Learning from two crises

March 4, 2009
THINK-TANK

By Tommy Koh



IN 1997 and 1998, East Asia suffered a serious financial crisis that wiped out decades of progress. Unemployment and poverty increased substantially in countries such as Indonesia and the Philippines. The political leaders of Thailand, Indonesia, and South Korea lost their mandates and were replaced.

Although Thailand is an ally of the United States, it is not as important an ally as Mexico, which received a bailout from Washington to prevent a surge in immigration. To the disappointment of the Thai government and people, the US declined to come to its rescue. This may be one of the reasons why Thailand has drawn closer to China and has downgraded its relationship with the US.

The International Monetary Fund (IMF) worked closely with the US Treasury in the rescue of Indonesia, Thailand, and South Korea. The IMF prescribed bitter medicine: distressed financial institutions would be allowed to fail in order to avoid a 'moral hazard'. The idea that allowing banks to fail would pose a systemic risk was brushed aside. In the case of Indonesia, the IMF prescription went beyond the financial crisis. It forced then-Indonesian President Suharto to accept a humiliating wholesale reform of the country's political economy. Many Asian leaders suspected that the IMF-US agenda in Indonesia actually included regime change.

The US, supported by Europe, lectured Asia during the 1997-1998 financial crisis. Asian governments were told to avoid becoming overleveraged, to strengthen regulations, to increase transparency, to reduce the role of the state in their economies and to pursue responsible monetary and fiscal policies.

When speculators mounted an attack on the Hong Kong dollar in an attempt to break its peg to the US dollar, the Hong Kong government decided to intervene. The thought leaders of capitalism in America, such as the late Milton Friedman, condemned Hong Kong. But many Asian leaders and thinkers applauded.

Some of my American and European friends were unsympathetic during the Asian financial crisis. A few even gloated over Asia's misfortunes, displaying some of the West's worst prejudices towards Asia. Some went so far as to pronounce 'Asian values' dead. Nobel laureate Paul Krugman declared that the East Asian miracle was a mirage. He famously compared Singapore Airlines with Aeroflot.

A decade later, fortunes have been reversed. Asians have watched the Western financial crisis - including the collapse of Lehman Brothers and staggering government bailouts in the financial sector - with disbelief. The crisis in America spread rapidly to Europe, where governments had to nationalise or inject capital into banks to prevent bankruptcies. Two European countries, Iceland and Hungary, have sought the help of the IMF.

Unlike their Western counterparts a decade ago, no Asian leader or thinker has gloated over the misfortunes of America and Europe. Instead, Asians, led by the Chinese and Japanese, have tried to be helpful where possible and where our help is welcomed. We realise that we live in the same global village, and when the mansions of the two wealthiest families are on fire, the prosperity and security of all are threatened.

So, what lessons can be learnt from these two crises?

# First, be humble and refrain from lecturing. It is always easier to dispense advice than to follow one's own advice. I would respectfully point out that the US did not practise what it preached. It is overleveraged at all levels. Its regulatory structure is weak. Its financial products, especially the securitised products, lack transparency. It has not pursued responsible and prudent macroeconomic policies.

# Second, practise the virtue of thrift and follow the simple rule that one should live within one's means. Thrift has largely disappeared in America. Households save only 2 per cent of their income; the average American household has nine credit cards and a debt of US$17,000 (S$26,000); the US government owes the world more than US$10 trillion. America has become the world's largest debtor nation.

# Third, we must find the courage to confront our problems rather than point the finger at scapegoats. Instead of facing up to America's problems of low savings and overconsumption, some US leaders are blaming others. For example, Federal Reserve chairman Ben Bernanke has attributed the current financial crisis to 'global imbalances' and the 'excessive savings' of Asia. Strangely, we Asians get blamed when we have too much debt as well as when we have too much savings.

# Fourth, it is to be hoped that this crisis has diminished the attractiveness of Wall Street's style of capitalism. Unfortunately, that 'greed is good' culture has infected some Asian countries. Excessive pay for senior management, for example, has become fashionable in certain parts of Asia. This is not consistent with our communitarian values or our emphasis on team work and equity.

# Fifth, the latest crisis has reinforced the fact that global economic and financial power is slowly and ineluctably moving east. This makes forums such as the G-7 and G-8 moribund. Without the presence of China and India, these forums do not reflect the realities of our contemporary world.

# Sixth, we must stand united against protectionism. The big lesson from the Great Depression is that protectionism is not the cure. It will lead to trade wars and economic disaster.

The writer is chairman of the Institute of Policy Studies. Think-Tank is a weekly column rotated among eight leading figures in Singapore's tertiary and research institutions. An earlier version of this essay appeared in What Matters, a publication of McKinsey and Company.