This Week, December 28, 1997: Paul Krugman debates Mark Malloch Brown, World Bank Vice-President


SAM DONALDSON: Joining us now from our bureau in Washington is Mark Malloch Brown, vice president of the World Bank, and from Nita (ph), Massachusetts, our bureau there, Paul Krugman, economist at MIT. Welcome to both of you.

MARK MALLOCH BROWN, V.P. the World Bank: Thank you.

SAM DONALDSON: Well, now in the coming week, $10 billion will be going to South Korea. The first, I suppose, of perhaps more to try to bail out that countries economy. And the question is, is it going to do it? Will it be enough? Mr. Malloch Brown.

MARK MALLOCH BROWN: Well, the markets will deliver that verdict this week, I imagine, but the early signs are very positive. Yes, it's seems as though the international rescue effort is credible in the eyes of the markets, and when it's supported, as it now is by a very strong reform program from the new president-elect, I think there's every confidence that this thing is going to hold and Korea will start to turn.

SAM DONALDSON: Mr. Krugman, are you also optimistic?

PAUL KRUGMAN, Economist, M.I.T.: I'm hanging on by my finger nails. I think every time we think the worst of this crisis is passed, we discover something else, some other skeleton in the closet. I hope that the bank and the fund are right. But I won't think that we're out of the woods until another year has past, and we have really seen that the things started turning around.

SAM DONALDSON: Well, in the last few days, South Korea has clearly been resisting the kind of effort that on December 3rd was announced to try to bail out the country. And I suppose the question is, do you think the political will, with the new president, is going to work and that they will now get behind the program? Mr. Krugman?

PAUL KRUGMAN: I think you have to understand these guys are experiencing a bit of whiplash. You know, it's only six months ago that everyone was telling them how great they were, that everyone was talking about the East Asian miracle, was holding up Korea as the -- the emblem of that miracle. Now, all of a sudden, they are being told that everything in their economy is wrong, that they have to change their whole way of doing business. The truth is most of the criticism is right. But you know, imagine that foreign bankers and the World Bank and the IMF came to the United States and said "OK, you have to uproot your whole financial system. You have to turn around. You have to break up all your major industrial enterprises, change your whole way of doing business now, immediately, or your country is about to go into the sea." We would find a hard time doing that, as well, especially because all of these measures are going to lead to a lot of unemployment in a country that, until now, hasn't had any.

SAM DONALDSON: Well, Mr. Malloch Brown, but that's the old business about the tapeworm. I mean, yes, the medicine is awful, but the tapeworm is worse.

MARK MALLOCH BROWN: Well, I think that's right. I mean, I think Koreans are facing some very ugly choices. I think Mr. Krugman is right that we should not underestimate the political fallout from this crisis. Few countries have fallen as far as fast as Korea has in recent months. And I remember myself growing up in Britain as a student at the time of the IMF bail out of the British economy. It led to a completely unexpected turn in British political life and the Margaret Thatcher ascendancy for some 18 years. And in the same way, I think the political fallout -- both in Korea, but also in its neighbors, which have suffered similar crises -- is likely to be very prolonged and very fundamental with a dramatic liberalization and opening up not just of the economies, but of the political structures in these countries. And exactly what the outcome will be at the end of that process is hard to tell. But I think it's the role of the World Bank, the Fund, but also the U.S. and other governments to try and make sure it's a positive outcome leading to more liberal open market economies rather than the perfectly possible alternative scenario, which is that these countries respond to this crisis by closing their doors, becoming nationalistic, turning in on themselves, introducing more protectionist economies. So we have got a great interest in making sure the outcome is a positive one.

GEORGE WILL: Mr. Krugman, I'd like to hear your comment on that. Now, fish got to swim, and birds got to fly. And the IMF has to ride to the rescue because that's what it does. But is there not a case to be made for benign neglect in a situation like this, to let the Koreans cope with this on their own. That's called self-government, and that's how people learn, rather than have a nanny institution from the so-called "international community" come in and set them right.

PAUL KRUGMAN: Well, it's the -- there is a case to be made. I mean, there's no question that the IMF has an institutional imperative. As you say, it's their job. And they are always trying to expand their job. On the other hand, I think that -- let's put it this way. The U.S. would not have gone along with this. I -- I know that the U.S. was initially very reluctant to get involved in these rescue packages. In fact, we sort of passed on the Thai rescue package a few months back because we said, well, where is the clear justification? What was -- has turned out is that the contagion -- the Asian flu, as you say -- has turned out to be much stronger than anyone expected. And we don't think that it can really infect the Japanese. And we're quite sure, which is to say we don't think, that it can infect us. But -- but everybody is scared. And I guess the truth is we'd rather take the risk of lending some money and maybe losing some of it than take the much bigger risk that by failing to do something we allow this to turn into a domino effect that spreads who knows how far.

GEORGE WILL: Mr. Brown, more about the domino effect. Now you mentioned a moment ago the possibility of political turmoil in these countries. Americans want to know what might happen to their dollar and their checkbook and their savings account. Now, is it possible that we are, because governments do this -- it gives them something to do -- we overestimate the frugality of the world, the ecology. We -- perhaps, we're overestimating the frugality of the international economic system.

MARK MALLOCH BROWN: Well, I think this is a little unlike global warming in the sense that if that's the comparison you had in mind.


MARK MALLOCH BROWN: I think, you know, this economic challenge is right in front of our eyes, and we've seen a currency depreciation of 50 or 60 percent. And we've seen what at the moment is a market crisis start to bite into the real economy in terms of early bankruptcies in Asia of which we're going to see a lot more. And when we look at the Korean economy, which is the world's 11th largest, I think we can see the interlinkages with that of the U.S.

GEORGE WILL: But maybe -- is it possible this is all very invigorating and hopeful news? It proves the velocity of capital, the velocity of money, and that sins by governments and economies get punished quickly and thereby corrected?

MARK MALLOCH BROWN: And by the way, despite this nanny institution you mentioned, the IMF -- and by the way, if nanny is the right metaphor, it's Victorian nanny from the 19th century because they come in with a pretty big ruler, I think, to push through reforms. So it's not easy medicine and not just rescue for its own sake. It's linked to real changes in these economies. But I think your point is that whether it's the IMF or my institution, the World Bank, that we somehow contribute to moral hazard as the term is by undermining the ability of markets to correct and punish poor performers, I think your point is overdrawn in that moral hazard, at least in financial markets, is not an absolute. And there are going to be lots of losers in this crisis, investors whose foolishness they will pay for dearly. But I think for my own institution, the World Bank, what we're in there to protect is actually the poor, because this region of Asia has had a world-breaking performance in recent years in reducing world poverty. And we want to make sure that the economic dominoes in the region don't bring down the poor. And we're more interested in that, frankly, than protecting the wealthy in this process.


LINDA DOUGLASS: OK. Mr. Krugman, the Clinton administration makes much of the fact that we're living in a global economy now. What effect, though, do you think this actually is having -- that is, the Asian crisis, the South Korean crisis, the spreading crisis -- on the economy here in the United States?

PAUL KRUGMAN: So far, you can barely see it. I mean, so far, in fact, the effects have been favorable, because it's actually helping to keep prices down because they're selling a lot of stuff cheaply and what amounts to a fire sale of their exports. It shouldn't in the normal course of events -- this shouldn't really matter. I mean, you know, we had a much worse crisis...

LINDA DOUGLASS: Excuse me. Why not?

PAUL KRUGMAN: Because they're not that big in terms of our markets. I mean, we had a heck of a crisis in Mexico three years ago, which is a smaller economy than Korea but a lot closer, and the effect on the U.S. economy was invisible. You just, you know, the unemployment rate kept on falling right through it. It was good times. The stock market kept on rising. Ordinarily, there should be no fallout that the economy as a whole would notice. Some individual businesses would be hurt, but nothing you'd really notice. The only thing that makes me nervous here is that there's a pretty good case that we've got a fairly serious bubble in our own economy. It's very hard to understand why stock prices are as high as they are. It's very hard to understand how our economy can really be floating as high as it is right now. And so this could be the pin that pricks the bubble, and that's the reason, I think, that we are more nervous than we would ordinarily be. After all, there's no linkage between Thailand and Korea that you can point to. Right? Those are -- Thailand doesn't sell a lot -- sorry, Korea doesn't sell a lot to Thailand. You know, these are not interdependent economies in the normal sense of the word. Nonetheless, a currency crisis in Thailand quickly spread to a debt disaster in Korea. And I think the precautionary thing is to say, well, gosh, you know, maybe we should try and do a little bit to stop it here.

LINDA DOUGLASS: Right. And Mr. Brown, just from you very briefly, why didn't we see this coming? Why didn't all the financial leaders see this crisis coming?

MARK MALLOCH BROWN: Well, because I think, you know, financial crises are like that. It's not that the fundamentals in an economy dramatically change. It's a collection of small events gather a momentum and suddenly the wall of the dam breaks. So that the way currencies moved against each other with the Korean won going up with the U.S. dollar and therefore down -- therefore, up against the yen and other regional currencies that had to work against a series of interactions and interrelationships meant that there was an undermining of the economic situation which we were all slow to see. Now, I think all of us can point to the fact we gave warnings. But the fact is clearly none of us sounded the alarm with sufficient vigor. And I think there's a lot to be learned about this crisis for all of us.

SAM DONALDSON: Thank you very much, Mark Malloch Brown and Paul Krugman, for coming in today. We hope you will come back.



SAM DONALDSON: Next, we'll talk with historian Doris Kearns Goodwin. (voice-over) .about events of 1997.

(Commercial Break)

Originally broadcast, 12.28.97