austin-murphy-the-triumph-of-evil

226 THE TRiUMPH OF EVIL
about 40% are controlled by Japanese organized crime, which purchased
them on credit in the 1980s speculative bubble (Kaplan, 1998),
and which has gained enormous power through violence and threats,
including extorting major Japanese companies for over $1 billion a year
in return for just not disrupting their annual meetings (Becker, 1997b).
Without being able to obtain a liquid recovery of their enormous bad
debts, whose book value is estimated to be about $1 trillion (Desmond,
1996), the banks have been reluctant to lend money to productive enti·
ties, and so the economy has stagnated without the domestic investment
of an adequate amount of capital.3
In tum, the economic slowdown in Japan negatively affected exports
from Southeast Asia (both through reduced Japanese imports from
Southeast Asia and through greater competition from Japanese firms
seeking to export their excess production to the rest of the world) and
therefore contributed to the balance of trade problems there that led to
the Asian currency crisis of 1997 (Henderson, 1998). The Asian currency
crisis in tum led to the Russian currency crisis of 1998 and the
Brazilian currency crisis of 1999 by slowing world economic growth
and by making the production of countries like Russia and Brazil re latively
less competitive (i.e., countries like Russia and Brazil were
pushed over the brink, as they already were only marginally competi·
tive internationally before the crisis, and the devaluation of the Asian
currencies made their products even less competitive). Even the cur·
rency crisis in Mexico in 1994 could be partially blamed on this chain
of events as the economic slowdown in Europe and Japan (as well as
lower priced competition from Eastern Europe) had a negative impact
on that country's international current account, which in tum led to the
collapse of the Mexican peso in 1994.
THE SPREADING CURRENCY CRISES
In and apart from the fact that the major currency crises later in the
1990s at least partially spread from the initial Eastern European crisis
of the early 1990s, these later crises also had other similarities in terms
of being fundamentally caused by the same economic forces (which in
tum related to the imposition or existence of global free markets or cap·
italism). In particular, in all the crisis countries but Russia in 1998, the
current account deficits had fo r years been very large as a percentage . of
GOP (8% in Mexico and Thailand, 5% in South Korea and Malaysia,
CHAPTER 6 227
3% in Indonesia, and 4% in Brazil), while the current account deficit in
Russia had just turned negative before its newest currency crisis in 1998
(to an annualized amount equal to 4% of its GOP in the second quarter
of I 998). In all but Malaysia, the current account had deteriorated in the
year before the crisis, at least in some cases because of an earlier reduction
in relative protectionism in the crisis countries (just as in Eastern
Europe in the early 1990s). For instance, Mexico had long had a relatively
higher level of protectionism compared to its major North American
trading partners, and it had been reducing this level gradually (and
significantly) in the years prior to 1994 and then proceeded to do so
more quickly with the imposition of the North American Free Trade
Agreement (NAFTA) in 1994 (Murphy, 1995)." In addition, the increase
in the current account deficits in Asian countries prior to their crisis in
1997 was at least partially caused by increases in protectionism (especially
by the developed countries) against their imports (Chandrasekhar
and Ghosh, 1998) at the same time that a prior world trade agreement
(under GAIT), along with a local trade agreement (ASEAN), had forced
them to open up their own markets more (Vatikiotis, 1995).
A large decline in the currency value or real income was therefore
necessary to bring the account back into balance. In each situation, high
real interest rates (over 5% above the domestic inflation rates) had been
postponing a needed devaluation until there occurred some event or
catalyst, which significantly raised investors' subjective estimate of the
probability that a currency devaluation would be used to solve the BOP
problem. The interest rates required by investors to compensate them
for the higher risk of the expected devaluation-related losses therefore
rose, and the crisis countries were forced to devalue because they could
not maintain such prohibitively high interest rates.
While the fundamental economic situation prior to each crisis was the
�· the catalyst that triggered the crisis was different in each case
(I.e .• the event . that motivated investors to greatly raise the interest rate
leqlllred to finance the current account deficit varied). In Mexico, a
leading politician's statement in late 1994 indicating an intention of the
Mexican government to crack down on organized crime resulted in a
� leted
very heavy outflow of mafia capital from Mexico (Murphy, 1995) that
Me�ico's foreign exchange reserves ( �
hich �
ere expe�d� to
eep the capttal outflow from causing a large 1mmedtate devaluation)