Hunting Asian Tigers: Washington and the 1997-98 Asia Shock

By F. William Engdahl

American Cold War dominance of the non-communist world had been based on the perceived global threat of Soviet and potentially Chinese Communist aggressions. Once that threat ended at the end of the 1980’s, as Washington well knew, restraints on its major military allies were gone. The allies were potential economic rivals. Japan and East Asia, as well as the European Union, were emerging as major economic challengers to American hegemony. That economic challenge was to be the focus of U.S. geopolitics after 1990.

Armed with the Gospel of free market reform, privatization and dollar democracy, and backed by the powerful Wall Street financial firms, the Clinton Administration began a process of extending the dollar and U.S. influence into domains which had previously been closed to it. The near religious campaign to win those areas to Washington’s peculiar brand of market economy, was to include not just former communist economies of Eastern Europe and the Soviet Union. It was to include any and every major part of the world that continued to try to develop its own resources, independent of the mandate of the IMF or the dollar world. The process also involved bringing every major oil region of the world under more or less direct U.S. control, from the Caspian Sea to Iraq to West Africa and Colombia. It was an ambitious undertaking. Critics termed it imperial, the Clinton Administration called it the extension of market economy and human rights. It was definitely not what most of the world were hoping for as the Cold War drew to an end.

The Clinton Administration and its Wall Street allies had brought one region after the other into its direct orbit during the 1990’s, with the promise of the free market as the road to wealth and prosperity. The catch word was “globalization,” and in reality it was globalization of American power, consolidated through American banking and finance and corporate power.

Few realized it might be part of a well thought-out strategy, until the process was well advanced. Free trade had traditionally been the demand of the superior economic power on its weaker partners. By the time it became clear what the Washington agenda was, America had largely disarmed potential opponents, and built a new ring of military bases around the world to defend its gains, a guarantee that the new converts to free market did not lose the faith, and try to revert to older economic forms.

In the 1950’s, under the Cold War, and the Eisenhower Doctrine, the United States declared itself prepared, with armed force if necessary, to assist any Middle Eastern country asking help to resist any incursion backed by international communism. This brush was used repeatedly by Washington during the four decades after 1945, to paint countless nationalist leaders from Mossadegh to Nasser, with a red color. The red taint justified military or other action.

After 1990 Washington faced a significant problem. What bogeyman could it find to justify such acts of foreign policy in the future, now that the danger of Godless communism could no longer be used as a rationale? The answer was to take until the new millennium, more than a decade.

In the meantime, the U.S. establishment had prepared a full plate to dish out to an unsuspecting world, starting in Japan. Washington knew its continued global dominance depended on how it dealt with Eurasia, from Europe to the Pacific. Former Presidential adviser and geostrategist, Zbigniew Brzezinski, put it bluntly, “…in terminology that hearkens back to the more brutal age of empires, the three grand imperatives of imperial geostrategy are to prevent collusion and maintain security dependence among the vassals, to keep tributaries pliant and protected, and to ‘keep the barbarians from coming together.’” It was an ambitious agenda.

Japan: wounding the lead goose

One of the most pressing challenges to the United States’ role in the post-Cold War world, was the enormous new economic power of its Japanese ally, over world trade and banking. Japan had built up its economic power during the postwar period through careful steps, always with an eye to its military protector, Washington.

By the end of the 1980’s Japan was regarded as the leading economic and banking power in the world. People spoke about the “Japan that can say no,” and the “Japanese economic challenge.” American banks were in their deepest crisis since the 1930’s, and U.S. industry had become over-indebted and under-competitive. It was a poor basis to build the world’s sole remaining superpower, and the Bush Administration knew it.

Prominent Japanese intellectual and political figures like Kinhide Mushakoji, were keenly aware of the special nature of the Japanese model. “Japan has industrialized but not Westernized,” he noted. “Its capitalism is quite different from the Western version, and is not based on the formal concepts of the individual. It has accepted selectively only the concepts associated with the state, economic wealth accumulation and technocratic rationalism.” In short, the Japanese model, which was tolerated during the Cold War as a counterweight geopolitically to Chinese and Soviet power, was a major problem for Washington once that Cold War was over. Japan was soon to learn how major.

No other country had supported the Reagan era budget deficits and spending excesses during the 1980’s more loyally and energetically than Washington’s former foe, Japan. Not even Germany had been so supportive of Washington demands. As it appeared to Japanese eyes, Tokyo’s loyalty and generous purchases of US Treasury debt, real estate and other assets, were rewarded in the beginning of the 1990’s, by one of the most devastating financial debacles in world history. Many Japanese businessmen privately believed it was a deliberate Washington policy, taken to undercut Japanese economic influence in the world. At the end of the 1980’s, Harvard economist and later Clinton Treasury Secretary, Lawrence Summers, warned, “an Asian economic bloc with Japan at its apex is in the making…raising the possibility that the majority of American people who now feel that Japan is a greater threat to the U.S. than the Soviet Union, are right.”

The Plaza Hotel Accord of the G-7 industrial nations in September of 1985 was officially designed to bring an overvalued dollar down to more manageable levels. To accomplish this, the Bank of Japan was pressured by Washington to take measures that would increase the yen’s value against the US dollar. Between the Plaza Accord, the Baker-Miyazawa Agreement a month later, and a Louvre Accord in February 1987, Tokyo agreed to “follow monetary and fiscal policies which will help to expand domestic demand and thereby contribute to reducing the external surplus.” Baker had set the stage.

As Japan’s most important export market was the United States, Washington was able to put Japan under intense pressure. And it did. Under the 1988 Omnibus Trade and Competitiveness Act, Washington listed Japan for “hostile” trade practices and demanded major concessions.

The Bank of Japan cut interest rates to a low of 2.5% by 1987, where they remained until May 1989. The lower interest rates were intended to spark more Japanese purchases of US goods, something which never happened. Instead, the cheap money found its way to quick gains in the rising Tokyo stock market, and soon a colossal bubble was inflating. The domestic Japanese economy was stimulated, but above all, the Nikkei stock market and Tokyo real estate prices were pumped up. In a preview of the later US New Economy bubble, Tokyo stock prices rose 40% or more annually, while real estate prices in and around Tokyo ballooned in some cases by 90% or more, as a new gold rush fever gripped Japan.

Within months after the Plaza Accord, the yen had appreciated dramatically. It rose from 250 to only 149 yen to a dollar. Japanese export companies compensated for the yen’s impact on export prices by turning to financial speculation, dubbed “zaitech,” to make up for currency losses in export sales. Japan overnight became the world’s largest banking center. Under new international capital rules, Japanese banks could count a major share of their long-held stocks in related companies, the keiretsu system, as bank core assets. As the paper value of their stock holdings in other Japanese companies rose, bank capital rose with it.

By 1988, as the stock bubble roared ahead, the ten largest banks in the world all had Japanese names. Japanese capital flowed into US real estate, golf courses, luxury resorts, into US government bonds and even into more risky US stocks. The Japanese obligingly recycled their inflated yen into dollar assets, thereby aiding the Presidential ambitions of George H.W. Bush, who succeeded Ronald Reagan in 1988. Commenting on Japan’s success during the 1980’s, New York financier, George Soros, remarked, “…the prospect of Japan’s emerging as the dominant financial power in the world is very disturbing…”

Japanese euphoria over becoming the world’s financial giant, was short-lived. The inflated Japanese financial system, with banks awash with money, led as well to one of the world’s greatest stock and real estate bubbles, as stocks on the Nikkei index in Tokyo rose 300% in a space of three years after the Plaza Accord. Real estate values, the collateral of Japanese bank loans, rose in tandem. At the peak of the Japan bubble, Tokyo real estate was valued in dollar terms greater than that of the entire United States real estate. The nominal value of all stocks listed on the Tokyo Nikkei Stock Exchange accounted for more than 42% of world stock values, at least on paper. Not for long.

By late 1989, just as the first signs of the collapse of the Berlin Wall surfaced in Europe, the Bank of Japan and Ministry of Finance began a cautious effort to slowly deflate the alarming Nikkei stock bubble. No sooner did Tokyo act to cool down speculative juices, than major Wall Street investment banks, led by Morgan Stanley and Salomon Bros., began using exotic new derivatives and financial instruments. Their aggressive intervention turned the orderly decline of the Tokyo market into a near panic sell-off, as the Wall Street bankers made a killing on shorting Tokyo stocks in the process. The result was that no slow, orderly correction by Japanese authorities was possible.

By March 1990 the Nikkei had lost 23% or well over $1 trillion from its peak. Japanese government officials privately recalled a May 1990 Washington meeting of the IMF Interim Committee, where a heated debate over Japanese proposals to finance the economic reconstruction of the former Soviet Union was drawing strong opposition, from Washington and the Bush Treasury Department. They saw that meeting as a possible reason behind the speculative Wall Street attack on Tokyo stocks. It was only partly true.

The Japanese Ministry of Finance had issued a report to the IMF, arguing that, far from being a problem, as argued by Washington, Japan’s huge capital surplus was urgently needed by a world needing hundreds of billions of dollars in new rail and other economic infrastructure investment following the end of the Cold War. Japan proposed its famous MITI model for the former communist economies. Washington was unenthused, to put it mildly. The MITI model involved a heavy role for the state in guiding national economic development. It had proven remarkably successful in South Korea, Malaysia and other East Asian countries. As the Soviet Union collapsed, many began eagerly looking to Japan and South Korea as better alternatives to the U.S. “free market” model. That was a major threat to Washington plans as the Cold War drew to an end.

The Bush Administration was less than eager to accept a leading role from Japan in rebuilding Eastern Europe and the Soviet Union. Washington had other plans for its former Cold War adversary, and creation of a Japanese-financed economic bloc with Russia was not on the list. To drive the point home in Tokyo, George Bush sent his Defense Secretary, Dick Cheney, to Tokyo in early 1990 to “discuss” drastic U.S. troop reductions in the Asia-Pacific rim, a theme calculated to raise Japanese military security anxieties. Cheney’s barely concealed blackmail mission followed on the heels of a January trip by Japan’s Prime Minister Kaifu to Western Europe, Poland and Hungary, to discuss the economic development of the former communist countries of Eastern Europe. The message was clear— “do as Washington says, or we leave you poorly defended.”

By the time the Japanese Prime Minister met the American President in Palm Springs that March, he had gotten the point. Japan was not to compete with American dollars in Eastern Europe. Within months, Japanese stocks had lost nearly $5 trillion in paper value. Japan Inc. was badly wounded.

The second phase of breaking up the Japan model involved destroying the East Asian economic sphere, a highly successful model to challenge the American dictates of free market rugged individualism. The Japanese model, as Washington knew well, was not limited to Japan. In the postwar period it had been nurtured in South Korea, Thailand, Malaysia, Indonesia and other East Asian economies. In the 1980’s these fast-growing economies were labeled the Tiger states.

East Asia had been built up during the 1970’s and especially the 1980’s, by Japanese state development aid, large private investment, and MITI support. While it was done with little fanfare, in effect the booming economies of East Asia in the 1980’s owed much to a deliberate regional division of labor, in which Japan was at the center, and Japanese companies outsourced manufacturing processes to East Asian centers. They were referred to in Asian business circles as the yen bloc countries because of the close ties to Japan’s economy.

Those Tiger economies were a major embarrassment to the IMF free market model. Their very success in blending private enterprise with a strong state economic role was a threat to the IMF free market agenda. So long as the Tigers appeared to succeed with a model based on a strong state role, former communist states and others could argue against taking the extreme IMF course.

In East Asia during the 1980’s, economic growth rates of 7 to 8% per year, rising social security, universal education and a high worker productivity, were all backed by state guidance and planning, albeit in a market economy, an Asian form of benevolent paternalism. Even more than Soviet central planning, the self-sufficient Asian Tiger economies were an obstacle to the global spread of the dollar free market system being demanded by Washington in the 1990’s.

Beginning in 1993, at the Asia Pacific Economic Cooperation (APEC) Summit, as Japan’s banks struggled with the collapse of their stock and real estate markets, Washington officials began to demand East Asian economies open up their controlled financial markets to free capital flows, in the interest of “level playing fields,” they argued. Previously, the debt-free economies of East Asia had avoided reliance on IMF loans, or foreign capital other than direct investment in manufacturing plants, usually as part of a long-term national goal. Now they were told to open their markets to foreign capital flows and short-term foreign lending.

With the rhetoric of “level playing fields,” many Asian officials wondered privately whether Washington was talking about cricket or about their economic future. They soon learned.

Once capital controls were eased and foreign investment allowed to flow freely, in and out, South Korea and other Tiger economies were awash in a sudden flood of foreign dollars. The result was creation of speculative bubbles in luxury real estate, local stock values and other assets between 1994 and the onset of the attack on the Thai baht in May 1997.

Once the East Asian Tiger economies had begun to open up to foreign capital, but well before they had adequate controls over possible abuses in place, hedge funds went on the attack. The secretive funds first targeted the weakest economy, Thailand. American speculator, George Soros, acted in secrecy and armed with an undisclosed credit line from a group of international banks including Citigroup. They bet that Thailand would be forced to devalue the baht and break from the peg to the dollar. Soros, head of Quantum Fund, Julian Robertson, head of the Tiger Fund and reportedly also the LTCM hedge fund, whose management included former Federal Reserve deputy, David Mullins, unleashed a huge speculative attack on the Thai currency and stocks. By June, Thailand had capitulated, the currency was floated, and it was forced to turn to the IMF for help. In swift succession, the same hedge funds and banks hit the Philippines, Indonesia and then South Korea. They pocketed billions as the populations sank into economic chaos and poverty.

Chalmers Johnson described the result in blunt terms: “The funds easily raped Thailand, Indonesia and South Korea, then turned the shivering survivors over to the IMF, not to help the victims, but to insure that no Western bank was stuck with non-performing loans in the devastated countries.”

A European Asia expert, Prof. Kristen Nordhaug, summed up the Clinton Administration policy towards East Asia in 1997. Clinton had developed a major economic strategy, using the new National Economic Council, initially headed by Robert Rubin, a Wall Street investment banker. East Asian emerging markets were targeted for an offensive. “The Administration actively supported multilateral agencies such as the IMF…to promote international financial liberalization,” Nordhaug noted. “As…the strategy of targeting East Asian markets (was) in place, the U.S. Administration was in a strong position to take advantage of the financial crisis to promote liberalization of trade, finance and institutional reforms through the IMF.”

The impact of the Asia crisis on the dollar was notable. The Bank for International Settlements General Manager, Andrew Crockett, noted that while the East Asian countries had run a combined current account deficit of $33 billion in 1996, as speculative hot money flowed in, “1998-1999, the current account swung to a surplus of $87 billion.” By 2002 it peaked $200 billion. Most of that surplus returned to the U.S. in the form of Asian central bank purchases of U.S. Treasury debt, in effect, financing Washington policies. Japan’s Finance Ministry had made a futile effort to contain the Asia crisis by proposing a $30 billion Asian Monetary Fund. Washington made clear it was not pleased. The idea was quickly dropped. Asia was to become yet another province of the dollar realm through the IMF. Treasury Secretary Rubin euphemistically termed it America’s “strong dollar policy.”