By Donella Meadows

–January 15, 1998–

The Washington Post quotes a portfolio manager for Asian mutual funds: “We do not get a very good grade for spotting Asia’s problem.”  Michael Sivy, chief investment strategist at Money magazine, says, “Everyone is genuinely surprised by the decline.” He’s the one who wrote an article titled: “How to Cash in on the Asia Boom,” which came out right before Thailand’s currency plunged, setting off an economic implosion that isn’t over yet.

Not everyone is surprised.  Many people in the real world and even some in the crazed world of international finance knew the Asian bubble was being blown up to the bursting point.

It didn’t take a rocket scientist.  I was in Bangkok in 1994, stuck in a bus in one of that city’s classic traffic jams with 20 environmentalists from 12 Asian countries.  We could see around us at least 50 huge construction cranes hovering over high-rises on their way up.  “Who is going to occupy all those offices and condos?” we asked our Thai colleagues, who shrugged helplessly.  Now Bangkok has $20 billion worth of unsold office towers and residential complexes.

Anyone who was willing to look could see it coming.  The earlier financial crash in Japan caused global investors to pull their money out of there and look for someplace else where it could multiply.  Cash poured out of Hongkong too, ahead of the Chinese takeover.  New fortunes in Taiwan and Korea couldn’t be invested profitably in those overcrowded, overbuilt countries.  But Thailand, Malaysia, Indonesia were hot.  Billions flowed in to build golf courses, luxury real estate, factories where people worked for a pittance making toys and clothes and electronics for export.  Corrupt governments and public subsidies greased the way.

The boom didn’t begin to put enough wealth in the hands of ordinary folks to create demand for what was being built.  The rest of the world slowed its demand for Asia’s exports too, as $30 a week Asian wages undercut the incomes of billions of workers elsewhere.

Because the Asian economy grew so fast (doubling in less than 10 years), it overshot a long way before banks began to notice and admit that new shopping centers and hotels were not repaying their loans.  The full extent of the disaster is probably still not admitted; every week a bit more gets revealed.  But at the first wobble of the Thai baht last April, currency speculators closed in, financial capital began to flee, and the hysteria that overpumped asset values began to work in reverse.

The history of capitalism is full of such booms and busts.  From tulip bulbs in Holland to 1929 New York stocks, from Florida real estate to Tokyo real estate, foolish money has piled onto trends, vastly overvalued real wealth, and crashed.

It would be nice if we could learn from this process.

One lesson we should learn fast, because we’re getting it wrong again, is that the people who are most hurt by financial crashes are not the investors and bankers who create the problem, but the larger population that gets savaged by the downward plunge.  In Seoul and Jakarta right now, people are thronging supermarkets, turning their remaining money, whose value is dropping daily, into rice, sugar, flour, noodles, and toilet paper.  Meanwhile Suthasini Keoleklai in Thailand is one of 499 seamstresses who lost their jobs when the PAR garment factory abruptly shut down.  She’d been working there for ten years, since she was 19, and had been earning $3.50 a day.  Now she can’t find a job anywhere.  The plummeting Thai economy has put as many as two million low-income workers on the street.

Last to benefit, first to suffer, the millions who lose what little purchasing power they had are the key to pulling the economy back up, if they can be supported through the hard times.  The IMF and World Bank and central banks have it backward when they rescue big capital (with taxes collected from the workers of other countries) while requiring governments to pull back social supports that keep consumer demand up.

Another lesson is that the free flow of capital is not necessarily a good thing.  It can be a dangerous, self-deluded, destabilizing thing.  The Asian crash may have come just in time to derail the next global trade agreement, called the Multilateral Agreement on Investment, which aimed to tear down any control a government like Thailand might use to prevent money from flooding in or out at the touch of a speculator’s computer buttons.  What’s needed is not only national controls on capital accountability, but also the “Tobin tax,” proposed years ago by economist James Tobin, to be levied against short-term currency exchanges.  Such a tax would slow down knee-jerk money flows without discouraging serious long-term investment.

Another important lesson: trade, dependence on export income and foreign capital, winning economic competition by undercutting wages, these all make a shaky foundation for any economy.  A solid economy builds up its capacity to supply its own domestic demand, and it supports domestic demand by protecting workers and incomes.  That doesn’t mean no trade.  It just means trade is not a god with no other gods before it.

The biggest lesson of all is that capitalism has many virtues, but it is far from flawless.  It is no magic potion in which to put all social trust.  In fact capitalism can be amazingly blind to things that ordinary citizens, who look at the real economy instead of flows of money, can plainly see.

Copyright Sustainability Institute 1998