Book Review from January 1999 issue of the Socialist Standard
Tigers in Trouble. Ed. Jomo K.S. Zed Books. £14.95.
The current crisis in Asia is usually said to have begun with the forced devaluation of Thailand’s currency, the baht, in July 1997. It then spread to the other countries of the region, in particular Indonesia, Malaysia and South Korea which also had to devalue their currencies as outside banks and financial institutions stampeded to withdraw their money.
It would, however, be a mistake to see this as just a financial crisis. As most of the contributors to this book make clear, the financial crisis was a reflection of the situation that had arisen in the real economy where, spurred on by rising export sales which they expected to continue, private capitalist firms had expanded productive capacity beyond what could profitably be sold on world markets. As various different contributors put it:
“In Japan the post-Plaza recovery [i.e. after 1985] was based on a very strong investment boom, but only to result in excess capacity subsequently. Again, the current difficulties in East Asia are traced back to excessive investment in the region since the beginning of the decade” (p. 42).
“Alternatively, it may be termed an over-investment crisis which, in a way similar to Japan, has caused massive over-investment and over-capacity which will produce downward pressure on the prices of traded goods and thus deteriorate the terms of trade of these countries” (p. 57).
“Insofar as it is possible to isolate the original sin in this particular Asian drama it must lie in the deceleration of export growth experienced by the entire region from about the middle of 1995” (p. 66).
“[In Korea] Lack of investment co-ordination led to overcapacity, which resulted in falling export prices, falling profitability due to low capacity utilisation, and the accumulation of non-performing loans in a number of leading industries, including semi-conductors, automobiles, petrochemicals and shipbuilding” (p. 228).
This became a financial and currency crisis because much of the investment in productive capacity that proved to be excessive in relation to markets had been financed by loans from local banks which in turn had borrowed the money from financial institutions in the industrialised world (US, Europe, Japan) where interest rates were.
Contrary to what some claim, banks do not make profits by “creating credit” by the stroke of a pen but are, as this crisis has again confirmed, intermediaries who make profits—or not—out of the difference between the rate at which they lend out money and the rate they pay those they themselves borrow the money from.
When exports began to slow down some of these loans became “non-performing”, i.e. the interest on them was not being paid. Which meant that the local banks were not going to be able to pay interest to those they had borrowed from. When these international lenders got wind off this they decided to get out. This put pressure on the dollar exchange rate of the local currencies which eventually collapsed, so making the situation of local banks worse as they had in effect borrowed in dollars which now became more expensive. This “credit crunch” meant that they were unable to lend so much to local businesses, even those which were still profitable, so obliging them too to cut back on production and lay off workers.
The slump in production which always follows over-investment and overproduction set in, with countries which had enjoyed in the decade 1985-1995 sustained annual growth rates of over 7 percent returning negative figures and seeing unemployment more than double.
In time—after the excess capacity in relation to the market has been destroyed (capitalism’s solution to the problem of poverty amidst potential plenty)—growth will resume but two contributors (Chandrasekhar and Ghosh) doubt that this will be at the same rate as previously. These countries’ growth has been based on “export-oriented industrialisation”, but “the fundamental problem of insufficient world markets for very rapidly increasing exports still remains” (p. 82). Another, Kregel, is even more pessimistic. He thinks this situation could lead to a rise in protectionism which “is precisely the scenario which was the prelude to the global crisis of the 1930s” (p. 66). We shall see.