Why not allow Korea to go to the wall?
On why it might have been better to allow Korea to go under and the merger of UBS and SBC
Saturday 06 December 1997
Very few of us these days would think it right to bail out an ailing industrial company, or even a bank, and it is only charity which leads us either privately or through the mechanism of the welfare state to help those who should be helping themselves. So why rescue the sick man of Asia?
Explanations range from the altruistic to the self-interested, but certainly the specific case of Korea is a rather harder one to justify that usual, if only because Korea is a comparatively rich and successful country. Even we in Britain are being forced to contribute to this massive handout, both indirectly through our contributions to the International Monetary Fund, and directly with our own $1.25bn line of standby credit.
On any perspective, this is a bizarre turn of events. Britain still seems prepared to pay Korea's leading corporations huge amounts of money in state aid to set up in business here. Now we are proposing to subsidise them at the other end of the spectrum too.
The West really only has itself to blame for the crisis in the Far East. It is partly our Western money that funded the breakneck pace of growth in the Pacific Rim economies. For every couple of jobs created with our money at Daewoo in Seoul, we lost a couple at Rover in Coventry, but still we cheered from the sidelines, wowed by the success of the Asian Tigers.
Until the present crisis, few had anything but praise for the Far Eastern economic model, of which Korea seemed to be a shining example. Before the election, Tony Blair even went so far as to make one of his policy- setting speeches from the Pacific Rim, as if to say the way they do it out here is what we in Britain should be aiming for too.
As their manufacturing base grew and prospered, we began in an act of reckless insanity to start competing with our European partners for their favours. Worse, our own regions would outbid each other for their "expertise" and "knowhow" with ever larger amounts of taxpayers' money.
As we now know, these economies are more epitomised by corruption, cronyism and easy money than anything resembling the miraculous. Isn't it about time all this ended? Isn't it about time we turned off the life support machine?
Er, well, maybe not. Satisfying though it might be to see the Korean economy go down the swannee, it probably wouldn't be in our interests. A Korean collapse would greatly exaggerate the already serious economic crisis in the Far East, with damaging knock-on effects into the world economy.
At its most extreme the effect might be to plunge the global economy into a deflationary spiral. In the short term at least, it therefore cannot be in our interests to let these economies go to the wall. Moreover, though the Far East seems to have done rather better out of the bargain than us, these are still important markets for Western goods. As a consequence, the slowdown in these economies is already threatening growth in the West as well.
The unpleasant irony is, that if these were smaller, less significant and poorer economies, nobody would have lifted a finger to help them. It is because their collapse threatens our own prosperity that we are willing to lend support.
The other main argument for this bail-out is that it comes at a high price. The international package of aid is only a temporary bridging loan; everyone expects to get their money back. More importantly, the IMF is able to extract a weighty level of economic and structural reform as a condition of its support. This is judged important not just because it ought to bury the lax, corrupt and dirigiste ways of the past, but also because it allows the IMF to impose the American economic model on a region which has habitually cherry-picked the most advantageous aspects of our Anglo Saxon ways while attempting to disregard the rest.
In a sense, what the IMF is doing is its own particular form of economic imperialism. Because the Asian economies have so ruthlessly exploited our own domestic economies and capital markets while stubbornly failing to open up their own, it seems somehow justifiable. Britain knows all about the humiliation of going through the IMF mangle, because we were there ourselves in the mid-1970s. We also know that it is possible to see in the reforms that were forced on us by the IMF in 1976 the roots of our own economic revival today.
The more enlightened elements of the Korean government already see their own national humiliation much in this light. For them there is a silver lining to the crisis, because it allows for the introduction of necessary economic and structural reform while being able firmly to blame it all on the forces of American imperialism. Neat.
There is an important argument against what the IMF is doing, however, which is the argument used against all forms of development aid. Far from helping the situation, such support only accentuates it, the argument goes, by providing a cushion and slowing the necessary process of catharsis and rebirth. There is something in this, though in the case of a large economy like Korea, it needs to be carefully weighed against the likely economic damage to the West if we were to allow events to take their own course. The possibility that things could turn against the West politically if Korea were allowed to go to the wall also needs to be taken into account.
It is human nature always to avert a crisis where it is possible to do so, a tendency learnt from the generally brutal short-term consequences of allowing things to reach the meltdown stage. But it may be that we would have done better to leave well alone. By any standards this was a massive bail-out. It is all very well pouring money into ensuring that the merry go round carries on turning, but it is not at all clear that the world can afford these massive infusions of cash. The IMF has yet to get its money back from the last bail-out, Mexico. This latest raft of rescues tests the international purse strings to their limits.
Western equity markets have meanwhile begun to behave as if the crisis in the Far East never happened. Both the FTSE 100 index in London and the Dow in New York are back to within spitting distance of their all- time highs. Many have lost more money on the bounce than the original drop. This can be taken as evidence either of a remarkable degree of resilience in Western economies to events elsewhere in the world, or of a quite breathtaking complacency. Unfortunately, I am unable to offer an opinion on which of these views is the more likely to be correct. Things have defied gravity for so long now, that it may be this has become the natural way of the world.
Merging Swiss Bank Corporation with Union Bank of Switzerland makes such obvious commercial sense that it is a wonder it has taken the two so long to start talking. The potential for cost savings in regional, private and investment banking make the benefits of combining NatWest and Barclays look pedestrian by comparison.
However, there's another way of look at it. Putting together SBC Warburg with UBS Phillips and Drew will mean big job losses in the City and the disappearance of yet another competitive force in equity trading and corporate finance. We've already had in short order the sale and consolidation of the equity businesses of both NatWest Markets and BZW. Now another big player, UBS, is about to join them in the dustbin of history. Isn't it about time the competition authorities took a look at whether the investing public is being disadvantaged by this banking carve up?
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