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Political science professors Jeffrey Winters and Meredith Woo-Cumings

discuss the Asian financial crisis and assess its long-term impact.

by Richard Greb

Meredith Woo-Cumings and Jeffrey Winters, Northwestern associate professors of political science who specialize in Asia, make a convincing argument that the collapse in much of the Far East was caused by flaws in the global economy - particularly in the way capital moves among countries. Those flaws should force the world to look at whether the old ways still work. Both academicians question the methods of monetary institutions such as the World Bank and the International Monetary Fund, which emerged from the Bretton Woods agreement back in 1944.

"One of the criticisms the IMF is facing in this crisis is that it is a repairman with a single tool in his bag," says Winters. "Every time it comes upon a crisis in a country, it applies precisely the same method that's supposed to cure every ill. But people are suggesting that the nature of this crisis is somewhat different from previous crises that countries have faced, even as recently as Mexico in 1994 and '95, and that the single tool, the single cure, is not what Asia needs."

He and Woo-Cumings note that some Asian nations have rejected standard IMF provisions, such as raising interest rates and curbing government spending to brake the economy. Instead, they are taking control of their own currencies and trying New Deal-style and other programs to get things working again.

Winters suspects the crisis is rewriting a lot of economic theory, noting that "no economists, no think tanks really were able to predict that this was going to happen. The World Bank and the IMF, which have thousands of economists associated with them, were caught completely by surprise by its onset. Virtually no one has really been able to come up with a solution. So it's been a humbling experience for the disciplines of the social sciences. And beyond that, it has a tremendous impact on the lives of the people of Asia, casting many of them into a level of poverty they have not seen in three decades."

While Woo-Cumings agrees that there is a shortage of solutions, she says the signs of impending danger were quite visible, at least to currency traders. To her, the crisis is rooted in debt. Asian countries became prime customers for dollar and yen lenders, which considered them bulletproof.

Southeast Asian nations such as Malaysia, Thailand and Indonesia, which had been primarily agrarian, began building up their manufacturing bases about 10 years ago, while north Asian countries, such as Taiwan and Korea, had strong existing industrial infrastructures and 35-year histories of growth. Western banks often made little distinction between these societies as they pushed a lot of money into Asia without the credit analyses they would have relied on in their home countries.

"There was sentiment that these were very good investments," Woo-Cumings says. "Moreover, unlike Latin America, the impression was that there was no such thing as default in Asia. You could loan and loan and loan."

In those countries emerging from agrarianism, much of the borrowed funds went into real estate, which was important as collateral for further loans. A tendency developed, Woo-Cumings says, to deliberately overvalue prices to command larger amounts.

In 1994, China devalued the yuan. Export prices of manufactured goods dropped, making less money available to service the huge debt that was centered on the inflated real estate sector. Investors, including currency arbitrageurs, sensed these problems and began betting on currency weakness, particularly the Thai baht. This began a year before the crisis came to a head in 1997.

"One of the things I think we've discovered about the investment process is how psychological the movement of capital is," says Winters. As long as countries like Thailand, Malaysia and Indonesia were hyped as terrific places to invest, they received massive inflows of capital. The flows themselves became indicators of economic health, and a herd mentality, not only among investors but among observers, set in.

"Once that psychology was broken, the effects were devastating. It raises the question, 'What are the real fundamentals of the economy?' " Winters continues. "Are they factors that are on the ground, or are they predominantly an attitude? It's a matter that is really prominent now as people try to look at what happened, because there's hardly any other way to understand the sort of domino effect of such a crisis."

The two professors agree that the magnitude of the crisis, which now includes Russia and possibly Latin America, demands some kind of Bretton Woods II. Winters is organizing a conference of policy makers and scholars, to be held at Northwestern in March, on reconstructing the World Bank. He hopes for concrete, workable recommendations and options that the countries of the world may want to consider.

Both further agree that Japan is key. Woo-Cumings notes that if Japan were to sell its U.S. bond holdings, which she considers unlikely, the impact would be brutal. Winters worries that Japan is not facing the crisis head-on and that the U.S. leadership has not been paying attention to severe global problems, both economic and political. "I can hardly imagine a worse time for the United States to be fixated on sex," he says, referring to President Clinton's recent troubles.

"Still," Winters adds, "if Japan can solve its financial crisis as quickly as possible, if China does not devalue again and set in motion another string of competitive devaluations, and if the countries in the region can stabilize politically, then there's a chance the region could begin to turn the corner in two to three years." Woo-Cumings sees a chance for normalization in north Asia in about two years, though "Southeast Asia is lost. I think they're going to go through a lost decade the way Latin America did in the '80s."

Richard Greb is a freelance writer based in Highland Park, Ill.

"This crisis is really the first postwar, post-massive-globilization, Internet-revolution kind of crisis,

where all the things that used to worry us about whether an effective global governance structure is in

place to haunt us. An in fact, the answer is no, we don't have an effective systtem to deal with a

number of issues."

- Meredith Woo-Cumings

South Korea and Japan in Crisis:
The Difference Is Wealth

Japan and South Korea have similar economic structures, and that's hardly accidental, says Meredith Woo-Cumings. Korea was occupied by Japan for 50 years and modeled itself on its former colonizer.

As a result, both economies today are combinations of a surprising openness and a conservatism that outsiders often find exasperating. Both also are home to large corporations that still conform to residual industrial policies.

"But Japan is a developed country. South Korea, on the other hand, was devastated through colonialism and war," says Woo-Cumings, a Northwestern associate professor of political science who was born in Korea and went to secondary school in Japan before coming to the United States for college.

In the early 1990s, South Korea was forced to deregulate its financial system, opening the door to foreign borrowing that was no longer mediated by the government, says Woo-Cumings, whose father was a policy maker at the Republic of Korea's Economic Planning Board, the equivalent of Japan's Ministry of International Trade and Industry. This deregulation took place in the absence of an effective regulatory framework. Suddenly, Korean bankers were raising massive amounts of capital abroad. By mid-1997, Korean foreign debt was about 35 percent of its gross domestic product, almost the level of Mexico's when it defaulted in 1995.

"The Koreans thought they could service their debt through exports," says Woo-Cumings, who has been at Northwestern for five years. "They were running small trade deficits, but they had what was essentially a sound economy with strong fundamentals. They thought they could get over the cash crunch."

When Korea realized it was in deep trouble, its leaders asked for help from the United States and Japan, she says. In the past, this tactic worked, but not this time. Instead, Korea was asked to turn to the International Monetary Fund. Investors who got burned in Southeast Asia panicked and took money out of the country. The panic psychology created a spiral in which the Korean currency lost half its value, making it still harder to service the debt.

"Korea is more vulnerable than Japan to outside pressures for two reasons," Woo-Cumings says. "First, Korea is in the midst of a debt crisis, whereas Japan is not a debtor country. It is the world's largest creditor country. It doesn't have the International Monetary Fund breathing down its neck.

"The second difference is that Korea has a centralized presidential system," she concludes. "Although there's a very thriving democracy and an obstreperous parliament, the president has a great deal of leeway to impose control and reform. Japan doesn't have that. It has a cabinet system, one that is particularly immobilized. Its system is deficient in accountability." - R.G.

"One of the things we're finding with globalization is that you can be very, very strong at home and

yet, because of the integration of the financial world, crises in faraway places, even if delayed, tend

to ripple back with severe consequences. So, if you look at a graph of the U.S. stock market's

volatility, it looks like it's connected to a brain-wave machine and somebody's having a bad dream."

- Jeffrey Winters

Southeast Asian Countries:
Competing Routes to Recovery

Indonesia, Thailand and Malaysia, countries at the center of the economic crisis in Asia, are laying out individualized responses to their problems, according to Jeffrey Winters. These range from conforming to the traditional conditions laid out by the World Bank and the International Monetary Fund to their own unique programs.

"Countries have begun to move in broadly different directions to try to respond to this crisis," Winters says. "That's what's going to be interesting about this in one sense. Countries are trying such varying responses that we're really going to have a good opportunity to study what worked and why."

Winters is an associate professor in political science at Northwestern who specializes in Southeast Asia. He has spent several years in Indonesia, though he was temporarily barred in October from entering the country after he repeated allegations of corruption by high government officials.

At one end of the response spectrum, Winters says, is Indonesia, which is "on an IV drip from the IMF. Indonesia is still plugged into the international world, capital markets and flows and so on. The volatility in its currency is still there. It's being rocked on a daily basis, but Indonesia started off trying an orthodox IMF austerity package, and it's not working."

Thailand stands in the middle. "It's also on an IV drip. It initially tried the same orthodox cure, but it decided that really wasn't working well, so now it's trying to spend its way out of the problem quietly and discreetly," Winters says.

At the other end of the spectrum is Malaysia, which stunned the world by imposing capital controls. It also never accepted an IMF package. At the outset of the crisis, Malaysia tried to impose an IMF cure domestically but decided that wasn't working and switched. Malaysia stopped the flow of convertibility of its currency and now is trying a massive Keynesian stimulation to find a way out of the crisis. But Malaysia's experiment has been badly undercut by political turmoil.

Winters feels there is no single Asian crisis, but rather a series of crises in different countries. Although the region on average is not doing well, some countries are doing better and others worse. He notes that the Philippines, for example, is not in nearly in the same dire straits as Thailand or Indonesia. "It turns out that when the crisis happened, there were benefits in not having been as deeply plugged into trade and investment flows," Winters says.

The same can be said for Vietnam, although that country is a more extreme case. "Vietnam began opening up very seriously in the mid-1980s, but by the time the crisis arose, the country still did not have a fully convertible currency, nor did it have a stock market that could be rocked by the movement of emerging market managers out of their funds," Winters says. - R.G.

Meredith Woo-Cumings and Jeffrey Winters photos by Eugene Zakusilo