SYNOPSIS: Scorns the idea of Capital Controls as based on too little thought. Calls Krugman an intellectual lightweight

In a widely circulated Fortune magazine article and in a series of presentations in Asia this past week, MIT economist Paul Krugman — with considerable theatrical flair — suggested that since the International Monetary Fund (IMF) formula had failed to revive the Asian economies, it was time to think about "the unsayable words," exchange controls.

Mr. Krugman is no stranger to drama, or controversy. You’ll recall that he gained notoriety, or rather, world attention, with his 1994 Foreign Affairs article, "The Myth of the Asian Miracle." Earlier, in 1992, he was a disruptive voice during then president-elect Bill Clinton’s economic summit, a meeting similar in some respects to the multi-sectoral dialogues we conducted during the administration of Corazon C. Aquino. Mr. Krugman’s negative assessment of the summit — and its theme that America must get its act together — was in turn pooh-pahed by other participants.

Krugman got his revenge, in both cases, as we’ll see. The heroes of the summit — such as "that economic juggernaut, Japan," John Sculley, and the company he headed, Apple Computer — had "disappeared from view" in less than five years, along with most of the wobbly Clinton administration legislative agenda.

<But that’s a timeframe Krugman should pay particular attention to. Fame is, well, fleeting. The moment in time all the hype bestows demigod status — Mr. Scully as the world’s best manager, Apple as the world’s best company, Japan as the world’s model of the modern nation state, and… Mr. Krugman as the world’s most astute economist — generally coincides with the moment the object of the hype begins to believe all the hoopla. And when a sudden — and strangely unexpected — steep decent to below sea level begins.

Indeed, Mr. Krugman’s had a terrific run of late. Following the 1994 "Myth" article, Singapore’s senior minister Lee Kuan Yew — particularly incensed over Mr. Krugman’s comparison of Asian economies with that of the old Soviet Union under Joseph Stalin — took to regularly thrashing Mr. Krugman and his argument. Put simply, the argument was that Asia’s growth was almost entirely attributable to mobilization of resources, principally people and foreign investment, and not from value-added in the form of productivity, technology, or quality enhancements. As disingenuous as his argument sounds now, it provoked a storm of controversy among insecure Asian government executives and corporate chieftains ensconced in inefficient, protected companies. Criticism, as usual, was principally spin-based, not factual: Mr. Krugman didn’t understand Asia, Asian values accounted for Asia’s success, his data was wrong. All of this, of course, made Mr. Krugman extraordinarily famous — and a media star — especially in Asia, as the economist who stood up to Mr. Lee. Meanwhile, Mr. Lee quietly began to read and talk quite a lot about productivity and innovation.

When the Asian financial crisis struck, Mr. Krugman was suddenly the economist who predicted the Asian crisis, and demigod status soon followed. Mr. Krugman, who has always been a prolific writer, is the author of, he thinks, 16 books and several hundred articles. But this was a whole new ball game. Already a regular columnist for the respected but limited "circulation" Internet magazine Slate, by November 1997 he was writing for Fortune. I’m told Mr. Krugman travels back and forth to Asia — including Singapore — so frequently that he would make an Asian expatriate’s frequent flyer miles an acute embarrassment. Every major conference involving senior government and private-sector officials must have Mr. Krugman as keynote, although he has taken to publishing his columns and papers on the Internet about the same time — and sometimes before — delivering them, much to the dismay of organizers.

All this is a bit curious. Mr. Krugman, in a January, 1998 paper, "What Happened to Asia," says, "It seems safe to say that nobody anticipated anything like the current crisis in Asia." Those nobodies certainly included Mr. Krugman, although he and other miracle skeptics regarded "the claims of an Asian economic miracle as overstated." Like other pessimists, Mr. Krugman expected "something along the lines of a conventional currency crisis followed by at most a modest downturn, and we expected the longer-term slowdown in growth to emerge only gradually." However, there have been few voices as articulate as Mr. Krugman’s. "This guy can write," says Fortune managing editor John Huey.

But for all his eloquence, what has Mr. Krugman said, prior to his sudden advocacy of exchange controls, about how the crisis should be managed? And the answer is that he has said virtually nothing. And he tells us why.

In March this year, in a Hong Kong speech attended by John Hopkins University economist Steve Hanke, Mr. Krugman referred to an "economic snake-oil salesman" in comments critical of proponents arguing that Indonesia create a currency board to stabilize its currency. Mr. Hanke was the well-publicized advisor to then president Suharto recommending such a board. Asked a question later, Mr. Krugman responded, "I wish I was as sure about anything as he is about everything," of Mr. Hanke. Could that be what’s bothering Mr. Krugman? He doesn’t know what to do? And if he is not, as he admits, sure about anything, why on earth is he recommending something as horrifying as exchange controls? This is better than a currency board? Why, and how? Is he sure? If so, how sure?

Krugman went after Mr. Hanke again, calling him a "Rupiah Rasputin," in a Fortune column in April. Clearly, Mr. Krugman still wasn’t in the mood for radical measures then. But it may have been Mr. Krugman’s long-standing admiration of "economics heavyweights" Stanley Fisher and Lawrence Summers — and his desire to support them — that really accounts for his criticism of Mr. Hanke and his ideas. Mr. Fisher is the second-highest ranking official at the IMF. Mr. Summers is likewise the number two official at the U.S. Treasury. Mr. Hanke’s proposals came at a time that Fisher and Summers, as well as the institutions they represented, were coming under enormous political pressure from panicking Asian governments, as well as other vocal, and usually virulent, critics. It’s likely that Mr. Hanke and his ideas — for whatever they were really worth — were making it harder for these officials to convince Asian governments that the IMF prescription — what Krugman calls Plan A — was the way to go.

If so, there was much more than Mr. Hanke’s arguments that should have been considered according to Nobel laureate Milton Friedman. Mr. Friedman says that, "In my opinion, the IMF is largely responsible for the Asian crisis." Nevertheless, Mr. Krugman continues to "understand why they initially tried plan A." Now that Mr. Krugman has stood by, and by his acquiescence abetted the IMF, he proposes that Asia suffer through "Plan B," something as implausible and unmanageable as currency controls.

While it may be clear that Plan A didn’t work for Asia — and perhaps should never have been undertaken in the first place — it is also clear that the prospects for Mr. Krugman’s Plan B are even further far fetched. As Mr. Krugman says, no one expected the Asian crisis to be so unique, and severe. It would therefore seem to follow that its solution will likewise be extraordinary, and certainly not as ordinary — and dangerous — as currency controls.

Interestingly, Mr. Krugman does acknowledge — although he apparently didn’t intend to — why Asia is in its current fix: "You don’t have to agree that the time has come to adopt Plan B — or even that it will ever come — to admit that something like this is the obvious alternative to the current wait-and-hope strategy." Wait-and-hope is the key. Asia’s governments up until very recently were willing to go only half way, if that, with the IMF: a tight money regime was implemented, but structural reforms were not instituted. The reason that reforms weren’t instituted were the same as those that caused the crisis: desire to support — and protect — cronies and favored tycoons. Mr. Krugman argues that the IMF prescriptions were intended to restore investor confidence. And from my perspective, that should continue to be the objective. The Asian crisis won’t be remedied by half-way measures, and certainly not by deadly ones, as we’ve already seen. Nor will it be remedied if what is broken is not fixed. Banking sector reforms should push through, cronies allowed to go bankrupt, and an effective regulatory framework put in place. And these things should be done before any crazy — I mean radical — Plan B is verbalized. Exchange controls should remain "unsayable."

Copyright 1998 The Events & Awards Managers of Asia and
Hamlin-Iturralde Corporation. All rights reserved.