After dragging their feet for weeks, US, Japan and
other industrial nations led by the IMF have decided to
pump another $10 billion into the South Korean economy. The major economic
players in the globalized
world were scared by the impact of the imminent possibility of breakdown
of the South Korean: it could
lead to a worldwide recession/depression and the situation may get
out-of-hand quickly. The South Korean
example shows that if the economy is of a significant size--South Koreans
have the tenth largest economy in
the world--and globalized, the economic superpowers and the IMF can
go to any extent to rescue it.
Otherwise, in cases like Pakistan, the major players don't do much
other than issue soothing statements or
throwing in meager amounts.
Japan's economy has been in a lot of trouble for
many years and the South Korean economic collapse can
further deteriorate the situation: many Japanese financial institutions
have become insolvent. The US
economy is at its best for now but it can easily tailspin. The IMF
has already warned that the present pace
of the US economic growth is unsustainable and if proper measures are
not taken, it can get into very
serious trouble. Therefore, the US and Japan are acting to rescue the
South Korean economy, primarily due
to self their interests and only partly because of any benevolent reason.
Following are the major considerations behind the rescue plan:
--The East Asian currencies in general and South Korean in particular
have lost about half of their value in
the last few months. This means that their exported goods will become
much cheaper and the goods
produced in Japan and other industrialized countries will not be able
to compete with them. Consequently,
several production units in the industrialized countries will cease
to produce, leading to layoffs and, hence,
recession. Therefore, to prop up the battered currencies of South Korea
and other East Asian countries is
vital for the survival of the industrialized world.
--The collapse of South Korean and other East Asian economies will eliminate
their ability to import goods
from abroad. At present, the US produces high-value goods like machinery,
airplanes and defense weapons
etc. East Asia, having the sizeable economies and high per capita income,
is one of the major markets for
the US. If US exports suffer, not only its balance of trade will tilt
against it--having serious economic
implications-- but also its production will suffer giving rise to recession.
Of course, US would like to avert
such eventuality at any cost.
--South Korea owes more than $160 billion to the foreign banks. If it
defaults on its payments and goes
bankrupt, many banks in Japan, US and other western nations will get
into a serious crunch: many may
burst. Although, it is claimed that US banks have not a major exposure
in this situation but active
maneuvering by the six US largest banks to get this package approved
shows that the world banking system
has very high stakes in this crisis.
--US government officials are anxious to forestall a South Korean default
because they fear it would cause a
further loss of confidence in other emerging market economies, conceivably
leading to worldwide recession.
Further, US multinational corporations are major players in the world
economy and a deterioration of the
emerging markets can lower their profits triggering a downward spiral
of the US stock and bond markets.
East Asian crisis has already started showing its negative impact on
the Wall Street: US stocks market has
already lost about 8% to 10% of its value in the last few months.
--The South Korean economy has to be propped up because North Korea
is still conceived to be a
potential threat to American interests. Commenting on this aspect US
Treasury Secretary Robert E. Rubin
argued, "If you have economic instability [in South Korea], you run
the risk of political and social instability
there, and that can have all kinds of national security implications."
South Korean political resolve to implement IMF conditionalities
has also facilitated the approval of such a
rescue package. Not only were current government leaders committed
to meet international requirements
but also the newly-elected president has pledged to adopt the IMF programme.
Moreover, business leaders
and the Workers Union of South Korea are in unison to share the hardships
caused by the austerity
measures of IMF prescriptions. Essentially, there is a nationwide consensus
to put the economy back on
track by accepting hardships now. Hopefully, the South Korean economy
will be rehabilitated
Pakistan's economy is stuck in a pigeon-hole, but
no white knight is coming to rescue it. Basically, Pakistan's
economy is not integrated into the global system. It does not export
goods that can have an effect on the
industrialized world and its imports are also largely limited to primary
commodities. Therefore, the basic
concern of the industrialized world is limited to recovering the money
(about $30 billion) its institutions have
lent to Pakistan. A default by Pakistan can have negative consequences
for some international financial
institutions. As result, the IMF and other industrialized nations are
lending amounts that can keep it afloat to
service its loans. Nothing more than that.
Pakistan also lacks political resolve to address
its economic issues. The opposition and the labor unions are
constantly undermining the IMF-initiated austerity programme.
Political instability has also discouraged world
powers to chip in aid. And there is no North Korea next
door. Pakistan cannot become South Korea overnight with a $10,000 per
capita income; Pakistan's per
capital income is less than $500. However, Pakistan can, and should,
bring about a social consensus on the
economic reform agenda and draw the world's attention towards its troubled
economy.