At least for now, major Australian companies and the Australian Government are playing down the significance of the Asian currency crisis. Whether this is whistling in the dark or taking a restrained, sensible view is hard to tell. This is because economies are vulnerable to a host of influences, the most profound of which is that most unpredictable element of all: human irrationality. It is now clear that the value of the Indonesian rupiah has been based far more on sentiment than a rational assessment of asset value. We do not know, of course, whether this is a case of the old exchange rate of 2000 rupiah to the US dollar being a gross over-valuation because of greed or whether the present rate of 16,000 to the US dollar is a gross under-valuation because of fear. Most probably both. Markets are driven far more by greed and fear than a rational assessment of value.
Market economists put far to much faith in market forces. They argue that markets ultimately correct. True. But not after some wild fluctuations during which great fortunes are lost or gained, as we are seeing in Indonesia. The result is usually a great deal of misery. More worrying is the further misery likely to be caused in affected Asian countries as international pressure is applied to what precious little spending goes on health, education and the subsidy of basic foods.
The enormous tragedy unfolding with the Asian currency crisis is that the very poor in the very poor countries are paying for the incompetence and corruption of their rulers. The ordinary people in Indonesia are suffering most as the currency crisis sends a reaction the system. Corporations which have taken out US dollars loans are now faced with a debt eight times the size. They will fail and people will be thrown out of work. Imports will be prohibitively expensive.
Unfortunately, there is little sign that those who created the crisis will fully pay. The crisis evolved because people in power abused the power by misdirecting resources to family members and political cronies with special deals of subsidies and government grants. But this part of the Indonesian economy will be subjected to far less of the rigors of market theory than the subsidies of food, education, health and welfare to the poor.
Australia, which has thrown substantial foreign reserves into the ring as loans, should bring pressure on to ensure that if we are to have market discipline, then its intolerance of subsidies is applied in a more consistent and equitable way. Australia has a duty to its neighbour, but not just to the neighbour’s ruling clique.
Currency instability has frequently been a cause of social and political unrest. It is in Australia’s interest to help, but in a way that will prevent, not aggravate, that unrest.