The collapse of the "Asian miracle"

For the past decade-and-a-half, defenders of the profit system have hailed the rapid economic expansion of South East Asia as proof of the triumphal march of capitalism and the dynamism of the market.

Citing annual economic growth rates of up to 10% in the "tiger" economies of Thailand, Malaysia and Singapore, and increasing investment flows into Indonesia, the Philippines, Laos, Cambodia and Vietnam, they have called capitalist development in the region an "Asian miracle."

But with the eruption of the Thai currency and financial crisis two months ago, the situation is now looking very different. Not only has the crisis spread rapidly through the region, it is threatening to bring to the surface deep-going divisions between the major capitalist powers.

The Thai crisis was set in motion by a decision in mid-July to float the baht, considered to be significantly overvalued in relation to the US dollar. Bangkok's aim was to lower the baht's value, boost exports and overcome an emerging balance of payments shortfall. However, the decision had other ramifications. It meant that virtually overnight the cost of repaying foreign loans and short-term debts, denominated in US dollars, had ballooned.

The baht plunged in price, exposing the dire situation in the banking system of Thailand, where the continuous inflow of foreign capital over the past decade had fuelled a speculative boom in construction, real estate and land. So far this year 58 of Thailand's 91 finance companies have been forced to cease trading.

In mid-August the US brokerage firm Salomon Brothers reported that Thai finance companies were carrying a bad debt burden of some 1 trillion baht, equivalent to 21% of the country's Gross Domestic Product. Of the total debt of around $73bn, half was considered short-term, with almost $40bn owed to Japanese banks.

With the entire financial system under threat, the Japanese government and major banks moved in to organise a "rescue" package and austerity measures through the International Monetary Fund. But the salvage operation has not only failed, it has exacerbated the conflicts between the US and Japan.

Almost as soon as it was announced, it was clear that the $17.2bn package was not enough. Doubts were also expressed in financial circles over the capacity of the Thai government to enforce the austerity program demanded by the IMF.

While the bailout was organised under the auspices of the IMF, which set conditions for the loans in the form of government spending cuts and the abolition of state controls on the movement of capital, the IMF itself contributed only $4bn to the total. The rest of the money was organised by Tokyo, involving the Japanese banks and other regimes in the region, including the Australian government, which pledged around $1bn. Significantly, no money was contributed by the United States.

In other words, in a situation where the Japanese banks confront a major international crisis, Washington not only made no contribution to bailing them out, it used its influence to ensure that the IMF's contribution was kept to a minimum. At the same time, the US took the whip hand in imposing drastic cuts on the Thai government.

Investment shift

The resulting turmoil has already extended beyond the Thai borders and into Malaysia, where the stock market has plunged by more than a third and the ringgit has fallen to its lowest level since it was floated against the US dollar in 1973. The financial markets in Indonesia and the Philippines have also suffered sharp falls.

In a major report, the Far Eastern Economic Review quoted the remarks of a senior executive of the Bangkok Bank who likened Thailand to a beautiful house which had been "infected by termites from the roof to the foundation; everywhere you touch is soft and one day it will crumble."

The article went on to point out: "It isn't only the foundations upon which Thailand is built that suddenly seem woefully weak; the foundations of all the economies of Southeast Asia are equally so. The Asian Miracle, or the Asian Myth as some would now say, was propelled by a seemingly endless flow of outside capital which appeared cheap."

It is the change of direction of this capital flow which has sparked the crisis. The latest UN World Investment Report shows that while total foreign investment flows to developing countries increased to a record $129bn last year, the proportion going to the South East Asian economies fell by half.

The report attributed this to "domestic capacity constraints, infrastructure bottlenecks and, in particular, stiff competition from other economies." The latter factor is clearly visible in the latest figures on financial flows.

The main Asian competitor for investment funds is China, which received half of the total inflow of $81bn into the region. China has become the pre-eminent low cost producer, and not only in traditional cheap labour areas such as textiles. It is rapidly moving into electrical goods and is developing the capacity to completely overshadow the South East Asian countries.

Business Week commented in its August 11 issue: "Throughout the region, there is a glut in capacity in everything from automobiles to chemicals... Having already displaced many of its neighbours in garments, toys and watches, China is a rising power in such sectors as consumer appliances, auto parts and telecommunications equipment."

The other main rival for funds is Latin America and the Caribbean, which last year received $39bn in investment funds, an increase of 50%.

Deep-going divisions

These vast shifts in capital flows lie behind the public slanging match that has erupted between Malaysian Prime Minister Mahathir and international financier and currency trader George Soros.

In a major speech before the meetings of the IMF and World Bank held in Hong Kong last month, Mahathir denounced currency trading as "immoral." He called for it to be banned in order to prevent developing countries from being impoverished by "ultra rich" Westerners, whom he compared to highwaymen robbing the poor.

Soros in turn branded Mahathir as a "menace to his own country" and denounced his proposal to ban currency trading as "so inappropriate" that it did not deserve consideration. Soros insisted that the free movement of capital was essential to the capitalist system.

While public attention has been focused on the Mahathir-Soros row, an even more far-reaching conflict has been developing behind the scenes, of which the clash over currency trading and the activities of speculators such as Soros is only a partial expression.

With the Japanese banking system confronting a potential loss of tens of billions of dollars in bad debts as a consequence of the South East Asian currency crisis, the Hashimoto government floated a plan for the creation of a $100bn Asian monetary fund to avoid further currency turmoil in the region.

The plan, which was unveiled by Japanese Finance Minister Hiroshi Mitsuzuka at a meeting of the G-7 finance ministers in Hong Kong on September 21, was immediately opposed by both the United States and the European powers, with the response of the US being described as "particularly hostile."

Washington fears that the creation of a new Asian fund would undermine the global authority of the IMF as the main instrument for enforcing the abolition of regulatory controls, which the Clinton administration is insisting be carried out through the Asian region. For their part, the European powers fear that such a fund would strengthen moves for an Asian-based yen bloc, creating a potential rival for the euro single currency, due to come into being at the start of 1999.

The European Union intends to make the euro a world store of value to rival the dollar. In fact, this push to establish a second world reserve currency was one of the factors motivating the Japanese plan.

With its national banking system still deep in debt and the economy in recession -- the latest figures show that output fell at an annual rate of 11.2% in the second quarter -- the Japanese capitalist class is alarmed by the prospect of an economic collapse in South East Asia. The experience of Thailand has already demonstrated that rather than providing assistance, the response of the US and the European powers in such a situation will be to push their own economic advantage.

Last month's IMF-World Bank meeting had been scheduled to celebrate the "Asian miracle" and proceed with the opening up of financial markets throughout the region. Instead, it ended without adopting any measures to meet the currency turmoil and with the US and Europe scuttling Tokyo's monetary fund plan.

The mounting currency and financial crisis will drive forward two explosive processes: the intensification of the class struggle as the regimes throughout the region impose brutal austerity measures against the working class on the orders of the IMF and international banks; and a deepening economic conflict between the major imperialist powers as the world economy increasingly fractures into three blocs.

The shattering of the "Asian miracle" and the collapse of the associated myth that this represented some new and viable path of capitalist development are the clearest indications that major economic and political upheavals and class battles are on the agenda.

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