December 2, 1998
I) IS GLOBALIZATION LEADING THE WORLD TO A NEW DEPRESSION?
Since my "graduation" from the Philippine presidency at the end of June, I have been traveling through East Asia, Europe and the Americas - and everywhere I have been asked about the financial and currency crisis that has so devastated the economies - and the politics - of East Asia.
We of Asia-Pacific have the dubious distinction of being the first region to experience the downside of globalization.
And never before have we needed to promote understanding and cooperation among the peoples of Asia-Pacific more than we do now.
Since July of last year, we have been seeing how quickly the new digital technologies can move portfolio investment out of any region - just as quickly as they bring it in.
Our home-region - once the site of the "East Asian economic miracle" - has suffered the most drastic reversal of fortune in modern economic history.
While the Philippines has also suffered substantially, we are relatively fortunate - our economy is creeping along at about 1.5% this year. Even Singapore is struggling hard against recession.
Malaysia's economy may shrink by 3-5% -- Thailand's and South Korea's economies by 7-8% -- and Indonesia's by as much as 16%.
And the question that businesspeople in particular most often ask is: Does the East Asian crisis give warning of a crisis of the liberal economy - as the critics of globalization assert?
I do not pretend to know the complete answer to this question.
I only know this specific crisis will indeed become a crisis of neo-liberal capitalism if the world's political and business leaders do not take concerted action.
Causes of the East Asian Crisis
In East Asia, the crisis has reversed 30 years of economic growth the world has never seen before.
And the contagion has been spreading - here to Australia - to Russia - parts of Western Europe - and the Americas.
Until now the experts disagree on what had set off the crisis. Some blame it on poorly supervised financial systems --on unhedged loans sunk in bubble investments - and on crony capitalism.
I tend to agree with those who trace its basic cause to the essential volatility of financial markets - which is being compounded by the revolution in the information and communications technologies.
As Alan Greenspan (of the U.S. Federal Reserve Board) noted wryly, "The new technologies have engendered a highly efficient and increasingly sophisticated financial system. But that same efficient financial system also has the capability to rapidly transmit the consequences of errors of judgement in private investments and public policies to all corners of the world at historically unprecedented speed."
Progress always extracts a Price
But greater even than the characteristic fickleness of capital markets is the volatility of free-ranging capitalism as a whole.
Capitalism (as we know) is relentlessly inventive: it defines itself by its technological virtuosity. Even its harshest critic, Karl Marx, noted that, by comparison with capitalism, "all earlier modes of production were essentially conservative."
Capitalism's core process the eminent Austrian economist Joseph Schumpeter described memorably as "creative destruction."
Capitalism works by constantly displacing old ideas - old products - old methods of production - with new and better ideas, products, and methods.
And in our time, changes in technology and the globalization of production are accelerating - in a new spurt of growth driven by powerful clusters of new inventions.
While these changes may benefit an economy as a whole, they can harm its more vulnerable sectors severely. And that is what the vastly enhanced mobility of both capital and the productive processes is doing to low-skilled workers in both the rich and poor countries.
Since the invention of the automatic loom, technological change has, of course, produced losers. But never before has it done so on such a scale - and at such a speed - approximating revolutionary change in our own time.
To cite just one example - migratory capital seeking the advantage of lower labor costs in the developing countries has put to risk the living standards of 250 million workpeople in North America and the European Union.
Because of the universality of assembly, East Asian workers can produce much of the same industrial goods - and at average wages only one-thirtieth of what Western workpeople draw.
Ruthless downsizing in American industry became an international scandal a few years back - and transnational industry migrating to the poor countries has sometimes revived forms of exploitation that characterized capitalism in Karl Marx's time.
And right now, we are witnessing the effect of imprudent lending and investment on the fragile financial systems of the developing countries.
Millions of Southeast Asia's families - who had painfully pulled themselves up to middle-class status - are slipping back into abject poverty.
According to a United Nations report, half of all the children under three in Indonesia are malnourished - as a result of that country's economic difficulties.
Is there another World depression in our Future?
The more creative capitalism gets, the more destructive it becomes. Industries that do not adapt fail, worker's skills grow obsolete, entire production areas - even whole countries - loose their competitive edge.
In the long run, however, the winners outnumber the losers. Economies expand and open on a new threshold of mass affluence.
But pain always precedes gain. And sometimes, one wonders whether the gain is always worth the pain.
Now, there are those who fear that the reduced purchasing power of worker families in the rich countries - the collapse of the welfare state - the sharp increase in income inequality -- and the excess supply of goods and labor that exert downward pressures on prices and wages, there are those who fear that all of these things together are bringing the world to the brink of another Great Depression - which as we know, brought in its wake violent ideologies, class conflicts, social chaos, and world war.
II) THE RICH COUNTRIES CANNOT BE INDIFFERENT TO THE CRISIS
So - what is to be done?
One thing is clear. This financial crisis is no longer East Asia's problem alone. It has become a problem for the whole of the global community. Thus the measures to deal with it must also be global and international.
And the global community must do more than merely contain this specific crisis. It must correct the growing mismatch between global markets and the inadequate national institutions that regulate them - less and less effectively.
This is a time when the temptation to go it alone becomes almost irresistible for any single country.
But this is also a time to help one another.
Efforts to get the G-7/G-22 countries together on the East Asian crisis suggest the difficulties of getting an agreement on international solutions.
But the effort must continue to be made - because the price of doing nothing is high.
If nothing is done, entire countries will drop out of the international system - and inward-looking nationalisms will rear their ugly heads again.
If nothing is done, the globe faces the prospect of fierce trade protectionism - a return to managed trade. Once again political authorities are liable to superimpose their all-too-fallible judgement on the impersonal market.
The very concept of capitalism might once again excite social resentments.
What must be done to avert this catastrophe?
Certainly the G-7 countries have a responsibility to take the lead in pulling the global economy out of the recession. And certainly China - which has so far been a good neighbor to East Asia in crisis - should be co-opted into this collective leadership.
The G-7 blueprint announced in late October is still far from being a working formula for a "strengthened financial architecture for the global marketplace."
A great deal of thinking, consultation, negotiation - and action - still lies ahead for our political leaders and economic mangers.
In the search for a solution, the developing countries must be heard as well. They must not be made to feel that crucial decisions are being made above their heads or that a new kind of colonialism is being imposed on them.
Some restriction on the flow of portfolio capital now seems unavoidable. We cannot keep treating capital-account convertibility as we do free merchandise trade - because capital flows - unlike merchandise trade - are subject to hysteria, panics, and crashes.
Certainly, future arrangements must also ensure that private-sector creditors share in losses resulting from any financial crisis.
Among the East Asian economies most badly hit - that of Indonesia for one - some debt-restructuring is both urgent and vital. The political transition from the Suharto era is already difficult enough - even without its successor government being weighed down by a crushing burden of debt.
The Rich Countries cannot Remain Indifferent
The Western democracies cannot remain indifferent to East Asia's crisis.
Almost since World War II, East Asia has been the living laboratory for the vision of free markets that the Western democracies have been promoting throughout the world.
East Asia's amazing growth these last 30 years demonstrates the superiority of the market system over the command economy, and East Asia's increasing democratization shows the liberating political effects of the free market.
Now a prolonged slump in East Asia could weaken the support for economic liberalism - and not just in East Asia but in poor countries throughout the world.
If the "haves" - the affluent, comfortable countries - do nothing, they risk a political backlash - not just against free trade - but against all the rech countries and the transnational corporations that dominate the global economic system.
What do the rich countries need to do?
At the very least, they should keep their own economies and their markets open.
Protectionism does not protect, the tariff wars of the 1920s and the 1930s merely precipitated the great depression that set off World War II.
Yet, in the United States, protectionist sentiment is growing rapidly - as its trade deficit surges from the decline in East Asian imports. Already, an unlikely alliance of America's steel industry and the steelworkers' unions is lobbying a vulnerable U.S. Congress for higher tariffs against "foreign steel…being dumped on our shores at cutthroat prices."
I regard as well-taken the European Union leaders' decision - in Austria three weeks ago - to focus on accelerating economic growth and creating jobs.
Australia has not only contributed to all three I.M.F. bail-out packages for South Korea, Thailand and Indonesia, it has been a pillar of the G-22 forum seeking ways of stabilizing the global financial system.
The bottom line is this: no country - or region - can stay an island of stability in a world sinking into recession.
In today's integrated world economy, a crisis anywhere affects everyone else. And, by the same token, a restoration of growth in East Asia will have its beneficial effects on the economies of rich countries.
III) TAMING RUNAWAY CAPITALISM
Beyond the easing of this specific crisis, we must find a way of taming runaway capitalism - of stemming the spread of materialistic and selfish values into all spheres of human life.
We need to fashion strategies and institutions - not merely to temper the volatile swings of the international marketplace - but to avoid the dangers - and to seize the opportunities - of the new global economy developing before our eyes.
A most interesting experiment is taking place in Western Europe. There, the social democrats who have come to power in 13 of the 15 countries in the European Union are trying to discover a middle ground between pure market economies and the currently over-elaborate safety nets of the welfare state.
The political ideas of this new, pragmatic generation of socialists are far removed from the traditional dogmas of state ownership and central planning.
Europe's social democrats are turning away from runaway entitlements which had invited abuse - and trying to bring people from welfare to work.
Through the so-called "third way," the new European leaders seek to reform Le Capitalisme Sauvage - the "Savage Capitalism" - of the Anglo-Saxon economies - which they regard as driven entirely by financial objectives - with little or no regard for the human costs.
Western Europe's prosperity after World War II had been built on the concept of the "Social Market" - a social contract that provided both economic growth and generous entitlements for workpeople.
But globalization has made providing these social benefits a crippling burden for European economies. And since the kind of downsizing allowed by Anglo-Saxon capitalism is prohibited by the European social contract, the result has been stagnant economies and mass-unemployment. In both France and Germany, joblessness exceeds 10%.
The third way seeks to steer between free markets and government efforts to ensure social justice.
The challenge Western Europe's new-type socialists see for themselves is how to modernize their economies - adapting to market forces - introducing deregulation and labor-market flexibility - while combining capitalism and the market with a strong public sector and a clear government role in the economy.
The Market is Never Enough
Certainly the European "third way" is one path the world community might follow toward a more benign global economy - one that reconciles market forces with a measure of social justice.
Both the social market and the welfare state must be reformed, if they are to be preserved. In the end - I believe - governments must reassert their powers to provide such a "reconciliation" and protect the rights of peoples around the world from runaway capitalism.
To unreconstructed "free enterprisers," this may sound heretical - but there is really no such thing as an "unregulated market."
Every economy works within a specific political framework: even the nineteenth-century "free market" required a legal basis for enforcing property rights.
Capitalism's natural drive is to maximize returns: it has no internal regulator to check its social behavior. Left to itself, the market remains indifferent to the ethical dimensions of whit it is doing to vulnerable people.
This is why, in this age of globalization, we need effective states more than ever. Before - to reconcile the priorities of global markets with society's need to care for those whom development leaves behind.
The question is the degree of regulation the state must impose. And Peter Drucker answers it felicitously: The State (he asserts) must strive to control the economy's climate - but not its short-term weather.
IV) DEVELOPMENT AND DEMOCRACY MUST GO TOGETHER
So far the East Asian crisis has been disruptive not only of economic growth and damaging to people's lives. In some countries it has been destabilizing to national politics. But over the longer term, its effects might on balance be beneficial.
The crisis may, in the end, result not only in more transparent East Asian financial systems but also in more participatory political systems and throughout the region.
Not only is the crisis forcing corporate cultures to converge in the direction of more openness and greater efficiency.
Across differences in history and culture, the crisis is also compelling East Asian states to establish their authority less and less on coercion - and more and more on social consensus.
And for a simple reason: as the example of the former Soviet Union instructs us, government whose political authority is based on coercion cannot run an economy that operates at world-class standards.
The Crisis and East Asia's Politics
Over these last 30 years or so, East Asia's amazing growth had somehow compensated for the restriction on people's freedom imposed by its authoritarian governments.
Between 1965 and 1995, average incomes in Malaysia, Indonesia and Thailand multiplied four times - doubling every seven and a half years. And in South Korea, incomes multiplied seven times - doubling almost every four years.
And growth at this rate produced a dramatic decline in regional poverty. Over the twenty years between 1970 and 1990, absolute poverty in Malaysia decline from 18% to only 2% -- in South Korea from 23% to only 5% -- and in Thailand from 26% to 16%.
In Indonesia, thanks to rural development programs that brought high-value crops, fertilizer subsidies, and outright dole-outs to peasant families, poverty declined the most dramatically - from 60% down to 15%.
But now the crisis has severely damaged the viability of regimes whose popularity is based on their delivery of economic growth and social services to their national constituencies.
As growth has weakened, demands for freedom and political participation have become louder - from new middle classes afraid to slip backward into poverty.
The very same social classes that have benefited the most from the stability and progress of authoritarian regimes are the most aggressive and vocal in demanding political participation and recognition.
Everywhere in the region, people have become more openly critical of governments; and in regimes that bottle up popular feelings, dissent could burst out in civil disorder.
In short, the crisis might also be a signal that, in East Asia, the time of authoritarianism is past; and popular participation in national politics has become the wave of the future.
Australia Can be a School of East Asia
To these demands for empowerment from ordinary and powerless East Asians, Australia and the other rich countries cannot be indifferent.
Southeast Asia, with a population of some 440 million, by itself has become a more important export market for Australia than either the United States or the European Union. And Northeast and Southeast Asia together account for more than 60% of Australia's merchandise exports.
Beyond commercial interests, East Asia is where Australia's future lies. In my view, East Asia is where both Australia's security and prosperity will ultimately be decided.
And for its neighbors groping their way toward civility, Australia can be a school for tolerance, moderation and compromise, and for respect for opposing opinion.
Australia and the other rich countries must also help ensure that the market system in East Asia emerges stronger and more stable from this crisis. They must lead in discouraging any tendency among the distressed economies to return to protectionism, to recede into an inward turning nationalism.
In East Asia, the spread of the market economy has not merely brought about higher living standards. It has also had a liberating political effect.
Many East Asian societies in our time are poised at a transition between various forms of authoritarianism and democracy.
If they are to negotiate this transition without serious mishaps, they will need a buoyant regional economic environment and the goodwill of the outside world.
Not only in East Asia but also in Eastern Europe, Latin America, and in many parts of Africa, Democracy has arrived - along with free markets and private enterprise.
Ultimately, development and democracy must go together - if the vast majority of Earth's peoples who are poor are to have a better chance for higher quality of life.
Development, indeed, must have a human face.
The Challenge for the World Community
Now to summarize and conclude - what is the challenge the crisis of globalization poses for the global community?
The challenge is for us to correct the growing mismatch between global capital markets and the increasingly inadequate national institutions that support and regulate them.
The challenge is for us to grasp the opportunities globalization presents - while minimizing our shared vulnerability to its risks.
The challenge is for us to reconcile market forces with social cohesion - and capitalism with a good measure of social equity in an open global community.
A Declaration of Interdependence
Finally - beyond the adjustments and innovations in national policy that globalization compels our separate countries to make, I believe it is time that we together make a declaration of interdependence.
As the Asia Society preaches, the 21st century - and the new millennium - ahead of us must be one of transpacific interdependence, or it will fall short of what we can become - on both sides of the Pacific.
Together we can build a safer, more prosperous and more equitable Pacific community
Only by recognizing the common bonds of humanity that link us can we mitigate the hatreds generated by narrow nationalisms, ignorance that breeds isolation, petty partisan politics, tribal rivalries, and religious extremism.
Only by building networks of friendship among us can we mitigate the downside of globalization - the relentless economic integration of the planet, which some see as threatening jobs and incomes in the rich countries, and reviving raw forms of exploitation in the poor ones.
Only by linking East Asia, Australia and the Americas into a stronger Asia-Pacific community of shared responsibility, sympathy and compassion can we create decent and moral societies - for ourselves and for those who will come after us.