Rich using crisis to force open Asian economies

The Malaysian Prime Minister has warned that the current financial crisis in Asia has provided an opportunity for the rich countries to force open and dominate the economies of the South. At the same meeting, the IMF Managing Director, in contrast, put the blame of the crisis on policy errors in Asian countries and called for further financial liberalization, sparking critical comments from the floor .

by Martin Khor

KUALA LUMPUR: The current crisis in Asian countries has provided an opportunity to the rich countries to force open and dominate their economies, and emerging nations of the South are losing their wealth as well as their economic sovereignty.

This warning was given on 1 December by Malaysian Prime Minister, Dr Mahathir Mohamad, who added that conditions imposed by the IMF on countries resorting to its loans would open their financial sector and cause foreign banks to dominate their finances.

In a wide-ranging speech at the opening ceremony for a series of meetings of ASEAN Finance Ministers (1-3 December), as well as of a seminar organized by the ASEAN Business Forum, Mahathir focused on the modus operandi of currency speculation and its devastating effects.

Effects of currency speculation

He said there may not be a conspiracy to dominate the economy of East Asian developing countries. "But obviously, their troubles have afforded an opportunity for forcing open their economies and possible domination by strong and powerful nations."

"The assaults by the currency traders against the emerging economies of the South have done nothing good for these target countries. Much has been made about the eventual recovery of these countries but even if they do recover they would have lost a lot of their wealth and the fruits of their struggle. In addition, they may have lost their economic sovereignty as well."

The Prime Minister added it was not only the countries of Asia but also of Latin America and even Africa which had been attacked by speculators. The countries which had been spared are those which have no money to be worth attacking.

Alluding to the lack of relation of the currency movements to economic fundamentals, Mahathir said that "strangely, the currencies of some of these poor countries have appreciated against those of the richer countries which had been attacked. These poor countries must have good fundamentals or else how can we explain their currencies' performance?"

The Prime Minister noted that currency trading was estimated to be twenty times bigger in money terms than world trade in goods and services. Whilst trade contributed tangibly to development and well-being, currency trading did not create growth in employment, business or wealth.

"On the other hand, it has obviously impoverished millions of people. It has impoverished countries and regions. It has wiped out decades and years of hard work."

Role of IMF

The Prime Minister asked, what had the IMF to offer in the face of the currency problems and the worsening of the ability to repay loans?

"It offers to lend money with which to repay loans to foreign lenders. But with the loans come a string of conditions, principal among which is the opening of the financial sector to full foreign participation. It is likely that this will result in foreign banks eventually dominating the finances of the country concerned."

For this reason, said Mahathir, South Korea hesitated to seek IMF support. He quoted from an Associated Press report which stated that Seoul "sees that route, with its accompanying economic control, as a last resort, one that would reduce a proud country to a beggar surrendering its sovereignty."

He said no one can argue that the right of currency traders to make huge profits over-rides the well-being and wealth of millions of people and of countries and regions.

If currency trading is to be allowed, it should be made transparent and be regulated.

Mahathir said, it was ridiculous that at a time when governments and all other businesses are being exhorted to be open and transparent, currency trading must be allowed to operate in almost absolute secrecy.

"We don't know who they are, how much capital they have, how much they have borrowed, what currencies they hold, who they sell to and who they buy from. What taxes do they pay, and to whom, on the profits they make from their target countries? Certainly these countries collect no taxes from them."

While trade in stocks and shares and in commodities are carried out in the open and in properly designated markets, said Mahathir, "there is no proper market for currency trading, no membership, no rules and no government regulations to stop abuses".

"Who decided that the traders can leverage up to twenty times or more of the funds they deposit with their bankers? Who are these bankers who can make available trillions of dollars to their clients? What are the capital resources of these banks? Who invested in them and how much? How can these banks become richer than most countries of the world?"

The Prime Minister added that whilst we believe in globalization and trade liberalization, surely liberalization and deregulation of national entities should not result in exposure to an anarchic world.

Call on WTO to regulate currency trading

"Haven't we been told to abide by the rule of law?" he remarked. "How come then that the abolition of national laws should lead to absence of the rule of law in the enlarged world market?"

"If globalization and open markets are to contribute to growth and enrichment, there must be the rule of international law for everyone to respect. Without laws, the strong and the corrupt will rule, will dominate. Is this what is being advocated?"

Mahathir also called on the World Trade Organization to formulate regulations for the currency trade. The IMF should continue to supervise, but if currency trading is "trade", then the WTO should discuss and formulate rules and regulations for international currency trading which are fair and just, and which the rich and poor alike have a hand in drawing up.

He asked why regulations are considered objectionable for currency trade when it is good for trade in goods and services.

"Is there something sacred about currency trading or is there something in it that does not bear public examination? In a world which believes in the right to know, a world which pries and probes into the private lives of very private people, cannot we know of the people and the activities of currency traders whose decisions can inflict all kinds of misery on millions of people and a large number of countries?"

Mahathir also said it was normal for people who make money to pay taxes to the governments of the people they make money from. The profits of currency traders are made from trading in the currencies of many countries, but as far as is known these countries receive no payment of taxes.

"Is it fair for the countries of their domicile alone to collect the taxes? Have the countries which provide the currencies for the traders to make money from no right to impose taxes on them?"

Currency trading demands to be regulated

The Prime Minister concluded that looked at from any angle, currency trading demands to be regulated in everyone's interest, as every country (even the developed countries) would be adversely affected.

"They have left a trail of shattered, disoriented economies and nations wherever they went. These nations and others not yet visited by them live in fear of their attacks. And for so long as they are not regulated, for so long as they can have trillions of dollars at their disposal, their capacity to attack and to damage economies will remain, and they will strike fear in the hearts, not just of Governments and Finance Ministers but of businessmen and people, rich and poor alike."

Earlier, Mahathir had made a critique of the mechanics of the trade in currencies of developing countries.

He said that since currency trading is not transparent but very secretive, it is difficult to ascertain how much of the so-called exotic currencies were held by the traders.

What is certain is that the countries concerned never had so much offshore funds as were traded in the so-called currency market. Yet there seemed to be an inexhaustible supply of offshore money in the hands of currency traders for them to sell.

The Prime Minister said that actually, of course, this offshore currency did not exist. "Currency trading as devised by the currency traders is such that they can borrow offshore money and sell in most cases to each other. And every time they sell, the currency devalues by a number of points".

"By repeatedly selling the currency, its value could be depressed almost indefinitely. And when the currency has been depressed it can be bought back at the lower price and delivered to the buyers, who incidentally had already sold the paper amount they had bought which they had themselves to deliver."

"The only way the currency can recover is when someone purchases the currency by selling the US dollar. Central banks with dollar reserves can do this but their funds are limited and they deal in cash. Against the limited funds of the Central Banks, the currency traders can leverage their funds by more than twenty times."

Mahathir said it was estimated that currency traders have US$180 billion in funds. Twenty times this would be $3.6 trillion. "No central bank, no developing country can match this."

Clearly, the devaluation of currencies can be easily manipulated by traders, who did not invest in or hold the currencies they asserted would depreciate, nor did they run the risk of losing money.

"All they did was to borrow the currency from banks, sell and resell it repeatedly and took their profits from the difference in the initial high price that they sold and the lower price money that they delivered."

"They have discovered or rather invented a sure way of making billions in a few short days through selling and buying currencies and they use this against any country they choose." Mahathir said that as a bonus they also depress the stock markets through their attack on currencies. The reaction of Central Banks to attacks is to raise interest rates, which stifles share trading.

"The share prices go down and through short selling the currency traders make more money. Sometimes they were able to lend the money they had borrowed initially at the higher rates when the Central banks increase interest rates. More money was made."

Mahathir said it was clear that with their huge resources, the traders can attack any country no matter how strong their economy may be. Having attacked the South-East Asian countries they looked for other victims.

"There was no shortage of reasons for subverting the economy of any country. The traders publish and circulate analyses of the financial futures of every country. Through constant releases of unfavourable news and rumours about the markets, they could create grounds for the devaluation.

"In the absence of information to prove otherwise, their prophecy becomes self-fulfilling. From then on the so-called herd instinct among them takes over." (Third World Economics N0.175, 16-31 December 1997)

Martin Khor is the Director of the Third World Network.