US/IMF Protect Private-Sector Investors/Lenders in Bailout; Economy is Great---But!

[Michael Eisenscher <meisenscher@xxxxxxxxxxx>]

The Wall Street Journal Interactive Edition -- December 26, 1997
 Critics Worry U.S., IMF Protecting
 Private-Sector Investors and Lenders

 By DAVID WESSEL
 Staff Reporter of THE WALL STREET JOURNAL

 WASHINGTON -- Treasury Secretary Robert Rubin's decision to
 reverse course and join an international effort to rush $10 billion to
 South Korea raises a couple of big questions:

 What would have happened if the International Monetary Fund, the
 U.S. and other rich countries hadn't come through for Korea
 again? And are the U.S. and its allies stepping perilously close to
 guaranteeing the foreign borrowing of private debtors in big
 emerging-market economies?

 Exactly three years ago, Mr. Rubin and his deputy, Lawrence
 Summers, orchestrated a controversial rescue of Mexico, arguing
 that the alternative was allowing the Mexican government to
 default. That, they said, would have disrupted capital flows to
 emerging-market economies around the world.

 The Big Fear

 Now, Mr. Rubin and Mr. Summers are confronted with a much
 bigger crisis that, so far, has been resistant to international
 attempts to cure it. This time, the big fear isn't so much default by
 the Korean government, but default by Korean banks and
 corporations that are finding it hard to raise the dollars to pay
 short-term debts that are coming due.

 "I wouldn't spend a nickel to help private investors and private
 creditors," Mr. Rubin said Wednesday, interrupting a vacation to
 return to Washington to cope with the worsening crisis. "On the
 other hand, we have an enormous stake in re-establishing financial
 stability in South Korea. A byproduct of that, an inevitable
 byproduct, is that investors are going to do better than they would
 otherwise have."

 Just 10 days ago, Mr. Rubin said that South Korea didn't need a
 quick cash infusion, certainly not from the U.S. The only thing that
 would save Korea, he said, was a strong dose of economic
 reform. On Wednesday, with Korean borrowers on the verge of
 default and the won sinking, Mr. Rubin said the U.S. is lending
 Korea $1.7 billion as part of the $10 billion package that is linked
 to a move by big commercial banks to extend maturities of Korean
 private debt.

 Hard-Liners Prefer Default

 Some hard-liners, who have the luxury of second-guessing
 government officials without worrying about the consequences, say
 Mr. Rubin and the IMF are making a big mistake: They should have
 permitted the Korean companies to default, to teach foreign
 investors and lenders a sorely needed lesson.

 "They've gone too far," said Morris Goldstein, a former top IMF
 economist now at the Institute for International Economics. "I
 support the rest of the package. But they've gone too far in having
 the official sector assume all the liabilities of the banks." In
 connection with foreign commercial banks' move to extend
 maturities of short-term loans, Seoul is expected to formalize a
 promise it made in August to guarantee the debts of its
 commercial banks, though not debts of industrial companies.

 The U.S. and the IMF "are saying that if some of Korea's debt can't
 be paid by certain banks, it'll be a disaster," Mr. Goldstein added.
 "I'm not sure that's the case."

 Stake in Korea's Stability

 Mr. Rubin and his aides can't be sure either, but it is a risk they
 aren't willing to take. The U.S., as they point out repeatedly, has a
 large economic and national-security stake in stability in Korea.
 Mr. Summers says that, by some measures, Korea is the U.S.'s
 fifth-largest trading partner. And with Thailand, Indonesia, Malaysia
 and, now, Korea suffering from a lack of market confidence -- and
 with markets in the Philippines and Hong Kong on edge -- this
 hardly seemed to them to be a good time to rewrite the rules of
 international finance as they have been widely understood by
 refusing to come to Korea's aid.

 Wholesale defaults in Korea, the thinking at Treasury goes, could
 easily have prompted investors and creditors to flee from Brazil or
 Russia or other large vulnerable economies, turning an already
 huge problem into a gargantuan one.

 What's more, all this comes at a moment when Korea's neighbor --
 Japan, the world's second-largest economy -- is having difficulty
 restoring market confidence itself. Japan "has loomed very large"
 in Korea's inability to regain market confidence, Mr. Rubin said.
 Although he didn't say so, a further worsening of the crisis in Korea
 would also loom large in Japan's difficulties, and likely would put
 downward pressure on the already weak yen and the Japanese
 stock market.

 Higher Interest Rate

 To discourage countries from relying on international bailouts, the
 IMF, the U.S. and the dozen other governments involved are
 charging Korea an interest rate about 3.5 percentage points
 higher than the IMF traditionally has demanded. And to make sure
 that the $10 billion doesn't simply flow through the Korean central
 bank to foreign creditors, the Bank of Korea agreed to stop
 making cheap dollar loans to Korean commercial banks. Instead, it
 will charge a huge premium -- 10 percentage points now, rising to
 15 percentage points before yearend.

 But the latest expansion of the international bailout of Korea raises
 anew a question Mr. Rubin himself raised in a speech in Seattle in
 September: Are world governments and the IMF insulating private
 investors and lenders from the discipline of the market, bailing
 them out when their loans go sour and encouraging them to make
 ever-larger, ever-riskier loans that make for ever-costlier bailouts?
 "What we don't want to have is a situation where people can do
 unwise things and not pay a price," Mr. Rubin said then.

 Are governments and the IMF like a foolhardly fire-insurance
 company that repeatedly sells insurance policies to arsonists? Or
 are they firefighters putting out a blaze even though the property
 owner foolishly failed to install sprinklers?

 "That's an issue that's not fully resolved," Mr. Rubin conceded.
 "What we cannot do is allow our national interest to be sacrificed
 until we work it out."

 Copyright © 1997 Dow Jones & Company, Inc. All Rights Reserved.
===========================================

December 25, 1997

Economic Scene: Hidden in Glitter of Bountiful Economy, Problems Remain

By PETER PASSELL

   Joblessness is lower than it has been for a quarter-century. Inflation is
less than 3 percent and appears to be falling. Corporate earnings have been
powering a sustained boom in the stock market that has added trillions of
dollars to the wealth of the middle class.

But before succumbing entirely to the warm and fuzzy spirit of the holidays,
it is worth noting that all is not perfect in the New Economy. Indeed, there
is no compelling reason to believe the problems that stirred predictions of
doom and gloom a decade ago are any closer to solution.

PRODUCTIVITY: Yes, microprocessors are ubiquitous, revolutionizing
everything from inventory control to movie animation. Yes, the globalization
of trade and investment has left America's service industries at the top of
the heap. Yes, Wall Street leads the world in financing invention and
spreading risk.

But all that gee-whiz technology and organizational change has yet to make a
dent in the measured growth in output per hour of work. Productivity growth
in the sustained boom of the 1990s has averaged a bit more than 1 percent,
about the same as the sluggish 1970s and 1980s and less than half the pace
of the 1950s and 1960s.

Perhaps the measurements are light-years off -- perhaps the bean counters
haven't captured the full value of surfing the net, repairing wayward genes
or eating farm-grown salmon. But similar arguments could have been made
about direct-dial long-distance calls in the 1950s, jet travel in the 1960s
or heart bypass surgery in the 1970s.

Truth is, economists don't have a clue to why productivity is apparently in
the doldrums, or whether the winds of progress will soon freshen. Yet in the
long run, nothing is more important to economic well-being.

INFLATION VS. EMPLOYMENT: In the 1980s economists were convinced that 6
percent unemployment was "natural" in the sense that a lower rate would lead
to competition for workers that yielded unsustainable wage gains. Today,
unemployment is 4.6 percent and the worry-of-the-month is deflation. Surely
that's progress.

Maybe. For one thing, evidence from the past suggests that wage pressures
build slowly. For another, world commodity prices have been falling sharply
and the dollar has strengthened against other major currencies --
anti-inflationary benefits that cannot last and may well reverse.

Even if the trade-off between inflation and employment has permanently
improved, the widely offered explanation is hardly reassuring. America
workers, the reasoning goes, were so traumatized by downsizing, outsourcing
and the globalization of production over the last decade that they are
afraid to ask for raises.

SAVINGS: Like productivity, private savings are difficult to measure. And,
as with productivity, the anecdotal evidence of recovery from lean times in
the 1980s has yet to be matched by the hard numbers.

There has been progress on a related front. The government has pulled up its
socks, transforming budget deficits that subtracted two to three percentage
points from the national savings rate in the 1980s into projected surpluses.
But those socks may well slip again. Indeed, unless Washington cuts deeply
into the cost of Medicare, deficits that would embarrass even Ronald Reagan
are virtually guaranteed.

Private savings in aggregate are, of course, the sum of individual savings.
Thus if Americans were prepared to let retired baby boomers subsist on
Spaghettios, the savings issue could be ignored. But most of those future
retirees are somebody's parents. And the fact that they are currently
squirreling away just half of what they need to sustain their current living
standard will soon be everyone's problem.

INCOME INEQUALITY: Between 1974 and 1994, families in the upper 5 percent of
the distribution enjoyed an average annual gain in income of 1.2 percent.
But those in the bottom fifth of the pecking order saw their incomes shrink.

The change is not quite as depressing as it appears. The cost of living has
probably not risen as fast as the Consumer Price Index, implying that the
real incomes of all groups has probably gone up. Moreover, America's real
(if somewhat oversold) social mobility does allow the most tenacious to move
up the ladder.

But those who wonder how anyone can raise of couple of kids on the after-tax
proceeds from an $8-an-hour job will have a hard time finding the silver
lining. Most of the evidence suggests that the lion's share of gains from
productivity is going to those with talent. And even if training were
readily available to all, tens of millions of Americans would still be
condemned to work for less than a living wage.

Is this the best of possible economies? Certainly it is looking good
compared with stagnant Europe and crisis-ridden Japan.

Face it, though: Dr. Pangloss is a poor excuse for Santa Claus.

       Copyright 1997 The New York Times Company