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What the New U.S. Treasury Chief Has in Store or Asia

Business World (Philippines) - 26 July 1999

Larry Summers, the new US Secretary of the Treasury, first crashed into my consciousness in 1991, when, as chief economist of the World Bank, he penned the notorious internal World Bank memo justifying toxic waste exports to the Third World on the grounds that they were "underpolluted." "Just between you and me," he asked close colleagues, "shouldn't the World Bank be encouraging more migrations of the dirty industries to the LDCs ?"

The reason for this, he argued, was that toxic substances such as carcinogens will have a greater impact "in a country where people will survive to get prostate cancer than in a country where under-five mortality is 200 per thousand." So long as there exist wage disparities between rich and poor countries, continued the memo, "the economic logic behind dumping a load of toxic waste in the lowest wage country is impeccable and we should face up to that." "Grating" is how even the Economist, a Summers fan, described the leaked document.

Summers made an even bigger splash in 1995, when, as Robert Rubin's undersecretary, he emerged as the brains and manager of the Clinton administration's massive $20-billion rescue package for Mexico in early 1995.

The commitment of IMF and US money bailed out hundreds of US investment funds and banks, and the lesson that many of the world's high rollers drew from the episode was that countries in which massive amounts of speculative capital were committed would not be allowed to fail. Reassured, many of the same players moved from Mexico to play the overheating Asian casino, and the term "moral hazard" entered the popular vocabulary.

Which brings us to Summers and Asia. What really is Summers's record on Asia?

One might begin by pointing out that Summers was the World Bank's chief economist when the most important Bank research he oversaw was written and produced: the now famous East Asian Economic Miracle. In accounting for the "miracle," the Bank identified as a key factor the fact that "in each HPAE [high performing Asian economy], a technocratic elite insulated to a degree from excessive political pressure supervised macroeconomic management." It went on to say that "the insulation mechanisms ranged from legislation, such as balanced budget laws in Indonesia , Singapore, and Thailand, to custom and practice in Japan and Korea. All protected essentially conservative macroeconomic policies by limiting the scope for politicians and interest groups to derail those policies."

With the outbreak of the Asian financial crisis, Summers, scarcely batting an eyelash, made a 180-degree turn and attributed the developing disaster to "crony capitalism," or a typical Asian brew of government intervention, monopoly control, and financial shenanigans.

But even as Summers and his boss embraced the crony capitalist explanation, many close observers of the Asian scene were unconvinced and some, in fact, pointed to their policies as central to the crisis. As a remarkable New York Times expose that appeared earlier this year revealed, the Rubin-Summers team's "too dogmatic" insistence on free capital flows was identified by their own colleagues as a major factor that touched off the financial implosion. In the case of Korea, for instance, a key Treasury memo on June 20, 1996 sought to use accession to the OECD as a "way of prying open Korean markets in part to win business for American banks and brokerages." Nowhere in the strategy memo's three pages "is there a hint that South Korea should improve its bank regulation or legal institutions."

Once the crisis got going in earnest in mid-1997, Summers again played a decisive non-constructive role, this time by preventing what could have turned out to be a quick stabilization mechanism: the Asian Monetary Fund (AMF). Capitalized to the tune of $100 billion, the AMF was conceived as a multipurpose, low-conditionality, quick-disbursing fund that would have provided Asian economies with reserves to defend their currencies against speculative attack. Backed by Japan and practically all East Asian governments, the Fund was nevertheless vetoed by Summers on the grounds that the AMF would weaken the ability of the IMF to extract "reforms" from the troubled Asian economies. Moreover, as analyst Eric Altbach has noted, Summers and Treasury "saw the AMF as more than just a bad idea; they interpreted it as a threat to America's influence in Asia" coming from Tokyo.

As the continuing speculative attacks forced Asia's currencies down, Summers and Treasury pushed Thailand, Korea, and Indonesia into the straitjackets of orthodox IMF stabilization programs, with their stress on high interest rates and fiscal cutbacks. Not surprisingly, this had the effect of turning a downturn into a deflationary spiral from which the Asian economies still have to recover.

Conservative monetary and fiscal policies of the emerging economies combined with radical free-market reform have constituted the principal thrust of Treasury's Asia policy since then. Yet so evident has been the central role of speculative capital in activating the virus of financial instability that spread to Russia and Brazil that even Summers and Rubin have had to speak about the need for a "new global financial architecture." That was all rhetoric, however, and Treasury's strategy in the G-7 has been to dilute or kill efforts to control hedge funds and other speculative institutions and install the equivalent of speed bumps on the flows of speculative capital.

The recent G-7 program for global financial stability issued at Cologne in June was quintessentially Summerian in its stress on the usual litany of more transparency, better monitoring, and reliance on voluntary risk management by the private sector. The lack of teeth in a proposal for global reform is both disappointing and alarming, especially in light of Summers's admission in a Time interview that "Global capital markets pose the same kinds of problems that jet planes do. They are faster, more comfortable, and they get you where you are going better. But the crashes are much more spectacular."

This exercise in deconstructing Larry inevitably leads to the question: With such a record of environmental insensitivity, analytical errors, and macroeconomic missteps, how did Summers qualify to be secretary of the Treasury?

Part of the answer lies in the Rubin-Summers team's unsurpassed skills in manipulating the media. The selling of Summers as whiz kid, top economist of his generation, and natural heir to Robert Rubin has been going on for several years now. It reached its climax in 1998, at the height of the Asian crisis, when, on the TV evening news, Summers would play Sundance Kid to Rubin's Butch Cassidy. The spreading global financial crisis often appeared to be simply a backdrop for the performance of a mutual admiration club, with tough questions serving as the cue for the boss to compliment the young Summers as the real strategist behind the US economic team and yield the stage to him.

But, aside from superior media management, there is one area where Summers has indeed been successful, and this is in promoting US economic interests.

The grand buyout of depreciated Asian assets by US financial and industrial corporations now in progress from Bangkok to Seoul owes itself to Summers and Rubin's taking advantage of the crisis to pursue the strategic goal of opening up Asia to US corporate interests. Summers's vision for the post-crisis Asian economic order may be gleaned from his comments in a speech he gave to the Council of the Americas on May 3, 1999. In the same smooth way that his predecessor equated the common good with the US interest, Summers said: "Today, fully 50% of the banking sector, 70% of private banks, in Argentina are foreign-controlled, up from 30% in 1994. The result is a deeper, more efficient financial market, and external investors with a greater stake in staying put." Asia was, of course, as much on Larry's mind as Argentina.

Yes, Larry Summers may be a neanderthal when it comes to the environment and he may have an unenviable record as global economic manager. But you have to grant that he does a pretty good job at pushing the interests of American banks and corporations on the benighted and the recalcitrant. And that, after all, is what makes somebody a good secretary of the Treasury.

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