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"Miracle" workers

Asia's extremity another excuse for government remedy

In the flurry of effort to rescue Asian economies ravaged by currency devaluations, the line of ambulance chasers gets longer every week. Financier and currency speculator ad libitum George Soros arrived on the scene with his own bailout plan shortly after the International Monetary Fund and the World Bank announced their multibillion-dollar remedies. Deputy Treasury Secretary Larry Summers and Defense Secretary William Cohen simultaneously toured separate countries in the region earlier this month to communicate official U.S. worries and emphasize the strategic importance of East Asia's once-roaring financial markets. Even as international efforts redouble to prevent widespread deflation or even depression, insiders are questioning if they have the right vehicles for change.

"It is easier to criticize in hindsight than foresight," a World Bank official told WORLD, "but I blame our own people. I blame them for not detecting this. We are the ones who called them 'miracle economies.'"

A 1993 World Bank study titled "The East Asian Miracle" hailed the "high-performing economies" of Hong Kong, Indonesia, Japan, Malaysia, the Republic of Korea, Singapore, Taiwan, and Thailand. Its praise for the countries' "reliable" banking practices was still being hawked when World Bank and IMF officials gathered for their annual meeting last September in Hong Kong. But the downturn had already begun. East Asian stock markets became a seller's domain after Thailand devalued its currency, the baht, in July. Within weeks these same officials would be meeting to figure out how to rescue these "miracle economies," which, vastly overextending their short-term credit obligations, found their currency values in freefall and investors pulling out.

Experts say the crisis is worst where state intervention into financial services-as opposed to regulation-along with corruption and cronyism have persisted in spite of existing democratic institutions. Those kinds of abuses were evident but overlooked.

"I fault the euphoria that overtook not only the World Bank and IMF but also Wall Street and the commercial banks," said the World Bank official, who spoke to WORLD on condition of anonymity because of the ongoing negotiations for government-backed loans to the affected countries.

IMF officials, the World Bank source said, have annual consultations with finance leaders in each of the countries now caught in a crisis. "They stayed in nice hotel rooms where the finance minister or governor of the central bank comes to meet them and give a handsome report. They took the figures at face value."

A confidential report released earlier this month to IMF's executive board in Washington acknowledged that even the agency's remedies are flawed. IMF demands in October that Indonesia raise interest rates as part of its recovery program may have contributed to the recent collapse of Indonesia's banking system. That directive conflicted with simultaneous IMF instructions that the government shut down 16 large, insolvent banks, according to a report in the Los Angeles Times, and seized up the already compromised system.

Both the World Bank and the IMF began with separate purposes in the aftermath of the Depression and World War II. They were formed to shore up shaky currencies and fund capital improvements through low-interest loans backed by member nations. Those purposes have gradually converged as the gold standard was abandoned worldwide in 1971 and market economies became global. "Our functions are separate but complementary," is how World Bank spokesman Graham Barrett describes the World Bank-IMF relationship. But the end result is essentially the same. Both agencies engage in extending low-interest loans, which amount to subsidies. The IMF's primary goal is to preserve currency rates and balance of payments in beleaguered markets. The World Bank funds capital improvements.

Even as the World Bank was advertising the "Asian miracles," it was loaning more low-interest money to the region than anywhere else. East Asia was the top beneficiary of World Bank loans in 1996. Foreign-aid analyst Bryan Johnson says that is why the current IMF- and World Bank-sponsored bailout packages will only lead to more dependency.

"History has not shown that they are able to effect change in these countries, and this encourages chances that there will be future bailouts in Asian markets," Mr. Johnson told WORLD. In separate papers written for the Heritage Foundation, where he is a policy analyst, Mr. Johnson charges that the IMF is "outdated, ineffective, and unnecessary," and he sums up the World Bank's effort to promote economic growth as "50 years of failure."

Mr. Johnson says the IMF should have closed its doors when the gold standard was relinquished in 1971. "Instead it reinvented itself like most bureaucracies do," he said.

The present "floating" exchange-rate system does not require a policeman, Mr. Johnson says. Nor could one influence foreign exchange transactions, he argues, when they now exceed $2 trillion a day. South Korea could be a case in point: Last week the country was back on investors' "buy lists," just 10 days after depositors lined up to withdraw money from 14 banks closed by the government.

Instead of finding themselves without jobs as signs of correction emerge, World Bank and IMF officials look to be spending billions in 1998 to supervise East Asia's recovery. World Bank officials agreed at a Jan. 13 meeting to spend $20 million to hire additional Asian economic specialists.

U.S. taxpayers will be asked to contribute fresh funds to the bailout, probably next month. President Clinton has pledged support for the program, even as members of Congress are increasingly skeptical. No matter how many U.S. tax dollars flow into the bailout plan, Congress ultimately has little say in how it's managed.

"I don't think debate will center on opposing the bailout package," said Mr. Johnson. "The United States does not have jurisdiction to prevent the bailout from going through. It is a legal possibility that we could demand the return of all contributions to the IMF [because it functions like a bank]. We can withdraw contributions from it, and policymakers are more interested in this."

Meanwhile, the hard hit are hard to find. "Speaking for Hong Kong, everything is running smoothly, even if people are generally more pessimistic," says Hong Kong journalist Regina de Luna. But if macroeconomics take a while to be heard on the street, their effects will be no less severe. Indonesians are soon likely to see gasoline prices quadruple. A $5 billion deal between the United States and South Korea to build nuclear-power plants in North Korea is now in question. Thailand will delay buying fighter jets from Boeing. And, while Americans will find goods from Asia cheaper in the short term, they will eventually feel the pinch from Asians who can't afford U.S. products.

Mindy Belz

Mindy Belz

Mindy wrote WORLD Magazine's first cover story in 1986 and went on to serve as international editor, editor, and now senior editor. She has covered wars in Syria, Afganistan, Africa, and the Balkans, and she recounts some of her experiences in They Say We Are Infidels: On the Run from ISIS with Persecuted Christians in the Middle East. Mindy resides with her husband, Nat, in Asheville, N.C. Follow her on Twitter @mcbelz.