Less than a year ago, global capitalism was in danger of collapse. Asia was in the midst of a crisis with Malaysia defecting from the global financial system by erecting capital controls, Indonesia still in deep trouble and Japan’s Banks insolvent and incurring huge losses. The situation got so desperate that the Japanese government had to come to the rescue of their banks by capital injections or the nationalization of these banks. Outside Asia, Russia was unable to pay up their foreign debt and had to default on their treasury bills. Brazil and the rest of Latin America were nowhere near safety either. Banks worldwide became extremely adverse to risks. Large hedge funds, like Long-Term Capital Management, nearly went bankrupt.. The whole global financial system was really seeing a possibility of a breakdown.

However, after the Federal Reserve cut their short-term interest rates repeatedly 3 times in the previous year, markets around the world have recovered from a meltdown. Share prices in the U.S reached record highs and other markets benefited too with the outlook much brighter. However, the interest rate cuts were made to help Asia and other struggling economies and definitely not because the American economy was faced with prospects of slow growth. In fact, the American economy was ‘the envy of the world’ as put by Fed chairman Alan Greenspan. It had been growing smoothly and quickly for more than eight years, and had the highest productivity growth for decades after major restructuring and employment of technological advances. Unemployment and inflation were historically low at 4.3% and less than 1% respectively.

The fact is that the U.S and Europe have actually benefited from the Asian economic crisis. Although Asian economies have taken a beating, with Indonesia and Thailand plunged into hardships not seen since the Great Depression. However, these people were far from Europe and the U.S and their economic depression has only helped to keep inflation low in the European and American Economy by providing them cheap imports.

Although the European and American economies have not been victims of the Asian economic crisis, they cannot sit back and hope that they will continue to grow at the expense of others, as the happenings since the float of the baht have underlined and revealed several structural flaws in the global capitalist system they pride so much. They will have to keep the financial system in check to prevent the collapse of the system or else they too will suffer.

The world is now in fact one big global economy. Not only is there free movement of ideas, goods, services and capital. The system is characterized by the ability of capital to go wherever it wishes with relatively few restrictions. This has helped the improvement of technology, the development of better production methods and their adoption.

Before the Asian economic crisis came about, large amount of capital were pumped into emerging markets. The onset of the crisis however saw these funds flee the emerging markets, especially those in Asia. The funds ran out and found refuge instead in the American and European economies. This brought the stock markets in Europe and America to new highs at first with the injections of these capitals, and many thought this would help Asian economies recover. The Asian markets later recovered half their losses.

The desperation of some economies have driven them to defect from the global financial system. Indonesia’s and Russia’s economies faced a virtual meltdown although it was unintentional. However, Malaysia has purposely introduced their own measures to curb capital flight and temporarily prevented acute capital flight. This has only served to put pressure on other economies still keeping their market open. If Malaysia look good with their currency controls, other markets might be tempted to follow.

One more factor that did not help the global financial system from disintegrating was the mistakes that the International Monetary Fund made while trying to help the Asian economies. The IMF forced the borrowing nations to raise their interest rates in an attempt to strengthen local currencies but many argues it would only postpone their recovery.

The situation in Japan is really depressing. The Japanese economy has been stagnant for eight years and is now in recession. Since their economic bubble burst then, the banks have yet to solve their problems with non-performing loans. With the collapse of property prices, banks found their clients refusing to repay their debts but willing to leave their property for the banks to confiscate as the property prices have already plummeted. Many Japanese banks had aggressively lent out money without proper risk calculation and without a proper safety net. Yet, they are estimated to be hiding bad loans valued at more than a trillion yen. The Japanese government has lowered interest rates of its central bank to ridiculous levels, the lowest in the world at around 0.5% and lowered taxes to stimulate the economy. All these have however not yet taken Japan’s economy out of its stagnant state. With the onset of the Asian crisis. The Japanese government has had to rescue many big banks with the injection of public funds and by nationalizing a few of them, including Nippon Credit Bank.

I believe that worldwide, more financial discipline is needed and stricter regulations and supervision by central banks should bring this about. The risk estimation models in many banks are outdated and yet to be updated. This is one problem but the big culprits are still the lack of transparency and the presence corruption (cronyism).

To prevent capital flight from bringing out the worst effects on economies, an International Credit Insurance institution should be built to provide guarantees to those economies which risk the frightening possibility or capital flight.

March 7, 1997

Xu ShiChang, Desmond