Leach	Bereuter

sia’s financial crisis is forcing a shift in institutional relationships between government, the private sector, and citizenries in these countries, note economic specialists and government experts on the region. Also at stake in this crisis is the structure of the global financial system and the ability of international financial institutions to prevent future economic crises and to regulate an increasingly integrated global economy, they say. The principal opportunity and challenge for the United States is to assume a leadership role in resolving the crisis and in promoting “global standards” for economic and political management into the next century.

Indeed, if we fail to handle the current crisis properly, we may find ourselves having to deal with issues of war and peace, cautions U.S. Representative Jim Leach of Iowa. “The IMF [International Monetary Fund] and World Bank were created together at Bretton Woods under American leadership, with the understanding that there are economic causes of war, . . . ” Leach says. “Sometimes when we think of economics, we think we’re only dealing with economics. The background to all the Bretton Woods agreements, however, was war and peace, and when people don’t think in those terms, I think they’re making a major mistake.”

Leach was one of about 30 economic experts, policymakers, academics, and government officials discussing the political and security implications of Asia’s economic crisis and the challenges and opportunities it poses for U.S. leadership at a meeting February 23 sponsored by the U.S. Institute of Peace. The event was organized by program officer Scott Snyder, a specialist in Asian affairs. Institute president Richard H. Solomon moderated the discussion, most of which was off the record.

U.S. Representative Doug Bereuter of Nebraska—whose presentation along with Leach’s was broadcast to various cable TV stations—pointed out that the Asian financial crisis will have a serious negative impact on workers in the region, which could lead to social instability. He also urged Congress to show appropriate support for the IMF.

The Institute has published a Special Report that offers a preliminary assessment of a rapidly evolving situation, Beyond the Asian Financial Crisis: Political and Security Implications; Challenges and Opportunities for U.S. Leadership. Selected key points from the report follow.

Asia’s political leaders must manage the adjustment from the era of the “economic miracle” to a climate of lower growth, possibly accompanied by political turmoil and heightened regional tensions. If Asia’s leaders adopt IMF reforms, they will risk high unemployment, lower living standards, domestic unrest, and their own political legitimacy. On the other hand, if they fail to adopt needed reforms, their countries’ economic woes will continue—to their ultimate political peril. Fortunately, Asia’s leaders have thus far remained committed to participation in the global economic system. Yet the implications of the crisis go far beyond trade and finance. Asia’s financial crisis may mark a shift in relative long-term influence in favor of China at the expense of Japan. Mobilizing an effective policy response from Japan to institute market liberalization measures and growth-oriented policies is an essential task as part of an effective response to the crisis.

The current crisis will affect security relationships in the region, particularly if protracted political instability in Indonesia leads to refugee or other humanitarian crises. While the possibility of near-term military conflict or a regional arms race has been dampened with Asia’s recent reconsideration of defense procurements, economic difficulties may eventually put pressure on Japan and Korea to cut back financial support for American troops stationed there and may limit other nations’ participation in regional security cooperation with the United States. The United States should bolster weakened regional cooperation through more political support for the Association of Southeast Asian Nations (ASEAN) and the ASEAN Regional Forum.

Political instability resulting from the economic crisis might create a dual “moral hazard” dilemma for U.S. leadership. Attempts at economic stabilization might be perceived as a “bailout” for foreign investors or political leaders who took reckless financial risks. The perception also exists that the United States may take unfair advantage of the crisis by using the IMF to demand economic reforms that benefit U.S. businesses in Asia. Asia’s recent currency devaluations mean that bargains abound, and resentment is sure to follow U.S. policies that capitalize on such weakness. In the words of Hong Kong industrialist Gordon Wu, “This whole issue is very simple. If the U.S. extends a helping hand today, the Asians will remember. If it doesn’t, the Asians will remember that, too.” To demonstrate U.S. leadership in coping with the crisis, limited offers of short-term assistance—such as the Export-Import Bank credits offered to Thailand on the occasion of Prime Minister Chuan Leekpai’s visit to Washington in March—will earn valuable political capital and neutralize frustrations with IMF reform programs and perceived U.S. failure to lead.

The Asian financial crisis thus far has demonstrated that the United States remains the essential economic, political, and security stabilizer in Asia. It is better for U.S. leadership to try to contain the crisis and risk partial failure than to do nothing and risk further spread of the contagion—with results that would surely jeopardize U.S. economic performance and regional influence.

Congressional support for economic and political transparency in IMF operations during the crisis, and the effort to avoid stabilization programs that heighten moral hazard concerns, have been constructive components of the U.S. response to the crisis. Congress should consider the potential costs of the spread of the crisis as it debates support for IMF replenishment and other legislation. Some relatively limited capital investments in the short term may go a long way toward long-term objectives of sustaining American influence and pursuing economic and security interests in the Asia-Pacific region. Cooperation between Congress and the administration is necessary to reform the international financial architecture to deal with future economic crises.

To order a free copy of the Special Report Beyond the Asian Financial Crisis: Political and Security Implications; Challenges and Opportunities for U.S. Leadership, write to the Institute’s Office of Communications, call 202-429-3828, e-mail: usip.requests@usip.org, or see it on our website.

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