THE ASIAN ECONOMIC CRISIS

by Fred Moseley

Professor of Economics

 

I think that the "Asian economic crisis" will turn out to be a major event of the 20th century - and into the 21st century. This is not just a little blip on the screen that everyone will forget about in two or three years. "Blip on the screen" is what everyone thought when the crisis first started in Thailand and Malaysia a year ago, but it keeps getting worse and worse, and spreading. It is certainly the most serious economic crisis since the Great Depression of the 1930s.

Most of Asia is already in a depression, with no end in sight. This depression is having devastating effects on its population. Unemployment is soaring and there is little or no unemployment insurance. The long slow gains in living standards over the last several decades of rapid growth in these countries are being wiped out within a year or two of deepening crisis. Poverty rates, which had declined significantly during the period of rapid growth, are likely to double or triple in the next few years, and could reach two-thirds of the population, according to some estimates. In some countries (e.g. Indonesia), workers who had migrated to the cities for jobs during the boom years are returning to the countryside in search of some way to subsist.

The Russian economy is experiencing almost a complete breakdown. Many workers have not been paid in months, and in some cases even years. More and more of the transactions are barter trades. Half of the food consumed is grown in small backyard plots, and most of the rest is imported on credit. And Russia has defaulted on its foreign loans, sending shutters of fear through financial markets around the world.

And there is an increasing danger that the depression will spread to Latin America - which in the last few years was finally starting to grow a little bit after the "lost decade" of the 1980s. Latin American governments are being forced by the flight of capital from their countries to adopt restrictive policies, which increases the likelihood of depression and another "lost decade". Brazil is the center of attention right now. If Brazil falls into recession (or worse), which looks more likely every day, then the rest of Latin America will probably follow. (Brazil is the largest Latin American economy by far.)

In other words, the "Asian crisis" is no longer just an Asian crisis. It is now a global economic crisis.

The spreading global crisis is already starting to change both government macroeconomic policies around the world and macroeconomic theory. Macro policies are changing from more restrictive policies to more expansionary policies and from laissez-faire to more government intervention. The US Federal Reserve Board lowered interest rates a notch last week, which will probably be followed by similar interest rate cuts by the European governments, in a coordinated shift toward expansionary monetary policy. More and more governments are starting to consider some types of controls on international capital flows (and some like Malaysia have even begun to implement such controls). Even the International Monetary Fund is relaxing its condition of tight fiscal policy in some cases (like Indonesia and Thailand). And the IMF is also considering some selective capital controls. In the present circumstances, governments can no longer afford to depend on free markets by themselves to solve the crisis. Laissez-faire is too risky. The world economy is increasingly perceived to be in a potential debt-deflation situation which could spin out of control - in a downward direction. Governments are increasingly being forced by the seriousness of the crisis to take some actions to try to resolve the crisis. How effective these actions will be is another - and very big - question.

The crisis also seems to be changing the way macroeconomists are thinking. The dominant trend in macroeconomics since the 1970s has been away from Keynesian theory and the need for government intervention and toward a revival of classical macroeconomics and a faith in the stability of free markets and the "automatic recovery mechanism" of a free market economy without government intervention. But now the pendulum seems to be moving back in the opposite direction, and very rapidly. It took decades for economists to slowly regain their faith in laissez-faire. But it has taken only a year of escalating crisis for many economists to lose faith once again in completely free markets (especially international capital markets) and to call for more government intervention.

The big question for the US economy is of course: will the crisis spread to our shores as well? How long can the US remain an island of prosperity in a world of depression? A similar question could also be asked about Europe - which also like Latin America has recently shown signs of faster growth after a decade of stagnation and double-digit unemployment. I will return in a subsequent article to this most-close-to-home question of the possible effects of the spreading global economic crisis on the US economy.

In conclusion, I would emphasize that these are historic events taking place before our very eyes, and that it behooves all of us to pay attention to these events and to try to understand them. It is also a good way to learn a lot about economics