CORRECTING THE CRISIS
January 12, 1998
The NewsHour with Jim Lehrer Transcript
For months, Asia has been hit by waves of economic woes. Most recently the collapse of Peregrine Investment Holdings Ltd., a major financial house, sent Hong Kong shares falling to their lowest levels in almost three years. Does the region have the resources and leadership to pull itself out of this economic crisis? Following a background report, four experts discuss Asia's ability to heal itself.
STEVE LEVINSON, ITN: The financial brain power of the West was deployed throughout Asia today. Michel Camdessus, head of the IMF, was on the stump in South Korea. His deputy, Stanley Fischer, was dispatched to reassure President Suharto of Indonesia. Larry Summers, America's deputy treasury secretary, was sent by Bill Clinton to Singapore, and Defense Secretary William Cohen's mission was to give the Malaysians a hug. Also on hand, crisis management veteran Henry Kissinger. It was damage limitation on a vast scale. The aim: to reassure the markets that Asia's problems of too much debt and fragile financial systems can be contained. To some extent, it worked. Wall Street was steady tonight, and London recouped half of its early losses. But deep-seated problems remain.
A RealAudio version of this segment is available.
January 9, 1998:
Indonesia's reluctance to follow the IMF plan sends markets tumbling.
December 30, 1997:
Bankers world-wide announce support for South Korea's ailing economy.
December 29, 1997:
The Boston Globe's Asia bureau chief discusses the region's economic crises.
December 26, 1997:
South Korea is promised an emergency $10 billion loan by early January.
An Online Forum on the economic situation in Asia.
November 26, 1997:
What did the APEC summit accomplish?
November 25, 1997:
Asia's leaders search for answers at the APEC meeting in Vancouver.
November 24, 1997:
The APEC conference shows a grim economic forecast for Asia.
October 28, 1997:
The instability of Asian stocks causes worldwide fluctuations.
Browse the NewsHour's coverage of Asia.
International Monetary Fund
TREVOR GREETHAN, Merrill Lynch: People are taking this very, very seriously. And they do think it can impact places outside of Asia. Everybody's really worried that the crisis in Asia is worsening.
STEVE LEVINSON: As global trading grows increasingly difficult to isolate regional economic crises, in the last few days the collapse of a debt-ridden Indonesian taxi company, inappropriately named "Steady Safe," has had catastrophic international effects. Much of his borrowing came from Peregrine, a major Hong Kong investment bank. Peregrine had somehow lent a quarter of its capital to Steady Safe and today went into liquidation. Staff were left to pack up creep out of their building, unsuccessfully trying to avoid the cameras. The result: meltdown in Hong Kong's stock exchange, which dropped nine percent amid fears of further financial failures. The long-term issue for Wall Street and other western markets is the extent to which American and European economies will slow in response to the problems in Asia. But that question cannot be answered until the Asian crisis is brought under control.
JIM LEHRER: Now, an overview. It comes from former Vice President Walter Mondale, who was U.S. Ambassador to Japan during President Clinton's first term; Winston Lord, who served in five administrations, most recently as Assistant Secretary of State for East Asian and Pacific Affairs; Michael Armacost, former ambassador to Japan and the Philippines, and former undersecretary of state, now president of the Brookings Institution; and Paul Krugman, an economist at MIT whose most recent book is entitled "Pop Internationalism."
Vice President Mondale, President Clinton said today economic stability can be returned to these Asian nations if they are willing to take the steps to do it. Do you agree with that?
WALTER MONDALE: Yes. That's a big part of it. The collapse in Asia occurred because of some very deep systemic failures, particularly in their banking system, the failure to disclose clearly in times, so that these problems were contained. And in order to help Asia, the Asians must help themselves to reform, and basically restore confidence in those markets. That's basically what the IMF is doing. That's what these officers are doing during their trip throughout Asia. The United States has a deep stake in all of this. We have to be heavily involved, but fundamentally, it depends upon those nations and what they do.
Does Asia have the power to fix the crisis themselves?
JIM LEHRER: Mr. Krugman, do you agree, they have the power to fix it themselves?
PAUL KRUGMAN, MIT: Probably. That's if they have the political will. And, unfortunately, that doesn't depend only on the current leadership. What we're finding now is in places like Indonesia there's a certain crisis of legitimacy of the people who are currently in charge. After all, it was their mistakes, their responsibility, and in some cases their corruption.
JIM LEHRER: This was President Suharto and his family?
PAUL KRUGMAN: That's right. For example, that taxi company that had trouble had a family connection. Suharto's daughter was involved in the business. So it's not just a question of getting the leaders to do the right thing. It's also getting the people of the countries to do the right thing, getting them behind the leaders. And that's going to be a lot trickier.
JIM LEHRER: Now, Mr. Lord, on that issue alone, former Secretary of State Kissinger said the other day, and I think he repeated it today, and others have said the same thing, that you've got to be careful--if you push these countries too hard on reform, it could cause social and political unrest that could even be worse than the economic problem. What's your read on that?
WINSTON LORD, Former State Department Official: Well, I frankly think in their own self interest they have to be encouraged to take the kind of reforms that our two previous speakers have already mentioned. So there's--obviously, we have a huge stake out there, as Amb. Mondale has said, and I think our basic strategy is sound; namely, first looking to the countries themselves to reform their banking system, to have greater transparency, and to be more responsible, so as to restore confidence, then behind that, working with the IMF and other countries, to give them some temporary relief. We have a stake in this; we should be helping, but the countries have to take the first step and the international community, along with ourselves. So I think if they don't take these kind of steps, you're going to get instability. And I think there has to be a certain degree of encouragement and even pressure.
JIM LEHRER: Do you agree that pressure may work on--Mr. Armacost--do you think pressure form us and the IMF and the rest of the world, it's got to get these countries to do it themselves?
MICHAEL ARMACOST, Former State Department Official: A lot of the pressure's coming from the marketplace, and that's helpful. Certainly, if you've got external pressure, it's better to do it through an international organization, but in one way the biggest problem is in Japan, because they're the second biggest economy in the world, and in many ways it's their slow growth that makes it difficult for them to absorb exports from other countries in the region. And it also makes them more reliant on exports themselves to get out of the seven-year slump. So without the IMF involved, the question is whether or not the Japanese can step up to their own institution on other problems. And I think there's a constituency for that in Japan because, obviously, people want to grow faster. And Japanese growth would serve their own interests and serve the interests of the region and clearly our interest as well.
JIM LEHRER: But, meanwhile, you say they're not in a position to help Indonesia, Thailand, Malaysia, Hong Kong, and the others who are in trouble?
MICHAEL ARMACOST: They are contributing to the support for IMF programs, but in terms of their role in the region, the biggest contribution they could make would be by absorbing a larger portion of the exports of those countries. They've encouraged export-led growth and in the process incurred, I think, a certain obligation to help absorb those exports that other countries in Asia can now contribute.
JIM LEHRER: Amb. Mondale, do you think the Japanese are willing to do that, to play that hard--that strong--large a role?
WALTER MONDALE: Let me say I'm praying that they do. Japan is now in a recession, or a near recession. Her financial institutions are very fragile with all kinds of bad debts. Japan is not providing the markets for the region or for us, for that matter, as Mike Armacost just mentioned, and Japan's economy is larger than all the other Asian economies put together. One of the reasons that Mexico was able to get out of the deep crisis she was in, was that she was able to export her products to a very prosperous and growing America. Japan has to provide that role now in Asia. And I know that we've been pressing her hard to put in place a much stronger stimulation package, to take steps to reassure the safety of their sound financial institutions, and to deregulate to provide more openness, so that we can get into her market more easily. I think this is also in Japan's distinct best interest, but this is a big question, and I hope that Japan will move and move quickly.
JIM LEHRER: Mr. Krugman, how do you see Japan's role and whether or not they--even if they have the will, do they have the ability to solve this and play that large a role?
Does Japan have the "moral capital" to lead Asia?
PAUL KRUGMAN: Japan is a huge economy, very wealthy, doesn't have foreign debt. It's got a domestic economic problem, which they had been mysteriously unwilling to come to grips with, but they certainly have the resources to play this role. The question is whether they have the moral leadership to--the moral capital, if you like, to play the role. Since they haven't reformed themselves, they're not a very credible player in telling other countries to reform. In a way they've been through the Asian crisis, the stock market crash, the land market crash, you know, a number of years ago, and they've been sitting with the luxury of being a much wealthier, stronger economy. They've been sitting and really not responding to it for a long time. They are, I think, a supplier of money, but unfortunately other countries are going to have to be suppliers of leadership during this crisis.
JIM LEHRER: Now, why have they escaped the domino effect from these other countries thus far?
PAUL KRUGMAN: Mostly, they are very big. Again, you really have to think about just how huge their economy is--I think in dollar values about seven times as big as China. And they are also--well, everybody knows that they have the resources to bail out their own banks. Unlike South Korea or Indonesia, if the Japanese find themselves with a banking crisis, they actually do have the money, they do have the resources to deal with their own problems. And that means that people don't launch a run on Japanese banks the same way they will in Hong Kong, because you know that in the end the banks will be saved. As I say, they have the resources, but we've been waiting about six years for them to do something about themselves.
JIM LEHRER: Mr. Lord, speaking of political will, how do you read the political will in Thailand, in Indonesia, in South Korea to step up and do what they must do?
WINSTON LORD: Well, I think it's evolving. Thailand hesitated at first. They got a new government, and now they seem to be acting much more responsibly. The same with South Korea, where the new president, the coming president, flirted with rejecting IMF conditions and then retreated, or now is making all the right moves and all the right comments. And so I think in Thailand and South Korea they're clearly on a more positive path. Indonesia will have to see. President Suharto's budget of a few days ago sent the market reeling, but I gather the IMF deputy today said his talks were very constructive. Larry Summers and my successor, Stan Roth, will be meeting with Suharto tomorrow. And I think you're going to see announcements later this week by Indonesia that will be reassuring. So the market, as Mike Armacost has said, is the great discipline here.
In addition, in terms of any risk of reaction to U.S. pressures we talked about before, the combination of the market, the fact that it's the IMF and other countries will spread that around, but we can't totally avoid that. We are the largest country; we have to show leadership; and I believe the risk of inaction is much greater than the risk of action.
Why the international fuss?
JIM LEHRER: Mr. Armacost, starting with you, explain the U.S. stake in this, the chain reactions, and why this is so important to the United States, why Larry Summers was over there, why the President was on the phone to Suharto, why the United States is so much involved in this.
MICHAEL ARMACOST: Well, from a security standpoint, all the great powers' interests intersect there. It's the region in which we have our largest and most rapidly growing trade, or at least that was true until very recently. Our multinational companies have huge stakes that they've established through their direct investment in the region recently.
JIM LEHRER: Not only as customers, but they also have manufacturing plants and everything else over there.
MICHAEL ARMACOST: Absolutely. And of course, we are still involved in a residual way in a couple of Cold War problems that remain dangerous in Korea and Taiwan Straits. So we've got big national stakes riding on this, and of course, the implications in a global economy can't be stopped. Slow growth there--I mean, slower growth here--it means some pressure of a deflationary sort in some sectors of our economy certainly. It raises potential problems in the Treasury's market, though I think those have been exaggerated. Most importantly, it foreshadows a huge dramatic increase in our current account deficit. That means merchandise trade imbalance grows even more.
JIM LEHRER: Explain why.
MICHAEL ARMACOST: Because our economy's growing; they're reliant on the export sector.
JIM LEHRER: So--
MICHAEL ARMACOST: The wealth effects have meant that they've got weaker currencies; they've got stock markets in the doldrums; credit's tight; government budgets are austere. So they don't have demand at home, and so they'll export their way out of this crisis.
JIM LEHRER: And they sell their products at a cheaper price.
MICHAEL ARMACOST: We're the only country providing an engine for the world's economy, and Europe's picking up a little bit, but we're the primary target, and that's good for us, because we can use those products; they're cheaper; they check inflation; they lower our costs; but we know from the inability of the administration last fall to get fast track that it will bring some political challenges for us too. That's the--
WINSTON LORD: Jim, if I might intercede in that--
JIM LEHRER: Sure.
"This hits Main Street as well as Wall Street..."
WINSTON LORD: --in terms of our stake here, as Mike has said, it's huge. Our exports have grown 50 percent since 1993, and 1/3 of that growth has been in Asia. Eleven million jobs depend on exports, one fifth of all manufacturing jobs. One third of our exports last year were to Asia. This is crucial in economic terms, plus the security dimensions that Mike mentioned, so we're not just doing a favor to our Asian friends. This hits Main Street as well as Wall Street, and it is very important to the average American interest, whether it's pension funds or investment in the stock market, or the overall economy and jobs and exports.
WALTER MONDALE: Could I make one point here?
JIM LEHRER: Sure.
WALTER MONDALE: As long as we're toting up this list of America's distinct stake in solving this problem. And that is if these problems get bad enough, it could trigger political and social collapse and revolution. We hope none of that will happen, but it's this sort of thing that can produce that. And that can produce political and security challenges that history has taught us in Asia can be very dangerous to the United States.
JIM LEHRER: Where are the most vulnerable spots?
WALTER MONDALE: I think you'd start right now in Indonesia, where there's always been a deep fissure in that society between the Chinese ethnics and the others.
JIM LEHRER: Because the Chinese are three percent of the population.
WALTER MONDALE: Right.
JIM LEHRER: But they own about 60/70 percent of the goods and--
WALTER MONDALE: Right. And there's been reports today of tensions of that kind beginning to arise, reports out of Singapore that they're afraid that there could be a spill over into Singapore. We hope that the Korean thing will go all right. Temporarily, it's encouraging, but you could--you know, they have a democracy now--but it has--it's not all that stable--established. I think they're going to be all right, but we shouldn't be testing these things. To the extent that we can solve these economic problems we're also contributing to the kind of basic political stability that is so important to us as well.
PAUL KRUGMAN: If I could say something here--
JIM LEHRER: Yes.
PAUL KRUGMAN: Only seven months ago, everyone was telling these countries how great they were. Only seven months ago they were on top of the world. Now we're suddenly saying to them, you're a mess, you have to change everything you do, you have to change all your way of doing business, everything that you were doing is wrong. They wouldn't be human if they weren't suffering a pretty bad psychological backlash. We've got to do something to try and get them through this.
Why didn't anyone see the Asian economic crisis coming?
JIM LEHRER: Mr. Krugman, that's the question I was going to ask you. Why is it that nobody saw this coming? This is being treated like a--you know, like a storm in the Pacific Northwest or in the Northeast today, rather than as something that people, economists as well as political people, saw coming.
PAUL KRUGMAN: Part of it was the Asians did invent a new kind of crisis, I think. This is really something--we didn't know--there are usual things that you look at for a crisis. You look at government budgets; you look at things that are basically on the books. And this turns out to be an off-the-books crisis. It's all the hidden liabilities of institutions that weren't exactly publicly guaranteed, that weren't exactly not publicly guaranteed.
JIM LEHRER: You're talking about like banks, brokerage firms--
PAUL KRUGMAN: Right. Finance companies, and all of them somehow or other run by the president's nephew. It's a lot of--it's a lot of--a culture in which the line between what is private and what is public was not well drawn, and we're not used to that. We weren't used to it. We didn't know how to read the statistics. We didn't have statistics. We weren't looking at the right things. The other thing is, look, a lot of people were--it's very hard to argue with success. These economies were doing so well for so long that someone who said, gosh, you know, I see some risks out there tended to be argued down, you know, just take a look at the place; take a look at all the construction. And so people were lulled into a false sense of security.
JIM LEHRER: Mr. Armacost, when this thing is--let's say that this thing is solved, that it doesn't get any worse than it is as we sit here tonight, is it ever going to be back to where it was? Are the tiger economies ever going to return?
MICHAEL ARMACOST: Well, I think one of the transitions that take place is away from reliance on the main banks to finance growths toward the equity markets. And the main bank system was one in which the decisive influences over the allocation of credit were made kind of behind the curtain. The bankers would talk with businessmen, politicians, bureaucrats, and sometimes less reputable elements of society, but those were confidential relationships. The equity markets come in and they in order to inspire confidence require disclosure, require transparent regulatory arrangements, and that's a different system. And I think part of getting out of this crisis requires movement on those fronts. These kind of structural reforms are part of the IMF packages, I believe, so they went to take place overnight. But if getting out of the crisis means solving some of the institutional weaknesses, then we'll be in a better position to do business there, because we're accustomed to doing business that's transparent.
JIM LEHRER: But you agree with Mr. Krugman that we told them it was great there as long as it was--everything was fine, but now in order for them to save themselves, they're going to have to change more than just a few minor items?
MICHAEL ARMACOST: Well, we've been involved for some year with the Japanese and trying to promote some structural adjustments. Both Fritz Mondale and I bear some scars for that. So this isn't quite a new thing, but it is true that they did the fundamentals well; we tend to assume growth was both self-sustaining and like could it be sustained for a long time. They've run into some problems. I think these are these financial instability problems that the company--robust growth, rather than the harbinger that Asia's going to fall apart--but only time will tell.
JIM LEHRER: All right. And speaking of time, we have to go. Gentlemen, all four, thank you very much.