Ignore the IMF and Bring Interest Rates Down in Asia
International Herald Tribune
June 9, 1998
Philip Bowring

This time, Malaysian Prime Minister Mahathir bin Mohamad has it right. Asia (excluding Japan) is being crippled by extraordinarily high interest rates that threaten to turn a necessary short, sharp recession into a depression. Policy must be changed, regardless of the IMF.

Mr. Mahathir may see conspiracies of foreign capitalists. Koreans like Kim Woo Choong, founder of Daewoo, may see a Western desire to cripple South Korea's industrial challenge. Many in Asia may see a United States using the sudden withdrawal of Western capital as a lever for its trade and investment policies.

But there is no need to look for such ulterior motives. Shortsighted stupidity is as good an explanation as one will find for the march toward depression.

This is not the time to be re-examining the causes of the crisis or apportioning blame. It is time for action to bring down rates everywhere.

In almost every economy in East Asia, real (inflation-adjusted) prime lending rates are well above 5 percent. In the cases of South Korea and Thailand, the countries where the IMF has had most impact, they are in double digits.

The collapse of domestic demand around the region has stunned even the more pessimistic forecasters. GDP estimates are everywhere being slashed, for 1999 as well as this year. Yet the position of the IMF seems to be that this shows that the countries which take its medicine are responding correctly.

Take the latest letter of intent issued in connection with the Fund's support for Thailand. It now envisages that tight monetary policy will result in a current account surplus of 7 percent of GDP this year. Such a huge surplus can be viewed as desirable only if priority is given to repaying short-term loans made by imprudent, and not infrequently corrupt, foreign banks.

The surplus is possible only because of a collapse of local demand and hence of imports. Is that really what is good for Thailand and its trading partners?

The same applies in South Korea. Its trade surplus is now running at $3.5 billion a month despite flat exports. If this continues, its current account surplus could hit 10 percent of GDP, while the economy as a whole contracts by at least 5 percent.

Interest rates of around 20 percent are supposed to bring currency stability and induce corporate reform. But by collapsing domestic demand they have impaired the viability of many of South Korea's largest companies, and thus their ability to continue borrowing from foreign banks and credit markets.

Reducing chaebol leverage is a desirable long-term goal, but even in the best of circumstances it could only be achieved slowly. It is almost impossible at present, when all corporate cash flow has to be devoted to interest payments.

It is impossible to imagine any Western government imposing the kind of monetary policies now being faced in much of Asia.

They would be understandable if there were strong inflationary pressures or large fiscal imbalances. In fact, apart from the one-off impact of devaluation, inflation is nowhere to be found. Deflation is everywhere. Prices of everything except money have collapsed. Fiscal deficits are still tiny.

If it were just one country suffering a severe recession, very tight policies might not matter to others. But regional decline is self-reinforcing.

South Korea and now China are hurting because of the collapse of their important Asian export markets. The wells of overseas Chinese capital are everywhere drying up as liquidity problems are transferred from one country to another.

Hong Kong and China have to keep interest rates high to protect their currency pegs to the dollar. Even in Malaysia, with its relatively small foreign debt, Mr. Mahathir's hopes of interest rate cuts are running into opposition from a central bank mouthing IMF orthodoxies.

Lower interest rates are not a cure-all. Huge investment mistakes have been made and must be paid for. But crippling rates are driving viable businesses to the wall to achieve the current account surpluses now deemed necessary for currency stability.The IMF pretends to be a lender of last resort, and dictates policies as if it were. But it has neither resources nor the will to require major shareholders to address the international problems caused by their banks in the name of open capital markets.

And Western hubris is growing. Even the normally sensible Alan Greenspan has opined that "the Asian crisis is a milestone in the global trend toward capitalism." Not only does he forget the still reverberating U.S. savings and loans debacle, he seems unaware that many in Asia see the crisis as that of the form of capitalism espoused by Mr. Greenspan — unrestricted money flows.

Asian resentment of Western prescriptions will escalate dramatically if output keeps falling. For everyone's sake, countries should start now to mitigate recession by reinvigorating domestic demand, whatever the views of the IMF or of the fashion houses of finance, the foreign investment banks. Keynes or common sense will do better.

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