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APEC: A FIREFIGHTERS' SUMMIT
Elusive Search for an Economic Viagra
by B.Raman
A significant feature of the forthcoming Asia-Pacific Economic
Co-operation Forum (APEC) summit at Kuala Lumpur is the almost total absence of the type
of hype about the coming millennium being the Asia-Pacific millenium, which used to
precede the previous summits.
There is an air of embarrassment over the forthcoming summit partly due to the Dr.Anwar
Ibrahim controversy in Malaysia and partly due to the continuing downward-spiral of the
economies of the Asian members and Russia. The speed of the downward spiral has been
reduced, but there is as yet no sign of its being halted and reversed. On the contrary,
signals from China indicate that behind its façade of continuing growth, but at a reduced
rate, serious economic trouble may be brewing.
Neither Dr.Anwar Ibrahim, the sacked Deputy Prime Minister and former Finance Minister of
Malaysia, nor Dr.Mahatir Mohammad, the Prime Minister, has come out well in the
controversy which has led to public demonstrations in Malaysia for political reforms and
has been played up out of proportion by the Western media and analysts. Dr.Mahatir, like
his compatriots, is a man of tremendous self-pride and the West never forgave him for his
habit of calling a Western spade more than a spade. The West sees in the present
controversy an opportunity to put any Asian leader, who dares to challenge Western wisdom,
in his or her place.
Dr.Anwar , the party-designated would-be successor of Dr.Mahatir, was an ambitious man in
a hurry. He tried to exploit the economic troubles of Malaysia since July last year to
have the credibility of his Prime Minister weakened and his authority undermined, while
overtly continuing to express his solidarity with Dr.Mahatir. In this, he had the strong
support of the Western elements anxious to have Dr.Mahatir removed. No leader, in the
Government or the private sector, could have tolerated the type of devious tactics
allegedly used by Dr.Anwar to have the ground cut from under the feet of his leader.
If Dr.Anwar so strongly felt about the need for political reforms as he and his followers
are now claiming after his dismissal and arrest, all he had to do was to quit the Cabinet
and go to the Party and the public with his agenda.
Dr.Mahatir was totally justified in sacking from his Cabinet an allegedly disloyal deputy,
but he has unnecessarily put himself on the defensive by his subsequent arrest and
prosecution of Dr.Anwar in a manner, which has given the impression of vindictiveness.
The unnecessary controversy created by the West, Australia, New Zealand, and apparently
even the Philippines and Indonesia, over the Anwar Ibrahim affair, has diverted the
attention of the summit from the more serious economic problems, which should have been
engaging its undivided attention.
APEC Government leaders used to attend the previous summits as dreamy-eyed, far-sighted
globalisers and reformers determined to make the new millennium that of this region. They
would be gathering for the forthcoming summit as shame-faced fire fighters still
struggling to sort out the economic crisis created by the Governments and the private
sector of the region.
From a layman’s perception—as distinguished from that of economic
experts—the basic cause of the crisis was the self-defeating hype of the economic
advisers and analysts about the prospects for continuing rapid growth. The seeds of the
crisis were sown during the boom years of 1992-95.
The hype about the likelihood of a huge demand for luxury office and residential
accommodation from foreign multinationals moving into the region in a big way led to
frenzied real estate construction with money recklessly borrowed off-shore. The result has
been that countries such as Thailand and Indonesia have more luxury accommodation than
they would need for another five years and their owners have not been able to repay their
debts.
The similar hype about the prospects of the Indian and Chinese markets opening up in a big
way following India’s post-1991 import liberalisation and China’s allowing
foreign and joint ventures to sell part of their production in the domestic market led to
a mad expansion of existing manufacturing capacities, again with short-term off-shore
borrowings.
These demands failed to materialise due to the conservative purchasing habits of the
Indian and the Chinese middle class and there has now been a belated realisation that in
India and China, an increasing ability to purchase due to better earnings does not
necessarily lead to an increased desire to purchase.
The result: Excess capacities in many industries, particularly for electronic goods and
cars, mounting inventories and price deflation. The majority of the bank defaulters are
real estate companies, manufacturing units and share market speculators.
The way the crisis in the banking sector was sought to be dealt with under IMF pressure
has created a not unjustified impression amongst the common people that the objective of
the exercise was to protect the interests of those in the West and Japan who had lent
money for these unwise ventures, with no regard to those of the ordinary depositors.
This has shaken the confidence of the people in banks and other financial institutions.
The people of the region continue to be thrifty savers, but they no longer put their money
in banks. They either keep their savings at home or deposit them in post office savings
banks or other similar institutions of the Government, which though inefficient, are, in
their perception, more dependable.
At a time of falling demand for most goods, that for combination and
other steel safes has been increasing and supply has not been keeping pace with the
demand. In Japan, during the last one year, 52 per cent of the savings has gone to the
post office savings bank which now holds more deposits (US$ 1.74 trillion) than any bank
or financial institution anywhere in the world.
During the student riots which preceded the exit of former President
Suharto of Indonesia, street plays were staged projecting banks as places where the small
people place and lose their deposits so that the big people can prosper by borrowing and
not repaying.
Unless and until this crisis of confidence is resolved, economic recovery would continue
to be delayed. Under IMF and Western pressure, the affected countries except Malaysia have
relaxed or removed restrictions on foreign equity participation in banks and on
acquisitions and mergers. The expectation that this would lead to a rush of foreign buyers
thereby facilitating recapitalisation has been belied.
The hesitation is understandable because no foreigner would like to acquire or start a
bank when people are afraid to deposit their money in banks and when the collateral coming
with the acquired banks consists of buildings, manufacturing units and cars with no buyers
and junk shares.
While the first priority has to be to restoring the ordinary people’s confidence in
the financial sector, which is the core of any economy, the second priority, which has not
yet received adequate attention, has to be to what a columnist has described as creative
destruction of the excess manufacturing capacities built up in belied anticipation of a
torrential demand from India and China. Though some restructuring has been initiated in
South Korea and Thailand, there is still wishful thinking that demand would pick up in the
near future and that the expanded capacities could come in handy and hence should be
retained. Hence, the slow pace of the restructuring.
Some seemingly positive indicators are not as positive as they are projected to be. The
increase in trade surplus and in foreign exchange reserves is more due to the drastic
reduction in imports of machinery, spare parts and raw materials than due to a substantial
increase in the value of exports. Exports have definitely increased, but in volume only
and not much in value.
Due to the collapse in the value of the local currencies, to be able to earn the same
foreign exchange as before July, 1997, the regional countries have to export thrice as
much in volume as before July,1997. Such an increase is hard to achieve considering the
fact that 40 per cent of the exports of the ASEAN countries was amongst themselves and no
new markets or expansion of existing markets have been emerging.
During the boom years, countries such as Thailand, Indonesia and Malaysia became
manufacturing centres, but their production was based more on assembling components
imported from Japan and the West and their dependence on imported raw materials was great.
The increased cost of imported components and raw materials consequent on the loss of
currency values has further diminished the prospects for an early recovery.
The ability of these countries to arrest and reverse the contraction of their economies
would also depend on the continuing strength of the Chinese economy and the ability of the
Chinese authorities to resist the pressure for a further devaluation of their currency in
order not to lose on the export front to the cheaper exports of the ASEAN countries.
Compared to the difficulties faced by Japan, South Korea and the
ASEAN countries, the Chinese economy, at least its façade, is much stronger, but not as
strong as before. The data for the first nine months of this year released by the Chinese
State Statistical Bureau are self-explanatory: Exports increased by 3.9 per cent only as
against 21 per cent last year and the GDP grew by 7.2 per cent as against an anticipated 8
per cent. Foreign Direct Investment flows are still high (US $ 31.4 billion), but seemed
to have reached a plateau.
Despite these seemingly reassuring figures, anxiety over the continuing strength of the
Chinese economy is increasing. For one thing, there is growing skepticism about the
correctness of the Government’s economic data. Even in the past, a small number of
experts had questioned Chinese claims of a double-digit growth. The Chinese authorities
were not able to satisfactorily explain as to how in a decade of plus 8 per cent growth,
there was no proportionate increase in the electricity consumption and domestic freight
movement.
This skepticism has now been further strengthened by unexplained discrepancies in the
officially-released figures regarding China’s foreign exchange reserves. Its budget
for 1997 showed an unreconciled amount of US $ 22.7 billion in its foreign exchange
earnings due to accounting "errors and omissions"—that is, 2.5 per cent of
its GDP. The figures for the first nine months of this year show an FDI flow of US $ 31.4
billion and a trade surplus of US $ 35.3 billion.
Even if one presumes that most of the FDIs came as machinery and spare parts and not as
cash, the foreign exchange reserves should have risen by at least US $ 30 billion plus.
But they increased by US $1.1 billion only to US $ 141.1 billion.
This would indicate either of two reasons: fudged statistics or Chinese businessmen are
not bringing back into the country their export earnings due to fears of an economic
crisis next year. Fears of such a crisis have been further
fuelled by the collapse of at least two international trust and investment corporations in
the Guangdong province bordering Hong Kong because of their inability to re-pay
short-term, off-shore loans. What used to be projected as the Chinese economic miracle was
essentially a Guangdong-Fujian-Shanghai miracle helped by a torrent of FDIs from the
overseas Chinese of Hong Kong, Taiwan and South-East Asia, who even now account for
two-thirds of the FDI flows. These flows were funneled through such corporations.
The reasons for their collapse are the same as those for similar collapses in Thailand and
Indonesia before July 1997. Excessive investments in real estate and in expanding
manufacturing capacities and in stock market speculation (in the so-called red chips in
Hong Kong ,that is, shares of Chinese companies supported by the Government), with
short-term, off-shore (partly from overseas Chinese businessmen) borrowings. These
investments failed to produce adequate returns resulting in repayment difficulties.
To calm the nervousness of foreign lenders, the Chinese Government has assured its
protection to the money lent by them, provided all these borrowings were accompanied by
the required documentation.
This caveat has aggravated the nervousness of foreign financiers
because most of the loans from overseas Chinese financiers were given to these trust and
investment corporations and other companies with very little accompanying documentation.
It was the attempt of the Thai and South Korean authorities to fudge their data regarding
the working of banks, foreign trade and foreign reserves and to conceal the difficulties
faced in 1996-97 which contributed to the sudden collapse of their economies when truth
ultimately came out. A similar fate may befall China next year.
The search for an effective solution to the problems of the regional
countries has so far failed to produce results due to a lack of clinical objectivity in
analysing the root causes and in working out solutions. It is doubtful whether the APEC
summit would succeed whether others have failed so far.
7-11-98
(The writer is a former Additional Secretary of the
Cabinet Secretariat,Govt.of India and presently Director, Institute For Topical
Studies,Chennai)
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