Context and Perspective:

Lee Kuan Yew speaks about the Asian financial crisis from a unique angle. Rather than solely blaming corruption, bribery, and nepotism, he explores the crisis from the victim’s perspective, offering a nuanced understanding of what contributed to the financial downfall.

Global Economic Fragility:

Lee notes that more than a year after the Asian currency crisis began, the global economy has become fragile. East Asia and Japan are in recession, while Latin America is also at risk. Even the U.S. economy, in its seventh year of expansion, is susceptible to downturns, and Europe’s growth is constrained by high unemployment.

Capital Flows and East Asia’s Vulnerability:

In the mid-1980s, East Asia began benefiting from Japanese investments, resulting in job creation, technology upgrades, and market expansion. However, by the 1990s, G7 countries began pouring capital into East Asia. This was not necessarily beneficial, as East Asian countries already had high domestic savings rates and didn’t need the extra boost from foreign capital.

Consequences of Misguided Policies:

International organizations like the WTO, IMF, and the World Bank encouraged East Asian countries to liberalize their financial systems, disregarding the potential risks. Consequently, countries like Thailand, Indonesia, and Korea removed or relaxed their capital controls, leading to unchecked capital inflows and eventual financial instability.

Critical Errors in Capital Management:

Lee points out that these countries allowed short-term capital in while blocking long-term investments, a mistake that made their economies vulnerable. Domestic corporations borrowed from abroad due to lower interest rates, increasing external debt dangerously. Many borrowed short-term for long-term projects, a foundational mistake they could not have made had their capital accounts remained closed.

Final Thoughts:

Lee Kuan Yew argues that the crisis was not solely a product of internal corruption but was also exacerbated by external pressures to liberalize financial systems without adequate safeguards. His analysis serves as a cautionary tale for economic policymakers to carefully consider the ramifications of capital account liberalization.

Moral Hazard in Exchange Rates:

Lee Kuan Yew discusses the moral hazard problem that arises when governments peg their exchange rates to stable currencies like the U.S. dollar. This practice misleads businesses into thinking that exchange rates will remain stable, allowing them to borrow in foreign currencies without fully accounting for currency risk.

False Sense of Security:

Because governments pegged their currencies to the U.S. dollar, corporations assumed there was no currency exchange risk. Consequently, they did not hedge their foreign exchange exposure. This led to a dangerous lack of awareness of financial vulnerabilities.

Unaccounted Risks:

Funds from international capital markets seemed cheap because the risks weren’t fully priced in. If countries had floating exchange rates instead, borrowers and lenders would have had a clearer understanding of the true risks involved, such as currency depreciation.

Unmonitored Capital Flows:

Countries like Thailand and Indonesia would have benefited from more gradual liberalization of their capital accounts. There was a need for a system to monitor and control short-term speculative funds, ensuring that debts and investments were maturity-matched.

Asset Bubbles:

A significant proportion of these short-term funds went into long-term investments like stocks and properties, creating asset bubbles. These assets were then used as collateral for further borrowing, exacerbating the bubble.

Importance of Financial Systems:

Lee Kuan Yew argues that countries need to liberalize their financial systems in line with the strength of their financial systems and institutions. This would involve adequate checks and controls to monitor capital flows and prevent crises.

Advocacy for Trade Liberalization:

Lee Kuan Yew acknowledges the G7 countries were right to promote trade liberalization, which produces efficiency gains. However, he criticizes their aggressive stance on financial market liberalization, citing potential disadvantages for developing countries.

Debate on Free Capital Mobility:

He mentions that the question of whether free capital mobility is unequivocally beneficial is still up for debate among financial experts. The sheer speed at which large sums can be moved in today’s globalized financial markets poses inherent risks, as warned by Joseph Stiglitz, the chief economist of the World Bank.

Calibrated Liberalization:

Lee Kuan Yew suggests that capital account liberalization should be implemented more carefully, tailored to each country’s financial system’s robustness and sophistication. He advocates for “circuit breakers” or controls for countries not prepared for such financial risks.

Chilean Model:

He cites Chile as an example, which discourages short-term capital inflows through taxes and deposit requirements. While such controls may slow growth by increasing the cost of capital, they also make that growth more stable and sustainable.

Alternative Plans:

Economist Paul Krugman’s Plan B—capital controls—provides an opportunity to stimulate economic growth while maintaining monetary expansion. Malaysia adopted this plan, stabilizing its currency and allowing for lower interest rates and banking reform. However, this approach is not without its risks, including trade imbalances and potential capital flight.

Limitations and Risks of Capital Controls:

Though some experts see merits in controlling short-term capital flows, comprehensive controls can be difficult to manage and potentially corrupt. They could also induce a false sense of security, leading to economic complacency and poor financial discipline.

Impact on Open Economies:

For open economies like Singapore, capital controls are not an option as they would significantly damage the country’s reputation as an international banking center. Nevertheless, no country can entirely escape the repercussions of financial turmoil, as evidenced by Singapore’s experiences.

Singapore’s Resilience:

Singapore managed to weather the financial crisis better than its neighbors due to stringent macroeconomic discipline and vigilant banking system oversight. Despite this, the country still faced some negative impacts, including credit rating downgrades and reduced tourism and trade.

In summary, Lee Kuan Yew emphasizes the need for a nuanced approach to financial liberalization, advocating for safeguards and adaptive strategies to manage the complexities of globalized financial markets.

Crisis Impact:

Lee Kuan Yew begins by stating that the economic crisis has severely impacted East Asia, particularly Indonesia. It has nullified years of growth and development. The Indonesian rupiah lost most of its value, impacting investor confidence and causing social devastation.

Role of U.S. Interest Rates:

He notes that a recent drop in U.S. interest rates had a positive but slight effect on Asian currencies. If U.S. interest rates continue to decline, it could ease the region’s economic recovery.

Strengths and Weaknesses:

Despite the setback, East Asian countries still possess underlying strengths like hard work, education, and an entrepreneurial spirit. These countries have also developed their infrastructure, technology, and management skills. However, the crisis revealed areas requiring improvement, such as financial systems and legal frameworks.

International Ranking:

He cites the 1998 World Competitiveness Yearbook, which still ranks some Asian countries within the top 10, signaling that their enterprises are managed effectively, despite the downturn.

IMF’s Role:

Lee emphasizes the importance of IMF endorsement to restore investor confidence. While he notes the IMF may have made mistakes due to its prior focus on Latin America, its evolving approach can still play a crucial role in recovery.

Structural Reforms:

For a long-term solution, countries must focus on structural reforms such as bank recapitalization, enhancing financial regulations, and modernizing insolvency laws. Transparency in corporate governance has also become crucial.

Global Assistance:

Foreign assistance, especially from the U.S., Japan, and the EU, is necessary for turning the economies around. He specifically points out that as Asia’s largest economy, Japan plays a critical role and has been generous in its support.

Japan’s Position:

Despite its contributions, the best thing Japan can do for the region is to resolve its own financial issues, particularly its banking sector’s bad debts, to spur its own and the region’s recovery.

U.S. Stake in East Asia:

Lastly, he highlights the strategic importance of East Asia to the United States. With significant exports going to this region, a stable East Asia is beneficial for the U.S. economy.

Overall, Lee Kuan Yew emphasizes that while the crisis has been devastating, the underlying strengths and potential reforms could lead to a robust recovery, aided by international cooperation.

U.S. Commercial Interests in Asia:

Lee Kuan Yew highlights that Texas, like other U.S. states, has substantial commercial interests in Asia, exporting sectors like chemicals, electronics, and industrial machinery. This underlines the interconnectedness of the U.S. and Asian economies.

U.S. Role in Global Economic Order:

Beyond these commercial interests, the U.S. has been instrumental in establishing the current world economic order based on free-market principles. Lee argues that the U.S. should thus assume a leadership role in managing the crisis.

Historical Lessons on Leadership:

Referencing Charles Kindleberger’s History of the Great Depression, Lee emphasizes that a lack of leadership among industrial nations led to the economic depression in the 1930s. The shift in power from Britain to the U.S. created a vacuum as the U.S. was unwilling to assume global economic responsibilities.

Importance of Global Cooperation:

The lesson of the 1930s is that protectionist policies harm both national and global interests. He mentions the Smoot-Hawley Tariff Act as an example of a protectionist policy that worsened the Great Depression.

Current U.S. Involvement:

Lee appreciates the key role that the U.S. has already played in conjunction with the IMF to help crisis-stricken Asian countries but insists that more needs to be done. He agrees with President Clinton’s statement that the financial crisis is the most significant challenge to the world economy in 50 years.

Future Leadership Requirements:

According to Lee, the U.S. must continue to show strong leadership and collaborate with other major countries to tackle immediate and complex issues arising from the crisis. These issues also relate to the architecture of the global financial system.

Concluding Thoughts:

In conclusion, Lee warns that neglecting East Asia would be both short-sighted and potentially disastrous for the U.S. and the global economy. The crisis, which has gone global, requires a global solution, and the U.S. needs to provide focused and enlightened leadership.

Lee Kuan Yew ends by stressing the critical importance of U.S. leadership in resolving the East Asian financial crisis, both for the immediate challenges and the longer-term architecture of the global financial system.

Root Causes of Meltdown:

Lee Kuan Yew counters the notion that the meltdown in Asian financial markets is a result of them being tied to the U.S. dollar. He asserts that the true cause is the premature opening of capital accounts, which countries were unprepared to manage, leading to volatile capital flows.

Prospects of a Multi-currency System:

When questioned about the potential for a multi-currency system featuring the euro, Lee states it’s too early to assess. However, he doesn’t rule out the possibility of the euro becoming a stable alternative, especially if core European countries maintain political unity.

Asian Financial Models:

Lee talks about the tension between orthodox economic models promoted by institutions like the IMF and unorthodox methods, such as those employed by Malaysia. He suggests that a successful unorthodox model could challenge existing paradigms, but he personally leans towards the orthodox approach.

Capital Market Resilience:

He observes signs of stabilization in the Korean Won and the Thai Baht, especially after the Fed’s interest rate reduction. He believes that if this trend continues, then orthodox free-market principles may continue to govern Asian markets, albeit with countries better prepared for capital inflows.

Cause and Effect of Corruption:

Lee points out that issues like corruption and cronyism existed for years without destabilizing these countries. What brought them down was foreign debt, which became an issue only after their capital accounts were opened.

Role of IMF and Political Influence:

Lee acknowledges a debate about the IMF’s role. Some argue the IMF should only provide short-term financial solutions, while others influenced by media and political sentiments, think it should also address long-term structural issues, such as corruption.

Impact on Indonesia:

Lee expresses regret over the collapse of Indonesia’s stable regime, attributing it to financial instability rather than inherent governmental issues. He emphasizes that the downfall erased 30 years of stability and growth, thereby affecting regional peace.

Lee Kuan Yew’s insights offer a nuanced understanding of the complex factors contributing to the Asian financial crisis and the questions surrounding global financial structures and governance.

Economic Impact on Human Rights:

Lee Kuan Yew addresses a question about the liquidity of capital investment and its effect on human rights and sustainable development in Asia. He laments the tragedy where, in chasing $42 billion, an economy worth about $250 billion a year was destroyed. This led to 100 million people living below the poverty line, unable to meet their basic needs. Yew shifts the focus from freedom of expression to a more fundamental human right—survival. He highlights that humanitarian aid alone is insufficient to feed these 100 million people daily for five to ten years.

Political Situation in Malaysia:

On the topic of Malaysia, Lee Kuan Yew discusses the imprisonment of Anwar Ibrahim, the Deputy Prime Minister of Malaysia. He notes that the situation is sensitive and that what he says will be closely monitored. Yew was shocked to see Ibrahim in court with physical injuries and hopes the government-ordered inquiry will prove no wrongdoing. He indicates that the situation has led to a change in Malaysia’s social climate, with unprecedented street demonstrations. He expresses concern that the ongoing issue may further disrupt the Malaysian society if not resolved satisfactorily.

Final Remarks:

Lee Kuan Yew concludes by saying that the outcome of the inquiry into Anwar Ibrahim’s case will either settle the social unrest or exacerbate it. He hopes for a resolution that will allow the “dust to settle.”

The discussion touches on the delicate balance between economics and human rights, as well as the implications of political actions on the fabric of a society.