilize their banking and brokerage sectors.
Clearly, Japanese Prime Minister Ryutaro Hashimoto understands the need for reform. He has made all the right noises about financial deregulation. The question is whether he has the political muscle to work his will. Japan remains the most conservative of all the advanced nations. Hashimoto's challenge is to surmount the resistance of an entrenched bureaucracy and way of life that worked so well in the past, but is now a detriment to Japanese prosperity.
Opening up markets generally in South Korea, Thailand, Malaysia and Indonesia as well as Japan will create more innovation and competitiveness, fueling a new round of growth instead of the deflation they will court from remaining closed.
- Third and finally, the South Koreans and the Japanese need to put together a regional response for bailing out their banks that is similar in function to the Resolution Trust Corp. that salvaged the U.S. savings and loan industry from collapse. Certainly, Japan and South Korea have enough public- and private-sector assets to do this.
As with the RTC, the aim would be to remove bad loans from the banking system, thereby strengthening that system as a whole and rebuilding investor confidence.
Beyond this, the APEC (Asia-Pacific Economic Cooperation) nations pledged in Vancouver this week to stand behind the IMF if resources or guarantees are required for stabilizing the Asian economies beyond IMF capacity.
China can play a significant role in this regard as a guarantor of last resort in the region. Next to Japan, it has the largest foreign currency reserves in the world.
Drawing China into alliances with Japan and the United States to stabilize Asia has been a key strategic objective of the Clinton Administration. This is a perfect time to engage Beijing in a process which is in China's utmost interest as well as that of the rest of the world. It would make eminent sense to erect a tripartite arrangement with Japan and China to restore stability to the South Korean economy. Japan and China have long fought over the Korean peninsula. For the United States to be able to bring them together to help South Korea would be of enormous significance and very real practical benefit.
All of these measures, taken together, would eliminate the bubble rubble from the Asian economies and restore their sound footing. Growth would resume, currency values would be driven up again and the easy temptation for Asia to export its way out of trouble would be removed.
There is a long way to go in the evolution of the Asian model. We can't expect the same vigorous pace of progress as during the past five years. There will be setbacks. But, if the right policies are pursued, the Asian crisis will turn out much like the one in Mexico. After only two years, Mexico is stable again. Its economy is growing at an impressive rate and U.S. exports to that country are on the rise again.
We need not be pessimists about Asia. If America does not retreat from a world that needs it and Asia's leaders are realists about the reforms that must take place, the situation can be turned around.