Financial crisis in Asia - 12 December 1997

The Asian flu. The dread phrase we've used so often in the past few years to remind us, every autumn, to get our flu shot.

However, the Asian flu I'm talking about is the one that first hit Thailand and then Indonesia, leapfrogged to Hong Kong and finally through Wall Street for a 554 point tumble. Do you take my meaning?

They used to say when Wall Street sneezes, Europe catches cold but today Thailand catches cold and America and Europe are in danger of pneumonia. The medical analogy is inevitable since what has happened to our economies in the past few months sounds so like the bulletins put out by the United Nations World Health Organisation to alert us to the arrival in one country from another, of the latest, dangerous bug.

Incidentally, I wonder how many of us realise what the health of all of us would have been like if the World Health Organisation had never been formed soon after the founding of the United Nations. We've taken for granted for nearly 50 years a vital service, literally a matter of life and death, that became essential for somebody to deliver once the jet plane was invented and millions of people a year could rustle around the globe as easily as cockroaches.

I remember a conference in Montreal, I think, where the United Nations ICAO, International Civil Aviation Authority, was established. Did you know that the way your airplane ticket looks anywhere in the world, the outlined slot for the present flight, the whole printout and the language pilots of every nation speak to each other, F for Foxtrot and so on, these are only some of the blessings brought to us by the United Nations establishment in Montreal and by nobody else?

Well, I was recalling a conference, way back in the 1950s in that delectable city, where some doctor and I – can't even remember now which country he came from – pictured a world in which jet aircraft would be the normal mode of transport between one country and another. He wondered aloud: what if a passenger from Japan has a highly contagious bug and arrives overnight in Los Angeles with it and suddenly, for no reason anyone can figure out, there's an outbreak of a strange sickness in California?

It seemed so far-fetched at the time, the anxious doctor sounded as imaginative and as loony as Arthur C Clarke when he predicted the coming of the satellite 50, was it, years ago? But it's now the daily routine, indeed the unsleeping 24-hour routine, of the World Health headquarters in Geneva to keep tabs on any outbreak, even on the reported appearance in travellers of a new bug, and to alert the health departments, agencies, of a hundred countries what ailments are flying, thanks to the jet engine, from where to where.

Well you see why now the medical metaphor was inevitable since the Americas and Europe are now prey to financial ailments in an Asian country, just as we are to the various flus.

I talked the other evening with an old conservative investment banker, who's been just about 70 years at his trade. He said that his experience had never prepared him for the thought that one day the New York Stock Exchange, indeed the American economy, would ever react overnight to a wobble, to even a drastic fall, on the exchanges of remote Singapore and Jakarta. It used to be Vienna and London and then London and Wall Street and then Wall Street and the world.

And now what seemed only yesterday to be politicians' rhetoric, all that stuff about living in a global economy, has been brought bang home to us since Thailand developed that nasty cough. In ways we never guessed at, we are, as the Bible says, members one of another.

About a week ago the anxiety that ran through the money men and the economists, not least the White House, was pacified by the unprecedented largesse of the International Monetary Fund which came to the rescue of sinking South Korea. Let's first see what was unprecedented about the challenge that the fund was going to meet – it was the extent and depth of the Asian economic decline, wobble, setback: I'm avoiding the word "crash".

In a single year between November '96 and this November, the percentage losses in the Asian stock markets have been as follows – and remember that the 1987 Wall Street crash reduced stock values by just over 7% – Thailand -75%, Singapore -25, Japan -25, Hong Kong -27, Indonesia -80, Malaysia -68, South Korea -59%.

South Korea was, for various historical and political reasons, the country that most troubled the United States. It is, after all, the creature of the United States, which rescued it from conquest by Communist North Korea. Its success as a capitalist showcase has been due to the United States. So the International Monetary Fund came through with a massive $57billion loan.

More than any other country, South Korea was bogged down with a huge number of foreign short-term loans. Surely a whopping 57 thousand million dollars would do the trick – the essential trick being to restore investors' confidence. It hasn't happened.

To the great distress of Washington and Tokyo, the South Koreans came through last Tuesday like Oliver Twist. They were calling on America and Japan to take a step which both had pledged to take, if South Korea hit rock bottom – American and Japanese government money, independent of anything the Monetary Fund might have offered.

Now as late as last week the possibility of this desperate call was not even being talked about in New York or Washington certainly, but in one week, since the IMF's loan, the South Korean currency has lost 50% of its value against the dollar; 56 of its 58 investment houses stopped trading. The South Korean government closed down five more banks. To some people I imagine, the most curious item in this development is that Korea should be appealing to Japan, itself with an economy reeling beyond anything we could have imagined five years ago. It can only mean that in the country of the blind, the one-eyed is king.

Most American commentators – I mean economists, financial, monetary, specialists – have been saying ever since the collapse of Japan's biggest brokerage house that the Asian flu could not seriously infect the American economy because American exports to Asia are less than 7%. All American exports account for no more than 11% of the American gross domestic product. And this seemed, until now, an unanswerable argument.

However, it has been answered, reluctantly by a man who during the alternating euphoria and bellyaches of the past year or two, has made more continuous sense than anybody. He is Robert Samuelson. No relation, by the way, to the famous old Nobel Prize winner, though the record of his judgements might lead to you to believe he must be his son.

Robert Samuelson is all the more worth listening to because during the past two decades he's been the steady enemy of domestic doomsayers. In early 1980 the persuasive conventional wisdom was that the United States was going to de-industrialise. He said it wouldn't and a 50-odd percentage increase in production proved him right. The next scare was America's loss of competitiveness.

Not true, said Samuelson. On the contrary, the United States would become the world's largest exporter, and so it became. And lately they've said standards of living are declining. They aren't. But now he says, I'm uneasy with the stock market's swift recovery since October's black day, uneasy with the reassurances of the administration, even with the cautious but continuing optimism of Mr Alan Greenspan, the greatly admired and trusted chairman of the Federal Reserve. His domestic concern, mounting to a passion has been to keep inflation under control and at just over 2% it is the lowest of all the industrial countries and lower for a longer time than any in living memory.

So, to the theory that the United States is more or less permanently protected from anything short of a total Asian crash, by that often-quoted 11% export figure, Mr Samuelson replies that the 7% Asian export figure is deceptive, that one in four of America's export markets are going to decline and that this gloomy figure takes in outside Asia, Brazil, Argentina and Russia. And, because of what amounts to a global rush to seek sanctuary in American stocks and bonds, a higher dollar will make all American exported goods more expensive.

He also warns that Asia is awash in excess industrial capacity. Cheap imports could soon have the effect of depressing prices and lowering investment. He concludes, "I am not predicting another Depression, I'm not predicting anything". But he is saying that Asia's slump could go deeper and last longer than most economists now assume; the pessimism of the past underestimated the economy's basic vitality. Today's optimism may mistake strength for invulnerability. Surveying possible dangers ahead, I suspect that not all of them will bypass the United States. It would be nice to be wrong.

For myself, I thought you ought to get this nasty bit of news out of the way before, as a fundamentalist preacher predicts, the season of goodwill will set in, will revive the global economy and give us peace and permanent prosperity. Let us pray.

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