The Political Economy of the East Asian Financial Crisis



Nicholas Kiersey

9304517


MA Degree in International Studies

Supervisor: Camilla Noonan

July 1998




Submitted in part fulfilment for the requirements for the Master of Arts Degree in International Studies

Awarded an A1





Acknowledgements



It was clear from the first meetings of the 1997 Masters of International Studies Class, University of Limerick, that the East Asian financial crisis would be the most important topic of our often heated discussions. During the year, these discussions impressed upon me the need to consider the role of ideology in evaluating the international communities' efforts to deal with the crisis. Thus, it is appropriate that I first thank all the members of the class for their contributions on this subject. I would also like to thank my supervisor, Camilla Noonan, University of Limerick, for her vital assistance in finishing this project. My best wishes to her and her husband for their future happiness together. Sincere thanks to Dr Nabil Adawy for his excellent direction of the programme which ensured an informative and enjoyable year. I am also grateful to Doctor Eric Watkins for his insightful classes on American foreign relations. Finally, I would like to express my appreciation for the support and/or inspiration I received from my family, Roger Tooze of the University of Wales, Doctor Luke Ashworth of the University of Limerick, Aer Rianta (for keeping me liquid) and the staffs of the libraries of the University of Limerick and Trinity College, Dublin.

NOTE TO THE READER: In order to save space, none of the graphs or charts referred to in this dissertation have been reproduced here. However, if you need them, email me I will send you copies.



Introduction

From the mid-1960s until 1997, East Asian growth figures depicted an economic success story. The Asean countries (Indonesia, Malaysia, Thailand and Singapore), consistently outperformed the countries of other developing regions of the previous 30 years. In Malaysia, Indonesia, and Thailand, average income more than quadrupled between 1965 and 1995, and in Korea, average income increased seven-fold (see Figure 1). To international financial institutions such as the World Bank and International Monetary Fund (IMF), the countries of Southeast Asia were paragons of development whose sound, market-based, foreign investment-friendly, export orientated policies were to be commended (Rigg, 1993, p. 9 and IMF, 1998a, p. 3). At the same time, the Northeast Asian countries, Japan and Korea, were seen as role models too. Francis Fukuyama wrote that the values and cultures of these two countries made their approach to organising their economies uniquely suitable to adapt and succeed in the rapidly changing world of globalisation (1995, pp. 161-170 and pp. 127-145 respectively). The sobriquet 'miracle' was often used to describe the East Asian development phenomenon. The Economist wrote:

"It is now likelier than not that the most momentous public event in the lifetime of anybody reading this … will turn out to have been the modernisation of Asia" (Economist, 1993, p. 5).

As 1997 began, Asia seemed to be building on another year of growth. The International Monetary Fund forecast 7.5% average growth for the region in 1997 (Denison-Edson, 1997). Both Moody's and Standard and Poor's Long Term Debt Ratings 1996-97, gave positive outlooks for market creditworthiness (see Table 2). While some scepticism had been expressed regarding the ability of Asian countries to sustain their growth, there were few signs of an impending financial crisis in 1997. Robert Wade and Frank Veneroso (1998) note that Korea received one of the highest credit ratings for any developing country that June, the IMF and World Bank both praised governments of the region through the year, and bank lending to Asia rose to a record level in the third quarter. Daniel Tarullo, former international economics advisor to US President Bill Clinton, recalled that at the time there were "no crisis meetings … and certainly no sense that this was the start of an economic crisis that might roll around the world" (Sanger, 1998). Yet, by the end of the year, it would be clear that the whole region was experiencing a financial disaster of immense proportions.

There is much disagreement about what happened to East Asia in 1997 but aspects of the events that took place are clear. With hindsight, it seems that many East Asian economies were characterised by growing economic imbalances and weaknesses. Others, like Japan, with large exposures to these economies, were vulnerable too. According to Steve Radelet and Jeffrey Sachs, there was a rapid build-up of short-term external debt into weak the financial systems of Asian emerging economies (1998a, p. 13). This was provoked by the region's track record, fuelling expectations of continued success, and financial market liberalisation in East Asia which opened up new channels for foreign capital to flow to the Asian economies. Domestic bank lending in many East Asian countries expanded rapidly during the 1990s. Sachs and Radelet note that in Thailand, Korea and Malaysia, bank credit extended to the private sector increased by more than 50% relative to GDP in seven years, reaching 140% in 1996 (p. 14). And much of this lending was financed by banks borrowing short-term from offshore (p. 15). In Korea, the foreign liabilities of the banking system soared from 4.5% of GDP in 1993 to 9.5% of GDP in mid-1997. In Thailand, foreign liabilities of banks and non-bank intermediaries increased to 28% of GDP by 1995. Short-term debts to offshore banks in Korea, Thailand, and Indonesia, reached $68 billion, $46 billion, and $34 billion, respectively, by the end of 1996 (see Table 3). In these three countries, after 1994, the ratio of short-term debt to foreign exchange reserves exceeded one (p. 15). This ratio, combined with the fact that amounts of the lending were used to fuel real estate and non-traded asset purchases, creating a price bubble in fairly illiquid assets, indicated a vulnerability to a financial crisis. Creditors become more likely to ask for payment quickly when it becomes clear that reserves are threatened and there will not be enough liquidity in a system for all to be paid. In the 1990s, this vulnerability was exposed as a series of external shocks made emerging Asian economies less competitive; appreciation of the US dollar made pegs to that currency harder to maintain, stagnation in the Japanese economy led to a reduced Japanese demand for exports from Asian countries, and a 50% devaluation in the value of the Chinese currency in 1994 made other Asian economies less competitive. Further, there was a world-wide glut in semiconductor production, an area in which some Asian countries had significant stakes. All this made the regions pegged currencies more difficult to maintain; real exchange rates appreciated and export growth began to slow down, dropping acutely in 1996 (see Table 4). Then, starting in Thailand on July 2, 1997, the region was plunged in to economic turmoil. In January 1997, in Korea, a large firm called Hanbo steel had declared bankruptcy, leaving $6 billion in debts. Over the next few months, two more large Korean companies (or Chaebol) faced difficulties. All this put pressure on merchant banks which had borrowed overseas to lend to these firms. Then, on February 5, in Thailand, a major property developer called Somprasong Land was unable to meet a foreign debt payment. Land prices had been falling since late 1996. It became clear that companies exposed to the Bangkok property market were in trouble. There were a series of speculative attacks on the Thai Baht in anticipation of a devaluation. In March 1997, the Thai government made a promise to intervene in the property market to buy $3.9 billion in bad property debt from the troubled finance companies. However, the Thai government did not keep its promise. Further, in late June 1997, the government withdrew support from a major finance company, Finance One, announcing that creditors would incur losses. Thereafter, the confidence of foreign investors was lost and they started to withdraw funds. Thai reserves were rumoured to be in a weakened state and it was thought that soon the government would have to float the Baht. Due to continued speculative pressure and currency flight, this event finally took place on July 2, 1997. Wade and Veneroso (1998) note that once foreign lenders began consider the possibility of a fall of the Thai currency, they discovered their heavy exposures to other companies in the region with debt/equity ratios far above their prudential limits. "More exactly," say the authors, "they discovered the possibility that others might make a similar discovery, the aggregation of which would precipitate falls in the exchange rate - multiplying the loan burden and the risks of default." This realisation led to a propensity to call in loans as soon as possible and not make any new ones. Market reluctance to hold the Thai Baht quickly snowballed into a panicky currency flight from the whole region, ultimately forcing massive devaluations (see Figure 2). By August 14, Malaysia, Singapore and Indonesia had abandoned support for their currencies. By November, the yen was under pressure as three major Japanese banks had collapsed due to large exposures to Southeast Asian countries. By the end of the year, the Korean won had lost half its US dollar value. Thus the crisis started as a problem of liquidity and deepened into something far worse with terrible consequences both locally and beyond. In the region it significantly increased potential for social and political instability. The devaluations led to a decline in export revenues and made prices higher as imports became very expensive. Domestic asset markets collapsed. Banks failed, firms went bankrupt, and living standards began to plummet as unemployment accelerated. By July 1998, a year after the devaluation of the Baht, Asean members' GDP was expected had to have fallen by 15% (Economist, 1998a). For these reasons, Wade and Veneroso (1998) say the 'currency crisis' is more of a "development crisis"; although it may not be considered as severe as other humanitarian tragedies, the scale of the loss of security and productivity of the region are similar to the effects of a war. Beyond the region, global growth expectations have dropped and the exposed weaknesses in emerging markets have encouraged speculation. As regards growth, Allen Sinai, chief global economist at Primark Decision Systems, an investment advisory group, said "It is the single most negative economic event since the Great Depression in the United States" (Sanger, 1998). As regards emerging markets, the chairman of the US Federal Reserve Bank, Alan Greenspan (1998), said that the exposure of the excessive borrowing abroad of banks in developing countries "may turn out to be the Achilles' heel" of the global financial system.

Created at the Bretton Woods conference in 1944 with the purpose of safeguarding the stability of the international monetary system, the IMF sees a central role for itself in resolving the Asian financial crisis: "to restore confidence to the economies affected by the crisis" (1998a). A measure of the success the IMF is likely to have in this endeavour can be marked by the way it has interpreted the crisis. The Fund and its supporters in the United States Treasury Department and Federal Reserve Bank have adopted a 'cronyism' paradigm. Thus, the currency crises were only part of a broader financial crisis. Important to this point of view are five issues (IMF, 1998b, pp. 3-5):

Based on this interpretation, the IMF suggests essentially a two faceted plan to restore confidence (1998a and 1998b, pp. 5-7). First, there should be domestic austerity in order to allow foreign debts to be repaid. Second, there should be radical institutional reforms, including those geared towards complete capital account liberalisation, to mend the structural flaws of the effected economies. Liberalisation of capital movements, they say, promotes competition for financing by introducing foreign firms, resulting in an improvement in resource allocation (1998b, p. 7). In exchange for support of its prescription, the IMF has spearheaded the mobilisation of a US$110 billion financial assistance package from the international community, of which it has contributed US$36 billion (IMF, 1998a).

Opposition to the 'cronyism' interpretation of the crisis has been quite varied. Malaysian Prime Minister, Mahathir Mohamad, proposed that the currency fluctuations were the result of "hostile elements bent on … unholy actions" (Krugman, 1998b). For Mahathir, the Asia crisis was caused by a conspiracy between Western governments and their financial speculator henchmen with the object of jealously destroying the miracle that the region had worked so hard to create. The Economist (1997a, p. 65) said that Mahathir had "lost the plot" because there is a universal interest in the region's well-being, especially in averting Asians from the "political temptations of xenophobic nationalism." However, another opinion, such as that advocated by Radelet and Sachs (1998b) and Wade and Veneroso (1998), is less conspiratorial. Radelet and Sachs argue that the crisis was never much to do with debt. Rather, it was the result of a "euphoric inflow of capital that could not be sustained" (p. 2). Thus they characterise the crisis as a 'run' by panicked creditors on the currencies and on domestic assets, leaving borrowers unable to continue to finance their loans (pp. 5-8). Important to this 'excessive capital' view are five factors (p. 9):

Wade and Veneroso (1998) support the above, but focus on "excessive financial deregulation, including, above all, allowing banks and firms to borrow abroad without any government controls or co-ordination." If the 'financial panic' interpretation is correct then the IMF's policies are misguided. Radelet and Sachs (1998a, p. 41) say the Fund's prescriptions of high interest rates and reforms are, in short, "sufficiently restrictive, conditional, and tranched as to leave continuing doubts in the markets, and therefore continuing room for "rational" panics." Wade and Veneroso (1998) agree with this but argue that the IMF's policies are even more counterproductive due to the different financial structure found in Southeast Asia which puts higher costs and smaller benefits on austerity and financial liberalisation than elsewhere. An alternative to austerity, suggest Radelet and Sachs (1998a, p. 42), would be a negotiating framework for creditors and debtors that would overcome the collective unwillingness of creditors to roll over bad short-term debts. This is similar to the way bankruptcies are negotiated in the United States. A second point is that the reforms should not include capital account liberalisation. This is dangerous without proper supervision. While liberalisation of long-term capital flows can be beneficial, short-term capital flows, recognised as having facilitated the crisis in the first place, should be liberalised "only gradually and with extreme caution." However, the IMF's policies fail to take this into account because, as Jagdish Bhagwati (1998, p. 7) argues, the Fund's policies have been motivated by an aggressive, self-interested "Wall Street-Treasury complex" intent on creating a world of free capital mobility. According to Bhagwati, Wall Street's financial firms have put their "powerful oar into the turbulent waters of Washington political lobbying" to achieve their goals (p. 11). Martin Feldstein (1998, pp. 20-33) and Martin Wolf (1998a) both support all these points. They say that the IMF would be better advised to stick to its original task of helping countries to deal with temporary shortages of foreign exchange and sustained trade deficits.

The objective of this dissertation is to examine the attempts to resolve the East Asian financial crisis as a phenomenon of international political economy. Thus Section I critically considers the role of ideology in policy. It concludes that theory cannot be considered outside of the context of the events that have influenced it. The implications of this for the East Asian financial crisis are explored in Section II and III. During the 1970s, enthusiasm for freer capital mobility (neo-liberalism) was invigorated in the US and became the dominant perspective amongst American policy makers as it suited their interests. International financial institutions adopted to this new ideology to stay in favour with the US. Today, this perspective remains dominant. As Section II demonstrates, neo-liberal ideology has been fundamental in informing the IMF's interpretation of the crisis. However, many prominent leaders and economists suggest the IMF's analysis is fundamentally flawed. Section III reflects upon the IMF, its policies in East Asia, its supporters and its opposition. In particular, it notes the reaction to the IMF's prescriptions and indications of declining support for the IMF from elements both in the effected countries and abroad.

I - International Political Economy.

To understand the Asian financial crisis, it is helpful to think of it as an outcome or result of international political economy (IPE). Susan Strange (1995, p. 171) notes that "outcomes in the global household" are issues of distribution (who gets what) and power (the provision of stability and security). Robert Gilpin (1987, p. 11), says that international political economy is the study of the tension between states and the market. The modern market is powerful and able to influence state and policy to suit its own ends. Thus, even though state and market are often considered separately, they are "intimately bound up with each other in international politics" (Underhill, 1994, p. 18). Bearing this state-market tension in mind, Geoffrey Underhill argues that an adequate IPE theory is one that can do three things (1994, p. 22). First, IPE theory must explain the relationships between the economic and political domains. Second, as the state is the focus of decision making in the international system, IPE has to acknowledge the exigencies of the state from that system. This implies a third imperative: finding a "level of analysis" that reveals how the political and economic structures of the domestic and international domains relate to each other. A level of analysis must have something to examine and a point of reference from which to examine it. IPE analysis looks at the 'agents' or units of analysis; states, domestic and international organisations, domestic and international society, and domestic and international actors in markets. Traditionally, these analyses have been located in reductionist frameworks but, as demonstrated in this section, reductionism does not satisfy Underhill's criteria.

Liberal IPE theory says that outcomes are determined by the market (Underhill, 1994, p. 37). Robert Gilpin, a self-proclaimed liberal, describes liberalism as "a doctrine and set of principles for organising and managing a market economy in order to achieve maximum efficiency" (Gilpin, 1987, p. 27). Fundamental to this is the notion that individual behaviour is based on a rationality "determined by economic laws that are impersonal and politically neutral" (p. 29). Liberalism perceives markets as the spontaneous result of a human desire to gain maximum utility by buying or selling goods and services with a natural tendency towards equilibrium, where most of the people benefit most of the time. Material needs and distribution are satisfied by Adam Smith's famous "invisible hand;" ideally there is no "conscious direction…guiding state…[or] planning instruments, only a market and competition" (Pettman, 1996, p. 11). Smith saw the wealth possibilities from open competition. He noted that a country does not need to be protective if its productive (p. 44). David Ricardo added to this the idea of 'comparative advantage'. Every country has a natural advantage over another in production of certain commodities. This has implications for the global division of labour as it allows specialisation and, hence, economies of scale which allow one country to produce, say coffee beans, at a lower price than another. Where this occurs unhindered there is the global liberal economic regime which liberals advocate. Liberalism is, however, a diverse tradition. Its variants range from those prioritising small government and the freedom of the individual to those stressing fiscal or monetary regulation and social democracy. Not all liberals, for example, support completely unfettered markets. Indeed James Goldsmith, a mercantilist, often quoted John Maynard Keynes, a liberal, who said that "I sympathise…with those who would minimise, rather than those who would maximise, economic entanglement between nations … let goods be homespun whenever it is reasonably and conveniently possible, and above all, let finance be primarily national" (Goldsmith, 1995, p. 23). Keynes said this because he understood the effects of free-riding, where individual states abuse the liberal international regime by protecting their own markets while taking advantage of open access to other's. When this occurs aggrieved countries can lose confidence in the international structure and withdraw from it. For this reason, many feel the need for some sort of supervision. Charles Kindleberger (Gilpin, 1987, p. 307) advocated a dominant power, or hegemon, to oversee the market and stabilise financial crises; the provision of an international public good to safeguard the liberal economic regime and create a kind of international Pareto efficiency. Kindleberger thought of this as a benevolent sacrifice on the part of the hegemon because it could only assure world economic stability through a process called diffusion. As Gilpin explains (Grunberg, 1990, p. 439), such "governance of international systems involves a fundamental economic problem … the existence of a continuing economic surplus" which eventually leads to the hegemon's decline. From 1845 onwards, a British hegemony was in place. The time was characterised by an international gold convertibility standard guaranteed by Great Britain. A major by-product of gold convertibility was a system of pegged exchange rates; so the values of the British pound and other currencies were fixed in terms of any other currency. British hegemony declined, however, with the First World War. In the years between the two World Wars there was a significant return to state control through protectionism in response to depressed and vulnerable economies. During World War II, the United States and Great Britain took the initiative to develop a set of economic institutions to deal with anticipated problems of the post-war period. According to Peter Evans (1997), this was the beginning of a process characterised by "embedded liberalism". Evans describes this as liberalism "embedded" in a social compact that commits "the advanced industrial states to insulating … their citizens from the costs" of liberalism such as free-riding (p. 71). At the United Nations Monetary and Financial Conference held at Bretton Woods, New Hampshire, in 1944, charters were produced for these institutions. The International Bank for Reconstruction and Development (or World Bank) was established to finance the post-war recovery in Western Europe. Once this task was completed at the end of the 1940s, the Bank focused on various types of loans and technical assistance to developing countries. The International Monetary Fund (IMF) was established in 1944. It was founded to "enhance stability in international payments both by providing rules for changes in exchange parities and for exchange controls on international payments, and by managing a pool of national currencies that individual countries might borrow from to finance their payments deficits" (Mayer and Duessenberry, 1993, p. 503). A third organisation, the International Trade Organisation (ITO), was discussed separately but it ultimately resulted in a less ambitious outcome in the form of the General Agreement on Tariffs and Trade (GATT). These organisations, especially the IMF, became the foundations of what came to be known as the Bretton Woods System which was to provide stability in international monetary affairs.

Isabelle Grunberg (1990) explores two issues of what she calls the "myth" of hegemonic stability theory (or neo-realism). First, that hegemonic behaviour may not always be the 'self-sacrifice' that Kindleberger suggests. Second, that hegemony is difficult to maintain due to its tendency to 'burn out' through diffusion. On the first point, Grunberg notes that the literature advocating this form of international governance regards the hegemon as a benevolent force; "The notion of taxation extorted by force or even by sustained pressure does not seem to be prominent" (p. 493). Neo-realism is generally presumptuous of benevolence and, therefore, problematic "given the generally accepted predication that state actors will seek to further their own self-interests because they act either in response to voters or out of nationalism or both" (p. 441). This is apparent in the way the Bretton Woods System was broke down. The System introduced extra-national control over fiscal and monetary policy. During this time U.S. hegemonic leadership provided the resources to aid the post-war recovery of non-communist European countries and some Third World countries. However, as US interests changed so did the fate of the Bretton Woods System. Prior to the 60s, the US often ran small payments deficits as a reflection of the demand for the US dollar as a reserve currency abroad. In the late 1960s, however, US payments deficits began to increase above the level that could be explained by the foreign demand for US dollars. Essentially, the dollar became overvalued due to US duplicity. At the time, the dollar was subject to inflationary trends induced by expenditures on the Vietnam War and because of US President Nixon's desire to keep interest rates low in order to stimulate the US economy and thereby increase his chances in the run-up to the 1972 election. In order to defend the exchange rate system, it was left to other countries to keep the values of their currencies higher. The reluctance of those countries to do that, because they wanted monetary flexibility to fend off inflation, is essentially why the Bretton Woods System broke down. Grunberg's second point is that there is "no necessary connection between political hegemony and economic liberalism" (p. 463). That connection, she says, is only a recent phenomenon. Since the administration of President Ronald Reagan, the US has been in economic decline. Paradoxically, however, despite the decline of US hegemony, the liberal economic regime did not wither and die. Rather, as the results of the GATT Uruguay Round suggest, freedoms have increased. Thus there is a problem with the neo-realist theory of hegemonic stability. Primarily, this stems from the fact that it is tautological. It is not sufficient to argue that state behaviour and, by implication, the international order are determined by the distribution of power in an anarchic international structure. A level of analysis that rests on this will not explain why a state will act a certain way or not. As Underhill (1994, p. 31) argues, "Structure cannot determine structure without some intervening process." Ultimately state behaviour is the result of interdependency; the complex web of links between the domestic and international levels. Thus neo-realism provides a system within which international politics can take place but its level of analysis does not bridge the gap between the economic and the political or provide a full picture of the state; it does not account for the influence of a plethora of domestic and international actors or class.

Where liberals and neo-realists ignore the connection between politics and economics, it is precisely upon this, and its impact upon the state in the international system, which Marxist analysis focuses. However, Marxism cannot be considered a single current of thought. So, referred to here is structural Marxism, that is the epistemological analysis of the capitalist state and society. Contrary to the liberal perspective, it argues that the natural state of the market is not harmonic and, as a result, society is upset by class conflict. Within the state, a capitalist system of production allows one class to dominate another and it is this which fundamentally influences the market and the state in international politics as mutually beneficial economic and political arrangements are fostered between elites in different countries. Thus, contrary to realists, war and imperialism are not inevitable features of an anarchic international order but are "evil manifestations of a capitalism that will disappear with the communist revolution" (Gilpin, 1987, p. 43). But this approach still does not reveal an adequate level of analysis; it does not explain how the relationship between power and structure is actually articulated. It reduces politics to a function of the division of labour and the distribution of capital without considering how interests are organised and expressed. As Underhill (1996, p. 36) argues, it needs to consider articulation; the expression of policy preferences within the political institutions of the global system.

Robert Cox confronts the previous theories with a proposition based not on the tautology of the structure of states superimposed on the structure of anarchy or of the distribution of capital but on historical frameworks. Historical frameworks do not determine outcomes directly but constitute the framework within which action takes place. They provide context for the factors which inform actions. For example, the case of theory. Cox (1996a, p. 87) notes that "theory is always for someone and for some purpose." It is a subjective interpretation of reality. The perspective of interpretation involves an ontology; "the constituent elements and forces that configure socio-historical reality (and thus world order) in different periods" (Gill, 1994, p. 77). Thus each historical period has its own perspectives on reality which favour one or another kind of theory. During the Cold War, for example, theories focused on managing the relationship between the two superpowers. However, that these theories are influenced by their own socio-historical realities does not imply a flaw. Rather, Cox argues, that state and society are so complexly interpenetrated that these epistemological, or "problem-solving," theories which use static analysis "are only very vaguely and imprecisely indicative of distinct spheres of activity" (1996a, p. 86). Thus there is a need for an acknowledgement of "state/society" complexity as the basic entity of international relations (p. 86). And this complex originates in process or "history". Cox notes that "One cannot…properly abstract man and the state from history so as to define their substances or essences as prior to history" (p. 94). Process is defining. So, Cox advocates a critical theory to counter problem solving theory. The latter concerns the problematic facing the perspective; the thing to understand and to overcome. Thus, theory is tainted. It is always bound to the point of origin of the problematic and has a "historically conditioned awareness of…problems and issues" (p. 88). But theory can also be "critical," asking how the perspective's social order came about. It can look at the origins and changes in institutions and social power relations. Thus the agenda of critical theory is not set by the problematic, rather it appraises it (p. 89). And this appraisal reveals that epistemological theory ignores process and, hence, is misleading. Though Cox concedes that a strain of Marxism, called historical materialism, avoids this. Historical materialism, in contrast to structural Marxism, is more holistic. It reasons historically and seeks to explain (and promote) changes in social relations (p. 94).

With historical materialism the use of the word hegemony is broadened to include process variables. It is not sufficient to describe it as a relationship of states. Rather, it is a dominant social class exercising hegemony internationally. This idea has influenced others too; Gilpin (1987, p. 43) acknowledges the role of "ideological hegemony" as vital "if the hegemon is to have the necessary support of other powerful states" and Robert Keohane (1984, p. 43) suggests that international political economy is the result of a consensus on the common interests of leading capitalist states, bolstered by existing international regimes (institutions). Keohane quotes Cox's idea that power "based on dominance over production is rationalised through an ideology incorporating compromise or consensus between dominant and subordinate groups" (p. 44). This happens because hegemonies of the neo-realist type are founded by powerful states which have gone through social and economic revolution. This revolution not only modifies domestic economic and political structures but also influences structures beyond the states boundaries. This modification occurs as the methods of the dominant hegemonic class of the revolutionised country are emulated abroad (Cox, 1996c, p. 137). This can happen, for example, through international institutions or organisations. More often than not these are established by the state which establishes the hegemony or, at least, they have that states support (p. 138). They act to legitimise the norms of the world order as idealised by the dominant hegemonic class (p. 138). Further, they co-opt, assimilate and pacify any opposition to the world order. For example, the elite talent from countries further from the hegemonic core (and hence dangerous as they are less under its influence). Due to passive revolution, the importation of industrial production to peripheral countries without any revolution in social structure, the old local elites stay in power and become part of the hegemony as their interests become attached to that status quo. Thus, co-opted talent becomes condemned to work for the progress of their country only as long as the interests of the local elite or the hegemon are not effected. Real change is made very difficult within that structure. Cox calls this trasformismo and uses a simile to describe it. "Hegemony," he says, "is like a pillow: it absorbs blows and sooner or later the would-be assailant will find it comfortable to rest upon" (p. 139). Hence the hegemonic concept of world order becomes broader; founded upon a "globally conceived civil society, i.e., a mode of production of global extent which brings about links among social classes of the countries encompassed by it" (p. 136).

In summary, critical theory reveals a level of analysis that avoids many of the problems that epistemological or reductionist IPE theories encounter in explaining outcomes. It shows that reification of the economy is unrealistic because the economy is subject to political processes. Further, critical theory reveals the importance of considering how interests are organised and expressed, and demonstrates that hegemony is possible at a class level. For the purposes of this project, critical theory provides a way of explaining both the circumstances of the Asian financial crisis and why it has been managed so controversially.

II - Interpretations.

Critical theory indicates that outcomes in international political economy cannot be explained by reductionism; economic activity is subject to political process and ideology is important as motivating a globally conceived civil society. This section shows that the most powerful financial institutions in the world sympathise with radical free market ideology. It demonstrates how this ideology has influenced their analysis of the Asian financial crisis even though many prominent leaders and economists suggest that their analysis is fundamentally flawed.

According to Stephen Gill (1996, p. 75), a "neo-liberal political economy" has characterised the I.P.E. of much of the nineteenth and twentieth centuries. This evolved out of neo-realism based on Hobbes's notion of human nature as selfish; "a struggle of individual will in a struggle for survival" (p. 77). Hence, through Cox's trasformismo, hegemony has informed a need for regulation, a sacrifice of some individual sovereignty to a higher political authority, to avert anarchy and keep society free. Since the end of the 19th century, this need has often been met internationally by "regimes" serving the norms and desires of the dominant class. Thus, Evans (1997, p. 71) calls the Bretton Woods system "a product of an Anglo-American ideology significantly constrained by post-World War II fears that failure to protect domestic populations might reinvigorate the political traumas of the preceding decades." Or, in the words of John Meynard Keynes, the chief British negotiator at the Bretton Woods conference, the plan was to accord "every member government the explicit right to control all capital movements" (Helleiner, 1994, p. 164). US Treasury Secretary, Henry Morgenthau, said the objective was to "drive the usurious moneylenders from the temple of international finance" (p. 164). Discredited by the failure of laissez-faire economics during the interwar period, old policy makers were replaced by a new breed of Keynesian-minded economists, industrialists, and labour leaders. The negotiations at Bretton Woods were dominated by such characters as Keynes and Harry Dexter White, central figures in the intellectual movement challenging the liberalism of the 1930s. They said the state had to be protected from "flights of hot money" induced by "political reasons" or a desire to "influence legislation" (p. 164). However, the global financial environment that spawned the Asian crisis is not what Keynes sought to construct. Rather, the crisis in today's global financial markets is exactly what Bretton Woods sought to avert. How can this be explained? Louis W. Pauly (1994, p. 204) writes that as the interests of the industrial member-states that provide the IMF with the bulk of its resources change, so do the policies of the Fund. In the early 1970s, the US turned against the IMF's founding principles. Eric Helleiner (1994, p. 166) offers two reasons for this. First, that US policy-makers recognised that a more liberal order made US financial markets more attractive as compared to those in other, more regulated economies. Second, a "neo-liberal" ideology, as advanced by Milton Friedman and Friedrich Hayek, started informing US policy choices. Neo-liberals questioned the post-war concern to maintain strict capital controls. They rejected the idea that speculative financial flows would disrupt stable exchange rate systems by arguing in favour of floating exchange rates. They also praised the way international financial markets would move to discipline states and force them to adopt better fiscal and monetary programs. Critically, Helleiner (p. 167) notes, this movement found "strong support among an increasingly powerful bloc of social forces that favoured financial freedom." He identifies this bloc as an assortment of "private financial interests and conservative financial officials, as well as multinational industrial interests whose frustration with capital controls grew as their operations became increasingly global in the 1960s and 1970s" (p. 167). Traditionally, Craig Murphy (1994, p. 213) argues, change in the IMF and World Bank has always favoured this bloc and, as a result, these organisations have assisted in maintaining a world order that creates a "boundary of privilege" between rich and poor countries. Thus, as Evans notes (1997, p. 71), "Anglo-American ideological prescriptions have been transcribed into formal rules of the game, to which individual states must commit or risk becoming economic pariahs." An examination of the 1997 Asian financial crisis reveals the truth of this statement; a definite "neo-liberal" ideological agenda underlies the way the international community has interpreted and attempted to resolve the crisis. This persists without due consideration to nature of emerging market economies.

Conventional currency-crisis theory focuses mainly on one variable: the exchange rate. In the "first-generation" crisis model, a government persistently running money-financed budget deficits has only a limited stock of reserves to peg its exchange rate. Ultimately the attempts of investors to predict the collapse of this unsustainable policy leads to a speculative attack on the currency once reserves fall to a critical level. In the "second-generation" model a speculative attack on a currency develops as the market believes the government chooses whether or not to defend a pegged exchange rate based on preference towards either short-run macroeconomic flexibility or long-term credibility. Crisis occurs as the market anticipates that a defence of the latter will ultimately fail either as a result of a predicted deterioration in fundamentals or through self-fulfilling prophecy. However, the Asian crisis seems to have deviated from these standard approaches. First, none of the characteristics of the "first-generation" crisis model seem to have been present. Just before the crisis all the governments were more or less in fiscal balance. Second, unemployment rates were not substantial when the crisis began and therefore there was no motive to pursue expansionary monetary policy. So, where was the problem? Though there are many and varied analyses of the causes of the crisis, a general consensus is that the crisis stemmed from a combination of bad private sector decisions and bad government policy. Many economists are sympathetic to this point of view. Wade and Veneroso (1998) note that in Western financial systems "companies normally carry an amount of debt that is no bigger than and generally less than the value of their equity capital." According to standard prudential limits, intermediaries will not lend to companies with higher levels of debt. However, they say, in Southeast Asia these limits were not observed. Corporate debt/equity ratios among bigger firms were commonly found to be two to one or more. Fundamental to explaining this is the role of moral hazard, a term derived from insurance literature involving the increased probability of behaviour becoming negligent once insured. Krugman (1998a) notes that financial intermediaries whose liabilities were perceived as having a government guarantee seem to have been central players in starting the crisis. In Thailand, for example, a crucial role was played by so-called "finance companies" like Finance One - non-bank intermediaries that borrowed short-term money, often in dollars, then lent that money to speculative investors. The Thai central bank's Financial Institutions Development Fund (FIDF) had lent over Bt200bn ($8bn) to these struggling financial institutions, effectively draining seven years' worth of the Thai government's fiscal surpluses. Similarly, banks in South Korea borrowed extensively at short term and lent to finance very speculative investments by highly leveraged corporations. The excessiveness of this risky lending created inflation of asset prices and the position of the intermediaries seemed better than it was. And then the bubble burst. As external shocks hit emerging Asian economies and made them less competitive, those asset prices fell and made the intermediaries insolvent.

Giancarlo Corsetti, Paolo Pesenti, and Nouriel Roubini (CPR) argue the 'fundamentals' model in some detail. They say that the crisis reflected "an unsustainable deterioration in macroeconomic fundamentals and poor economic policies in the countries in the region" (CPR, 1998, p. 2). Rather than just being the result of a spontaneous flight of capital due to self-fulfilling prophecy, CPR suggest that "phenomena that appear as consequences of arbitrary shifts in expectations can be rationalised and explained in terms of fundamentals" (p. 69). Current account deficits, they say, are sustainable only to the degree that the trade balance can be reversed at some stage in the future without an external crisis. An external crisis can materialise in the form of a rapid real depreciation of the currency or a run on the reserves. Or it can come in the form of an inability to pay get financing to pay debts, or an actual default (p. 13). In this context, they observe five main contributory factors in the effected countries:

Based on this, CPR (p. 69) conclude that the crisis was in part common reaction to particular domestic and external shocks that hit different economies around the same time that their fundamentals indicated vulnerability to crises. These shocks lead to a deterioration of competitiveness. In turn, this lead to a game of competitive devaluations that lead to greater currency depreciation than required (they propose that a co-operative solution to the problem of how much depreciation would have been necessary to meet an external adjustment requirement would have resulted in a smaller aggregate depreciation in the region). The extent to which contagion took place can be considered a result of the reaction of domestic and international investors to the news of worsening fundamentals and the revelations of the weakness of data from emerging Asian economies. Thus, the crisis became a "standard 'collective action' problem faced by a large number of creditors who needed to decide whether to roll-over existing credits or call in their loans" (p. 70).

The IMF and its supporters share the 'fundamentals' view. The Fund states that the countries became "victims of their own success. This success had led domestic and foreign investors to underestimate the countries' weaknesses" (1998b, p. 3). Specifically, the IMF argue that:

"A combination of inadequate financial sector supervision, poor assessment and management of financial risk, and the maintenance of relatively fixed exchange rates led banks and corporations to borrow large amounts of international capital, much of it short-term, denominated in foreign currency, and unhedged. As time went on, this inflow of foreign capital tended to be used to finance poorer-quality investments" (IMF, 1998a).

This underestimation facilitated large-scale financial inflows which increased the demands on policies and institutions, especially in the financial sector. The countries' success in the past led to a reticent tendency among policy makers towards action when the problems started to become apparent. The IMF identifies five factors which contributed to the capital flight (1998b, p. 3). These are similar to the causes outlined by CPR:

The 'fundamentals' point of view is also popular among the IMF's supporters. In a speech, US Deputy Treasury Secretary, Lawrence Summers (1998), said the crisis was the fault of "practices uniquely Asian." In other words:

"the maintenance of mutually inconsistent monetary policy and exchange rate regimes; excess inflows of private capital channelled into unproductive investments; substantially reduced competitiveness; significant failures of debt management that led to unsustainable quantities of short-term debt" (Summers, 1998).

US Federal Reserve Bank chairman, Alan Greenspan, concurs. Of Asian economies, he says, "it is evident that [they] could not provide adequate profitable opportunities at reasonable risk in the 1990s to absorb the surge in capital inflows" (1998). To this failing, he attributes moral hazard, over-leveraged capital through cronyism, and lack of supervision:

"A sound institution can fend off unexpected shocks. But when they are undercapitalised, have lax lending standards, and are subjected to weak supervision and regulation, they have become a source of systemic risk to both domestic and international financial systems" (Greenspan, 1998).

Further, he adds, cronyism has exposed a weakness in emerging economies which may turn out to be the "Achilles heel" of the international financial system (1998). Thus, a generally held view of the crisis among the IMF and its supporters is that the highly praised, outstanding economic performance of the region in the preceding two decades was based upon a false economy. Therefore, and because the instinctively herd-like participants in financial markets have a propensity to stampede, it was only a matter of time before this weakness was exposed and the structurally unsound Asian miracle ended.

IMF critics disagree with the 'fundamentals' model. They argue that behind the crisis was a dramatic shift in market expectations and confidence i.e., 'financial panic'. This view is based on the notion that market euphoria over expectations for the region's continued success led to huge inflows of capital which became increasingly vulnerable to panic and ultimately succumbed through self-fulfilling prophecy. Vulnerability to 'panic' crises, according to Radelet and Sachs (1998a, p. 8), is indicated by illiquidity, when short-term liabilities to foreigners exceeds short-term assets. The authors use the example of the 1994-95 crises in Mexico and Argentina to explain the 'financial panic' model. Advanced economies, they say, have learned to control liquidity crises through the introduction of mechanisms and institutions that limit the possibility of self-fulfilling panics within the domestic economy (p. 9). The US Federal Reserve Bank (Fed), for example, acts as a lender of last resort to preserve liquidity in the domestic banking system. However, many emerging market economies lack the regulatory infrastructure that sustains Fed-like institutions. Hence, their systems are incompatible with sudden shifts in depositor confidence and, therefore, highly liberalised banking transactions. In the early 1990s Mexico and Argentina had started, but not completed, the process of financial-market liberalisation and reform. Money could move in and out more freely. Mexican economic fundamentals were good (p. 8). However, when capital inflows to Mexico dropped in the second quarter of 1994 due to political instability, the result was a capital flight. As Mexico maintained a pegged exchange rate, reserves started to fall. By the end of the year Mexico was forced to devalue and float. After the devaluation, creditors learned that the Mexican Government owed around $28 billion of short-term, dollar denominated debts (tesobonos) but only had $6 billion of reserves. The loans were unserviceable as no creditors were available; the Mexican Government was solvent, but illiquid. Solvency was demonstrated by the fact that $28 billion in debts was only around 10% of pre-crisis GDP which, Radelet and Sachs say, is "not a crushing debt burden" (1998a, p. 8). The crisis was severe but unnecessary, it was not justified by fundamental factors, and had only transitory effects (see Figure 3). The IMF bailed Mexico out, GDP recovered in 1996 and 1997, and private investment flows recovered in 1996 and 1997. In the wake of the Mexican crisis, foreign investors also started to doubt Argentina's commitment to fixed exchange rates as elections were due in May 1995. There was an exodus of creditors from Argentina's commercial banks. Then an emergency international bailout fund, combining funds from international financial institutions, including the IMF, provided liquidity enough for confidence to return. The crisis caused an abrupt collapse of GDP but, as in Mexico, recovery was swift.

Radelet and Sachs (1998b, p. 5) argue the Asian financial crisis resembles the events that hit Mexico and Argentina more than the 'fundamentals' model (1998b, p. 5). The authors (1998b) note that continuing growth in Asian the 1990s accompanied by a rapid build-up of short-term external debt into weak financial systems prompted by East Asia's history of strong growth and financial liberalisation. When these flows of capital waned in 1996 and 1997, a financial panic erupted. Thus, the proximate causes are similar enough to those advocated by the 'fundamentals' view. But the root issue of the crisis, however, is quite different. The 'fundamentals' line posits a problem of collective action of countries in downwards spiral of competitive currency adjustments. However, Radelet and Sachs (1998a, p. 5) shift the blame to the creditors. Fundamentally, the creditors behaved as if the borrowers were insolvent; lacking "the net worth to repay outstanding debts out of future earnings." In fact, as in Mexico and Argentina, the borrowers were illiquid; lacking the ready cash to repay the current debt servicing obligations but able to do so in the long term. Radelet and Sachs (p. 5) refer to this as a "liquidity crisis"; the unwillingness or inability of the capital market to roll-over loans to illiquid borrowers. Thus, creditors panic and rush to be first in line to withdraw, not because they have to, but because the other creditors are also panicking. In Asia, the crisis was triggered by a rapid and unexpected withdrawal of funds to the region (see Table 11). While it had been suggested that the Asian miracle was overstated, the vast majority of market participants and analysts believed Asia would continue to perform well. For example, a member of the Bundesbank Board reported that even on the verge of the collapse, German banks extended massive loans to Korea because the recent accession of Korea to OECD had given them confidence in that economy (1998b, p. 2). Up and until mid-1997, the region experienced a period of large increases in cross-border bank loans (see tables 12 and 13). Total foreign bank lending to these countries expanded from $210 billion at the of 1995 to $261 billion at the end of 1996. This is an increase of 24% in a single year. Importantly, inflows of capital were $13 billion for the first half of 1997 (p. 6). Then, in the second half of the year, $34 billion flowed out, representing a swing in bank loans of 9.5% GDP between 1996 and the second half on 1997. The authors argue that such a remarkable reversal of fortune in such a short period of time is difficult to attribute to changes in underlying fundamentals (p. 6). They say that even if the crisis became a prolonged recession, "the enormous gains in income levels, health, education, and general welfare in Asia during the last three decades will not be dissipated" (1998a, p. 11). This view is shared by Joseph Stiglitz, senior vice-president and chief economist of the World Bank. Where normally Bank and Fund staff keep their differences private, Stiglitz says:

"only a year ago, the East Asian countries were held up as models for other developing countries … This dramatic swing in opinions about the Asian development model, matching the dramatic changes in the markets, has gone further than is justified by fundamentals. No other economic system has delivered so much, to so many, in such a short span of time" (Stiglitz, 1998).

As opposed to the 'fundamentals' view, Radelet and Sachs (1998a, pp. 11-13) draw attention to the role of attempts towards financial reforms in East Asia in the early 1990s. These reforms were aimed at upgrading financial institutions. However, they left the economies exposed to instabilities in international financial markets. In Indonesia, for example, financial deregulation packages led to a large expansion in the banking sector. The number of private banks nearly tripled from 74 in 1988 to 206 in 1994. In Thailand, 1992, the Bangkok International Banking Facility (BIBF) was introduced and allowed a rapid growth in the number of financial institutions that could engage in foreign borrowing and lending activities. In Korea, financial market reforms carried out in compliance with the terms of OECD membership in the 1990s greatly increased the access of domestic banks to short-term international loans. But, the authors say, generally, the rapid expansion of financial services was not matched by careful regulation and supervision. As Wade and Veneroso (1998) observe, the new capital inflows were unmonitored and bribery and resulted in poor standards. Thus the countries hit hardest by the crisis, just like Mexico and Argentina, were those who had started, but not finished, the process of liberalisation reform. East Asia became vulnerable to financial crisis because it attempted to reform its financial markets in a market orientated manner. The resulting increase in banks led to an increased exposure in these economies to international financial shocks, mainly through the build-up of short term debts. In contrast, Asian countries with stronger financial systems, like Singapore and Hong Kong, were better equipped to deal with the crisis. Thus, Sachs and Radelet generalise the cause of the crisis as the accident of "partial financial reforms that exposed the Asian economies more directly to international financial market instability" (p. 13).

Clearly, two very different interpretations of the causes of the 1997 East Asian financial crisis exist. The important difference between the two is that the IMF and its supporters have adopted an interpretation of the crisis informed by an ontology that supports the idea of capital account liberalisation. Thus the crisis is the fault of the way Asian economies were run. Radelet and Sachs, on the other hand, are critical of the damaging effects of unfettered capital mobility on emerging economies that are incapable of defending against mass panics by foreign creditors. In this, Radelet and Sachs seem much closer than the IMF to the original principles of the Bretton Woods System.

III - Solutions and reactions

As the crisis deepened in 1997, many of the effected countries went to the IMF for help. The IMF is charged with safeguarding the stability of the international monetary system and acts as a sort of international lender of last resort for troubled countries. Thus, a role for the organisation in the resolution of the Asian financial crisis was clear. But a year after the devaluation of the Thai baht, the IMF is heavily criticised and its policies seem to have failed. On the right, opposition focuses on the moral hazard of the bailouts it has organised. On the left, critics point to the disastrous consequences of panic in financial markets. This section reflects upon the IMF, its capital account liberalisation policies, its supporters and its opposition. Ultimately, it argues that resistance to the IMF represents a significant challenge to the ideological consensus which assures the dominance of the hegemon. Although Asian countries seem to be willing to co-operate with the hegemonic core, as per Cox's theory of trasformismo, there are indications of declining support from elements in the effected countries and in the core itself.

Power in the IMF is centripetal, it originates with the governments of member countries. According to David Driscoll (1998), the Fund acts on the will of the majority of the membership and the individual member country. On joining the IMF, each member country contributes a certain sum of money called a quota subscription. Quotas serve various purposes. First, they form a pool of money that the IMF can draw from to lend to members in financial difficulty. Second, they are the basis for determining how much the contributing member can borrow from the IMF or receives from the IMF in periodic allocations of special assets known as SDRs (special drawing rights). The more a member contributes, the more it can borrow in time of need. Third, they determine the voting power of the member. Through an analysis of each country's wealth and economic performance, the IMF sets the amount of the quota the member will contribute. The richer the country, the higher its quota. In 1945, the then 35 members of the IMF paid in $7.6 billion; by 1997, IMF members had paid in more than $200 billion. The United States, with the world's largest economy, contributes most to the IMF, providing about 18 percent of total quotas (around $38 billion); the Marshall Islands, an island republic in the Pacific, has the smallest quota, contributing about $3.6 million. As the United States is the largest contributing nation, it holds most influence. Murphy (1994, p. 213) notes that traditionally any moves to increase the say of the less wealthy nations in the IMF have been opposed by the more powerful states.

As noted in Section II, both the Fund and the US government, its key supporter, favour the 'fundamentals' analysis. As a result, the troubled countries have been told to liberalise trade, deregulate financial markets and toughen disclosure rules. The IMF's long-term plan is "to enable the effected Asian economies to emerge more strongly to resume rapid development and to help strengthen the international monetary system to meet the challenges of the next century" (IMF, 1998a). To this end several policies have been introduced (for details in each case see Appendices 1-3):

The Fund has approved SDR26 billion (US$36 billion) of financial support for reform programmes and engaged in the mobilisation of US$77 billion of additional financing from other sources to back these up. It has also intensified consultations with other members that were effected by the crisis on reducing the impact of contagion and avert further damage. Further, in all cases the reform programs have demanded:

Closely tied to the above are efforts to redress the governance issues that also contributed to the crisis. Thus measures to improve efficiency of markets, break links between business and government, and liberalise capital markets have also been introduced. The US strongly supports all these efforts. President Clinton (1998) said "Our policy is clear: No nation can recover if it does not reform itself. But when nations are willing to undertake serious economic reform, we should help them do it". At his annual State of the Union address to Congress, he outlined his concerns:

"First, these countries are our customers. If they sink into recession, they won't be able to buy the goods we'd like to sell them. Second, they're also our competitors. So if their currencies lose their value and go down, then the price of their goods will drop, flooding our market and others with much cheaper goods, which makes it a lot tougher for our people to compete. And, finally, they are our strategic partners. Their stability bolsters our security" (Clinton, 1998).

In the same address, he also said that as "the turmoil in Asia will have an impact on all the world's economies, including ours, making that negative impact as small as possible is the right thing to do for America -- and the right thing to do for a safer world."

According to the Fund (1998a), the outlook for recovery is good: the reforms are being implemented, exchange rates have been stabilised, and global effects have been contained. But while the immediate panic seems to have been stemmed and the IMF presses ahead with its reforms, it has come under scrutiny for its optimism. The Fund has predicted a V-shaped recovery where, if all its suggested reforms are followed, confidence will recover during 1998, paving the way for a moderate rebound in growth in 1999 (IMF, 1998b, pp. 1-2). However, others have suggested a more L-shaped recovery which would take significantly longer. Jesus Estanislao, dean of the Asian Development Bank Institute, has commented that a full recovery could take up to six years. He said "I don't think there's anybody in the world who knows when this will end, but my own personal reading is that its going to be longer than a whole lot of people have been saying" (Agence France-Presse, 1998). A vice-president of World Bank, Jean-Michel Severino, said that growth in several East Asian countries could contract by up to 15% in 1998 (Richardson, 1998). He said "we are talking about a major recession and probably depression in this part of the world. This depression may be very long-lasting if one does not manage it very, very carefully." Thus many take issue with the way the IMF is approaching the Asia crisis. Radelet and Sachs (1998a, p. 41) argue that IMF bailout lending has not provided enough liquidity to restore confidence. This due more than anything to the fact that the Fund is not a true lender of last resort. Its loans are always "sufficiently restrictive, conditional, and tranched as to leave continuing doubts in the markets, and therefore continuing room for "rational" panics" (p. 41). As creditors will always know this, they have a motive to wait and see what happens in the future. Therefore, IMF loans are unlikely to staunch a financial panic. Throughout 1997, none of the IMF brokered deals managed to restore confidence to the effected countries. An alternative to bailouts conditional on austerity, suggest the authors (p. 42), would be a negotiating framework for creditors and debtors that would overcome the collective unwillingness of creditors to roll over bad short-term debts. This is similar to the way bankruptcies are negotiated in the United States. The authors point to the success of the US government brokered postponement of Korea's foreign short-term debts of January 1998 to support this argument (p. 30). On January 16, at the request of the US Government, foreign banks agreed to a complete roll-over of Korean debts falling due in the first quarter of 1998. This not only stabilised the Won but also halted the decline of the Thai (and temporarily the Indonesian) stock market (see Figure 4) Similarly, Wade and Veneroso (1998) note that efforts to reduce external current account deficits seem unrealistic. At the end of 1997, Korea, Malaysia, and Thailand were all running current account surpluses. However, this was the result of falls in imports rather than increased exports. As most of what these countries import consists of industrial goods and fuel rather than consumer goods, any reduction in imports would hurt exports. Thus, the authors say, it is unlikely that the trade balance can be made return enough foreign exchange to cover interest charges due in the next several years.

Wade and Veneroso (1998) argue that the IMF's prescriptions do not take account of a different financial structure that exists in Asia. They draw attention the fact that gross domestic savings to GDP ratios are one third of GDP or more in Southeast Asian countries. This is compared to 15-20% in western systems. According to the authors, Asian households are mostly responsible for this. They are highly averse to risk and hold their savings in bank deposits as opposed to equities. Asian governments are also low net borrowers. But banks must lend. And in order to be successful as late arrivals to markets where other firms are already well established, Asian firms must get their hands on very large amounts of resources. Thus, in Asia, banking systems are biased towards lending to firms. To make such a system work properly, co-operation is necessary between banks and firms. This has been interpreted as 'cronyism' by some commentators. However, the authors suggest that these commentators "miss the financial rationale for co-operative, long-term, reciprocal relations between firms, banks and government in a system which must intermediate high savings into high corporate debt/equity ratios." As Francis Fukuyama (1995, p. 14) points out, it was long believed that the key to the Asian miracle was that governments in each case stepped in and took an active role promoting development through supporting industry. Wade and Veneroso (1998) argue that the Asian system has "yielded a quantum leap up the world hierarchy in technology and scale, and rates of improvement of living conditions that surpass virtually all other countries." Critically, however, most of this quantum leap took place during a time when there were limits on the movement of capital in and out of Asian countries. While liberalisation of long-term capital flows can be beneficial, short-term capital flows, recognised as having facilitated the crisis in the first place, should be liberalised only gradually and with extreme caution. Radelet and Sachs (1998a, p. 40) say capital market liberalisation in Latin America and Asia have both been followed by extreme macroeconomic crisis. IMF responses to those crisis "have not prevented deep dislocations in the emerging market countries. Moreover, the emergency IMF bailout packages in Mexico, Argentina, and East Asia have arguably contributed to significant new moral hazards in international lending" (p. 40). As international financial markets are inherently unstable and developing countries do not have the regulatory structure to properly deal with short-term capital movements, "the rapid push towards fully open capital markets among the developing countries would seem to be misguided" (p. 40).

Paul Volker, former chairman of the US Federal Reserve, says that the real problem with the Asia crisis is that there was no one but the IMF to deal with the problem (Hoagland, 1998). He described the collapse of the Asian currencies as "only the latest, and most dramatic, episode in a series of events that raise some basic questions about global finance and its implications for economic development." Similarly, Martin Wolf writes that the fundamental question stemming from the Asian crisis is:

"what to do about capital account liberalisation, which the IMF is strongly promoting in all its programmes. The evidence now seems clear that any substantial net draft on foreign savings creates huge risks. Almost any large scale international borrowing, even by non-banks, threatens economic stability if it becomes big enough to threaten currency. At the least, there is an overwhelming case for permanent prudential regulation of foreign borrowing, particularly short-term borrowing, by commercial banks. Unregulated flows of short-term international capital are a licence to rack up losses at the expense of taxpayers" (Wolf, 1998b).

Jagdish Bhagwati, supporter of free trade, notes that the IMF has made its ambitions clear. In September 1997, at the Annual Meetings of the IMF and the World Bank in Hong Kong, the Fund issued a statement endorsing an eventual move to capital account convertibility and said it would pursue that goal aggressively (Wade and Veneroso, 1998). But the original IMF Articles of Agreement included only "avoidance of restrictions on payments for current transactions" (Bhagwati, 1998, p. 7). Bhagwati claims that the benefits of this new move have been grossly exaggerated by those who would gain most from free capital mobility. For capital flows, he says, are characterised by "panics and manias" (p. 7). The downside of unfettered capital flows is that a country has to do everything it can to restore confidence once a panic hits. This means raising interest rates which, in the case of Asia, has decimated domestic investment and firms with large amounts of debt. The result, he says, is a fire sale to foreign buyers. Further, effected countries are losing their economic independence to an "IMF increasingly extending its agenda, at the behest of the US Congress, to invade domestic policies on matters of social policy" (p. 9). This is evident, for example, in the Sanders-Frank Amendment of 1994 which attaches labour standards conditions to bailout funds. Bhagwati suggests that the IMF is a puppet of powerful financial institutions in the United States, the "Wall Street-Treasury Complex", operating under the "self-serving assumption that the ideal world is … one of free capital flows, with the IMF and its bailouts at the apex in a role that guarantees its survival and enhances its status" (pp. 7-12). To Bhagwati, at the heart of the matter is ideology and the interests of a dominating social class; "like-minded luminaries among powerful institutions" (p. 11). Roland Vaubel (1994) supports this with his account of IMF behaviour during the 1982 debt crisis. The United States reversed its policy on opposing an increase in the IMF quota. This was clearly a move induced by self-interests. Originally U.S. President Reagan was trying to cut down government spending. But many U.S. banks had assets in the debt ridden countries. Defaults would have placed immense pressure on U.S. banks liquidity. Further, it was not in U.S. interests to have some Latin American countries in crises. Thus, according to the U.S. Treasury, during the 1982 crisis, the IMF became a "convenient conduit for U.S. influence" (p. 45). It should, however, have been the role of the U.S. Federal Reserve to guarantee domestic bank's liquidity. IMF lending was not the most efficient way to achieve this, it bailed out not only those banks in trouble but also "all other creditors of the debtor nations, the vast majority that were not in danger" (p. 44). Thereby increasing global moral hazard risk. It was argued, in defence, that the IMF was in a better position than the creditor banks to identify the areas where reform was most needed. However, it would have been perfectly possible for the IMF to act as a negotiator of adjustment programs without actually getting involved in lending any money at all. Regardless, lobbying in the U.S. by banks was intense (p. 45) and IMF lending during the debt crisis served as an easy smoke screen to subsidise them. In conclusion, Vaubel comments that the debt crisis "confirms the rule that pressure groups are the natural allies of international organisations because they lobby for transfers and regulations and thereby increase the demand for the institutions' output" (p. 46). Bhagwati drives this point home in reference to the Asia crisis. "US banks," he says, "could all have been forced to the table, absorbing far larger losses than they did, but they were cushioned by the IMF acting as a lender of first, rather than last, resort" (1998, p. 12).

As Wade and Veneroso (1998) admit, it is difficult to know when the interest-based theory stops and the conspiracy theory takes over. The essential difference between the two is that nobody believes a conspiracy theory, as the response to Mahathir's demonstrations suggests. But Bhagwati says some things are clear:

"Wall Street has become a very powerful influence in terms of seeking markets everywhere. Morgan Stanley and all these gigantic firms want to be able to get other markets and essentially see capital account convertibility as what will enable them to operate everywhere. Just as in the old days there was this 'military-industrial complex', nowadays there is a 'Wall St.-Treasury complex" (Wade and Veneroso, 1998).

He notes that the staff of these institutions, like Treasury Secretary Rubin, come from Wall Street. Thus a Wall Street ontology, resulting in the affinity for taking capital in and out of countries freely, is very dominant. This, he says, ties in nicely with the IMF's vision of itself as a global lender of last resort:

"They see themselves as the apex body which will manage the whole system. So the IMF finally gets a role for itself, which is underpinned by maintaining complete freedom on the capital account" (Wade and Veneroso, 1998).

In this context, the complex has helped promote the World Trade Organisation's agreement on liberalising financial services that was being worked on in 1997. At the time many developing countries, including those in Asia, opposed the WTO. In response to this opposition, "Executives of groups including Barclays, Germany's Dresdner Bank, Societe General of France and Chubb insurance, Citicorp, and Ford Financial Services of the US, agreed discretely to impress upon finance ministers from around the world the benefits of the WTO deal" (de Jonquie'res, 1997). But then, say Wade and Veneroso (1998), came the financial crisis. By December 1997, the Asian leaders agreed to drop their objections. By December 12, 1997, more than 70 countries signed the agreement which committed them to open banking, insurance, and securities markets to foreign firms. Clearly, say the authors, the Asian countries had no choice: either they signed or their receipt of bail-out funds would have become complicated. Neither were Asian countries allowed to manage the crisis themselves. The US objected to alternatives to the IMF such as the Japanese proposal for an 'Asian IMF' tabled at the 1997 annual meetings of the IMF and World Bank. Stanley Fischer, vice-president of the IMF said he was "sceptical" of any efforts Asians might make and argued that an Asia-only fund would weaken pressure on governments to put their economies right (Economist, 1997b). All this suggests that the US is motivated to maintain a strong leadership position in the region. This leadership is vital as leverage to secure economic openness; the US Treasury made it clear that Korean financial liberalisation was a precondition to US bail-out contributions. Its rationale was that this would benefit US firms which would, in turn, generate further support among Americans for US polices in the area (Wade and Veneroso, 1998). The US has sent powerful economic diplomats to the region like Deputy Treasury Secretary Lawrence Summers, the Clinton administration's "guru" on international economics (Lexington, 1997). Summers works closely with "an unusual coalition" of business groups who are keen to see the IMF get funding and carry out its plans for liberalisation (Schmitt, 1998). The interests of this coalition are clear; the crisis has made a lot of the Asian industrial base very cheap indeed and, as the IMF continues its policy of making countries allow foreigners buy in to their previously protected industry and banking, it is probable that a lot of US business concerns are going to find very good bargains in an open Asia fire-sale. For example, on May 15, at the behest of the IMF, Korea announced it was opening its stock ownership to 100% by foreigners (Reuters, Bloomberg, 1998). Previously foreigners were only allowed own 55% of a company there. On May 16 the Korean stock index was near an 11 year low. General Electric Co. allocated $40 billion to invest in Asia over the next four years, taking advantage of the crisis to pursue low-cost acquisitions (Bloomberg, 1998). In July, 1998, this sum increased by $8 billion (International Herald Tribune, 1998a) after the successful purchase of 85% of all loans at Thailand's biggest liquidation sale of 56 bankrupt finance companies that June (International Herald Tribune, 1998b). In June 1998, analysts said that leveraged buyout funds were holding as much as $80 billion in the US that could be invested in Asia (Richardson, 1998b). Even the pop star Michael Jackson has become involved, negotiating to acquire a ski resort from a bankrupt Korean underwear manufacturer (Krugman, 1998c).

Krugman (1998c) argues that it is yet uncertain whether or not the 'fire-sale' which has taken place is unfair vis-à-vis whether the foreign purchase of assets represents the fair transfer of control to efficient owners who were previously unable to buy at a reasonable price; or whether it represents sales to inefficient owners who happen to have cash. A crucial point made by Krugman, however, is that regardless of the economic sense of the fire-sale, the legacy of foreign ownership will be contentious for years. Asians are genuinely fearful of a new form of colonial exploitation as global conglomerates threaten to take-over their devalued assets. In June, 1998, Mahathir warned of foreign "robbers" trying to take over Malaysian companies (Richardson, 1998b). Ralph Emmerson notes that this is typical of the general contempt for "anything-goes American capitalism" that exists among Asian leaders (1998, p. 48). Mahathir also said:

"Basically, there is anarchy in the international monetary domain. People, individuals, can do things that they like which have a devastating effect on other people. The idea is you make more money at whatever cost for yourself. You don't care what happens to others" (Far Eastern Economic Review, 1998).

The Economist (1998b) notes that, because of the crisis, such notions have become popular in Southeast Asia and generate anti-American sentiment. For those who are involved in building US foreign relations, this implies a dangerous contradiction in US policy. On the one hand the US is encouraging radical neo-liberal economics. On the other, it is trying to maintain political stability. The latter is in the cadre of the US Department of State's diplomats, people primarily concerned with how political instability effects US interests. Deborah Lutterbeck (1998a) argues that Clinton falls into the Treasury camp, consistently backing the idea of reform in exchange for funds. This has sidelined the State Department, effectively giving the Treasury the jurisdiction for foreign policy at least as far as the Asia crisis goes. Although Secretary of State Albright has publicly supported the reforms (Albright, 1998), the IMF's policies worry Department of State officials because they "lower economic growth and come with a social cost" which promotes instability (Lutterbeck, 1998b). For example, in Indonesia, the IMF demanded that fuel subsidies be cut, resulting in a 71% increase in the price of gasoline, in exchange for $1 billion of the $43 billion package the Fund put together for it (Shiner, 1998). The increase led to violent riots and racial attacks against the country's wealthy ethnic Chinese minority by Muslim mobs (Vatikiotis, 1998). Normally, Indonesia is a moderate Islamic country which has a stabilising effect on an otherwise anti-American culture. The crisis, however, has spawned a wave of Islamic militancy in Indonesia and destabilised security in the whole region. This is an important consideration for the Department of State as Islamic fundamentalist sponsored transnational terrorism has become the main threat to US interests in the 1990s. Moreover, there are vital shipping lanes in the Indonesian archipelago which the US wishes to keep secure. A total of 40% of the world's shipping transits through Indonesian waters, including tankers carrying 70% of Japan's oil imports (McBeth, 1998). The sea-lanes are also the strategic passageways for the US Navy from the Pacific to the Indian Ocean. It is argued that the US ability to defend these waters and maintain stability in the area is fundamental to guaranteeing the strategic relationship between the US and Japan and South Korea (Yergin, Eklof and Edwards, 1998, p. 47). But stability is still jeopardised by the continuing reforms. It is "confusing," according to one Indonesian official, that the State Department "is not taking the leadership role" (Lutterbeck, 1998a). If the Treasury and IMF continue to impose stringent reforms, he says, "none of them will take place and the economy will become a second priority to the political and social problems." Thus it is uncertain how long stability can last. The situation in Indonesia, for example, remains unpredictable. In late April, 1998, as the military moved in to quell the anti-Suharto riots, their commander said his actions were in the name of reform and that reform had "become a national agenda" (Wall Street Journal Europe, 1998). However, the reality is that, while the new Indonesian leader, Habibie, has promised reforms, he has much less control over his country's politics than his predecessor as a result of the ascendance of radical Islamic elements. As the popularity of these radicals is the direct result of social unrest caused by the reforms then, perversely, the reforms are jeopardising US power in the region.

Despite the dominance of the Treasury, the State Department's voice does not go unheard. When, in June 1997, it became apparent that the Japanese economy had entered a recession, there was uncertainty as to how the US would react. The US trade deficit was reported to have soared to a record $14.5 billion as the Asia crisis effected exports (AP, Bloomberg, 1998). While the trade deficit with Japan had narrowed, the trade gap with China had widened. When the Yen fell to rate of approximately 146 to the dollar, the US intervened to support it. However, this was driven by more than fears of just another episode in the crisis. Behind the scenes, China was using an implicit threat of devaluing its own currency to force the US's hand on the eve of President Clinton's historic visit. While Beijing had publicly proclaimed that it would not devalue in order to promote stability in the region, it also sent veiled warnings to the US about its intentions should the Yen fall further. China's vice-minister for foreign trade, Sun Zhenyu, said that the Yen's depreciation put "large pressure" on China's foreign trade and exports (Friedman, 1998). In the end, he said, if the situation worsened, then China would "have to consider the question of whether to make adjustments." Robert Hormats, a former US financial official, said that at that time he was getting "clear signals from senior Chinese officials that if the Yen hit 150 to the dollar they would be forced to devalue the Yen" (Friedman, 1998). In Washington, an anonymous Clinton administration official conceded that "everybody here is worried that China might devalue." Such an action, according to Alan Friedman (1998), would have had "highly damaging consequences in Asia and as far afield as Wall Street" by triggering another round of competitive devaluations and also putting further pressure on already embattled US exporters. Moreover, it would have been an affront to US economic leadership in the region. Thus, as June started and the Yen approached the 150 level, "the US Treasury became significantly concerned" (Friedman, 1998). At a Senate committee meeting on June 11, Treasury secretary, Robert Rubin, started by making it clear that there would be no US intervention to support the sliding yen. "Intervention," he said, "is a temporary tool, not a fundamental solution" (Chandler, 1998). But minutes later the yen dropped to 143. By the end of the meeting, after a note having been passed to him, Mr Rubin was saying that he "didn't want anyone to infer that we were suggesting that in all cases intervention is not an appropriate strategy for short-term effects." By the end of the next week, on June 17, the US had intervened with the Federal reserve Bank of New York, acting on behalf of the Treasury Department, spending about $2 billion to buy up yen (Knowlton, 1998). However, more importantly, there were no strings attached. According to Carl Gewirtz (1998), despite widely held expectations of an announcement of a quick fix solution for the ailing Japanese economy, nothing new emerged. Analysts have surmised from all this that the intervention was not made at the behest of the Treasury at all but by the White House. "Its increasingly apparent that the US decision to intervene wasn't made by … Rubin but by President Clinton," said Phillipa Malmgren, an analyst at Bankers Trust (Gewirtz, 1998). Clinton, in turn, was pressured into this action by the State Department, which was fearful of the implications for US leadership in the region if China devalued during a state visit (Gewirtz, 1998). Similarly, in July 1998, the IMF led an intervention in Russia when economic instability there threatened "a financial catastrophe" that could have spawned "political chaos in the world's second-largest nuclear power" (Blustein, 1998). $12.5 billion was committed to Russia despite no guarantees that the lower Russian house of parliament would give its necessary approval. Thus is apparent that, despite the neo-liberal aspirations of the 'Complex', issues of compromised leadership and security seem to have moderating tendencies.

Ironically, the most significant challenge to the 'Complex' comes from the US itself. An isolationist, Republican party dominated, US Congress has dogged the issue of US funding for the IMF. Republicans demand greater influence and openness in return for bailing out foreigners. In America, funding of international organisations is a persistent struggle between Clinton and the Republican Congress. In 1997, Congress denied President Clinton the authority to negotiate 'fast track' regional free trade agreements. In August 1997 Washington decided not to contribute directly to the bailout package because Congress was reluctant to give its necessary approval to $18 billion in new funding for the IMF without more influence in exchange. To the dominant conservatives in Congress, the money could be better spent at home. On May, 1998, George Shultz, Treasury chief under President Nixon and secretary of state under President Reagan, testified in front of the House of Congress. According to Jim Hoagland (1998), he said IMF bailouts were too generous, bailing out unworthy financial institutions that really should be allowed to fail. He accused the IMF and US Treasury of making Asia's problems worse rather than better. Further, he urged Congress to turn back "a pattern of escalation of ambitions of the IMF" so unhindered markets could resolve these problems. Following Schultz's comments, speaker of the House, Newt Gingrich, a Republican, was said to be inclined towards not scheduling a vote on the $18 billion requested for the IMF. He said "There's a way to get IMF funding," he said, "we should have some more oversight on what the IMF does" (Dewar, 1998). Until Congress gets what it wants, it finds plenty of ammunition to feed its obstreperousness. For example, Republican leaders have made their support for IMF funds conditional upon executive support for legislation that curbs the activities of US family planning agencies overseas. Clinton, however, opposes such a move. Another example, Republicans question the morality of the IMF's dealings with Indonesia. There are two main reasons for this. The first, as straightforwardly put by Congressman Brad Sherman, goes "we give money to the IMF that makes Indonesia stronger and they use that money to oppress the people … I have to explain to workers in my district why we are bailing countries whose predatory practices have taken a big chunk of the textile and consumer product market" (Lutterbeck, 1998b). But the second, more sinister argument, is whether or not the Democratic Party was ever in the pay of Suharto. According to the Economist (1996), the Democratic National Committee (DNC) received substantial funds from parties close to Suharto. Though the Democratic Party has moved to distance itself from any wrongdoing, for Republicans the questions remain; how much influence has Suharto had over Clinton and, by implication, the IMF? Washington only urged the Suharto regime to take heed of human rights but did not actually criticise the Suharto regime. This facilitated an easy transition when the dictator decided to step down and hand the reins of power over to his chosen successor and old friend, B.J. Habbibe. Thus Washington officials are afraid that Clinton is seen as having been "too associated with Suharto" (New York Times Service, 1998). This closeness further complicates Clinton's efforts to secure IMF funding. "Do you think that the administration wants to come up to the Hill and say they are defending Suharto Inc.?" asked a congressional foreign relations aide (Lutterbeck, 1998a). In the meantime, the Fund has been hurt by the absence of US funds. As the Asia crisis has left it short, the IMF had to draw on an emergency line of credit from rich countries in order to help Russia. "This puts them pretty close to the bottom of the barrel" said a former IMF official; if Congress does not approve new funds by the end of the year, then available funds will have declined to a worrying level (Stevenson, 1998). According to Richard Haass, a former senior aide on the Bush administration's National Security Council staff, Republican's have denied Clinton "any sense of momentum" as regards the Asia crisis (Frisby and Davis, 1998).

The IMF's mandate gives it a role in the resolution of the Asian financial crisis. However, its policies are condemned as weak where they should be strong and strong where they should be weak. IMF bailout funds have not provided enough liquidity to restore confidence because they are too conditional. Instead, it is argued, the Fund should be tougher on banks and arrange postponements on debt payments. Further, the financial reforms introduced in the economies are incompatible with Southeast Asian financial systems. Thus the IMF has strayed from its original purposes. It has been motivated in this context by powerful, self-interested, financial actors pursuing a neo-liberal ideology. However, as the crisis has progressed, the 'Complex' has encountered much resistance from elements in the effected countries and in the core itself. This represents a significant challenge to the ideological consensus which assures the dominance of neo-liberal ideology. On the one hand many Asians are doubting the benefits of financial liberalisation. On the other, US politicians are demanding an ever higher price for their support of IMF initiatives.

Conclusion

Robert Cox's critical theory posits that outcomes in the international economy are subject to the ideological whims of a dominant hegemonic class. The manner in which the international community has approached the East Asian financial crisis suggests this is true. Reflection upon both the interpretations and the prescriptions of the International Monetary Fund, the US Federal Reserve Bank, and the US Treasury, reveal that these institutions are motivated by a neo-liberal ontology or perspective on how the global economy should be run. They blame the crisis on poor East Asian governance and propose complete capital account convertibility as part of the solution. This indicates a blatant disregard for the welfare of people living in East Asia whose financial systems are ill suited to the high velocity of capital that neo-liberals aspire to.

Cox's theory suggests a critical level of analysis or point of reference from which to examine events in the international political economy. This equates to an analysis that appraises the dominant ideology or perspective of dominant social groupings in the international class structure. Thus critical theory posits that international power relationships exist at a class level. A direct consequence of this is that the international economy is subject to political processes. The central argument of this dissertation is that today's dominant class, which Bhagwati labels the 'Wall Street-Treasury Complex', supports a neo-liberal ideology and, as a result, has made an interpretation of the Asia crisis that is highly critical of the East Asian way of doing things. The IMF and the financial institutions that support it all want to create a world of free capital flows. Thus the 'Complex' are critical of the weaknesses in Asian economies that make them susceptible to crisis. But many suggest that the IMF's interpretation is flawed; the capital flights were the result of panic by creditors to the region who overexposed themselves to the region. This has negative implications for the appropriateness of short-term capital mobility in emerging Asian economies.

Interpretations are important as they can inform completely different perspectives on solving problems. The IMF's is supposed to be the world's lender of last resort, providing liquidity wherever necessary to stem panic in financial markets. However, the neo-liberal ontology of the Fund and those who support it has informed prescriptions based on austerity and financial liberalisation. This is beyond the IMF's original mandate and counterproductive too; austerity it is argued, will not promote growth and liberalisation is recognised as having caused the crisis in the first place. Moreover, the financial reforms introduced in the economies restrict the economic development model which gave rise to the Asian development phenomenon in the first place. Instead of bailouts conditional to reform programmes that damage Asian economies even more, it is suggested that the panicky creditors, acknowledged as having caused the crisis by IMF critics, should bear more of the cost of the crisis by postponing debts until Asian businesses can recover. With the exception of Korea, however, this has not happened. In the meantime, rapid recovery, as occurred in Mexico and Argentina, seems unlikely. As this becomes clear, Asian leaders criticise Western capitalism and Islamic extremists threaten to upset the political stability of the region. These are counter-hegemonic tendencies; as peripheral countries move away from the consensus necessary to maintain a stable ideological hegemony, Cox's trasformismo is challenged. This worries the US diplomats who fear a loss of US leadership in the area and disturbance in strategically vital Asian shipping lanes. But more disturbing for the hegemon are signs of decent at home. Conservative US politicians are demanding an ever higher price for their support of IMF initiatives. The reticence of the US Congress to approve funds for the IMF may soon compromise that organisation's ability to operate effectively.

In conclusion, an effective solution to the East Asian financial crisis is limited by US duplicity. The crisis will not be solved until those in positions of power start to consider the welfare of Asians as more important than financial liberalisation. The IMF's current prescriptions can only provoke more political instability. As counter-hegemonic tendencies gather impetus, it is not a stretch of the imagination to consider that, if a genuine change of heart is not forthcoming on the part of the 'Complex', Asia could be in for far worse than a financial crisis and the international community will be trying to fix more than just a regional economic collapse.

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Appendices

Appendix 1: Indonesia (as taken from IMF, 1998a)

The IMF-Supported Program of Economic Reform

The shift in financial market sentiment that originated in Thailand exposed structural weaknesses in Indonesia's economy, notably the large amount of short-term foreign debt owed by the private corporate sector. On November 5, 1997 the IMF's Executive Board approved financial support of up to SDR 7.3 billion or about US$10 billion, equivalent to 490 percent of Indonesia's quota, over the next three years.

The initial program of economic reform envisaged:

financial sector restructuring, including closing unviable institutions, merging state banks, and establishing a timetable for dealing with remaining weak institutions and improving the institutional, legal, and regulatory framework for the financial system;

structural reforms to enhance economic efficiency and transparency, including liberalization of foreign trade and investment, dismantling of domestic monopolies, and expanding the privatization program;

stabilizing the rupiah via the retention of a tight monetary policy and a flexible exchange rate policy; and

fiscal measures equivalent to about 1 percent of GDP in 1997/98 and 2 percent in 1998/99, to yield a public sector surplus of 1 percent of GDP in both periods, to facilitate external adjustment and provide resources to pay for financial restructuring. The fiscal measures included cutting low priority expenditures, including postponing or rescheduling major state enterprise infrastructure projects; removing government subsidies; eliminating VAT exemptions; and adjusting administered prices, including the prices of electricity and petroleum products.

Against a background of continuing loss of confidence in the Indonesian economy and further sharp declines in the value of the rupiah, the Indonesian authorities announced a reinforcement and acceleration of the program in the Memorandum of Economic and Financial Policies issued on January 15, 1998. Key reinforcing measures included:

adjustments to the 1998/99 budget that would result in a public sector deficit of about 1 percent of GDP, in order to accommodate part of the impact on the budget of the economic slowdown;

the cancellation of 12 infrastructure projects and the revoking or discontinuation of privileges for the IPTN's airplane projects and the National Car project;

further bank and corporate sector restructuring, including the subsequent announcement of a process to put in place a framework for creditors and debtors to deal on a voluntary, case-by-case basis with the external debt problems of Indonesian corporations; the establishment of the Indonesian Bank Restructuring Agency (IBRA); and a government guarantee on bank deposits and credits;

limiting the monopoly of the national marketing board (BULOG) to rice, deregulating domestic trade in agricultural produce, and eliminating restrictive market arrangements; and

measures to alleviate the suffering caused by the drought, including ensuring that adequate food supplies are available at reasonable prices.

Due to policy slippages and other developments, the rupiah failed to stabilize, inflation picked up sharply, and economic conditions deteriorated. The government issued a Supplementary Memorandum of Economic and Financial Policies on April 10, 1998, adapting the macroeconomic policies to the deteriorated economic situation and expanding the structural and banking reforms agreed in January. The envisaged measures included:

a strong monetary policy to ensure stabilization of the rupiah;

accelerated bank restructuring, with IBRA to continue its take-over or closure of weak or unviable institutions and be empowered to issue bonds to finance the restoration of financial viability to qualified institutions; the elimination of existing foreign ownership restrictions on banks; and the issuance of a new bankruptcy law;

a comprehensive agenda of structural reforms to increase competition and efficiency in the economy, reinforcing the commitments made in January and including the further privatization of six major state enterprises and the identification of seven new enterprises for privatization in 1998/99;

accelerated arrangements to develop a framework with foreign creditors to restore trade financing and to resolve the issues of corporate debt and interbank credit, with subsequent agreements on these issues reached on June 4, 1998 after talks between Indonesian officials and international banks;

strengthening the social safety net through support for small and medium-sized enterprises and through public works programs; and

enhancing the implementation and credibility of the program through daily monitoring by the Indonesian Executive Committee of the Resilience Council, in close cooperation with the IMF, the World Bank, and the ADB; substantive actions prior to approval of the program by the IMF Executive Board, and frequent program reviews by the IMF Executive Board.

Chronological Highlights

1997

October 8 The IMF announces support for Indonesia's intention to seek support from the IMF and

other multilateral institutions (News Brief No. 97/19)

November 5 The Executive Board approves a US$10 billion stand-by credit for Indonesia and releases

a disbursement of US$3 billion (Press Release No. 97/50)

1998

Mid-January IMF Management visit Jakarta to consult with President Suharto on an acceleration of

reforms already agreed under the program, after further depreciation of the rupiah. (News

Brief No. 98/2)

January 15 Indonesia issues Memorandum of Economic and Financial policies on additional measures.

January 26 The IMF welcomes Indonesia's plans for a comprehensive program of the rehabilitation

of the banking sector and putting into place a framework for creditors and debtors to deal,

on a voluntary and case-by-case basis, with the external debt problems of corporations. (News Brief No. 98/4)

April 10 Indonesia issues a Supplementary Memorandum of Economic and Financial Policies on

additional measures. (News Brief No. 98/10)

May 4 The Executive Board completes the first review of the stand-by arrangement and

disburses US$989 million. (News Brief No. 98/11)

Tentative Schedule of Forthcoming Reviews

To be determined Monthly reviews of the stand-by arrangement

Appendix 2: Thailand (as taken from IMF, 1998a)

The IMF-Supported Program of Economic Reform

The financial crisis first started in Thailand, with the baht coming under a series of increasingly serious speculative attacks and the markets losing confidence in the economy. On August 20, 1997, the IMF's Executive Board approved financial support for Thailand of up to SDR 2.9 billion or about US$4 billion, equivalent to 505 percent of Thailand's quota , over a 34-month period.

The initial program of economic reform featured:

financial sector restructuring, initially focusing on the identification and closure of unviable financial institutions (including 56 finance companies), intervention in the weakest banks, and the recapitalization of the banking system;

fiscal measures equivalent to about 3 percent of GDP to correct the public sector deficit to a surplus of 1 percent of GDP in 1997/98, support the necessary improvement in the current account position, and provide for the costs of financial restructuring, including an increase in the VAT tax rate from 7 percent to 10 percent;

a new framework for monetary policy, in line with the new managed float for the baht; and

structural initiatives to increase efficiency, deepen the role of the private sector in the Thai economy, and reinforce its outward orientation, including civil service reform, privatization, and initiatives to attract foreign capital.

The program was modified in a Letter of Intent on November 25, 1997, in light of a larger-than-expected depreciation of the baht, a slowdown of the economy that was sharper than anticipated, and severe adverse regional economic developments. The modifications included:

additional measures to maintain the public sector surplus at 1 percent of GDP;

establishment of a specific timetable for implementing financial sector restructuring, including strategies for the preemptive recapitalization and strengthening of the financial system; and

acceleration of plans to protect the weaker sectors of society.

The program was further modified in a Letter of Intent on February 24, 1998, to give clear priority to stabilizing quickly the exchange rate while limiting the magnitude and negative social impact of the larger-than-expected economic downturn, and to set the stage for Thailand's return to the international financial markets. Among the modifications were:

accelerating financial system restructuring, including the privatization of the intervened banks;

adjusting fiscal policy targets from a targeted public sector surplus of about 1 percent of GDP to a deficit of 2 percent of GDP in response to the weaker economic activity and larger-than-anticipated improvement in the current account, in part to finance higher social spending;

ensuring an adequate availability of credit to the economy to lead to economic recovery, while maintaining a tight monetary stance;

strengthening the social safety net; and

further deepening the role of the private sector, including initiatives to attract foreign capital.

The program was again modified in a Letter of Intent on May 26, 1998 , with the main priority minimizing any further decline of the economy and bringing about an early recovery, while preserving progress made in stabilizing the exchange rate and fostering confidence. The modified program called for:

allowing further cautious reductions in interest rates and somewhat higher monetary growth rates, in line with recovering money demand;

adjusting the fiscal target by increasing the public sector deficit target to 3 percent of GDP, in view of the larger current account surplus and in order to minimize any further decline of the economy;

implementing concrete measures to strengthen the social safety net and allocating an additional 0.5 percent of GDP in the budget for this purpose;

accelerating corporate debt restructuring by strengthening the legal and institutional framework, including through reform of the bankruptcy act, foreclosure procedures, and foreign investment restrictions , with the latter intended to increase resources for restructuring;

continuing to focus financial sector reforms on the need for the core banking system to strengthen its capital; and

designing a strategy to strengthen the finance company sector and resolving the status of the four intervened banks to minimize the need for any future public support for these institutions.

Chronological Highlights

1997

August 11 The IMF convenes meeting of interested countries in Tokyo; total support pledged for Thailand eventually reaches about US$17 billion. (News Brief No. 97/17)

August 20 The Executive Board approves a US$4 billion stand-by credit for Thailand, and

releases a disbursement of US$1.6 billion. (Press Release No. 97/37)

October 17 The Executive Board reviews the stand-by arrangement under the emergency

financing mechanism procedures.

November 25 Thailand issues Letter of Intent on additional measures.

December 8 The Executive Board completes the first review of the stand-by arrangement and

disburses US$810 million. (News Brief No. 97/29)

1998

February 24 Thailand issues Letter of Intent on additional measures.

March 4 The Executive Board completes the second review of the stand-by arrangement and

disburses US$270 million. (News Brief No. 98/5)

June 10 The Executive Board completes the third review of the stand-by arrangement and

disburses US$135 million. (News Brief No. 98/19)

Tentative Schedule of Forthcoming Reviews

September 1998 Fourth review of the stand-by arrangement, with the next two reviews on a quarterly

basis, and semi-annually thereafter

Appendix 3: Korea (as taken from IMF, 1998a)

The IMF-Supported Program of Economic Reform

Over the past several decades, Korea transformed itself into an advanced industrial economy. However, the financial system had been weakened by government interference in the economy and by close linkages between banks and conglomerates. Amid the Asian financial crisis, a loss of market confidence brought the country perilously close to depleting its foreign exchange reserves. On December 4, 1997 the IMF's Executive Board approved financing of up to SDR 15.5 billion or about US$21 billion, equivalent to 1,939 percent of Korea's quota, over the next three years.

The initial program of economic reform featured:

comprehensive financial sector restructuring that introduced a clear and firm exit policy for financial institutions, strong market and supervisory discipline, and independence for the central bank. The operations of nine insolvent merchant banks were suspended; two large distressed commercial banks received capital injections from the government, and all commercial banks with inadequate capital were required to submit plans for recapitalization;

fiscal measures equivalent to about 2 percent of GDP to make room for the costs of financial sector restructuring in the budget, while maintaining a prudent fiscal stance. Fiscal measures include widening the bases for corporate, income, and VAT taxes;

efforts to dismantle the nontransparent and inefficient ties among the government, banks, and businesses, including measures to upgrade accounting, auditing, and disclosure standards, require that corporate financial statements be prepared on a consolidated basis and certified by external auditors, and phase out the system of cross guarantees within conglomerates;

trade liberalization measures, including setting a timetable in line with WTO commitments to eliminate trade-related subsidies and the import diversification program, as well as streamlining and improving transparency of import certification procedures;

capital account liberalization measures to open up the Korean money, bond, and equity markets to capital inflows, and to liberalize foreign direct investment;

labor market reform to facilitate the redeployment of labor; and

the publication and dissemination of key economic and financial data.

As described in a Letter of Intent on December 24, 1997, the program was intensified and accelerated as the financial crisis in Korea worsened and concerns about whether international banks would roll over Korean short-term external debt placed additional pressures on international reserves and the won. The revised measures, whose announcement was followed by a significant voluntary increase in rollovers and extension of claims by international bank creditors on Korean financial institutions, included:

further monetary tightening and the abolition of the daily exchange rate band;

speeding up the liberalization of capital and money markets, including the lifting of all capital account restrictions on foreign investors' access to the Korean bond market by December 31, 1997;

accelerating the implementation of the comprehensive restructuring plan for the financial sector, including establishing a high-level team to negotiate with foreign creditors and reducing the recourse of Korean banks to the central bank; and

speeding up trade liberalization measures, including making binding under the WTO the liberalization of financial services as agreed with the OECD.

In a Letter of Intent on February 7, 1998, amid the encouraging results from the strengthened economic program, which included an agreement with a group of foreign creditor banks on a voluntary restructuring of Korea's short-term debt on January 28, 1998 and the establishment of the Tripartite Accord between labor, business, and government concerning social issues on February 5, the macroeconomic framework was revised and the policies that the government intended to pursue for 1998 were set out. The measures included:

targeting a fiscal deficit of around 1 percent of GDP for 1998 to accommodate the impact of weaker economic activity on the budget and to allow for higher expenditure on the social safety net;

moving forward to implement a broader strategy of financial sector restructuring, having contained the immediate dangers of disruptions to the financial system;

increasing the range and amounts of financial instruments available to foreign investors, increasing the access of Korean companies to foreign capital markets, and liberalizing the corporate financing market (e.g., mergers and acquisitions); and

introducing a number of measures to improve corporate transparency, including strengthening the oversight functions of corporate boards of directors, increasing accountability to shareholders, and introducing outside directors and external audit committees.

In a Letter of Intent on May 2, 1998, the program of economic reform was updated in view of, on one hand, the progress made in resolving the external financing crisis and, on the other, the need to support the recovery of the real economy in the latter half of the year. Positive developments included the conclusion of the restructuring of US$22billion of Korean banks' short-term foreign debt, a successful return to the international capital markets through a sovereign global bond issuance of US$4 billion, the shifting of the current account to a substantial surplus, and an increase in usable reserves to over US$30 billion. The measures included:

the accommodation of a larger fiscal deficit of around 2 percent of GDP in 1998, in light of weaker growth and through the operation of automatic stabilizers, and measures to monitor and further strengthen if necessary the social safety net;

the formation of an appraisal committee including international experts to evaluate the recapitalization plans of the undercapitalized commercial banks;

the publication by August 15, 1998 of regulations to bring Korea's prudential regulations closer to

international best practices, including strengthening compliance with existing guidelines concerning foreign exchange maturity mismatches;

further phased liberalization of the capital account, including loosening restrictions on foreign exchange transactions, foreign ownership of certain assets, and ceilings on foreign equity investment in nonlisted companies; and

corporate governance steps to increase disclosure and monitoring of conglomerates, as well as corporations' accountability to shareholders, via, for example, further lowering the shareholding threshold required for a shareholder to initiate legal action against a company and requiring listed companies to have at least one quarter of the Board of Directors be outsiders.

Chronological Highlights

1997

November 21 The IMF welcomes Korea's request for IMF assistance. (News Brief No. 97/25)

December 3 The IMF notes the successful conclusion of discussions with Korea and the pledges of support coming from the World Bank, ADB, and countries in the group of potential participants in the supplemental financing support package for Korea.

December 4 The IMF Executive Board approves a US$21 billion stand-by credit for Korea, and

releases a disbursement of US$5.6 billion. (Press Release No. 97/55)

December 18 The IMF Executive Board concludes the first biweekly review of the stand-by arrangement and releases a further US$3.5 billion, activating the IMF's new Supplemental Reserve Facility. (News Brief No. 97/30)

December 24 Korea issues a Letter of Intent, concerning intensification and acceleration of its program. The IMF Managing Director announces his intention to recommend to the Executive Board a significant acceleration of the resources available to Korea, in light of Korea's Letter of Intent and in the context of the progress between Korean and international banks in dealing with Korea's external debt, and notes that the World Bank and ADB will disburse a total of US$5 billion and the group of potential participants in the supplemental financing support package for Korea will disburse

US$8 billion. (News Brief No. 97/32)

December 30 The Executive Board approves the request by Korea for modification of the schedule of purchases, bringing forward part of the amounts originally scheduled for February and May 1998, but without changing overall access to Fund resources, and disburses US$2 billion to Korea.

1998

January 7 Korea issues a memorandum on the economic program regarding the Letter of Intent issued on December 24, providing additional details on policy intentions.

January 8 The IMF Executive Board concludes the second biweekly review of the stand-by arrangement and disburses US$2 billion.

February 7 Korea issues a Letter of Intent on additional measures.

February 17 The Executive Board completes the first quarterly review of the stand-by arrangement and disburses a further US$2 billion.

May 29 The Executive Board completes the second quarterly review of the stand-by arrangement and disburses a further US$2 billion.

Tentative Schedule of Forthcoming Reviews

August 1998 Third review of the stand-by arrangement, with subsequent reviews on a quarterly basis through 1998 and semi-annually thereafter.