The vortex of the world market

by Kevin A. Barry and Mary Holmes

The economic crisis of East Asia, previously confined to the less developed nations of Southeast Asia, spread last month to Japan and South Korea, the world's second and eleventh largest economies.

After considerable resistance, South Korea has appealed to the International Monetary Fund (IMF) for emergency loans in exchange for austerity measures--including higher taxes and lower social spending--intended to guarantee repayment of debt. It is the first advanced country to be forced into this position, and its loan request of $55 billion or more is the largest ever.

Seven of South Korea's giant conglomerates have collapsed this year, another is failing, one has been nationalized, and many more collapses are expected. Together with a sharply declining currency, which makes foreign debt more expensive to repay, and a contraction of foreign lending, the bankruptcies have put the country's banking system in severe danger of breakdown.

Coming during a presidential election campaign, the appeal for IMF aid is acutely embarrassing to the ruling party. Longtime oppositionist and democrat Kim Dae Jung, though openly opposed by the conglomerates, is now favored to win the Dec. 18 election.

Both IMF-imposed austerity measures and restructuring of the conglomerates are expected to cause massive layoffs, but South Korean unions have threatened major strikes to protect jobs and wages, and demonstrations have already begun. The Korean Confederation of Trade Unions has vowed to do "whatever it takes to fight against foreign interference in the Korean economy."

Japan has been forced to allow four large banks and brokerage houses to fail in the past month. Among them was Yamaichi Securities which will be laying off 7,000 workers. It is the largest Japanese company to fail since World War II. The bank deposit insurance system is broke, and the government may require as much as $80 billion to rescue it.

This, however, is only the tip of the iceberg. The drying up of cheap credit in the wake of the region's crisis, together with defaults on loans extended in Southeast Asia and a continued drop in stock prices, could cause up to one-third of Japan's financial institutions to fail. A government rescue of the system could cost as much as $500 billion.

Nor is the malaise in Japan's economy limited to its financial sector. Unemployment is at a post-World War II high. The nation's Gross Domestic Product, stagnant throughout most of the decade, fell sharply in the second quarter of this year, and industrial production, housing starts, and retail sales all fell in October. Weak demand for its products, both at home and in its Southeast Asian markets, will make it difficult for Japan to rebound without stepping up its exports to the U.S., but U.S. officials, including President Clinton, have sternly warned it not to do so.

The crisis shows signs of spreading wider still. Both Russia and China have started to suffer from declining foreign investment, as escalating fear causes capital to flee from the "emerging markets" as a whole. The first sign that the crisis may spread to the United States is the recent report that this country's trade deficit with the Asian "tigers" doubled in September, due to a steep drop in their demand for imports.

--Andrew Kliman [contributing writer]

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