AN ETHICAL ANALYSIS OF THE ASIAN FINANCIAL CRISIS from a CHRISTIAN PERSPECTIVE

By Prof. Victor Aguilan Professor of Christian Ethics Divinity School Silliman University CBA-Forum 24 August 1999

Thank you for inviting me to this gathering. I will go directly to my topic: AN ETHICAL ANALYSIS OF THE ASIAN FINANCIAL CRISIS from a CHRISTIAN PERSPECTIVE Ethics is the science and art of morality, .i.e., rightness or wrongness, goodness or badness of human act. A Christian is one who believes in Christ, recognizes the authority of the Bible and a member of Christs visible Church. Applying ethical analysis from the Christian perspective with regard to the Asian Currency crisis, I would use a threefold level analysis. To make my conceptual position clear, Ill share with you an example taken from the medical field. The first level analysis is the moral agents concrete behavior, e.g. the doctor tries to lengthen the life of a patient. Why? To answer this why question we move to the second level analysis which is the ethical-value analysis e.g., a doctor should protect life in every situation because human life is of absolute importance. Often times we limit our analysis to these two levels. However when we face an ethical dilemma, e.g., in certain cases is the doctor allowed to end the life of a patient. But why is human life so important? Who says so? Here we enter the third level analysis-the metaphysical basis. Let us proceed with the first level analysis of the Asian Financial Crisis

1. THE BEHAVIOUR and CONSEQUENCES

The first level analysis would be to identify who should be blame for the Asian Crisis? Who are responsible for the Crisis? The best known explanation is the role of foreign speculative investors like George Soros who exploited the liberalization of capital markets in Asia by parking billions of dollars to skim off profits from higher banking interests and rising values of stock and real estate, contributing in the process to the creation of a bubble economy. When these speculators got out of the Asian markets, they trigger a currency meltdown that was supposedly aggravated by the herd mentality among foreign investors. (BLAME THE SPECULATORS) Another explanation is the one given by the multilateral and bilateral institutions, which traces the Asian financial/economic crisis to both the structural weaknesses of the

financial sector, the lack of transparency and favoritism (cronyism and protectionism) in the corporate sector in countries such as Thailand, Indonesia and South Korea, the three hardest hit countries. (BLAME THE CRONIES) A third explanation is more applicable to the Philippines: a bubble growth in the nonproductive sectors in 1995-96 shrouded the weaknesses of the real productive sectors. After the ratification of the Philippine membership to the WTO in late 1994 and with the various liberalization-deregulation programs in place, the official expectation was that the country would flood the world with exports. This did not happen; instead its trade deficits widened (see table 1). These deficits, in turn, fuel increase foreign borrowings, some of which were incurred through the application of the build-operate-transfer (BOT) scheme in the infrastructure development of the country. On the other hand, the huge inflows of speculative capital and the tremendous rise in the values of the stock market and real estate helped create a bubble economy, an economy supposedly surging, even if there were signs that in the bubble years 1995-96, both domestic industry and agriculture were already collapsing (e.g. sugar industry). Thus when the speculative capital flew out, the peso easily fell and today the crisis of industry and agriculture under globalization is in full view. (BLAME THE GOVERNMENT and WB-IMF-WTO)

Table 1 SELECTED STASTISTICAL INDICATORS, 1992-1997 (IN BILLIONS OF US $) Items Trade Deficits Foreign Debt Foreign Direct Investment Portfolio Investments 1992 -4.69 30.93 931 588 1993 -6.22 34.28 2135 2369 1994 -7.85 37.07 2492 3685 1995 -8.94 37.77 2944 4488 1996 -11.34 41.87 3621 8007 1997 -11.12 45.43

SOURCE OF BASIC DATA: Central Bank The fourth explanation is the role of the global competition or the globalization process in the making of the crisis. (BLAME THE RICH AND POWERFUL NATIONS US AND CHINA) The July-August 1997 depreciation of the bath, peso, ringgit, rupiah and won were actually preceded by years of growing current account deficits in the countries of these currencies (see table 2). These deficits are accounted by the surge in imports due to trade liberalization and the slackening in exports, primarily in the labor-intensive industries such as garments and footwear.

Table 2 CURRENT ACCOUNT DEFICITS OF SELECT ASEAN COUNTRIES (in billions of US$) Country Indonesia Malaysia Philippines 1990 2.29 .87 2.70 1995 7.02 7.36 1.98 13.55 1996 7.75 5.16 3.47 14.70

Thailand 7.28 Source: Sakura Institute of Research, 1997.

Stagnation of labor-intensive exports of ASEAN countries is traceable to the rapid rise of the Peoples Republic China as a major exporter of these items in North America, Europe and other markets. China, Asias second biggest dragon, had been competing head-tohead with the ASEAN countries in a whole range of export products. And the outcome of this contest is undoubtedly in favor of China whose labor cost is much lower and whose industrial infrastructure is as sophisticated in the ASEAN region. WINNERS AND LOSERS UNDER THE ECONOMIC CRISIS In this crisis there are clearly winners and losers. Rich countries (US) won. The Philippines lost. Foreign investors reap the prize, domestic investors eat their pride. The National Statistics Office reported that 40% of the 357 manufacturers it surveyed in the last quarter of 1998 were operating at less than 70% capacity. Some of the industries which suffered huge declines in demand are garments, car and oil refining. In 1998, 40 banks closed down, including one commercial bank (Orient Commercial Banking Corporation). All the rest were Rural and Thrift Banks. There are options of debt-ridden banks so as to recover their money, namely, restructuring, foreclosure, or payment in kind. Profits of commercial banks dropped by 5-10%. The International Exchange Bank for example fell by 10%. As to agriculture, its output was largely negative. Production is down because of the flooding of the imported cheap agricultural products. This is best illustrated in the case of sugar. The domestic market is now saturated with imports. In 1998 the GNP grew by a measly 0.1 percent, far below the 1.5 to 3.5 percent range official target. The growth was marginal due to the contraction in the agriculture and industry sectors. At present, an estimated 70% of the GNP is generated in urban areas. One winning group is the corporate raiders, those who are buying up bankrupt companies for almost a song. In fact, a great part of the new investments coming in are not creating new plants or new production processes; the new investors are simply buying

into existing facilities, meaning buying out the incumbent owners. (Thiss is what happened in the cement industry, a predominantly Filipino industry, which was transformed in 1998 into a foreign-controlled industry, with the entry of Blue Circle Industries plc of Britain, Lafarge SA of France, Holderbank Financier Flaruse AG of the Netherlands and Cementos Mexicanos.) However there are people who are excluded in the competition who became victims 1) The displaced workers, who are victims of factory closures and various downsizing programs taking place across industries in response to the requirements of survival and competition; The small income earners (small family businesses, farmers, fisherfolks, etc) whose real income or purchasing power has been eroded by price increases.

2)

Dole statistics (see table 3) show that the displaced workers in industry more than double, from 62,724 in 1997 to 155,198 in 1998. This figure is conservative because closures by small and micro enterprises are often not reported anymore. And so are the separations or non-renewals of casual and contractual workers. Table 3 Establishment resorting to closure/retrenchment And number of Workers affected, 1996-98
Year Establishment Perment Layoff 347 338 642 Workers Perment Layoff 47,023 39,176 76,726 Affected Temporary Layoff 29,773 19,843 50,744

Temporary Layoff 724 804 2310

Rotation

TOTAL

Rotation

TOTAL

1996 1997 1998

39 48 2903

1079 1155 3072

4,206 3,705 27,728

81,002 62,724 155,198

Source: BLES, DOLE

2. ETHICAL AND VALUE FRAMEWORK .

What motivated these actors? Profit-ACCUMULATION OF MONEY. To invest and to make profit. Freedom to do business. Free competition. Milton Friedmen said it well, There is one and only one social responsibility of business to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud. (Capitalism and Freedom). The problem with this ethical-value guideline is when profit-seeking and profit maximization would entail human misery. When human suffering is ignore for the sake of profit through deregulation, downsizing, inter-locking directorate, insider-trading,

cronyism, stock market manipulation, and foreign exchange speculation raises the question of justice. When profit maximization comes into conflict with the value of human life and dignity, economists, technocrats, business leaders, government and labor must choose which value should be given priority- profit or human dignity. The choice made would depend on a presupposition which we dont usually bring into our economic analysis the METAPHYSICAL BASIS.

3. METAPHYSICAL BASIS (World View)

Metaphysics is how we define or view reality. It is an attempt to answer the question what constitutes the world, the cosmos, the universe or reality? At this level of analysis it is but proper to raise fundamental questions about the role of the market and the accumulation of profit. Does the free market have absolute power over humanity? Is profit-seeking part of the natural order of things? Who say so? Or the free market is as human construct which can be modified or reconstructed? Or is the market under a higher authority? These are metaphysical questions! As a theologian Ill draw my answer from the Holy Bible. The first two commandments in the Bible warns against idolatry. You shall have no other gods before me. 4 You shall not make for yourself an idol, whether in the form of anything that is in heaven above, or that is on the earth beneath, or that is in the water under the earth. Exodus 19:3-4 The first emphasizes God as creator and the prohibition against worshipping false gods. These false gods or idols are human constructions (man made) but are worshipped as absolute. Any ideology, system, or nation made absolute is an idol. Idols are made by human hands. This insistence on the constructed character of idols is profoundly liberating because the power of idolatry, indeed the power of all social constructions of reality, is dependent upon our forgetting that these are historical constructs, not essential structures of reality. And if something is constructed it can be torn down and rebuild anew. Is the monetary system with its institutions and instrumentalities such as money, banks, stock market, financial institutions, IMF-WB, policies and fundamentals, a human construct? I believe the answer is Yes. The monetary system is man made. The main product of this human constructed system is money, the main instrument of exchange. The Biblical faith is deeply suspicious of money. According to Ecclesiastes 5:10, He who loves money will not be satisfied with money; nor he who loves wealth, with gain; and 1 Timothy 6:10 warns, The love of money is the root of all evils. Money is not

regarded as a gift from God or a sign of Gods blessing. Rather, its possession is seen as a great spiritual risk. The Scriptures treat money harshly because its accumulation seems to be an attempt to make oneself independent of God. So serious is the threat money poses that Jesus regarded it not mere passive instrument but as a demonic power. In mammon, money is personalized and competes with God for our absolute loyalty and commitment. Thus Jesus dire warning, You cannot serve God and mammon(Luke 16:13). The biblical concern, of course, is not with currency itself. Currency as an instrument of exchange is not evil nor demonic. It is accepted that goods be bought and sold, paid for in silver, gold and coin of the realm. Yet the reality is that money loses tie to exchange, to consumption, and becomes a value in itself because it gives the possessor power over the output, and therefore the lives, of others. Money becomes an end in itself. Money becomes more valuable that its user (human beings). Instead of serving people and society, money begins to subjugate and enslaved people and society. Money become a false god, an idol. It is the worst temptation of a monetized society like the Philippines. When the system is absolutized it captivates our imaginations. In turn, public opinion is bombarded in the media with glowing images of global growth and prosperity. The economy is said to be booming under the impetus of the free market reforms. Business forecasters and academic economists alike casually disregard the dangers of the present financial crisis alluding to "strong economic fundamentals". Ordinary people accept without question and debate the so called sound macro-economic policies such as budgetary austerity, deregulation, downsizing and privatization, higher taxes, currency devaluation as sacred words which ensure our economy salvation. Any criticism of these sound macro-economic policies is considered blasphemous. Even if these policies are causing untold human tragedy or not meeting human needs. A false god does not liberate humans from the bondage of slavery like the living God in the Exodus who said. I am the LORD your God, who brought you out of the land of Egypt, out of the house of slavery. Any system which does not liberate nor meet human needs must be either transformed or abandoned. Therefore, the need for regulation of the market becomes unavoidable in that it clearly does not function equitably. Which means, in ethical terms, that it creates injustice. And this unjust character points to the perversity of the mechanism, which needs constantly to be corrected. Of course, those who benefit from the injustice it creates think that the market should be neither controlled nor regulated. They insist that the market should be free. This is utopia which favors their own particular vested interests. The mechanism itself can never be free. Those who are free are the companies or the individuals who hold the power to manipulate it. To ensure that such private interests do not profit excessively from this power, generating yet greater injustices, the market has to be regulated.

BIBLICAL WARNING ON IDOLATRY Exodus 19:3-4 You shall have no other gods before me. 4 You shall not make for yourself an idol, whether in the form of anything that is in heaven above, or that is on the earth beneath, or that is in the water under the earth Psalm 115:1 1 Not to us, O LORD, not to us, but to your name give glory, for the sake of your steadfast love and your faithfulness. 2 Why should the nations say, "Where is their God?" 3 Our God is in the heavens; he does whatever he pleases. 4 Their idols are silver and gold, the work of human hands. 5 They have mouths, but do not speak; eyes, but do not see. 6 They have ears, but do not hear; noses, but do not smell. 7 They have hands, but do not feel; feet, but do not walk; they make no sound in their throats. 8 Those who make them are like them; so are all who trust in them. BIBLICAL WARNING ON MONEY Ecclesiastes 5:10 He who loves money will not be satisfied with money; nor he who loves wealth, with gain; 1 Timothy 6:10, The love of money is the root of all evils. Luke 16:1. You cannot serve God and mammon Heb 13: 5 Keep your lives free from the love of money, and be content with what you have;