---------- Forwarded message ----------
Date: Wed, 17 Dec 1997 07:37:41 EST
Subject: Global "Recession" Warning
"We run the risk of a worldwide recession," said Lawrence Krause, an
economist at the University of California. "For the first time, I smell a
whiff of the 1930s ...
"It's a very touchy situation, very dangerous."
WARNINGS OF WORLDWIDE RECESSION
by Jonathan Marshall
San Francisco Chronicle, December 16, 1997
The Asian financial crisis is not yet contained and could
trigger a global economic meltdown, experts at the Asia
Foundation in San Francisco warned yesterday.
"We run the risk of a worldwide recession," said Lawrence
Krause, an economist at the University of California at San
Diego. "For the first time, I smell a whiff of the 1930s."
Krause aired his dire scenario at a workshop of the Pacific
Economic Outlook project, a group of economists from around the
Pacific Rim who issue forecasts of growth, inflation and other
economic trends in the region. The project is headed by Krause
and sponsored by the Asia Foundation.
The gloom of the conference was not lifted by yesterday's
show of investor confidence in South Korea's economy.
Prospects of emergency help from the International Monetary
Fund and the news that Korea will post the first monthly surplus
in its international financial accounts have helped boost the
won, Korea's currency, by 10 percent and its stock market by
about 7 percent.
But Korea hasn't turned any corners yet. It still owes $100
billion in foreign currency debt that comes due over the next
year, yet has only $10 billion in foreign reserves. The 41
percent drop in the dollar value of the won this year has made
repayment of those debts far more costly than before the crisis
hit.
At yesterday's conference, Krause noted that the Korean
government previously turned a bad economic situation into a
catastrophe by closing its currency markets at the first sign of
trouble, thus panicking investors..
Korea won't have a real economic policy until after its
national elections on Thursday, Krause said. Even then, the new
government's hands may be tied by militant unions that refuse to
accept austerity measures as the price of containing the crisis,
said Florian Alburo, an economist from the Philippines.
An even bigger problem for Asia now is China, Krause
maintained. In the last year it has aggressively pushed its
exports, crowding out goods from the rest of Asia in world
markets while holding the lid on imports.
Unless China starts buying more from Asia, its regional
neighbors will have to turn to the United States to export their
way out of trouble. They will take advantage of their sharply
devalued currencies to sell cheaper goods to the American
market.
But if the White House throws up trade barriers to prevent a
surge of new imports, "it could spoil the atmosphere for
cooperation among financial authorities" in the Pacific region,
Krause said.
That, in turn, could topple further economic dominoes around
the world.
"It's a very touchy situation, very dangerous."
Other economists noted that China isn't the only wild card
in the region.
Japan also has a weakening economy, falling currency and
dangerously large exposure to bad bank loans in Southeast Asia
and South Korea.
"The timing of the region's recovery all depends on Japan,"
said Iwan Azis, a Malaysian economist. "If Japan (slips further)
into recession, the whole region will be in trouble."
Ironically, some economists said one other threat to the
region's health comes from the very agency dedicated to finding a
cure: the International Monetary Fund.
The IMF is busy telling countries in the region that long-
term economic health can only be achieved with bitter medicine
--such as raising taxes-- to crimp short-term economic growth.
Such a policy might have been appropriate in Mexico, which
ran large budget deficits before its peso crisis, said Wing Woo,
an economist at the University of California at Davis. But the
standard IMF prescription is ill-advised for many of Asia's
battered economies, which already run budget surpluses.
Malaysia's Azis agreed, noting that IMF policies may plunge
many countries in his region needlessly into a deeper depression.
"Its program is outrageous," he said.
