Blowback: The 1997 East Asian Financial Crisis

When I picked up Chalmers Johnson’s Blowback: The Costs and Consequences of American Empire what I was expecting was an elaboration of the term ‘blowback’ and some examples of the negative consequences of US military operations.  What I got was much more.  The book shines when it dies into financial machinations centered in the East Asian pacific region, blending gruesome stories of what goes on in US military bases with complex currency manipulations designed to keep those countries from growing too strong economically.  Written before the events of September 11th, 2001 and the subsequent war on terror the book lets us see the workings of US imperialism from a less spectacular era.  The Cold War having been won and US global dominance assured, the full power of dollar diplomacy and economic intervention is brought to the fore.

This is not to say that the gory history of war and death squads are ignored.  Chalmers Johnson wields a huge list of initiatives and decisions that caused massive pain and misery across the earth at the behest of maintaining US hegemony and weaves them sporadically into his narrative.  Paying attention to financial maneuvers provides a window into understanding why the world is ruled the way it is and has been from the Cold War to the present.  Of particular importance are the systems enforced on the satellite countries of East Asia, especially now that the US has targeted China as an enemy here in 2021.

After World War II Asian countries like Japan, Thailand, Malaysia, Indonesia, and South Korea developed export-based manufacturing at a rapid rate.  Their low labor costs and access to a robust consumer market in the US allowed for increased production.  Exported goods would be shipped over Pacific Ocean routes to ports in Los Angeles and elsewhere.  Prosperity kept these “satellites” in the “orbit” of the US’s “sphere” (of influence) – a demonstration of the fruits of working within the capitalist western system and away from the communist countries of the USSR and China.  These exporting economies led by Japan grew so large that their low priced goods began outselling or underselling US manufactured goods from about the 1970’s onward.  This global imbalance of  low wage East Asian export selling to high wage US and western economies became a problem for a US economy bent on maintaining its imperial aims.

“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 thee ranks of followers: fist, 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…

Over time, however, this pattern produced gross over investment 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.”


A rebalancing of the world economy would require higher wages for East Asian countries so that they could consume more of what they produce.  This would make these economies more self-reliant but US consumer goods would have to compete with Asian goods in Asian markets to achieve something like commercial parity.  Moreover, the U.S. was the strongest military power and didn’t want to jeopardize its network of bases across the Pacific.

“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 Untied States would have had to level the security playing field as well, and this it remains unwilling to do so.”


Instead of an inward-oriented rebalancing of the U.S. economy by boosting manufacturing and an outward encouragement of higher wages in East Asia, the U.S. hopped on the low-wage bandwagon and moved much of its production abroad.  Globalization papered over a problem by creating more problems.

“The current overcapacity in East Asia has created intense competition among American and European multinational corporations.  Their answer haas 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 something like the Great Depression… 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.”


The financial systems of these East Asian countries differed sharply from U.S. and other western countries.  In banking and finance government plays the dominant role and extends credit according to national interests over personal profit.  Stability is the priority.  It is an entirely different model geared towards ensuring that capital is invested for the sake of ramping up production and building national wealth.  Finance and investment (credit) is conducted by governments, or at least under their supervision and with the general welfare in mind.

“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… 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 brought out-right 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 government 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 of the success of a loan.”


Chalmers Johnson goes on to recount an episode where a corporate raider was blocked by Toyota when he tried to take over their headlight division.  The company would not allow a foreign capitalist to come over and muck up the whole system.

“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.”  But the stability of the any East Asian economy depended on its keeping its financial system closed – that is, under national control and supervision.”


When the U.S. moved to “fix” the problem of East Asian countries out-performing western manufacturing on the world market they turned to exchange rates and capital controls to pry open those closed financial systems.  This makes the second book I’ve read recently (the other being by Giovanni Arrighi whom Johnson cites elsewhere in the book) to put a strong emphasis on crucial importance of the 1985 Plaza Accords at the Plaza Hotel in New York City.

“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 the 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 marker.  The accord was, as a result, the root cause of the major catastrophes that befell East Asia’s economies over the succeeding fifteen years.”


A higher yen makes exports more expensive.  When Japanese goods are sold abroad the home currency that was used to manufacture the goods is valued higher relative to the currency that purchases it.  The cheaper dollars received in the export sale must be converted into yen and it now takes more dollars to make a yen.  This diminishes the value of every export.

All Japan could do was accelerate its manufacturing and pump our even more exports.  The Bank of Japan lowered interests rates to stimulate the production and this led to astronomical real estate values and other assets that could be bought with credit.  The real estate bubble was blowing up.  It seems as we experience ‘blowback’ we ‘blow-up’.

“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 its bankrupt banks.  Financial leaders said to the Americans that they needed relief from the high yen in order to increase Japans’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 crisis.  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 business and countries around the world could exchange Southeast Asian currencies for dollars.  So long as the dollar remained cheap, this gave them 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.”


So Japan’s switch from unfavorable exchange rates post Plaza Accord to favorable exchange rates after the “reverse” hurt every other country in East Asia.  A currency peg is meant to insulate a country from wild swings in currency values but the “reverse Plaza Accords” destroyed this stability because Japan became an advantaged competitor for U.S. markets.  Where the U.S. would go from here is where this gets really ugly.

“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.”


And so the money poured in: “In 1996, Asia was the destination for half of all global foreign investment, European and Japanese as well as American (P.205).  With their capital controls lifted and investment flooding into the East Asian countries could also suddenly be pulled out and converted out of the home currency back into dollars.  With exports lagging behind Japan these economies were especially vulnerable.

The U.S. gave the advice that would prompt the destruction of these “Asian Tigers,” private investors would attack the currency when restrictions were removed, and the IMF would swoop in with austerity measures attached to the rescue loans.  Once self-sustaining export economies would be by turns pressured, crippled, and subdued.

“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 them 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 we 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 chairman of the Federal Reserve Board, went from being a deputy of Long-Term Capital Management (LTCM), a huge hedge fund with its headquarters in Greenwich, Connecticut, but its money safely stashed in the Caymen 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…”

(p.207) [That last part about Mullins I just couldn’t leave out]

The pressure (or persuasion if you like) came in the form of the Asia-Pacific Economic Cooperation forum (APEC).  Bill Clinton attended in 1993 to get all East Asian countries on board with eliminating capital controls and opening up their economies to international investment.  The U.S. would push for the removal of tariffs and other instruments that protected them from national manufacturing development.  By 1998 Malaysia was openly defying APEC by imposing capital controls to keep foreign capital from flowing in, making huge gains off of currency speculation, and flowing out as it pleased.  Al Gore was not happy and apparently encouraged the people of Malaysia to overthrow the prime minister Mahathir Mohamad.  Malaysia’s imposition of capital controls ensured that their crisis was less severe.  Neither Malaysia nor the U.S. attended the APEC meeting in 1999.

“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… 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 recession, it would provoke 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.”

(p.209-210) [my bold]

Foreign capital wanted its profits and would take them wherever it could get them.  The asian model did not consider the large debts of its companies to be life-threatening, after all, they existed to boost the economies of their home nation.  When foreign capital decided to “reduce its risk” out of fear for the solvency of the Asian companies they had invested in, they converted local currencies to dollars and the sudden flight drove the value of local currencies way down.  East Asian companies, now with dollar investments and therefore needing to pay off dollar loans, were forced to have dollar reserves that were suddenly shrinking. They too rushed to exchange for dollars, further diminishing the value of their home currencies.

The value of the Asian countries having fallen so far, they had to pay far more for the dollars needed to pay back dollar investors.  The entire crisis was the result of relative currency values and the ability to buy and sell national currencies at will.  The power of control over ones currency value was destroyed by the loss of capital controls.

After the reverse Plaza Accord, East Asian exports had trouble competing for U.S. markets because their exchange rates were pegged to the dollar before the reversal.  They not only faced tougher competition industrially, their currencies were also needed to be de-pegged so that they could exchange them for much needed dollars.  With home currency values sinking even lower, foreign capital took flight and escaped in a kind of positive feedback loop and the bubble of asset prices popped.

Still needing to service dollar debts, the IMF entered offering bailouts that came with strings attached.  Structural adjustment packages forced austerity and government budget cuts, preventing any kind of stimulus or central government action that could assist their own countries.  The end result was the constriction of governmental action to control these wild currency fluctuations. 

“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 business to foreign bargain hunters.”


Not only that, “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 conditionalities imposed prevented governments from extending credit or printing money in anything resembling Keynesian stimulus programs as the U.S. has done many times after.  But distressed local businesses could now be swooped up and bought cheaply by foreign “vulture capitalists.”

“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.”


This is only the penultimate chapter in a book that details many areas of U.S. imperial involvement.  It’s focus on East Asia is instructive but doesn’t forget to mention that the 1997 East Asian financial crisis had ripple effects that touched Brazil and Russia.  The state guided capitalist systems of East Asian countries were wildly successful and the clash between them and the private investor-led financial systems of the U.S. and Europe created widespread suffering.  Over 10,000 people committed suicide as a result of the crisis and rioting over food prices brought down the governments of Suharto’s Indonesia and Thailand.

These are the imperial actions that shaped the anti-imperialist left in the late 90s, culminating in the 1999 WTO protests in Seattle. It’s important to remember what what lurks behind rhetoric of “free markets” and “open economies” as rivalry between the U.S. and China continues to grow in the Pacific. State-guided development economies that have brought so much prosperity to billions of people around the world can be infiltrated and quickly crashed by capital flows from off-shore. One last quote should bring this point home.

“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.


Author: billrosethorn

(Geo)Philosopher. Building bridges between populism and geopolitics for fellow earthlings.

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