I recently had the opportunity to watch the Korean film “Default” (Gukgabudo-ui Nal) (2018). The film models itself quite transparently on “The Big Short” (2015), aiming to be a behind-the-scenes tell-all about the lead-up to the Korean chapter of the 1997 Asian Financial Crisis. To the extent that I knew far too little about this Korean leg of the crisis, the film was informative and interesting; however, I was awed with how much this film seemed to advocate policies that ran counter to good and standard economic practice, and how much of a biased and one-sided perspective the film took against everyone’s favorite perennial punching bag, the IMF. Allow me to give a quick summary before giving a few salient scenes and a counter from the perspective of orthodox economic policy.
In 1997, The East Asian Financial Crisis was underway due to a sudden loss of confidence in East Asian governments/economies and a pull-out of credit and investment from global investors. The intricately interwoven economies of the area fell like dominoes as each country had to call in favors and liquidate investments in the next in order to stave off complete collapse. In the fall of that year, after it seemed that most of the damage had been confined to Southeast Asia, Korean policymakers came to realize that they were overexposed and would soon go over the cliff as well. Quixotic Bank of Korea head of monetary policy Han Shi-hyeon, the film’s main protagonist, is shown attempting to take the side of “the people” against the banks and big corporations who, as the film would portray, created the mess.
Criticism 1: Money alone does not an economic crisis make
As the drama unfolds, the governments economic officials strongly urge that no information about the impending crisis be made public, but the film wishes us to side with Ms. Han’s plan to “tell the people” about the issue so that they can begin saving and can avoid making poor investment and savings decisions. To really sell this argument, the film weaves in another vignette of a factory owner who takes out a large loan just hours before news of the crisis breaks. The film’s obvious lesson and argument are that “the government should have been transparent about the problem as soon as it could, and the opacity caused undue tragedy for common people”.
So what exactly is wrong with this perspective? The simple answer is that economies are not made up entirely of dollars and products. They are equally composed of expectations and perceptions. As John Maynard Keynes dubbed them, “animal spirits” like consumer confidence can cause economic effects that dwarf many material realities. It is not balance sheets, but rather perceptions of and reactions to those balance sheets, that make a crisis. An issue on a balance sheet can be corrected, or policy safeguard can be effected, without consumers or traders ever knowing and without a crisis ever occurring. The goal of any government in such a situation should be to delay the public realization of a problem as long as possible while stopgaps and corrections can be put into place. It is a race against the public finding out – to go directly to the public and announce a crisis is to call one into being. The couple of factory owners who make bad investments because of the lack of news surely exist, but are red herrings here, very small unfortunate situations in the scheme of an economy of millions of people.
Criticism 2: Whether to Turn to the IMF
A little later in the film, the question comes up of whether to turn to the IMF for help. Just a few of the the most egregious tidbits:
- “The IMF Doesn’t just lend money. They’ll make demands about running our economy”
- Ms. Han: “In return for a bailout loan, they[the IMF]’ll require unreasonable conditions”
This line of critique of the IMF is extremely common, but misses the point entirely. The IMF is a lender of last resort. Any country would rather go to a bank or an allied national creditor first. No one compels a country to go to the IMF. The IMF is bitter medicine for a country in such a bad financial situation that no other bank or lender in the world wants to take a risk. And if a country has gotten itself into that situation, it needs medicine, no matter how bitter. The reforms required by the IMF are often radical, though are always in line with global economic best practices and policies for restoring financial solvency. But any country has the option of not agreeing to those reforms and not taking the loan. As the IMF representative in the film retorts to Ms. Han, the IMF offers nothing other than “the funds you asked for…you’re not exactly in a position to make a deal”.
Relatedly, Ms. Han’s proposed alternative, going to the US and EU for loans and then “using government-owned assets as security” for ABS (Asset-Backed Security) bonds, is not different in principle from a common IMF policy of selling off bloated government assets into the market to raise capital. Either way, government assets are being marketized.
Criticism 3: the Nature of Developing-Country Economic Crises
This criticism is a bit of my own soapbox about an issue that I have never seen put in the terms that I think of it in. As Ms. Han states in the film, “The question of improving the Korean economy should be considered separately from the foreign reserves issue.” But to counter Ms. Han, when a developing country has a crisis, it does not have just one crisis. If it has an economic crisis, it also has a financial crisis and the two are inextricably linked, with only one way out. This presents a terribly inflexible situation.
To explain what I mean, let us consider how things work in a “developed” country like the United States. When the US faced its financial and economic downturn in 2008, there was an immense decline in consumer confidence and consumer spending that threatened to turn a recession into a depression. At the same time, however, there was very little lack of confidence in the solvency of the US dollar or the solvency of the US government. As a result, lenders were happy to back the expansion of the US deficit to pay for TARP, the Auto Bailout, and the Stimulus, three massive Keynesian expenditures that sought to – and by all indications ultimately were able to – stabilize consumer sentiment and market confidence and reverse a slide into depression.
When an economy has a downturn, what the government should do according to modern post-keynesian orthodoxy is inject money into the economy through stimulus programs – be they checks or tax incentives – to rev it back up. But to do this, the government must have at least one of two things: the cash reserves to do it, or the confidence of lenders to be able to finance it at a deficit.
So how does it work differently in developing countries like 1997 Korea? Such countries often lack these latter two resources. When an economic crisis hits, developing countries often have relatively little cash on hand to directly pay for a keynesian injection of funds into the economy; they also don’t enjoy the unwavering confidence of the markets in the way the US does. So they cannot really pursue Keynesian stimulus policies to any realistic degree. One of their few policy levers available for economic stimulus in such a situation is inflation: lower the value of the currency so that the country imports less and exports more, increasing the balance of trade and helping to stabilize the economy, but coming at the cost of consumer purchasing power, as well as the competitiveness of some import-heavy sectors, as well as overall standard of living. One problem with this is that if the country’s external debts are denominated in other currencies (e.g. if Korea took out loans in Yen and US Dollars), the cost of those debts would increase in terms of the domestic currency (e.g. the Won). Thus, what is good policy for paying of government debt is bad policy for stimulating the economy, and vice versa.
I do not envy the government of a developing country during an economic crisis.
Criticism 4: The Bundling of Neoliberal Policy Positions with General Assholery
This is not a policy critique exactly, but a critique-of-a-critique. In the film, the primary proponent of seeking the assistance of the IMF and pursuing neoliberal reforms in the Korean economy, the unnamed Vice-Minister of Finance, is made out to be a general asshole. Shortly after giving his strawman argument for seeking IMF assistance, he devolves into a sexist and classist tirade, insulting his female colleagues as overly emotional and demanding they – cabinet level or other high-ranking women- bring him coffee. It should go without saying that I find these attitudes repulsive in and of themselves – once again, I unabashedly favor the complete and total socio-politico-economic equality of the sexes – but I also find it repugnant that the only defender of any sort of neoliberal policies in the film is also made to be an asshole.
This is a common trope, without question: neoliberal reforms are heartless and cruel, they put money before people, they put big faceless institutions ahead of society, etc. Rarely do we see strong and explicit support for such policies. Rarely do we hear how free trade brings peace and prosperity; rarely do we hear about where a lack of regulation actually improves well being (not that I favor complete deregulation of the economy, far from it, but there are many wonderful bright spots – the early days of Silicon Valley come to mind). And we never get to see the counterfactuals of what countries that do seek the help of the IMF would do if the IMF did not exist. We do not see the counterfactual world in which the moral hazard of writing off the loans of many developing countries runs rampant. And when we do get to see these policies defended in popular media, it appears to always be by the most shallow, arrogant, and cold-hearted of representatives.
Concession and Conclusion:
Ms. Han does have a few valid criticisms, however. She notes with alarm that some of the IMF conditionality requirements, such as the requirements of hostile takeovers and several capital and labor market reforms, coupled with the involvement of the US treasury, may serve primarily to advance US interests rather than to simply shore-up the solvency of the Republic of Korea. These criticisms are valid, and indeed there has been a chorus of criticisms for decades that IMF reforms do unfairly privilege large businesses in the market at the expense of SMEs and social stability more broadly. These critics must at least be listened to, if only to secure the legitimacy of neoliberal institutions. For if these systems and institutions are not defended, there are others waiting in the wings to take their place.