Korea Inc.: Wiseguys at the Calamity Bazaar

John Barker 23.09.1998

‘Crony capitalism’ was and is the phrase used by the West as a catch-all explanation of the East Asian economic crisis. It has been useful in diverting attention from over-production as a global phenomena, and the fragility of global credit finance; justifying the penetration of Asian financial markets by western credit capital. It also indicates a blindness to the structures of ‘crony capitalism’ in the west.

The Asian economic crisis will eventually be seen as a milestone in “the inexorable trend towards market capitalism.” This is how a satisfied Alan Greenspan, Chief of the US Federal Reserve summed up the situation in April. ‘Inexorable trend’ is fundamentalist language, of the free market variety. He blamed the crisis on elements of state planning in the affected countries which produced an over-production of goods that consumers did not want.

What he did not say was that the furtherance of the interests of US-led free-market capitalism in this situation was achieved by a ruthless display of superpower geo-financial might. This is not said rhetorically. US might rests on two tightly inter-related sources of power, the world reserve currency status of the dollar and its military superpower position, one enhanced by the Gulf War. As the crisis unfolded the Chief Economist of a major multinational bank talked of “the dollar in the Asian region becoming like a bowl of rice in a famine”, just when as the price of rice in an impoverished Indonesia had shot up. Taking advantage of this power, unprecedented openings and gains for western finance capital in the region have been made. At the same time, when the sudden impoverishment of the region had become apprarent, US Defence Secretary William Cohen toured the region to gain new docking rights for the US navy, and called for South Korea not to cut back on its defence spending, despite the cuts demanded by the IMF in general government spending.

Nor did Mr Greenspan mention in his triumphlist speech his own coded warnings about global recession and the overvaluation of US stocks made in speeches to a different audience. Other commentators spoke about the dangers of globalisation on two counts: its propensity to over-produce; and the massive unregulated flows of credit finance, and the role it played in the crisis. By and large however, they failed to hold to the courage of their convictions in face of an institutional and media offensive which coined the phrase ‘crony capitalism’ as a catch-all denouncement of an Asian development model which had in the previous 25 years produced phenomenal levels of economic growth.

An equally unremarked irony was that the US-led management of the crisis to its own benefit, was itself a prime example of western crony capitalism of which Mr Greenspan is an integral part. It was he, ex-Goldman Sachs Treasury Secretary Robert Rubin, the bankers of JP Morgan and other leading figures of the Clinton Administration who finally had to emerge from behind the shell of the ‘neutral’ IMF to prevent South Korea from defaulting on its debts. The combined effect of the IMF’s own severely deflationary medicine for the country and its battering ram approach on behalf of international credit finance had made such a default likely. At this moment, just before Christmas 1997, concern about the impact of this on a vulnerable global system of credit finance briefly dominated the western press. The meeting of crony capitalists held in the Situations Room of the White House (normally the preserve of US geo-military management) reluctantly accelerated financial credits to South Korea, the immediate crisis was averted, and the media resumed the theme of Asian crony capitalism.

The crisis began in June last year when the problems of Thai banks as a result of over-lending to the property sector, funded in part by over-lending to those banks from international credit finance, could no longer be disguised. This prompted an attack in the currency markets on the Thai baht whose value had been pegged to the US dollar for 14 years. This pegged exchange rate was abandoned on July 2nd and over the next four months there was a self perpetuating ‘flight of capital’ as other pegged regional currencies came under attack. The standard explanation is that this happened because there was some collective realization that these economies were riddled with crony capitalism, and that pegged rates were themselves part of the problem. For free market ideology, floating exchange rates should be the universal norm. But as the crisis showed repeatedly, this ideology is of the pick’n mix variety. Thus when Donald Tsang, the free-marketeer Finance Minister of Hong Kong defended its pegged rate in October, he was applauded by the financial press for having maintained stability and sustained ‘confidence’.

Free-market ideology has a self-idealized picture of rugged and rational individualism. It exists as a force despite the real world of multinational corporations with their ten year plans. What this crisis also revealed was the herd mentality of international credit finance. Figures from the Bank of International Settlements show that money continued to flow into the region despite warning signs. The standard ‘crony capitalist’ version of events is that this was because of lack of ‘transparency’ in SE Asian banking practices, the need for which has become a mantra for western political leaders. But the World Bank (Global Development Finance report 1998) has said clearly:

“There seems to have been sufficient publicly available data in Thailand to allow observers to foresee problems at least a year before the devaluation of the baht.”

Ignoring this data was made explicable in a moment of candor from the Financial Times. Describing a historical period of overpriced equities in Western markets it described the quadrupling of net private capital flows to developing Asian countries from 1992 to 96 thus:

“What caused the inflow was largely the search for better returns by investors made insensitive to risk and hunger for profit by the western bull market, As usual, mania ended in panic.”

In an era of top-heavy financial credit capital, there is a keen need for banks to lend and so called emerging or developing markets have been identified as areas of maximum return. This ultimately rests on wage levels being lower in these areas. One largely unremarked prompt for the panic was rising wage levels in the region relative both to the west and China since its partial emergence into the globalized economy. The Korean worker who until recently was used to scare the western working class into working harder for the same pay, had become during the violent strikes of February 1997, a pampered worker who needed to face up to the reality of the globalized economy. The crisis has enforced this with a vengeance.

The panic however was further prompted by the rescue package imposed on South Korea by the IMF and by the interpretation of the crisis by the west’s own crony capitalists. As Jeffrey Sachs put it:

“The Fund turned a dangerous situation into a calamitous situation by very publicly and ostentatiously closing banks, raising interest rates, tightening credit, and signalling to anyone who didn’t see it before, that these economies would go into free fall.”


It, Standard and Poor (The US based credit rating agency which had seen nothing wrong with East Asian debt until the crisis was underway) and the US Treasury became themselves arbiters of confidence. This is hardly surprising given the inter-related power of the dollar and US geo-military superpower status. As arbiters of confidence their actions and comments furthered the slide in Asian currency values.

The SE Asian development model in South Korea for example was also especially vulnerable to ‘flights of capital’. Owing to its especially high levels of domestic saving and a development strategy in which Samsung for one understood that they needed to borrow heavily to be effective competitors in micro-chips for example, such companies were financed by loans rather than the shareholding/equity model of the west. It was remarkably successful but vulnerable to situations in which rates of interest reached level where debt repayment at any moment exceed gross profits. Massive de facto devaluations of currencies and IMF imposed rises in interest rates have exacerbated this situation.

Mr Greenspan’s disingenuous arguments about any form of state planning are aimed precisely at this model which has been so successful. The evidence however is that the model came unstuck precisely when ‘liberalization’ measures had been pushed through. Ha Joon-Cheng of Cambridge argues that over-borrowing and corporate collapses arose precisely when Seoul abandoned its traditional policies of investment co-ordination and managed competition in the early 90s. The weakening of the bank-firm-state collaboration then saw an explosion of foreign debt.

In this new situation there were large pockets of over-capacity in the country but Mr Greenspan is equally disingenuous in seeing over-supply as special to this region and this model. One especially brash free-market fundamentalist, Ed Yardemi, chief economist of Deutsche Morgan Grenfell had said early in the crisis “Korea Inc is already bankrupt…This is a zombie economy”, but despite such adolescent fatuousness he did also have his eye on the global picture, where he described a situation of global over-production in a wide variety of sectors ranging from plastics and cars to electronics and micro-chips. His conclusion was that:

“The world needs all the yuppies it can muster”.

It is a perverse, unconscious recognition of the widening gap between rich and poor both globally and domestically, under-consumption as the mirror of over-supply. It implies that getting around this imbalance depends on the spending power of the relatively rich.

This is far too uncomfortable for free market ideology, or even ‘new’ social democracy. Instead, over-supply has been labelled as an Asian problem. A classic case is micro-chips in which Samsung’s success in standard capitalist terms has been described as reckless over-production despite the fact that the US company Micron increased output of the standard 16M chip ferociously during 1997 and was most instrumental in their steep price fall, itself contributing to Korea’s liquidity problem. Instead East Asian companies have not just been exclusively labelled as over-producers, but their capacity for production weakened by the US-led solution to the crisis. Thus the Chinese People’s Daily (despite Western praise for China’s conduct in the crisis) talked of US/IMF demands “easing East Asia’s threat to the US economy.” Even Western bank economists talked of countries like Indonesia ‘sliding down the value-added ladder.’ The obvious contradiction arising from these demands is that the severe Asian recession that has ensued, has furthered western fears of a global recession. More recently western blame-pointing has focussed on Japan and the failure of its consumers, yuppies and otherwise, to consume.

At the same time the gains made by the west in the region have been legion. There is contradictory evidence (no transparency here) about the scale of western purchases of East Asian assets when they had been rendered so cheap. What is less ambiguous is the penetration of western financial capital into the region. Unprecedented IMF conditions ensured the opening up of the Korean financial sector to this penetration. Further, these gains were globalized at the massively under-reported World Trade Organization accord on financial services in early December 1997. It was signed by 102 countries, will affect 142 and come into effect in 1999 opening up this sector after some years of Third World opposition. As the FT reported, it followed lobbying by American and European financial institutions, and finally the Asian crisis which broke the opposition. The Wall Street Journal commented that just when it looked like 50 years of free trade momentum had come to a halt (a reference the US Congress blocking Clinton’s most recent fast-track negotiations), “the shambles in Asia got it going again.”

Reflecting the top-heavy dominance of credit finance, a trimphant Charlene Barshefsky, the US Trade representative said:

“It’s the biggest deal the US will ever do because there’s no sector in the US that will ever come close to the financial services sector.”

It is also not a matter of free trade, rather that western credit finance will now be able to mediate between savings in any part of the world and investment in any part of the world, and profit from it. It further undermines the very possibility of national economic development. Looked at in this light, the continued emphasis on the lack of transparency in East Asian banking practice serves as a justification for the universalising of western financial presence in every corner of domestic banking, insurance and life assurance in other parts of the world. This is not to say that there has not been corruption and cronyism in Japanese and Indonesian banking for example, but some qualifications need to be entered. Even if the corruption exposed in the Savings and Loan scandal in the US is ignored, western banks (as evidenced by the Financial Times) have been seeking and finding ways around the Basle rules on prudential banking, the ratio between capital and credit, at the same time they seek to impose them on the East Asian banking system. In the west these rules have been bent in the search for maximum profitability. Equally, powerful free market pressure groups in the US are seeking to break down rules affecting liabilities between so far rigidly seperated industrial and financial groupings when the breakdown of such barriers has been identified as a key component of Asian ‘crony capitalism.’

This emphasis on the deficiencies of Asian banking, their lack of transparency, has served another purpose. It has been used to sideline any purposeful debate or policy suggestions about regulating the free global flows of credit capital. The western position was best summarised by Robert Hormats of Goldman Sachs (International):

“If your domestic institutions are strong then you don’t need very strong global institutions. If domestic institutions inside countries are weak, it won’t matter how strong your global institutions are, they will not be effective.”

There are it is true, maverick voices in the west. The views of George Soros have been most publicized but the most surprising has been that of Peter Sutherland, also of Goldman Sachs (and British Petroleum), and formerly head of the World Trade Organization, who continued to be disturbed by that fragility of the system briefly exposed in December ’97 . He has called for a global summit to deal with the challenges of globalisation, arguing that existing forum were too narrowly based. Yet this voice, one of crony capitalism epitomized, has been ignored.

US-led western capital does not want regulations, international institutions with real power, or international negotiations on capital movements or the global economy. This has been the case for 25 years when floating exchange rates were imposed in 1971, swiftly followed by the appearance of the ‘petro-dollar’. At the one moment in recent world history when serious global economic negotiations might have taken place, when the oil producers of OPEC had real power, Henry Kissinger, with the connivance of the Saudi regime, ensured that the re-cycling of petro-dollars was done on an ad hoc basis by US-led western finance. Even the IMF was downplayed out of existence until it was called upon to sort out the South American debt crisis of the eighties. What did emerge was the ad hoc G7 which, by mere longevity, has become an ‘institution’, one which is definitively non-global. This ad hoc template continues because in any seriously global negotiations the notion of fairness is likely to emerge. For western capital all notions of fairness are a can of worms, as is witnessed by the fate of the Brandt report of the 70s which argued only for a degree of international fairness being in the long term interest of western capitalism.

Since the Asian ‘crisis’ has ceased to be front page news, there has been a shift of emphasis, it is one component in the possibilty of a global economic recession. Such a recession would question the legitimacy of free market capitalism globalized. This ‘questioning’ will take many forms: the resistance of Korean workers to the ‘logic of rationalisation’; the possibilty of Asian and European financial blocs outside the power of the dollar; and for those of us who read and write, a universalising of the rhetoric of Transparency. It can be guaranteed that this rhetoric will run into capital’s fanatical belief in the virtue of ‘business confidentiality’ and ‘national security’, both in the murky state-capitalist business of armaments and oil, and more generally. There is a job of work to try and make all such things Transparent.