ON Oct. 29, 1929, the stock market crashed in America. Wall Street’s crash kicked off the Great Depression, an economic downturn that devastated America in the early 1930s and the world, too.
If you’d like to know more, I’d like to suggest “Rainbow’s End: The Crash of 1929” by Maury Klein, who weaves together a fascinating tale of out-of-control bankers, society figures, and politicians.
But briefly, my point is this. An economic crash can spill over and traumatize not only a country, but the world.
Among the consequences of the Great Depression were: The rise of Hitler in a Germany. It was so economically devastated by the depression, that banknotes bore figures in the trillions, and the price of bread changed between the time you lined up for it, and bought it with a suitcase full of money.
In “The End of Poverty,” Jeffrey Sachs recounts that the first prime minister of independent India, Jawaharlal Nehru, focused economic activity inward, because he recalled the global dislocations of the Great Depression.
Last June, an article (http://www.asiasentinel.com/index.php?option=com_content&task=view&id=554&Itemid=31) appeared in The Asia Sentinel, an independent online newsmagazine covering the region. The article covered the breakdown in negotiations for a joint defense agreement between Singapore and Indonesia. A problem arose concerning an extradition treaty linked to the agreement.
The Indonesians were the ones who wanted the extradition treaty particularly badly:
“Local analysts say Jakarta moved too fast to sign the [defense] treaty because the government wanted the extradition treaty...[The] extradition agreement [was] eagerly awaited by Indonesian prosecutors who hope to hunt down white-collar fugitives hiding in Singapore. Jakarta also hopes to recover some of the billions of dollars of embezzled government funds believed to be in Singaporean banks after being carted away during the 1997-98 Asian financial crisis by wealthy Indonesians on the run.”
Ah, the Asian financial crisis of 1997-98. Last month, the world commemorated the tenth anniversary of this event: For Filipinos my age, it was the first crisis of our adulthood. For others, it was the second downturn in as many decades: The near-collapse of our economy in 1983 being the trauma for their generation.
Writing in Business World, Filomeno Santa Ana III penned an article titled “Ten Years After.” Here’s Santa Ana’s recap of how the crisis began: “The conflagration, as it were, began in Thailand. Financial investors panicked and like a herd, rushed towards the exit. The capital flight led to the precipitous fall of the once stable but overvalued Thai baht. The wild fire immediately spread to the neighboring region — Korea, Indonesia. Malaysia, and the Philippines. Within the same year, the Asian contagion reached other parts of the world, especially Brazil and Russia. Not only did their currencies plunge; their economies crashed.”
In 1997, Santa Ana says, Southeast Asian governments and international institutions suffered politically from the economic fallout. We know of course, that the state of the economy can make or break governments. The decline and fall of Ferdinand Marcos, for example, is usually tied to a specific, political event: The assassination of Ninoy Aquino. But it could also be tied to economic problems that the Aquino assassination magnified. Let’s put it this way: Marcos might have survived the political fallout from the Aquino assassination. He might have been able to survive the loss in public confidence his crony capitalism had brought upon the country. But put the two together, and his regime was doomed.
You may remember that when the financial crisis began in 1997, our exchange rate was 26 pesos to the dollar. By the time the crisis ended, the exchange rate was 40 pesos to the dollar. At one point, our economy stopped growing at all, and as economists call it, actually “contracted” by .06%. And even after the crisis, the collapse of public confidence resulted in our exchange rate hitting 55 pesos to the dollar at one point, around the time President Estrada was impeached.
We had a major devaluation during the 1983 crisis, and then again in 1997 and the years that followed. Besides being a focus for national pride — a good exchange rate seems, to most people, a sign our country’s doing well — the peso-dollar rate affects businesses. In the 1997 crisis, companies that had taken out loans in dollars suffered, when the exchange rate climbed. Banks were hit in turn, when businesses were unable to repay dollar-denominated loans.
This was the case in Thailand and Indonesia and other places, too. And Santa Ana says that one lingering effect of that regional trauma, is that countries have set aside huge foreign exchange reserves, as insurance in case their currencies again come under attack.
East Asian countries have $2.3 trillion set aside. China alone has $1.33 trillion. The Philippines has $26.3 billion in foreign-exchange reserves. Santa Ana points out though, that these billions set aside for a rainy day are a lost opportunity: That’s $26 billion, for example, our government can’t use to finance human development.
And this, Santa Ana says, is something the experts point out as a sign government’s haven’t learned the proper lessons from the 1997 crisis. He quotes the the Nobel Laureate Joseph Stiglitz, who said countries have failed to learn two major lessons from the 1997 crisis. First lesson: “Capital market liberalization — opening up developing countries’ financial markets to surges in short term ‘hot money’ — is dangerous.” Second lesson: “There is a need for a credible international financial institution to design the rules of the road in ways that enhance global stability and promote economic growth.”
Some say, that hope is slowly being restored. The question is, can the country cope with another regional economic downturn a la 1997?
