Blowback, Second Edition: The Costs and Consequences of American Empire

any ever attributed to the high-growth economies of East Asia. In fact, when the bailout came to light, a number of Asian publications cynically recalled how the New York Times had editorialized only months earlier that in Asia “collusive practices were not only tolerated, they were encouraged” and that “the United States needs to reiterate the importance of full transparency by companies and financial institutions.”¹¹ After the LTCM bailout, Martin Mayer, one of the most respected writers on the American financial system, observed that “the Fed [Federal Reserve Board] for all its talk of ‘transparency’ has made the fastest growing area of banking totally opaque, even to the supervisors themselves.”¹²

In order to make it intellectually respectable for the smaller Asian economies to swallow all the money the United States, Japan, and other advanced countries were offering them, the U.S. government threw its weight behind the Asia-Pacific Economic Cooperation forum (APEC), an organization the Australians had launched at a meeting of trade ministers in Canberra in November 1989. The forum did not, however, take off until November 1993, when President Clinton decided to attend an APEC meeting in Seattle and turned it into an Asia-Pacific summit of leaders from all the major East Asian nations. The Seattle meeting also produced APEC’s first “Economic Vision Statement”: “The progressive development of a community of Asia-Pacific economies with free and open trade and investment [italics added].” Under American leadership, APEC became the leading organization promoting globalization in East Asia. At annual meetings in different Pacific Rim countries, it insistently propagandized that the Asian “tiger economies” open up to global market forces, in accordance with the most advanced (American) theorizing about capitalist economies and in order to not be left behind as mere developmental states.

The November 1994 APEC meeting in Bogor, Indonesia, committed the participants to free trade and investment in the Pacific by 2010 for developed countries and by 2020 for developing countries, such as China and Indonesia. In 1995, at Osaka, APEC members agreed to unilaterally open their economies rather than attempt to negotiate a treaty like the North American Free Trade Agreement, which would have generated too much resistance in many of the member nations. Nothing much happened at Manila in 1996—except for a visit by the leaders to the old U.S. naval base at Subic Bay, now cleaned up of its prostitutes and turned into a free-trade and development zone. At Vancouver in November 1997, with the Asian financial crisis already under way, the United States pushed for the rapid removal of tariffs and nontariff barriers to trade in fifteen different sectors of economic activity. At Kuala Lumpur in November 1998, APEC finally came unglued. The prime minister of Malaysia, Mahathir Mohamad, had only a few months earlier reimposed capital controls over his economy to insulate it from gypsy capital, for which Vice President Al Gore openly denounced him, encouraging the people of Malaysia to overthrow him. The meeting ended in rancor, with Japan taking the lead in scuttling any further market-opening schemes for the time being. Its Ministry of Foreign Affairs declared that the United States was possessed by an “evil spirit” and accused it of endangering the region’s fragile economic condition by pushing market-opening measures down the throats of countries too weak to open their borders further.¹³ Malaysia and the United States did not even bother to attend the 1999 APEC meeting of trade ministers in Auckland, New Zealand.

The shock that brought this edifice crashing to the ground started in the summer of 1997, when some foreign financiers discovered that they had lent huge sums to companies in East Asia with unimaginably large debts and, by Western standards, very low levels of shareholder investment. They feared that other lenders, particularly the hedge funds, would make or had already made the same discovery. They knew that if all of them started to reduce their risks, the aggregate effect would be to force local governments to de-peg their currencies from the dollar and devalue them. Since this would raise the loan burdens of even the most expertly managed companies, they too would have to rush to buy dollars before the price went out of sight, thereby helping to drive the value of any domestic currency even lower.

The countries that had followed recent American economic advice most closely were most seriously devastated. They had opened up their economies to unrestricted capital flows without understanding the need to regulate the exposure of their own banks and firms. They did not ensure that borrowers in their countries invested the money they acquired from abroad in projects that would pay adequate returns or that actually constituted collateral for the loans. The foreign economists who advised them did not stress the institutional and legal structures needed to operate in the world of American-style laissez faire. No one warned them that if they raised their interest rates in order to slow inflation, foreign money would pour into their countries, attracted by high returns, whereas if they lowered interest rates in order to prevent a recession, it would provoke an immediate flight of foreign capital. They did not know that unrestricted capital flows had put them in an impossible position. What took place in East Asia was a clash between two forms of capitalism: the American system, disciplined by the need to produce profits, and the Asian form, disciplined by the need to produce growth through export sales.

The International Monetary Fund entered this picture and turned a financial panic into a crisis of the underlying economic systems. As already mentioned, the Bretton Woods conference of 1944 had created the IMF to service the system of fixed exchange rates that lasted until the “Nixon shocks” of 1971. It survived its loss of mission in 1971 to become, in the economist Robert Kuttner’s words, “the premier instrument of deflation, as well as the most powerful unaccountable institution in the world.”¹⁴ The IMF is essentially a covert arm of the U.S. Treasury, yet beyond congressional oversight because it is formally an international organization. Its voting rules ensure that it is dominated by the United States and its allies. India and China have fewer votes in the IMF, for example, than the Netherlands. As the prominent Harvard economist Jeffrey Sachs puts its, “Not unlike the days when the British Empire placed senior officials directly into the Egyptian and Ottoman [and also the Chinese] financial ministries, the IMF is insinuated into the inner sanctums of nearly 75 developing country governments around the world—countries with a combined population of some 1.4 billion.”¹⁵

In 1997, the IMF roared into a panic-stricken Asia, promising to supply $17 billion to Bangkok, $40 billion to Jakarta, and $57 billion to Seoul. In return, however, it demanded the imposition of austerity budgets and high interest rates, as well as fire sales of debt-ridden local businesses to foreign bargain hunters. It claimed that these measures would restore economic health to the “Asian tigers” and also turn them into “open” Anglo-American-type capitalist economies. At an earlier meeting at Manila in November 1997 called to deal with the crisis, Japan and Taiwan had offered to put up $100 billion to help their fellow Asians, but the U.S. Treasury’s assistant secretary, Lawrence Summers, denounced the idea as a threat to the monopoly of the IMF over international financial crises, and it was killed. He did not want Japan taking the lead, because Japan would not have imposed the IMF’s conditions on the Asian recipients and that was as important to the U.S. government as restoring them to economic health.¹⁶

In Indonesia, when the government ended its dollar peg and let the currency float, the rupiah fell from about 2,300 to 3,000 to the dollar but then stabilized. At that point, with almost no empirical knowledge of Indonesia itself, the IMF ordered the closure of several banks in a system that has no deposit insurance. This elicited runs on deposits at all other banks. The wealthy Chinese community began to move its money out of Indonesia to Singapore and beyond, and the country was politically destabilized, leading ultimately to the overthrow of President Suharto. All Indonesian companies with dollar liabilities rushed to sell rupiahs and buy dollars. Equities instantly lost 55 percent of their value and the currency, 60 percent. The rupiah ended up trading at 15,000 to one U.S. dollar. David Hale, chief economist of the Zurich Insurance Group, wrote at the time, “It is difficult, if not impossible, to find examples of real exchange rate depreciations comparable to the one which has overtaken the rupiah since mid- 1997.” He suggested that a proper comparison might be with the hyperinflation that hit the German mark in 1923.¹⁷

By the time the IMF was finished with Indonesia, over a thousand shopkeepers were dead (most of them Chinese), 20 percent of the population was unemployed, and a hundred million people—half the population—were living on less than one dollar a day. William Pfaff characterized the IMF’s actions as “an episode in a reckless attempt to remake the world economy, with destructive cultural and social consequences that could prove as