by Piyaporn Hawiset
May 13, 1999
Malaysian Prime Minister Mahathir Mohamad had just finished an unscheduled stay in hospital in April 1999. His former deputy was put in in jail. Capital controls imposed in September 1998 remained in place, albeit after some revisions, with no clear timetable for their elimination. Kuala Lumpur is as overbuilt as ever (as most of Southeast Asia) and the restructuring of the country's debt-heavy conglomerates is a messy work-in-progress.
Yet Malaysia was hot--so hot that the government planned to sell $2 billion of bonds to the same investors who were screaming just a few months previously about Dr. Mahathir and his supposedly hare-brained economic policies.
In Hong Kong, stocks were soaring. Could this be the same stockmarket that was crippled after the government bought bushels of blue chips in 1998 in a complicated attempt to defend the local currency? In South Korea, the government was so worried that foreign demand for won-denominated bonds and shares will push the currency higher that it ordered a temporary halt to new issues.
Across Asia, there is not much concrete evidence of greater transparency in corporate boardrooms or in governments full of corrupt officials who have incestuous relations with business, or of more rights for minority shareholders, a devotion to financial conservatism, a sharper focus on core businesses or any of the other things investors said were absolutely necessary before they would buy another share. Yet they do not seem to have learned anything and they are buying with abandon. Greed sure does strange things and makes seemingly rational and careful people behave irrationally and with abandon.
At the Asian Development Bank annual meeting that ended on May 2 in Manila, the cocktails and canapes were flowing. Fleets of luxury sedans ferried bankers from reception to corporate reception. There was no more talk of cutting off recalcitrant borrowers from the international capital markets.
This is all very good news--and extremely worrying. Good news because the money is flowing again. Extremely worrying because financial markets and commercial banks are proving their critics right. At the height of the Asian crisis in late 1997 and early 1998, defenders of the global financial system insisted that Asia was wrong and the bankers and traders were right. The more evangelical free-market types, Americans in particular, saw this as an unfortunate but just punishment for the region's sins of corruption, nepotism and cronyism which fed the bubble that in the end burst. The financial markets, we were told, are impersonal, rational and governed by a higher law.
So what are the markets telling us now? One possibility is that the markets are saying: "Oops, sorry, we made a mistake." A second is that hard-core macroeconomists are right and central banks can turn economies and markets on and off like water taps by adjusting money supply and interest rates. A final and more convincing possibility is that financial markets, for all the pretensions of market participants, simply don't work very well, largely because the average market participant is a highly strung, emotional and greedy creature with the attention span of a mosquito--particularly if it looks like quick money can be made.
There are reasons to wonder whether banks are riddled with deeper flaws than the stock and bond markets. Commercial banks are supposed to be more serious than those flighty traders. If only it was true. The Asian crisis and most previous crises have shown that international commercial banks are just as likely to jump off the cliff like lemmings as nerve-jangled traders. This herding behaviour is what turns a financial problem into a financial panic and a banking problem into a banking crisis. If people kept their cool there would not be the classic cascading effect of a possibly manageable problem turning into a panic or crisis.
As long as investors and bankers remain fickle, fixing financial markets and international banking will be difficult. That's why the international community has made so little headway with repairs despite repeated financial disasters. After Mexico blew up at the end of 1994, there was a big push to "fix" the global financial system. That effort fizzled out as soon as foreign capital started flowing into Mexico again. And that is precisely why the apparent return of exuberance in many Asian and other emerging financial markets is worrying. At the World Bank and International Monetary Fund meetings in Washington in April 1999, one could almost see the wind going out of the sails of the latest effort to design a new global financial architecture. In Asia, domestic financial reform may slow if the money flows continue. The fact is that the Asians did not learn anything about their past behaviour and are not interested in doing so. Greedily reaping wealth is the only interest--at any cost to others. The Asian attitude is always to chase short-term benefits and forget about the long term. It is exactly this attitude that leads to disasters--be it financial, economic, tehnical or social.
Arguing that reforms are not needed because the money is flowing again misses the point. The idea is to repair the damage caused by this crisis and prevent the next one. That seems a reasonable request. The financial sector has more emergencies and gets more help from taxpayers when it self-destructs than any other industry. There are good reasons for that: Modern economies cannot function without financial systems. But in exchange for that special status it is fair to insist on reforms--such as shifting more of the enormous costs of panic to lenders--that could help smooth out the financial system's extreme mood swings. It is good news for Malaysia if it sells $2 billion of bonds. It is bad news for Malaysia and the rest of us if the global financial system and Asian governments declare the crisis over and put reform in cold storage until the next panic. Reform is aimed at creating transparency and a sounder economic system. Putting it on hold means a return to corruption, nepotism and cronyism. This means an outward semblence of wealth while the masses and, therefore, the countries of the region remain inherently poor and backward.