---------- Forwarded message ---------- Date: Thu, 20 Aug 1998 00:59:09 -0500 From: Kim Scipes <[EMAIL PROTECTED]> Reply-To: Forum on Labor in the Global Economy <[EMAIL PROTECTED]> To: [EMAIL PROTECTED] Subject: Econ meltdown in Asia (1/2) August 19, 1998 Folks-- I have been watching the on-going global economic crisis develop--by no means is it confined to Asia--and thought I'd share my latest thinking. This will be a two part message: part I focuses on Asia and what has been happening there. Part II focuses on the impact of the Asian "crisis" on other countries and regions of the world--it follows this one. However, while I'd hoped to be able to send both out before I leave for the American Sociological Association's annual meeting in San Francisco tomorrow, Part II will have to wait until next week until after I return or perhaps even the following week. Let me quickly say that the current situation in Russia is very much related to that in Asia, although of course, it has a different trajectory--more next time. To sum up: if the goal of the US and the IMF has been to stimulate the global economy so as to overcome the economic turmoil that started in Asia, then it has been a total failure. As far as I can see, there has been no positive news coming out of Asia--things have only gotten worse and look like they will still worsen over the forseeable future. -- The Japanese yen continues to fall--it is now approximately $1: Y 145, when it was approximately $1: Y 115 barely over a year ago. The weakening yen--i.e., one dollar can buy more yen than it could a year ago--means that Japanese exports become cheaper when sold in the US or Europe. This puts additional pressures on other countries' exports that compete with Japan's. The country that also seems to be key to Asia's well-being in the near future is China. China, whose renminbi is generally protected, has promised again and again not to devalue the renminbi. The problem the Chinese face, however, is two-fold: (1) as the yen falls against the dollar, it places more competitive pressure on the renminbi and the currencies of countries that directly compete with Chinese exports: Indonesia, Thailand and the Philippines in particular. In other words, as the value of these currencies fall, each of these countries has to compete even harder to sell in the US and Europe because the value of their exports are worth less. That means that less-competitive factories must be closed, meaning more layoffs and more social turmoil. Basically, it means that exporters are having to cut each others' throats in order to export successfully, and even so, the value of the exports are less due to this competition. But China and Japan are at completely different levels technologically. That is true. And this is where the importance of Korea comes through: the Koreans are at a level of technological development that is somwhere in-between that of China and Japan: the Koreans compete with the Japanese in some high-end items, but they also compete with China in some low-end items. The fall of the yen gives the Japanese advantage where they compete with the Koreans, and there is a certain point--a few months ago, the general consensus was at the $1: Y 150 level--when it is expected that the Koreans will have to devalue the won so as to reduce the advantage Japanese corporations gain as the yen weakens. If this happens, then Korean firms will then have an advantage in comparison with the Chinese. At some point in time--and not in the too-distant future--I think China will be forced to devalue the renminbi. If this happens, the China's direct competitors will be forced to again devalue so as to keep the Chinese from getting too big of an advantage from their devaluation. I think you get the picture--continued devaluation of currencies forces other currencies to devalue, and so on and so forth. It is a downward spiral that I think likely. The key to stopping this downward spiral would be the development of domestic economies that would absorb goods that previously had to be exported to be sold. China is probably the only country in Asia that still has the potential to do this, as other countries that could do it--Japan, Korea and Taiwan--have all done it in the past. The problem that China faces is that its workers are so poorly paid, and there seems to be no chance for big wage increases (which would ultimately hurt China's export competitiveness), that I cannot see this happening in the foreseeable future. In fact, this brings me to the second point I mentioned above concerning the Chinese government: as they enter the global economy to a greater and greater extent, there is even more pressure on them to make their economy more efficient. This means that millions and millions of people will be losing their jobs--this has already been going on for years now--and this will put even more pressure on Chinese workers' wages as more and more people compete for fewer good jobs. This alone will keep Chinese wages down--and hinder China's ability to develop its internal markets. However, since China needs to achieve about 8% growth of GDP per year just to absorb new workers entering its labor markets, any growth below that rate will only intensify these pressures--and it looks like China will not achieve 8% this year. China has made amazing strides to industrialize--from what I can tell from my reading and conversations with Chinese colleagues, it has vastly improved the standard of living for a significant portion of its population. But it also seems that in moving China toward a more market-focused economy, the Chinese Communist Party (CCP) has basically lost any legitimacy it previously had except for its skill in managing the economy. (For those that know about it and do not accept the government's explanations, the massacre in Tienanmen Square almost certainly cost the CPP much legitimacy, but I don't know how many people in China know about it, or if they know about it other than as a necessary response "counterrevolutionary action.") In other words, the overwhelming legitimacy that the CCP retains today is connected with its ability to improve the standard of living of its people, and this first and foremost means the ability to create good paying, stable jobs for people. The problem is that this requires a minimum growth rate of 8%, just to keep up with the number of people who enter the labor market yearly--and there are said to be 30-40 million unemployed people in the country that an 8% growth rate doesn't even begin to address. While perhaps too low, Business Week estimates that China's economy will only grow 5% in 1998 (BW, August 31, 1998: 118). I think there's a good liklihood of increased social turmoil over the next few years, although whether that will be enough to threaten the government remains to be seen. But in any case, China seems limited in its ability to create a strong domestic market that would significantly slow down or end the larger crisis. --Even as we think about the future possibilities, we must keep in mind that there has been extensive economic and social pain throughout Asia (especially outside of Japan, but Japan has not been immune) already. Some quick overviews: ASIA: "Depression. The term conjures up such nightmarish images that few economists use it for fear of provoking panic. But whether or not it is yet appropriate to use the word depression to describe Asia's worsening crisis, THAT'S EXACTLY WHAT IT IS STARTING TO LOOK LIKE ON THE GROUND (emphasis added). [para] The weak corporate profits jolting Wall Street don't begin to tell the story. In South Korea, the shattered lives of the middle classes show up in soaring suicide and bankruptcy rates. In Japan, unofficial estimates put joblessness at 10%.... In Thailand, Prime Minister Chuan Leekpai has done all he can to implement painful reforms. But the economy still could shrink 20% over the next two years.... [para] The next Asian crisis may be political. As outrage grows, both Chuan and Kim are in danger of losing their political mandates. Standard & Poor's DRI estimates there is now at 20% to 25% chance of a depression in Japan itself. Preventing one depends on Tokyo's taking radical measures despite the social costs. If a political backlash prompts Asian countries to back off of needed reforms, the worst-case scenarios become plausible." Introduction to Business Week's Special Report, "Asia's Social Backlasth: As economies founder, popular rage threatens reform," August 17, 1998: 46-51. CHINA: "Corporate China's earnings in the first half of the year were expected to be disappointing. They are proving to be dismal. [para] Lower than forecast interim results have not only been pushing the share prices of Chinese companies to record lows day after day, THEY HAVE STARTED TO SEND A WORRYING SIGNAL ABOUT THE DECLINING HEALTH OF CHINA'S ECONOMY" (emphasis added). China's business environment is suffering from overcapacity and declining demand. This weak demand is said to be from a general decline in domestic demand and increased competitiveness in export markets--and the increased competitiveness is at least somewhat coming from depreciating currency values across Asia. (see James Harding and Louise Lucas, "China suffers from natural disaster and self-inflicted damage," Financial Times, August 18, 1998: 16.) CHINA: China has been suffering a tremendous level of flooding--roughly an area of farmland the size of England and Ireland is under water. Tens of millions of farmers have been affected, and this is starting to affect the outlook on world trade for a number of key agricultural commodities--cotton, wheat and rice seem worst hit. The flooding is after previous flooding in some parts of the country and draught in others. "Even before the terrible weather attack, Chinese farmers were having a difficult year. Three successive strong harvests have resulted in a glut of agricultural produce, which has driven some farm prices down by as much as 50% this year." [Note: This strong reduction in farm prices has probably pushed more and more farmers to leave the land and seek jobs in the cities, putting further pressure on the need for strong economic growth.] (see James Harding, "China counts cost of worst floods in modern history", Financial Times, August 18, 1998: 22.) HONG KONG: The economy shrank 2.8% in the first quarter of 1998, and is expected to do even worse--perhaps shrink another 3% in the second quarter. Hong Kong is headed into its deepest recession since the end of World War II. Expectations are that Asia faces several years of recession. As Roy Ramos, a banking analyst with Goldman, Sachs & Co. in Hong Kong stated, "In general, we've been taken aback by how severely economies in Asia have contracted. And we've been taken aback at how high the rate of nonperforming loans has risen." In other words, things are bad and they are going to get worse, not only for Hong Kong but for the region as a whole. (see Mark Landler, "Stocks Fall as Hong Kong's Slump Worsens," NYT, August 4, 1998: C-4.) HONG KONG: Cathay Pacific, a key Hong Kong corporation, posted its first loss in 20 years. "Cathay Pacific's chairman, Peter Sutch ... cited a slump in tourism, a slowdown in business and the sharp depreciation in regional currencies [were key factors in the results], and said 1999 could be worse." (Agence France-Presse, "Cathay Pacific Posts First Loss in 20 Years," NYT, August 6, 1998: C-3.) HONG KONG: All of these things contributed to a 15 year high in unemployment in Hong Kong, which reached 4.5% in the second quarter of the year--and things were expected to get worse before getting better. (Associated Press, "Unemployment Rises in Hong Kong to 4.5%", NYT, July 21, 1998: C-7.) HONG KONG: The Government admitted it had intervened in currency markets to bolster the strength of the Hong Kong dollar. Apparently speculators were attacking, feeling that Hong Kong would have to break it currency board, that pegs the 7.8 HK dollars to 1 US dollar, in face of the falling Japanese yen. The gap between Hong Kong's currency and its Asian neighbors has been widening, making the HK dollar vulnerable to devaluation. The only way to prevent that, short of the government spending some of its reserves to maintain the value of the HK dollar, is to drive up the interest rates, which would slow the economy even more than it has been. (see Mark Landler, "Finance Chief Confirms Steps to Aid markets in Hong Kong," NYT, August 15, 1998: B-1, B-2.) INDONESIA: Indonesia's economy is in recession. The GDP shrank 16.5% in the second quarter of 1998 as compared to the same quarter in 1997, after falling 6.2% in the first quarter. Key one-month interbank interest rates at at a record 59.5%. (see Bloomberg News, " Indonesia Slips Into a Recession," NYT, July 8, 1998: C-4.) INDONESIA: The economy is expected to contract 13% this year--the first time the economy has shrunk since 1963. The World Bank forcesasts that 50 million of the country's 200 million people could fall below the poverty line by the end of the year. [World Bank data is based on a country's Government reporting, and regading poverty alleviation, I've found this to be overly optimistic from my work in the Philippines: I'd take this as saying simply a MAJOR increase in impoverishment of Indonesia's people.] The Government has expressed concern about people dying of starvation, and a severe drought has affected parts of the country. Government officials were trying to get international lenders to repackage up to $9 billion of debt. (see Timothy L. O'Brien, "Indonesians Visit US Seeking Help With Debt," NYT, July 9, 1998: A-5.) JAPAN: Japan's economy is officially in a recession. It's jobless rate is at 4.1%, bankruptcies have increased 26.3% over last year, retail sales are down 5.4% from last year, and business investment down 3% in the first quarter. Yet as the value of the yen declines, exports to the rest of the world expand: in May, Japanese exports grew 26%! However, Japanese banks have lent a lot of money to Asian corporations--as of the end of 1996, over $120 billion (US banks have about $34 billion in loans to the region)--and as the crisis has hit, Japanese banks are both cutting credit to the region, and have been demanding repayment. [With Japanese banks having approximately $1 trillion in bad loans, I can only seeing credit being much harder to get through these banks, while pressure to pay back loans intensifies--not a good combination for other countries in the region.-KS] Recent changes in the political system--the former Prime Minister resigned in the face of electoral defeats for his party, and a new Prime Minister has been chosen--so far have meant little to Japanese policies. (see Barrie McKenna, "The sun is setting on a complacent Japan, [Toronto] "The Globe and Mail," July 25, 1998: B-1, B-3.) JAPAN: Japan's financial system is in disaray, and has been for quite a while--the banks are said to have about $1 trillion in bad loans (i.e., their borrowers cannot pay them back as scheduled). In early July, the Japanese Government announced a new plan to tackle this problem by letting insolvent banks fail, but it was greated cautiously. (By letting insolvent banks fail--i.e., declare bankruptcy themselves--then strong banks could buy their assets and debts at very reduced price, low enough to allow the stronger banks to make a profit on the deal, such as when they sold the insolvent banks' colateral on the loans.) This removes weak banks from the system, and strengthens strong banks. But the Japanese Government has set aside $214 billion to reimburse those whose savings would be lost by the failure of the insolvent loans, meaning that taxpayers would be subsidizing the hoped-for recovery of the banking system, which got into such trouble because of bankers' greed. This is basically what happened during the US Savings & Loan debacle during the late 1980s. (see Sheryl WuDunn, "Japan Announces a Plan to Tackle Mountain of Debt", NYT, July 3, 1998: A-1, C-2.) [NOTE: To get some idea of the response by investors to the Japanese Government's plan--not necessarily the most important criteria by a long shot, but just one--you can examine where the value of the currency and the stock market since this plan was announced. When it was announced in early July, the yen was worth approximately $1: Y 140--as of August 17, it was 145.96, so the yen has continued to fall since this announcement. The Nikkei stock market index, similar to the Dow Jones index in the US, was at 16,471 after the announcement; as of August 17, it was at 14,664--it has fallen almost 2,000 points since the plan was announced. Obviously, investors are not convinced it will solve the problems affecting the Japanese economy. Another way to look at the Government's response to problems is to see how voters respond during elections. On July 13--AFTER the plan had been announced--Japanese voters rebelled, giving the ruling Liberal Democratic Party a terrible beating, so bad the the Prime Minister felt impelled to take personal responsibility and resign.] JAPAN: Japanese banks are also pulling back from lending in the US. "Japanese banks accounted for less than 10 percent of the syndicated loans provided to American companies with investment-grade credit ratings in the first quarter of 1998, down from 26 percent in the comparable quarter a year ago...". The banking crisis in Japan is also resulting in the sale of Japanese-owned hotels, office buildings and golf courses in the US: according to the US Federal Reserve, "assets held by Japanese-owned bank branches dropped to $347 billion at the end of 1997 from $404 billion at the end of 1994...". It was noted that, "But by and large, the retreat from the American market by the Japanese banks has had little effect on the American economy because there are many other sources of credit for companies. This CONTRASTS SHARPLY with the sitution in Japan and in other parts of Asia, where cutbacks in lending by Japanese banks have contributed to a credit crunch that has driven some companies into bankruptcy and worsened economic downturns" (emphasis added). (see Andrew Pollack, "Japanese Banks Cutting Back on US Presence," NYT, July10, 1998: C-1, C-2.) JAPAN: Japan's current account suplus fell by 2.4% in June, the ninth decline in the last 13 months. The current account is the braodest measure of goods and services flowing in and out of a country, and includes the balance of trade AND money transfered in and out. Japanese companies saw their mechandise trade with the rest of Asia fall 26.8% in the first half of the year--and Asian exports are 35% of total Japanese exports. Merchadise trade is 3/4s of Japan's current account. At the same time, Japanese exports to the US climbed 37.7% during the first half of the year, as compared to the first half of 1997. [NOTE: Obviously, Japan is exporting more to the US to overcome weaknesses in their Asian export markets. What happens if a recession hits in the US???] (see Bloomberg News, "Japan's Trade Surplus Falls; Asian Slump Slows Exports", NYT, August 14, 1998: C-4.) JAPAN: The Japanese government considers anyone who works more than one hour of the last week of a month as having a job! "That Japan's invisible unemployed don't count says a lot about why the country continues to muddle through its worst recession since World War II. It also points to one of the biggest challenges for Japan's new cabinet. On Prime Minister Keizo Obuchi's first day in office on July 31, the government announced that Japan's unemployment rate had hit a post-war high of 4.3%. Some economists and consultants estimate that, in reality, Japan's unempoyment rate could possibly be as high as 10%. *** [para] Still, joblessness is taking a personal toll on millions of workers across all generations--both blue and white collar. The official unemployment statistics don't reflect the throngs of housewives too discouraged even to try to enter the workforce, college graudates waiting at home with their parents for the economy to improve, and middle-age workers 'temporarily' laid off until their companies recover. Some weeks, 900 people line up for the free noodles served out of plastic garbage pails on Sundays by a church in Asakusa, up from 550 a few months ago. [para] Others, rather than seek help, take their own lives. Last year, the National Police Agency tallied 3,556 suicides because of economic woes--a 17% increase over the previous year. [para] It's clear that layoffs are only going to get worse. *** [para] Many of Japan's jobless have little chance of working again soon. ****" Emily Thornton, "JAPAN: Hidden Joblessness--With so many uncounted, the unemployment rate may actually be as high as 10%," Business Week Special Report on Asia, August 17, 1998: 49-50. JAPAN: The Japanese have been under increasing pressure, especially from the US, to let insolvent banks fail, so the market could then weed out the weak ones and (hopefully) help lead to the cleaning up of the mess. However, there is a major bank, with considerable international dealings, called the Long Term Credit Bank (LTCB) that is in deep trouble, and is causing major complications for the government. LTCB's share prices have been falling in recent weeks. "... it has become increasingly clear that its fate will be a crucial test case for the government's policy toward banking sector reform. [para] This, in turn, has left the Japanese government facing a dangerously painful dilemma. For if the government takes rapid action to close the troubled bank-as some western banking analysts would like--IT RISKS TRIGGERING A BROADER BANKING CRISIS THAT MIGHT RESULT IN INTERNATIONAL LENDERS CUTTING CREDIT LINES TO OTHER JAPANESE BANKS (emphasis added). [para] However, if the government simply bails the bank out, this will provoke accusations that Japan is once again backsliding on banking reform. *** [para] But some financial bureaucrats insist that the government cannot afford to declare LTCB insolvent because this would threaten [an impending] merger with Sumitomo Trust. And an insolvency, as Mesaru Hayami, Bank of Japan governor, yesterday pointed out, COULD HAVE DANGEROUS KNOCK-ON EFFECTS ON GLOBAL FIANANCIAL MARKETS" (emphasis added). (see Gillian Tett, "Japanese bank 'timebomb' strains market nerves," Financial Times, August 18, 1998: 4.) MALAYSIA: Malaysia's economy contracted at a 1.8% annual rate during the first quarter, with the government expecting somewhere between 1-2% contraction for the entire year. Malaysia's international credit rating was lowered to only a few levels above "junk" rating, and the Government abandoned an international effort to sell $2 billion worth of bonds which were to be used to deal with bad debts in the banking sector. (see Bloomberg News, "Malaysia Postpones $2 Billion Bond Sale", NYT, July 28, 1998: C-4). MALAYSIA: The Central Bank has cut its interest rates twice in one week recently, which is designed to reduce pressure on the deeply indebted nation. Malaysia is expected to have its economy contract for the first time in 13 years in 1998. (Agence France-Presse, "Central Bank Lowers Key Rate in Malaysia", NYT, August 11, 1998: C-4.) PHILIPPINES: The economic position of the Philippines has deteriorated severely over the past year. Both GNP and GDP has slowed appreciably since last year: first quarter GNP in 1998 ws 2.5% vs. 5.4% during the same period in 1997; the GDP grew 1.7% in the first quarter 1998, vs. 5.5% in the same period in 1997. The government had a 15 billion peso deficit during the first five months of 1998 vs. a 5 billion surplus the year before--the Asian crisis had some effect here, although this preceeded the Presidential election in May of 1988, so that obviously was a factor. Nonetheless, it left the incoming administration in a tough position, and some estimtes are of a 40 billion peso shortfall this year. (The budget has been in surplus every year since 1993 until 1998.) The country experienced a balance of payments deficit of US $3.3 billion in 1997, compared with a $4.1 billion surplus in 1996. Investments have continued their shifting from direct investments (say in factories) into portfolio investment (stocks and bonds): portfolio investments were 70.8% of all investments in 1992 and 86.6% in 1997--it's much easier to take one's money out quickly with portfolio investments. In fact, the size of portfolio investments, which had been increasing, dove dramatically in 1997: in 1996, there had been a net increase of $2.1 billion (up from $155 million in 1992), but in 1997, there was a net decrease of $406 million--about a $2.5 billion change! Japanese equity (direct) investments fell by $150 mllion between 1996-97, while US equity investments fell by $176 million, although British Virgin Island (!) investments increased by $70 million--these three countries accounted for almost 60% of foreign equity investments, and total foreign equity investments fell $1.28 billion between 1996 and 1997. (Major reductions in the value of equity investments were from Asian neighbors: Hong Kong investors pulled out almost $16.5 million; Taiwan, $27.6 million; South Korea $11.2 million; Malaysia, $6.62 million for a total of $62 million reduction--although Singapore investors increased their equity investments by $47.8 million.) The official unemployment rate jumped from 10.4% in April 1997 to 13.3% in April 1998--and these figures severely undercount real unemployment. Also, there was 128% growth in the number of establishments that closed or retrenched workers comparing Jan-June 1997 with Jan-May 1998, and an increase of 88% of workers being affected during this same period. (All of this data is from IBON Database Phils 1998 Midyear Economic and Political Briefing titled "The Estrada Administration: Coping with the Economic Crisis" and written by Danilo Araņa Arao, dated June 25, 1998--all figures are from government agencies. I've presented so much data here since there has been almost none in the mainstream US press.) PHILIPPINES: Agricultural output slumped 7.2% in the first half of the year as compared with the same period last year, largely due to effects from El Nino which devasted crop production. It was the worst set back for the farm sector in 20 years. "Agriculture is critical to the economy, representing about 20 percent of gross domestic product and employing about 44 percent of the workforce. The poor output has added to economic strains brought on by the Asian financial crisis." Corn production fell 44% year to year, while rice production fell 27%. (see Justin Marozzi, "Setback for farmers in Philippines", Financial Times, August 18, 1998: 4.) SOUTH KOREA: South Korea's economy is now projected as contracting at a 4.7% rate this year by the OECD (Organization for Economic Cooperation and Development), and expects growth to resume next year at a rate around 2.5%. [Note: I've found the OECD expectations during this entire crisis to be OPTIMISTIC--i.e., I think things will probably turn out worse.] (See Nicholas Bray, "South Korea Gets Gloomy Prognosis From OECD", "Wall Street Journal," July 31, 1998: A-9. SOUTH KOREA: "Back in December, when the IMF agreed to bail out Korea with a $58 billion loan package, few would have guessed the pain would spread so far. What began as an abstract run on the won turned into a very real social trauma. *** [para] Slowly but surely, Koreans are coming to realize that the old social compact of lifetime employment is probably gone for good. So, too, is the optimism of two years ago that Korea could catch up with Japan in autos, semiconductors, and other industries. As the economy makes the wrenching transition from a state-guided and paternalistic economy toward a more ruthless and market-driven one, high rates of joblessness and income inequality will be facts of life. [para] It will also mean a greater presence of foreign investment and competion, something that won't go down easily given Korea's deep-rooted nationalism. *** [para] Clearly, Korea is headed for its biggest culture shock in generations. The question is whether the new stresses and sense of betrayal will soon snowball into a social crisis. Nobody foresees the kind of rioting that left Jakarta in ruins. But the backlash could well thwart the badly needed reforms planned by the new government of Kim Dae Jung. [para] The most immediate flash point is labor. Some 40,000 workers spanning 60 unions walked off their jobs in a two-day strike that ended on July 16. Unions are threatening more and bigger strikes, which would devastate a declerating economy. That prospect has Kim's government backed into a corner. It views wildcat shutdowns as illegal and threatens strikers and organizers with arrest. Such developments could turn violent, says Yoon Young Mo of the Korean Confederation of Trade Unions. 'Once that line is crossed, we will move into uncharted waters', he warns. *** [para] The sources of tension will increase over the next year. With bankruptcies soaring and the economy expected to contract by 5% this year, most private economists see the jobless rate, already 7%, hitting 8.5% and leaving about 2 million out of work. In this patriarchal society, most of the jobless are men, and those who have wives are also supporting an average of two kids and maybe an in-law or two. Economists at the state-run Korea Development Institute figure that, as the number of jobless grows, 9% of the population will soon see its primary source of income wiped out. *** [para] Seoul already has burned through half of the $19.5 billion set aside for buying out bad debts, just to close five relatively small banks. Plenty more need to be shut. And that means more corporate failures. About 10% of the companies listed on the Korean Stock Exchange have defaulted on debt payments since January. Factories are funning at 66% of capacity, vs. 80% a year ago. The changes sweeping away the old economic model are coming so rapidly that 'in no other country have you seen this sort of fast transition without a war', figures Hyundail Motor Chairman Chung Mong Gyu. ****" Brian Bremmer and Moon Ihlwan, "KOREA: Rage and Despair--Will the economic pain spark a ruinous upheaval?", Business Week Special Report on Asia, August 17, 1998: 47-49. [Note: A graphic for this article sums up the problems: "Where the Pain Bites Deepest: LOST JOBS. Korea used to boast of almost full employment, but the rate has soared to 7% and is headed much higher. Economists see 500,000 more out of work by yearend. FAILED COMPANIES. About 90 companies go under daily. Bigger companies will vanish from the scene as financial-sector reform forces the shutdown of poorly managed banks and weak affiliates of chaebol. LOWER WAGES. Many companies are cutting salaries as much as 30%. Even unionized workers have accepted a wage cut, averaging 3%. And wages could plummet further. LIVES LOST. The shame of layoffs has torn apart families and driven white-collar workers to suicide. An average of 25 people a day took their lives in the first quarter--up 36% from a year earlier. This graphic is on p. 48.] THAILAND: Thailand's government announced a plan to get lenders back on their feet--bad loans are estimated to be equal to almost half the total amount of money in the entire Thai banking system!--and the cost to get the banking system straightened out may run almost $22.5 billion, or 15,000 baht for every man, woman and child in the country. This program, like the one discussed above for Japan, is based on the US's handling of the Savings and Loan fiasco of the late 1980s. (see Bloomberg News, "Thailand Approves Plan to Get Lenders on Their Feet", NYT, August 15, 1998: B-2.) THAILAND: "It had seemed that Thai Farmers Bank was on the mend. In March, the bank raised $850 million in an equity offering reserved for foreign investors, who paid 27% over the market price to snap up shares. With the funds, Thailand's third-largest bank hoped to retire bad loans. But since then, Thai Farmers has reported a $100 million second-quarter loss, its tock price has plunged 65%, and analysts expect it will have to return to the market to raise yet more money. [para] And Thai Farmers is among the country's strongest banks. So it should come as no surprise that the talk these days in Bangkok is not whether a few of the smaller, weaker banks can survive. Instead, the question is whether any can be salvaged. *** [para] Sheer desperation: There's no other way to describe it. With factories closing, unemployment soaring, and the financial sector crippled, Thailand is launching into a contraction that may surpass almost everyone's worst-case scenarios. [Russell Kopp, a regional bank analyst at Dresdner Kleinwort Benson] predicts that the economy will shrink by 20% over the next two years. *** [para] Thailand's woes represent a disturbing new stage in Asia's crisis. As the first wounded Tiger to seek an International Monetary Fund rescue when its currency collapsed last July, Thailand has seemingly done everything right.... They have closed dozens of finance firms, began to privatize state enterprises, lifted curbs on foreign investment, and enacted a slew of reform laws. [para] So why, many Thais wonder, is the economy still sinking? Unemployment is likely to hit 8.5% by year end. ****" Bruce Einhorn, "THAILAND: Banking Chaos--Will the Government nationalize the system?", Business Week Special Report on Asia, August 17, 1998: 51. ______ I think the above gives some support to my argument that things have only gotten worse in Asia. These conditions have also affected resource-dependent economies such as South Africa, Australia, New Zealand Canada, and Russia. They have hurt large Latin countries--especially Mexico, Brazil and Argentina--as investors are pulling out of "emerging country" markets, reducing their roles as export markets. (This means major US export markets such as Canada, Mexico and Japan have all been hurt.) Russia's depreciation of its currency this past week (34%) certainly will affect a number of European countries (especially Germany and France), whose investors have invested heavily in Russia. I expect all of these pressures will reduce European economic growth and European markets for imports--another US export market. I see all of this moving toward the US--but we're too busy with the "Bill and Monica" soap opera to even look up.... I'll try to detail these developments in the next message. Kim
