Blowback, Second Edition: The Costs and Consequences of American Empire

MELTDOWN

Each year approximately ten thousand American troops descend on Thailand for a joint military exercise called Cobra Gold. The military part of these visits is largely make-work for the American and Thai staffs, but the troops love Cobra Gold because of the sex. According to the newspaper Pacific Stars and Stripes, some three thousand prostitutes wait for the sailors and marines at the South Pattaya waterfront, close to Utapao air base. An equal number of young Thai girls from the country-side, many of whom have been raped and then impressed into the “sex industry,” are available downtown in Bangkok’s Patpang district. They are virtually all infected with AIDS, but the condom-equipped American forces seem not to worry. At the time of the 1997 war games, just before the economic crisis broke, sex with a Thai prostitute cost around fifteen hundred Thai baht, or sixty dollars at its then pegged rate of twenty-five baht to one U.S. dollar. By the time of the next year’s Cobra Gold the price had been more than halved.¹ This is just one of many market benefits Americans gained through their rollback operation against the “Asian model” of capitalism.

The global economic crisis that began in Thailand in July 1997 had two causes. First, the built-in contradictions of the American satellite system in East Asia had heightened to such a degree that the system itself unexpectedly began to splinter and threatened to blow apart. Second, the United States, relieved of the prudence imposed on it by the Cold War, when any American misstep was chalked up as a Soviet gain, launched a campaign to force the rest of the world to adopt its form of capitalism. This effort went under the rubric of “globalization.” As these two complex undertakings—perpetuating Cold War structures after they had lost their purpose and trying to “globalize” countries that thought they had invented a different kind of capitalism—played themselves out around the world, they threatened a worldwide collapse of demand and a new depression. Whatever happens, the crisis probably signaled the beginning of the end of the American empire and a shift to a tripolar world in which the United States, Europe, and East Asia simultaneously share power and compete for it.

During the Cold War, the Communists routinely charged that the United States used the Marshall Plan for rebuilding wartorn Europe and subsequent economic aid programs to advance the interests of American companies and to keep the Third World dependent on the First. According to the Communist theory of economic colonialism, capitalist states enforce an inherently discriminatory division of labor on less developed countries by selling them manufactured goods and buying from them only raw materials, an extremely profitable arrangement for capitalists in advanced countries and one that certainly keeps underdeveloped countries underdeveloped. This is why revolutionary movements in underdeveloped countries want either to overthrow the capitalist order or to industrialize their economies as fast as possible.

Such economic colonialism has long existed in many aspects of America’s relations with Latin America. During the Cold War, the United States wrapped this system of dependency in the rhetoric of anticommunism, labeling elected leaders Communists if they seemed to endanger American corporate interests, as in Guatemala in 1954, and ordering the CIA to overthrow them. Campaigns against the influence of Fidel Castro, for instance, often proved of great usefulness to American companies south of the border. But this pattern of relationships did not cause the global economic crisis of the late 1990s.

The fundamental structural cause was the way the United States for more than forty years won and retained the loyalty of its East Asian satellites. These non-Communist countries accepted the American deal as offered and worked hard at “export-led growth,” primarily to the American market. If the Japanese led this movement, behind them were three ranks of followers: first, the “newly industrialized countries” of South Korea, Taiwan, Hong Kong, and Singapore; then, the late developers of Southeast Asia, Malaysia, Indonesia, Thailand, and the Philippines; and finally, China, at present the world’s fastest-growing economy. The Japanese found this so-called flying-geese pattern appealing. They were flattered to be the lead goose and the inspiration for those that followed. The leaders of each of these countries assumed that their economic destination—Los Angeles (and from there the rest of the American market)—was a permanent feature of the international environment; and so long as the Cold War existed, it was as permanent as anything ever is in interstate relations.

Over time, however, this pattern produced gross overinvestment and excess capacity in East Asia, the world’s largest trade deficits in the United States, and a lack of even an approximation of supply-and-demand equilibrium across the Pacific. Contrary to Communist analyses of how neocolonialism should work, these terms proved surprisingly costly to the imperial power. They cost American jobs, destroyed manufacturing industries, and blunted the hopes of minorities and women trying to escape from poverty.

Judith Stein, a professor of history at the City College of New York, has detailed how the de facto U.S. industrial policy of sacrificing American workers to pay for its empire devastated African-American households in Birmingham, Alabama, and Pittsburgh, Pennsylvania. This is, of course, but another form of blowback. She writes, “At the outset of the Cold War, reconstructing or creating steel industries abroad was a keystone of U.S. strategic policy, and encouraging steel imports became a tool for maintaining vital alliances. The nation’s leaders by and large ignored the resulting conflict between Cold War and domestic goals. Reminiscing about elite thinking in that era, former Federal Reserve Board chairman Paul A. Volcker recalled that ‘the strength and prosperity of the American economy was too evident to engender concern about the costs.’ ”² Moreover, American economic ideologues always dominated what debate there was, couching the problem in terms of protectionism versus internationalism, never in terms of prosperity for whites versus poverty for blacks. The true costs to the United States should be measured in terms of crime statistics, ruined inner cities, and drug addiction, as well as trade deficits.

U.S. officials did finally start to negotiate more or less seriously with the Japanese and the other “miracle economies” to open their markets to American goods. But the attempt always collided with the security relationship. In order to level the economic playing field, the United States would have had to level the security playing field as well, and this it remains unwilling to do.

In East Asia, to create industries that could export to the American market, design the right products, and achieve competitive prices and levels of quality, governmental industrial policies became the norm. Japan was the regional pioneer in creating model collaborative relationships between government and industry. In part, it drew on its history as one of the world’s most successful late industrializers and on its wartime production system, in which the government and the huge zaibatsu, or corporate combines, had worked together to produce the weapons that Japan needed. After the onset of the Cold War, the Americans did very little to prevent the Japanese from re-creating the combines (now called keiretsu) and the legal structure that supported them, largely because occupation officials either failed to recognize what was happening or were blind to its implications.

To base a capitalist economy mainly on export sales rather than domestic demand, however, ultimately subverts the function of the unfettered world market to reconcile and bring into balance supply and demand. Instead of producing what the people of a particular economy can actually use, East Asian export regimes thrived on foreign demand artificially engineered by an imperialist power. In East Asia during the Cold War, the strategy worked so long as the American economy remained overwhelmingly larger than the economies of its dependencies and so long as only Japan and perhaps one or two smaller countries pursued this strategy. But by the 1980s the Japanese economy had become twice the size of both Germanies. Anything it did affected not just the American but the global economy. Moreover, virtually everyone else in East Asia (and potentially every underdeveloped country on earth) had some knowledge of how to create such a miracle economy and many were trying to duplicate Japanese-style high-speed growth. An overcapacity for products oriented to the American market (or products needed to further expand export-oriented economies) became overwhelming. There were too many factories turning out athletic shoes, automobiles, television sets, semiconductors, petrochemicals, steel, and ships for too few buyers. The current global demand for automobiles, for example, seems to have peaked at around 50 million vehicles at a moment when capacity has already grown to 70 million. To make matters worse, as a result of the global economic crisis, auto sales in Southeast Asia fell from 1.3 million in 1997 to 450,000 in 1998.

This is not to say that all the barefoot peoples of the world who might like to wear athletic shoes or all the relatively poor people who might someday be able to afford a television set or an automobile are satisfied. But for now they are too poor to be customers. The current overcapacity in East Asia has created intense competition among American and European multinational corporations. Their answer has been to lower costs by moving as much of their manufacturing as possible to places where skilled workers are paid very little. These poorly paid workers in places like Vietnam, Indonesia, and China cannot consume what they produce, while middle- and lower-class consumers back in the United States and Europe cannot buy much more either because their markets are saturated or their incomes are stagnant or falling. The underlying danger is a structural collapse of demand leading to recession and ultimately to something like the Great Depression. As the economic journalist William Greider has put it in his book One World, Ready or Not, “Shipping high-wage jobs to low-wage economies has obvious, immediate economic benefits. But, roughly speaking, it also replaces high-wage consumers with low-wage ones. That exchange is debilitating for the entire system.”³ The only answer is to create new demand by paying poor people more for their work. But the political authorities capable of enacting and enforcing rules to enlarge demand could not do so even if they wanted to because “globalization” has placed the matter beyond their control.

A crisis of oversupply was inevitable given the passage of time and the unwillingness of imperial America to reform its system of satellites. Even in the late 1990s, the American economy continued to serve as the consumer of last resort for the enormous manufacturing capacity of all of East Asia, although doing so produced trade deficits that cumulatively transferred trillions of dollars from the United States to Asia. This caused an actual decline in the household incomes of the bottom tenth of American families, whose real incomes fell by 13 percent between 1973 and 1995. It was only in 1997 that a weak link snapped—not, ironically, in trade, but finance—and threatened to bring the system down.

The financial systems of all the high-growth East Asian economies were based on encouraging exceptionally high domestic household savings as the main source of capital for industrial growth. Such savings were achieved by discouraging consumption through the high domestic pricing of consumer goods (which, of course, also led to charges of “dumping” of normally priced goods when they were sent abroad). To save in such a context was a patriotic act, but it was also a matter of survival in societies that provided little in the way of a social safety net for times of emergencies, and in which housing often had to be bought outright or in which interest payments on mortgages was not treated favorably as a tax deduction.

East Asian governments collected these savings in banks affiliated with industrial combines or in government savings institutions such as post offices. In organizing their economies, they had chosen not to rely primarily on stock exchanges to raise the capital their export industries needed. Instead they found it much more effective to guide the investment of the savings in these banks to the industries the governments wanted to develop. In East Asia, ostensibly private banks thus became partners in business enterprises and industrial groups, not independent creditors concerned first and foremost with the profitability of a company or the success of a loan. These banks in effect followed government orders and felt secure so long as they did so.

Superficially, corporations in most East Asian countries looked like their American or European equivalents, but in this case appearances were indeed deceptive. As the American corporate raider T. Boone Pickens discovered when he tried to buy a small Japanese company that made auto headlights, a significant block of shares was held by the Toyota Motor Company. The firm he wanted to acquire was part of the automaker’s keiretsu, or conglomerate of cooperating firms and banks. Although Pickens acquired what in the United States would have been a controlling interest in the company, Toyota blocked his takeover and prevented him from naming his own directors and corporate officers. The fact that Pickens was able to buy the shares at all was a fluke in Japanese corporate governance, the result of a single disgruntled stockholder. Until very recently Japanese corporations were “owned” entirely by one another in elaborate cross-share-holding deals designed to keep people like Pickens out and to keep the enterprise working for the country rather than for the profits of shareholders. The sale of shares was not a way to raise capital, and the people who held them were uninterested in the risks or profits that the company’s operations entailed.

This was actually a brilliant system. Oxfam, the British development and relief agency, maintains that the Cold War East Asian economies achieved “the fastest reduction in poverty for the greatest number of people in history.”⁴ But the stability of any East Asian economy depended on its keeping its financial system closed—that is, under national control and supervision. Once opened up to the rest of the world, the financial structures of the East Asian developmental states were extremely vulnerable to attack by foreign capital and international financial speculators. The industrial policy system produced corporations in which the burden of debt was five times greater than the value of the shareholders’ investments, whereas these so-called debt-to-equity ratios for U.S. firms are less than one to one. East Asian corporations operating with such large burdens of debt were normally indifferent to the price of their equity shares. Instead, they serviced these debts at their banks with income from foreign sales. When they were unable to repay their loans, the banks themselves very quickly veered toward bankruptcy. The whole system depended on continuous growth of revenue from export sales.

East Asian bankers are no stupider or more corrupt than those elsewhere. It is just that the industrial policies of the systems within which they operate put the profitability of a loan very near the bottom of the criteria they use for making an investment decision. Instead, these bankers focus on enlarging productive capacity, achieving larger market shares, accumulating assets, and having large balance sheets. It is true that from a purely Western perspective, they should not have offered many of the loans they made. To us it seems insane to ignore commercial criteria such as profitability. But for a Korean banker, it was more important to support an affiliated company that was building cars for the U.S. market than to question whether the company was making prudent investment decisions. That was part of the logic of being a banker in a satellite country within America’s hegemonic order in East Asia.

Then, without warning, that order changed. Perhaps the first important blow to the East Asian model of capitalism came in 1971, when President Nixon abolished the Bretton Woods system of fixed exchange rates, created by the United Nations Monetary and Financial Conference in the summer of 1944 at Bretton Woods, New Hampshire. The treaties that resulted from Bretton Woods were the most important efforts of the victorious Allies of World War II to create a better global financial system than the one that existed in the 1930s. The Allies intended to prevent a recurrence of the protectionism and competitive devaluations of national currencies that had deepened the Great Depression and fueled the rise of Nazism. To do these things, the Bretton Woods conference established a system of fixed exchange rates among the world’s currencies. It also created the International Monetary Fund, to help countries whose economic conditions forced them to alter the value of their currencies, and the World Bank, to help finance postwar rebuilding. The value of every currency was tied to the value of the U.S. dollar, which was in turn backed by the U.S. government’s guarantee that it would convert dollars into gold on demand.

Nixon decided to end the Bretton Woods system because the Vietnam War had imposed such excessive expenditures on the United States that it was hemorrhaging money. He concluded that the government could no longer afford to exchange its currency for a fixed value of gold. A more effective answer would have been to end the Vietnam War and balance the federal budget. Instead, what actually occurred was that the dollar and other currencies were allowed to “float”—that is, to be converted into other currencies at whatever rate the market determined.

The historian, business executive, and novelist John Ralston Saul described Nixon’s action as “perhaps the single most destructive act of the postwar world. The West was returned to the monetary barbarism and instability of the 19th century.”⁵ Floating exchange rates introduced a major element of instability into the international trading system. They stimulated the growth of so-called finance capitalism—which refers to making money from trading stocks, bonds, currencies, and other forms of securities as well as lending money to companies, governments, and consumers rather than manufacturing products and selling them at prices determined by unfettered markets. Finance capitalism, as its name implies, means making money by manipulating money, not trying to achieve a balance between the producers and consumers of goods. On the contrary, finance capitalism aggravates the problems of equilibrium within and among capitalist economies in order to profit from the discrepancies. During the nineteenth century the appearance, and then dominance, of finance capitalism was widely recognized as a defect of improperly regulated capitalist systems. Theorists from Adam Smith to John Hobson observed that capitalists do not really like being capitalists. They would much rather be monopolists, rentiers, inside traders, or usurers or in some other way achieve an unfair advantage that might allow them to profit more easily from the mental and physical work of others. Smith and Hobson both believed that finance capitalism produced the pathologies of the global economy they called mercantilism and imperialism: that is, true economic exploitation of others rather than mutually beneficial exchanges among economic actors.

Opponents of capitalism, such as Marxists, viewed such problems as inescapable and the ultimate reason capitalist systems must sooner or later implode. Supporters of capitalism, such as Smith and Hobson, thought that its problems could be solved by imposing social controls on the monetary system, as did the Bretton Woods agreement. As they saw it, lack of such controls led to the maldistribution of purchasing power. Too few rich people and too many poor people resulted in an insufficient demand for goods and services. The “excess capital” thus generated had to find some place to go. In the maturing capitalist countries of the nineteenth century, financiers pressured their governments to create colonies in which they could invest and obtain profits of a sort no longer available to them at home. The nineteenth-century theorists believed this was the root cause of imperialism and that its specific antidote was the use of state power to raise the ability of the domestic public to consume. After the United States ended the Bretton Woods system, these kinds of problems once again returned to haunt the world.

In the 1980s, when Japanese trade with the United States began seriously to damage the American economy, the leaders of both countries chose to deal with the problem by manipulating exchange rates. This could be done by having the central banks of each country work in concert buying and selling dollars and yen. In a meeting of finance ministers at the Plaza Hotel in New York City in 1985, the United States and Japan agreed in the Plaza Accord to force down the value of the dollar and force up the value of the yen, thereby making American products cheaper on international markets and Japanese goods more expensive. The low (that is, inexpensive) dollar lasted for a decade.

The Plaza Accord was intended to ameliorate the United States’ huge trade deficits with Japan, but altering exchange rates affects only prices, and price competitiveness and price advantages were not the cause of the deficits. The accord was based on good classroom economic theory, but it ignored the realities of how the Japanese economy was actually organized and its dependence on sales to the American market. The accord was, as a result, the root cause of the major catastrophes that befell East Asia’s economies over the succeeding fifteen years.

Once the high yen–low dollar regime was in place, the U.S. government assumed that the trade imbalance would correct itself. The United States did nothing to end Japan’s barriers against imports and still permitted Japan to export into its market anything and everything it could sell there. Japan reacted to the high yen by putting its industrial policy system into high gear in order to lower costs so it could continue its export-led growth, even at a disadvantageously high exchange rate. The Japanese Ministry of Finance also lowered domestic interest rates to make capital virtually free and encouraged industrial groups to invest more vigorously than they had ever done before. The result was fantastic industrial overcapacity and a “bubble economy,” in which the prices of such things as real estate lost any relationship to underlying values. Business leaders proudly announced on American television that a square meter of the Ginza was worth more than all of Seattle. Ultimately, huge debts accumulated and the Japanese banks were stuck with at least $600 billion in “nonperforming” loans that threatened to bankrupt the entire banking system.

By 1995, the contradictions were starting to come to a head. Japan still had a huge surplus of savings, which it exported to the United States by investing in U.S. Treasury bonds, thereby helping fund America’s debts and keep its domestic interest rates low. And yet Japan itself was simultaneously facing the possibility of the collapse of several of its bankrupt banks. Financial leaders said to the Americans that they needed relief from the high yen in order to increase Japan’s exports. They hoped to solve their problems in the traditional way, via more export-led growth. Eisuke Sakakibara, then Japan’s vice minister for international affairs in the Ministry of Finance, readily acknowledges that he intervened with Washington to lower the value of the yen and admits to his “inadvertent role in precipitating one of the 20th century’s greatest economic crises.”⁶ The United States went along with this; facing reelection in 1996, Bill Clinton certainly did not want Japanese capital called home to prop up Japanese banks at that moment. As a result, between 1995 and 1997 the U.S. Treasury and the Bank of Japan engineered a “reverse Plaza Accord”—which led to a 60 percent fall of the yen against the dollar.

However, in the wake of the Plaza Accord, many newly developing Southeast Asian economies had by then “pegged” their currencies to the low dollar, establishing official rates at which businesses and countries around the world could exchange Southeast Asian currencies for dollars. So long as the dollar remained cheap, this gave them a price advantage over competitors, including Japan, and made the region very attractive to foreign investors because of its rapidly expanding exports. It also encouraged reckless lending by domestic banks, since pegged exchange rates seemed to protect them from the unpredictability of currency fluctuations. During the early 1990s, all of the East Asian countries other than Japan grew at explosive rates. Then the “reverse Plaza Accord” brought disaster. Suddenly, their exports became far more expensive than Japan’s. Export growth in second-tier countries like South Korea, Thailand, Indonesia, Malaysia, and the Philippines went from 30 percent a year in early 1995 to zero by mid-1996.⁷

Certain developments in the advanced industrial democracies only compounded these problems. Some of their capitalists had spent the post–Plaza Accord decade developing “financial instruments” that enabled them to bet on whether global currencies would rise or fall. They had also accumulated huge pools of capital, partly because aging populations led to the exceptional growth of pension funds, which had to be invested somewhere. Mutual funds within the United States alone grew from about $1 trillion in the early 1980s to $4.5 trillion by the mid-1990s. These massive pools of capital could have catastrophic effects on the value of a foreign currency if transferred in and then suddenly out of a target country. Fast-developing computer and telecommunications technologies radically lowered transaction costs while increasing the speed and precision with which finance capitalists could transfer money and manipulate currencies on a global scale. The managers who controlled these funds began to encourage investment anywhere on earth under the rubric of “globalization,” an esoteric term for what in the nineteenth century was simply called imperialism. They argued that excess capital should be allowed to flow freely in and out of any and all countries. Some economists argued that the free flow of capital was the same thing as the free flow of goods, despite mountainous evidence to the contrary.

Capital flows to developing nations in Asia and Latin America jumped from about $50 billion a year before the end of the Cold War to $300 billion a year by the mid-1990s. From 1992 to 1996, Indonesia, Malaysia, Thailand, and the Philippines experienced money and credit growth rates of 25 percent to 30 percent a year. During this same period South Korea, Thailand, and Indonesia invested nearly 40 percent of their gross domestic product in new productive capacity as well as in hotels and office buildings; the comparable figure for European nations was only 20 percent and even less for the United States. In 1996, Asia was the destination for half of all global foreign investment, European and Japanese as well as American. On the American side, by 1997 Citibank held about $22 billion in local currency loans in East Asia, about $20 billion in securities, and $8 billion in dollar loans; Morgan Bank had $19 billion in Asian securities and $6 billion in dollar loans; and Chase had $4 billion in local currency loans, $15 billion in Asian securities, and $6 billion in dollar loans.⁸

Although they did not speak out at the time, a number of famous financiers and economists have since pointed out the dangers of what is called “hot money” or “gypsy capital.” George Soros, one of the world’s richest financiers and head of a large “hedge fund” located in the Netherlands Antilles, asserted that “financial markets, far from tending toward equilibrium, are inherently unstable,” and he warned against the folly of continuing down the path of deregulating the financial services industry.⁹ Jagdish Bhagwati, one of free trade’s most passionate supporters and a former adviser to the director-general of the General Agreement on Tariffs and Trade, argued that the idea of free trade had been “hijacked by the proponents of capital mobility.” He claimed that there was a new “Wall Street–Treasury complex,” comparable to the military-industrial complex, which contributes little to the global economy but profits enormously from pretending that it does. The East Asian economies did not really need hot money from abroad, since in most cases they saved enough themselves to finance their own growth. Bhagwati has also pointed out that an unregulated financial system can with relative ease become divorced from the productive system it is supposed to serve and so be unnaturally predisposed to “panics and manias.”¹⁰

There was as well a less financial ingredient in the disaster-in-the-making. Without particularly thinking about it or sponsoring any public debate on the subject, the U.S. government built its future global policies on the main military elements of its Cold War policies. It expanded NATO to include the former Soviet satellites of the Czech Republic, Hungary, and Poland; it reinforced its East Asian alliances; and it committed itself to ensuring access to Persian Gulf oil for itself and its allies. The Gulf War of 1991 was the first demonstration of this commitment. Eschewing a “peace dividend,” which it might have directed toward its own industrial and social infrastructure, the United States also kept its Cold War–sized defense budgets in the $270 billion range while seeking to reorient its military focus from the possibility of war with a more or less equivalent enemy to imperial policing chores everywhere on earth.

With hegemony established on military terms and the American public more or less unaware of what its government was doing, government officials, economic theorists, and members of the Wall Street–Treasury complex launched an astonishingly ambitious, even megalomaniacal attempt to make the rest of the world adopt American economic institutions and norms. One could argue that the project reflected the last great expression of eighteenth-century Enlightenment rationalism, as idealistic and utopian as the paradise of pure communism that Marx envisioned; or one could conclude that having defeated the Fascists and the Communists, the United States now sought to defeat its last remaining rivals for global dominance: the nations of East Asia that had used the conditions of the Cold War to enrich themselves. In the latter view, U.S. interests lay not in globalization but in bringing increasingly self-confident competitors to their knees.

In any event, buoyed by what the apologist for America Francis Fukuyama has called the “end of history”—the belief that with the end of the Cold War all alternatives to the American economic system had been discredited—American leaders became hubristic. Although there is no evidence that Washington hatched a conspiracy to extend the scope of its global hegemony, a sense of moral superiority on the part of some and of opportunism on the part of others more than sufficed to create a similar effect.

Their efforts came in two strategic phases. From about 1992 to 1997, the United States led an ideological campaign to open up the economies of the world to free trade and the free flow of capital across national borders. Concretely this meant attempting to curb governmental influence, particularly any supervisory role over commerce in all “free-market democracies.” Where this effort was successful (notably in South Korea), it had the effect of softening up the former developmental states, leaving them significantly more defenseless in the international marketplace.

Beginning in July 1997, the United States then brought the massive weight of unconstrained global capital to bear on them. Whether the U.S. government did this by inadvertence or design is at present impossible to say. But at least no one can claim that America’s leadership did not know about the size and strength of the hedge funds located in offshore tax havens and about the incredible profits they were making from speculative attacks on vulnerable currencies. In 1994, for example, David W. Mullins, former Harvard Business School professor and vice chairman of the Federal Reserve Board, went from being a deputy of Reserve Board chairman Alan Greenspan to a position as a director of Long-Term Capital Management (LTCM), a huge hedge fund with its headquarters in Greenwich, Connecticut, but its money safely stashed in the Cayman Islands, beyond the reach of tax authorities. In 1998, after the conditions it helped bring about had almost bankrupted the fund, the New York Federal Reserve Bank arranged a $3.65 billion cash bailout to save the company—as good an example of pure “crony capitalism” as any ever attributed to the high-growth economies of East Asia. In fact, when the bailout came to light, a number of Asian publications cynically recalled how the New York Times had editorialized only months earlier that in Asia “collusive practices were not only tolerated, they were encouraged” and that “the United States needs to reiterate the importance of full transparency by companies and financial institutions.”¹¹ After the LTCM bailout, Martin Mayer, one of the most respected writers on the American financial system, observed that “the Fed [Federal Reserve Board] for all its talk of ‘transparency’ has made the fastest growing area of banking totally opaque, even to the supervisors themselves.”¹²

In order to make it intellectually respectable for the smaller Asian economies to swallow all the money the United States, Japan, and other advanced countries were offering them, the U.S. government threw its weight behind the Asia-Pacific Economic Cooperation forum (APEC), an organization the Australians had launched at a meeting of trade ministers in Canberra in November 1989. The forum did not, however, take off until November 1993, when President Clinton decided to attend an APEC meeting in Seattle and turned it into an Asia-Pacific summit of leaders from all the major East Asian nations. The Seattle meeting also produced APEC’s first “Economic Vision Statement”: “The progressive development of a community of Asia-Pacific economies with free and open trade and investment [italics added].” Under American leadership, APEC became the leading organization promoting globalization in East Asia. At annual meetings in different Pacific Rim countries, it insistently propagandized that the Asian “tiger economies” open up to global market forces, in accordance with the most advanced (American) theorizing about capitalist economies and in order to not be left behind as mere developmental states.

The November 1994 APEC meeting in Bogor, Indonesia, committed the participants to free trade and investment in the Pacific by 2010 for developed countries and by 2020 for developing countries, such as China and Indonesia. In 1995, at Osaka, APEC members agreed to unilaterally open their economies rather than attempt to negotiate a treaty like the North American Free Trade Agreement, which would have generated too much resistance in many of the member nations. Nothing much happened at Manila in 1996—except for a visit by the leaders to the old U.S. naval base at Subic Bay, now cleaned up of its prostitutes and turned into a free-trade and development zone. At Vancouver in November 1997, with the Asian financial crisis already under way, the United States pushed for the rapid removal of tariffs and nontariff barriers to trade in fifteen different sectors of economic activity. At Kuala Lumpur in November 1998, APEC finally came unglued. The prime minister of Malaysia, Mahathir Mohamad, had only a few months earlier reimposed capital controls over his economy to insulate it from gypsy capital, for which Vice President Al Gore openly denounced him, encouraging the people of Malaysia to overthrow him. The meeting ended in rancor, with Japan taking the lead in scuttling any further market-opening schemes for the time being. Its Ministry of Foreign Affairs declared that the United States was possessed by an “evil spirit” and accused it of endangering the region’s fragile economic condition by pushing market-opening measures down the throats of countries too weak to open their borders further.¹³ Malaysia and the United States did not even bother to attend the 1999 APEC meeting of trade ministers in Auckland, New Zealand.

The shock that brought this edifice crashing to the ground started in the summer of 1997, when some foreign financiers discovered that they had lent huge sums to companies in East Asia with unimaginably large debts and, by Western standards, very low levels of shareholder investment. They feared that other lenders, particularly the hedge funds, would make or had already made the same discovery. They knew that if all of them started to reduce their risks, the aggregate effect would be to force local governments to de-peg their currencies from the dollar and devalue them. Since this would raise the loan burdens of even the most expertly managed companies, they too would have to rush to buy dollars before the price went out of sight, thereby helping to drive the value of any domestic currency even lower.

The countries that had followed recent American economic advice most closely were most seriously devastated. They had opened up their economies to unrestricted capital flows without understanding the need to regulate the exposure of their own banks and firms. They did not ensure that borrowers in their countries invested the money they acquired from abroad in projects that would pay adequate returns or that actually constituted collateral for the loans. The foreign economists who advised them did not stress the institutional and legal structures needed to operate in the world of American-style laissez faire. No one warned them that if they raised their interest rates in order to slow inflation, foreign money would pour into their countries, attracted by high returns, whereas if they lowered interest rates in order to prevent a recession, it would provoke an immediate flight of foreign capital. They did not know that unrestricted capital flows had put them in an impossible position. What took place in East Asia was a clash between two forms of capitalism: the American system, disciplined by the need to produce profits, and the Asian form, disciplined by the need to produce growth through export sales.

The International Monetary Fund entered this picture and turned a financial panic into a crisis of the underlying economic systems. As already mentioned, the Bretton Woods conference of 1944 had created the IMF to service the system of fixed exchange rates that lasted until the “Nixon shocks” of 1971. It survived its loss of mission in 1971 to become, in the economist Robert Kuttner’s words, “the premier instrument of deflation, as well as the most powerful unaccountable institution in the world.”¹⁴ The IMF is essentially a covert arm of the U.S. Treasury, yet beyond congressional oversight because it is formally an international organization. Its voting rules ensure that it is dominated by the United States and its allies. India and China have fewer votes in the IMF, for example, than the Netherlands. As the prominent Harvard economist Jeffrey Sachs puts its, “Not unlike the days when the British Empire placed senior officials directly into the Egyptian and Ottoman [and also the Chinese] financial ministries, the IMF is insinuated into the inner sanctums of nearly 75 developing country governments around the world—countries with a combined population of some 1.4 billion.”¹⁵

In 1997, the IMF roared into a panic-stricken Asia, promising to supply $17 billion to Bangkok, $40 billion to Jakarta, and $57 billion to Seoul. In return, however, it demanded the imposition of austerity budgets and high interest rates, as well as fire sales of debt-ridden local businesses to foreign bargain hunters. It claimed that these measures would restore economic health to the “Asian tigers” and also turn them into “open” Anglo-American-type capitalist economies. At an earlier meeting at Manila in November 1997 called to deal with the crisis, Japan and Taiwan had offered to put up $100 billion to help their fellow Asians, but the U.S. Treasury’s assistant secretary, Lawrence Summers, denounced the idea as a threat to the monopoly of the IMF over international financial crises, and it was killed. He did not want Japan taking the lead, because Japan would not have imposed the IMF’s conditions on the Asian recipients and that was as important to the U.S. government as restoring them to economic health.¹⁶

In Indonesia, when the government ended its dollar peg and let the currency float, the rupiah fell from about 2,300 to 3,000 to the dollar but then stabilized. At that point, with almost no empirical knowledge of Indonesia itself, the IMF ordered the closure of several banks in a system that has no deposit insurance. This elicited runs on deposits at all other banks. The wealthy Chinese community began to move its money out of Indonesia to Singapore and beyond, and the country was politically destabilized, leading ultimately to the overthrow of President Suharto. All Indonesian companies with dollar liabilities rushed to sell rupiahs and buy dollars. Equities instantly lost 55 percent of their value and the currency, 60 percent. The rupiah ended up trading at 15,000 to one U.S. dollar. David Hale, chief economist of the Zurich Insurance Group, wrote at the time, “It is difficult, if not impossible, to find examples of real exchange rate depreciations comparable to the one which has overtaken the rupiah since mid-1997.” He suggested that a proper comparison might be with the hyperinflation that hit the German mark in 1923.¹⁷

By the time the IMF was finished with Indonesia, over a thousand shopkeepers were dead (most of them Chinese), 20 percent of the population was unemployed, and a hundred million people—half the population—were living on less than one dollar a day. William Pfaff characterized the IMF’s actions as “an episode in a reckless attempt to remake the world economy, with destructive cultural and social consequences that could prove as momentous as those of 19th-century colonialism.”¹⁸ Only Japan, China, and Taiwan escaped the IMF juggernaut in East Asia. Japan kept aloof even when the Americans publicly rebuked it for failing to absorb more exports from the stricken countries, for the Japanese knew that the Americans would not actually do anything as long as the marines were still comfortably housed in Okinawa. China remained largely untouched because its currency is not freely convertible and it had paid no attention to APEC calls for deregulation of capital flows. And Taiwan survived because it had been slow in removing its financial barriers. It also maintains a relatively low ratio of investment to gross domestic product, is shifting further toward a service economy whose capital needs are less, and has maintained export diversity—unlike, for example, Korea’s overconcentration in products such as semiconductors destined for the American market. Foreign holdings of Taiwanese currency are negligible because its peculiar political status makes it unattractive to the hedge funds. Thus, it has been able to offer some of its own huge foreign currency holdings to help bail out countries in Southeast Asia.

After the big investors had pulled their money out of East Asia and left the area in deep recession, they turned to Russia. They calculated that there was little or no risk in buying Russian state bonds paying 12 percent interest because the Western world would not let a former superpower armed with nuclear weapons default. But the situation was further gone in Russia than these investors imagined, and so, in August 1998, the Russians defaulted on the interest payments (they still owe foreign investors perhaps $200 billion). If Russia does not repay these loans, it will be the largest default in history. These developments so scared the finance capitalists that they started pulling their money in from all over the world, threatening even well-run economies that had implemented all the economists’ nostrums on how to get rich like the North Americans. The Brazilian economy was so destabilized that in mid-November 1998 the IMF had to put together a $42 billion “precautionary package” to shore it up. Needless to say, the IMF has also helped plunge millions of poor Brazilians deeper into poverty. In order to meet the IMF’s austerity requirements, the Brazilian government even had to cancel a $250 million pilot project to save the Amazon rain forest. The result was that other countries withdrew their matching funds for the Amazon, and the degradation of an area that contributes 20 percent of the globe’s fresh-water supply resumed.¹⁹

In speeches in Russia and East Asia during the second half of 1998, President Clinton warned the peoples of these areas not to “backslide” and urged them to open their nations even further to American-style laissez-faire capitalism. But he had lost his audience. By now his listeners understood that the cause of their misery could not also be its cure. Many remembered that the Great Depression started as a financial panic then made worse by deflationary policies similar to those prescribed by the IMF in 1997 and 1998 for East Asia, Russia, and Brazil. The result in the early 1930s was a general collapse of purchasing power. That has not happened so far this time, largely because the United States went on a consumption binge and provided virtually all growth in demand for the excess output of the world. Can American “shop till we drop” be sustained indefinitely? No one knows.

The economic crisis at the end of the century had its origins in an American project to open up and make over the economies of its satellites and dependencies in East Asia. Its purpose was both to diminish them as competitors and to assert the primacy of the United States as the globe’s hegemonic power. Superficially it can be said to have succeeded. The globalization campaign significantly reduced the economic power and capitalist independence of at least some of the United States’ “tiger” competitors—even if, as with Russia and Brazil, the crisis could not be kept within the bounds of East Asia. This was, from a rather narrow point of view, a major American imperial success.

Despite such immediate results, however, the campaign against Asian-style capitalism (and the possibility that America’s satellite states in the area might gain independent political clout as well) was ill-founded and included serious blowback consequences. The United States failed to acknowledge that East Asian success had depended to a considerable extent on preferential, Cold War–based exports to the American market. By cloaking its campaign in the rhetoric of market opening and deregulation instead of the need to reform outdated Cold War arrangements, the United States both destroyed the credibility of its economic ideology and betrayed its Cold War supporters. The impoverishment and humiliation of huge populations from Indonesia to South Korea was itself blowback enough, even if the blowback for the time being spared ordinary Americans. But if and when the stricken economies recover, they will almost certainly start to seek leadership elsewhere than from the United States. At a bare minimum, they will try to protect themselves from ever again being smothered by the American embrace. In short, by refusing to reform its Cold War structures and instead insisting that other peoples emulate the American way, the United States gave itself an unnecessary, possibly terminal case of imperial overstretch. Instead of forestalling global instability, it helped make such instability inevitable.

The triumphalist rhetoric of American leaders basking in their economy’s “stellar performance” has also alarmed foreigners. When Alan Greenspan asserted to Congress that the crisis meant the world was moving toward “the Western form of free market capitalism,” almost no one thought that was either true, possible, or desirable. Economics has not displaced culture and history, regardless of the self-evaluation of the economics profession. Many leaders in East Asia know that globalization and the crisis that followed actually produced only pain for their people, with almost no discernible gains.²⁰ Globalization seems to boil down to the spread of poverty to every country except the United States.

Clearly on the defensive, Richard N. Haass and Robert E. Litan, directors respectively of foreign policy and of economic studies at the Brookings Institution in Washington, lamented, “In some quarters [globalization] is seen as having caused the rapid flows of investment that moved in and out of countries as investor sentiment changed and were behind the Mexican [1995] and Asian financial crises.” But to them this would be a wrong conclusion. To accept it would be to “abandon America’s commitment to the spread of markets and democracy around the world at precisely the moment these ideas are ascendant.”²¹ But whether such ideas are actually ascendant is, thanks to the crisis, now in doubt, and such doubts are generating more blowback. The duties of “lone superpower” produced military overstretch; globalization led to economic overstretch; and both are contributing to an endemic crisis of blowback.