With the devaluation of the Thai baht in July 1997, the Asian economic and financial crisis spread across East Asia devastating much of the region’s economic success story. Two years later, the economic doldrums linger in Northeast Asia, in spite of an impressive comeback in some countries such as South Korea, and the relatively unaffected Taiwan. Japan’s unemployment rate reached 4.9 percent in June 1999, the highest level recorded since the statistic was initiated in 1953; unemployment in South Korea soared up from 2.1 percent in October 1997 to 8.7 percent by February 1999; China’s hulking state-owned industries are laying off tens of thousands in an effort to stay competitive. What little hope Russia’s Far East may have had of integrating more beneficially in the East Asian economic miracle is now on indefinite hold. Meanwhile, consumer confidence is way down in the region, with investors only cautiously returning.
Perhaps more importantly-but less-frequently considered-are the long-term political and social effects of the crisis. Social and political upheaval in Indonesia stands out as the most obvious example, but the crisis also affected the politics and social cohesion of others in the region: there have been protests and political shuffling in Malaysia, the opposition came to power in South Korea, political divisiveness appeared in Japan, and painful reform measures have been introduced in China. Even as the region recovers economically, these political and social effects may well have the greatest impact on the governments, economies and societies of the region.
In this report, the seven authors-all policy analysts or practitioners specializing on Northeast Asia-take a critical look at the economic, political and social legacies of the crisis, and offer reasoned policy prescriptions as their governments pursue varied paths to cope with its long-term aftershocks.
China: While not feeling the immediate effects of the crisis, China faces looming related problems as its export industries struggle to compete, foreign investment is down, and the country’s delicate banking sector comes under increasing pressure. Steady robust economic growth, public spending, introduction of re-employment services, and reliance on massive foreign reserves stand out as policies to protect China from the worst effects of the crisis.
Japan: The country remains mired in the worst economic recession of its postwar history. The recession has had a devastating effect on the Japanese psyche, and threatens to turn Japan even more inward and question the principles of globalization and free markets. Badly-needed reforms will be hindered by the paralyzing effects of the crisis itself, as well as the fractiousness which will dominate the Japanese political scene for the foreseeable future.
Korea: Regarded as an economic success story, the country experienced a tremendous setback as a result of the crisis. Politically divided, South Korean leaders have made important strides forward, but industrial restructuring remains sluggish and unemployment is high and may go higher. The Kim Dae-jung government must step up efforts in key areas: avoidance of the politicization of the reform process, dealing firmly with vested industrial interests, expanding public assistance programs, and sustaining a national consensus in favor of reform.
Russia: The Russian Far East, already economically lagging behind much of the rest of Russia, let alone East Asia, now faces an even dimmer economic future in the wake of the crisis. Hopes for renewed investments from Japan and Korea are premature. Looking ahead, the Russian Far East’s best hopes should be staked in political and economic integration with East Asia through the “permeability” of China and Chinese ports on the East China and South China Seas.
Taiwan: Economic indicators show Taiwan was able to avoid the worst of the financial storm. In addition, developments on the social and political front provide further evidence that people in Taiwan responded to the regional chaos in a unique and largely beneficial way. Having instituted fiscal, economic and political reforms over the past 10 to 15 years, and relying on large foreign currency reserves, Taiwan has been able to minimize the negative economic impact from the Asian financial crises and keep the best performance record in the region.
The crisis has affected China, though as yet not so directly. Three principal points summarize China’s situation in the wake of the Asian financial crisis. First, in terms of trade, because China’s main exports face a demand shortage at home, it is difficult to overcome shrinking overseas markets. Exports are crucial to China’s economic growth and employment; unfortunately, the crisis-affected region accounts for about 60 percent of China’s merchandise exports. With shrinking demand from the region, in the first half of 1998, China’s exports to Southeast Asia, Japan and Korea fell by 12.9 percent, 4.3 percent and 30.2 percent respectively.
Chinese exports face increasing competition from the region’s affected economies, especially owing to the appreciation of the Chinese renminbi (RMB) against other affected currencies; about 15 percent of China’s export goods overlap with exports from affected economies. Competitive pressure from currency-devalued economies has intensified, and may increase in the future. China’s monthly export growth rate has declined steadily, and went into negative growth in August 1998, with a record negative growth rate of 9.2 percent in October 1998.
Second, the crisis negatively affected China’s ability to attract foreign investment, a critical factor behind China’s economic growth. Foreign funded enterprises are the most dynamic part in the Chinese economy, accounting for approximately 50 percent of exports and employing some 18 million workers. Because about 80 percent of China’s foreign investment came from the crisis-hit region, many ongoing projects encountered financial difficulties. Both contracted and realized investment from the crisis-hit region fell by about 11 percent in the first ten months of 1998. Investment from Japan decreased by 25 percent in the first nine months of 1998-the fourth year in a row for declining Japanese investment in China. In addition, China may have less interest in export-oriented projects because of relative RMB appreciation.
Indirect international financing has been affected, too. In 1997, about US$4 billion in foreign capital was raised through selling stocks (mainly in Hong Kong) and bonds abroad. The financial crisis hitting the Hong Kong stock market affected Chinese “red-chips” particularly badly. Several plans by Chinese firms to list stocks abroad have been postponed or canceled, while international credit ratings of China’s big banks have been lowered.
Third, the RMB resisted pressure to devalue. Although the Chinese government announced that the RMB would not be devalued, there are strong doubts. Chinese leaders and economists agree that an RMB devaluation would have little effect on China’s exports, but may cause a regional currency depreciation cycle, which would hurt the recovery of affected economies. But there is a price to be paid to maintain RMB value. Though devaluation may do little to improve exports, it would adversely affect imports. Thus, the expansion of external demand will have to pull the economy through difficult times. In the first ten months of 1998, there was a surplus of US$38.4 billion in merchandise trade, a 7.8 percent increase over the same period of 1997. But without adequate confidence in the RMB, some export-oriented corporations keep foreign exchange abroad illegally. As a result, foreign reserves grew minimally, from US$140 billion at the beginning of 1998 to about US$145 billion for 1999. Because the RMB is not convertible under capital account, an effective firewall stands against international financial speculation. With a large foreign exchange reserve and trade surplus, the Chinese government probably has enough financial wherewithal to maintain the RMB exchange rate at least until early 2000, if not beyond.
In sum, while China has yet to be directly affected by the worst of the Asian financial crisis, it has nevertheless had an adverse effect on China’s economic growth and social stability. The crisis affects the real economy through the external sector, highlights the fragile nature of the banking system, and exacerbates unemployment problems. With China experiencing a downturn in its business cycle and facing the difficult task of reforming core social and economic institutions, the effect of the crisis could be even more severe.
Faced with the shock of regional financial turmoil, China has to deflect its adverse effects as much as possible while doing what it can to help its crisis-hit neighbors. To do so, China has adopted a complex set of policies. First, as an important regional political force, and the second largest economy in East Asia, China realizes its international obligations. China provided assistance totaling US$4.5 billion through the International Monetary Fund (IMF) and bilateral channels to countries including Indonesia, Russia, Thailand and South Korea. Second, to avoid a regional devaluation spiral, China announced it would maintain the current exchange rate of the RMB, although China absorbed severe economic loses from the relative appreciation of its currency.
Domestically, in order to avoid a potential banking crisis and increasing unemployment, China pursued steady economic growth and pushed institutional reform forward. As external demand contributed to 30 percent of China’s growth in 1997, the country maintained a trade surplus to avoid a downturn in its economic growth. Wishing to avoid the protectionist label, China did little to reduce imports. In adjusting export policy to offset the adverse effects of the crisis, but not devaluating the RMB, the Chinese government raised the rebate rate of value-added tax on certain types of export goods such as textiles and steel from 9 percent to 11 percent.
However, external demand is not the path to growth, despite the two percent tax rebate hike. To achieve higher growth targets of seven or eight percent, both monetary and fiscal policy measures have been adopted by the central government to spur domestic demand. For example, the central bank lowered interest rates four times since the onset of the crisis in mid-1997. Loan quotas, an important central bank lever to control money supply, were also abolished and non-state enterprises have been allowed more access to financial resources. As a result, the money supply increased as planned in the first ten months of 1998, with M2, M1 and M0 growing by 16.3 percent, 13.5 percent and 10.7 percent respectively.
With stagnating consumption, the government has emphasized investment to stimulate aggregate demand. An ambitious infrastructure investment program, amounting to RMB100 billion (approximately US$12 billion) for 1998-2000, was announced by state leaders in early 1998. However, this amount cannot meet the substantial demand for project funds, resulting in substantially increased reliance on bank loans. By the end of October 1998, loans outstanding from all financial institutions reached RMB8345.5 billion, 17 percent higher than a year before. Some question whether these infrastructure projects can absorb the loans, and predict that many of these loans will become non-performing.
Other sectors targeted for reform include the housing system, the grain circulation system, state-owned enterprises, the medical insurance system and government downsizing. To assure equal competition among different enterprises, military, armed police and judiciary authorities were to divest themselves from business activities by the end of 1998. China is also in the process of eliminating discrimination against non-state enterprises. An anti-smuggling campaign was launched to improve market order and prevent tariff leakage.
As a result of the crisis and certain Chinese policy decisions, other serious challenges have arisen. On the one hand, housing, medical insurance and government downsizing reforms may have a negative effect on consumer expectations. Banks may be more cautious about lending in a transition period so that interest rate cuts do not stimulate as much credit expansion as expected. Non-state enterprises with little or no credit record still face difficulties in getting loans. On the other hand, the expansion policy may also have an adverse effect on reform. To support the government’s massive investment program, major banks announced an expansive lending plan, which seems contrary to banking reform.
In addition, the ratio of governmental revenue, both budget and extra-budget, to GNP dropped from 39.6 percent in 1979 to 16.8 percent in 1996, a level much lower than that in most other countries in the world. The Asian financial crisis has not helped this situation. Lacking sufficient funds, the government requires state-owned enterprises (SOEs) to share social responsibilities such as hiring extra workers and maintaining current workers’ social safety net in the form of housing, medical insurance and pensions. The SOEs’ extra financial burdens and flaws in enterprise governance mean most of them run in the red, a problem further exacerbated by diminished domestic demand and increased competition abroad. The government has channeled more and more subsidies through the banking system to the ailing state-owned sector. In order to keep from going bankrupt, the leverage rate of China’s SOEs is among the highest in the world. Disturbingly, the bad financial performance of SOEs has pushed the ratio of non-performing bank loans to a level even higher than that of Indonesia or Thailand before the financial crisis. With household deposits being the number one source for bank financing, such a situation cannot be sustained unless the common people confidently place their hard-earned savings in the banks. A serious slow down in economic growth could start a downward spiral in confidence that could lead to a devastating banking crisis.
Finally, as part of the restructuring and reform process, accelerated in part by the financial crisis, the Chinese leadership has encouraged SOEs to begin laying off workers by the tens of thousands. As a result, unemployment is becoming one of the most serious problems in China. Such dramatically increased unemployment may lead to wider social unrest beyond the scattered incidents of worker action recorded in the recent past. With the danwei or “work unit” offering housing, medical coverage and pensions to SOE workers, unemployment or taking a job in the non-state sector can mean losing the long-cherished “iron rice bowl,” especially in the absence of an alternative social safety net from the state. Lacking a social safety net, the government requires some SOEs to keep redundant employees as so-called “laid-off workers” (xia gang gongren) to avoid a sudden surge in urban unemployment, thereby maintaining social stability. The “laid-off workers” continue to receive a basic sustenance income without going to work. The only way for SOEs to sustain such a heavy burden is through further bank subsidies, which in turn brings even greater pressure to bear on an already fragile banking system. The Chinese government realized the fragility of the social safety net and began to setup “Re-employment Service Centers” in most cities. These centers are funded by local governments and pay unemployment insurance to laid-off workers.
In spite of these potential problems, fiscal and enterprise reform policies have worked rather well so far. Several indicators support this view. First, the inconvertibility of the RMB under capital account prevents international speculators from attacking Chinese currency directly, which was the trigger for the financial problems in several neighboring countries. Second, the massive Chinese foreign exchange reserve and large trade surpluses also enhance the confidence of the Chinese currency, and help resist pressures to devalue. Third, the Chinese population has maintained strong confidence in the banking system: by the end of October 1998, overall savings in the banking sector increased by an annual rate of 17.6 percent, with household deposits increasing by 17.1 percent. This suggests strong consumer confidence in the banking sector in spite of concerns voiced in the international community. Fourth, other indicators, such as fixed asset investment, loans, and production of investment goods grew in the latter half of 1998. Industrial output showed some acceleration after August 1998. The official 1998 growth rate of 7.8 percent, while below government targets, was an impressive achievement at a time of regional economic turmoil.
From an economic and social perspective, China faces its most difficult stage since the beginning of reforms in the early 1980s. The government must implement reform while the economy is in the downside of the business cycle. While China can probably maintain the RMB exchange rate and avoid a banking crisis, it needs to improve the coordination of economic development, social stability, and institutional reforms. Long-term reforms are needed to setup a healthy financial system and maintain long-term rapid economic development. The only way to out of potential socio-economic problems is to push ahead with reforms. In this sense, maintaining China’s socio-economic stability is like riding a bicycle: if the rider does not keep up his speed, he will fall over.
In 1998, the film Titanic was the biggest motion picture hit in Japan. Its success in the midst of Japan’s worst economic situation since the end of World War II might stem in part from the fact that millions of Japanese could witness the virtual plight of hundreds of less fortunate people on the screen, and escape-if only for a few hours-the harsh social and economic reality outside the theater.
To put it another way, the current socio-economic condition of Japan is gloomy. While there might be some bright points such as cheaper imports from Asia, overall the situation has been negative. Japan is now under real economic recession (a heisei recession), with the Economic Planning Agency (EPA) admitting that Japan’s persistent recession results from the government’s own failure to deal with the banking crisis swiftly and decisively. Japan expects negative GDP growth for two successive years in 1998 and 1999, a first-time experience for contemporary Japanese; official GDP growth registered a negative 2.8 percent in 1998. The dismal atmosphere in society is penetrated with magazine features on failed companies and massive losses week after week. Japan’s unemployment rate reached 4.9 percent in June 1999, the highest level recorded since the statistic was initiated in 1953. Japan’s start-up rate for new businesses in 1998 was only around 3.7 percent. This is not only well under the U.S. rate of 13.8 percent, but even lower than Japan’s business close-down rate.
A look at some other economic indicators offers a basic illustration of the problems Japan faces in the wake of the Asian financial crisis. As for trade, the lifeblood of the Japanese economy, the situation has been particularly bad. To start with, Japanese exports to Asia have decreased. The rate of change in exports to Asia went as low as negative 18.0 percent for FY1998 (April 1998-March 1999), much lower than the negative 3.8 percent growth rate for exports to the world as a whole. Exports to the Association of Southeast Asian Nations (ASEAN) dropped particularly sharply-26.4 percent. Japanese imports from Asia also decreased. In FY1998, imports from Asia fell by 10.7 percent, while total imports dropped by 11.5 percent.
From a social and political perspective, there has been a heavy impact on the Japanese people in the wake of the crisis. They already felt pessimistic about their future when the Asian crisis occurred because the burst of the “bubble,” prospects for the society’s aging population, fear of increasing unemployment, and the loss of confidence in Japanese institutions (such as the financial sector and the bureaucracy). In fact, it could be said that the Asian economic crisis shocked the Japanese people and packed a greater psychological punch than its actual effects on the Japanese economy.
Additionally, the crisis has affected Japanese perceptions of the market economy and globalization. There is a widespread view that the Asian economic crisis illustrates the volatility of market mechanisms, thus damaging economic and social welfare. A popular practice of the Japanese media is to portray Asian countries as “victims” of market forces, and certainly the crisis presented a lesson in managing market forces, especially short-term capital movements. However, Japanese leaders need to resist interventionist efforts in this regard, which would unduly slow critical steps toward deregulation and structural reform so sorely needed in Japan.
Japanese policymakers must tackle two immediate issues, one abroad and one at home. The first involves assistance in the recovery of Asian economies. Japanese are always susceptible to the sentiments of Asian neighbors, and were struck with a sort of guilt when the Asian financial crisis hit in mid-1997. The Japanese felt responsible because their economy plays such a critical role in the overall Asian economic situation (Japan’s US$4 trillion GDP is twice as large as the remaining East Asian economies combined). As a result, the Japanese government has taken serious steps to rescue Korea, Indonesia and Thailand, offering support in the amount of $43 billion in cooperation with the United States and the IMF. In the fall of 1998, Japan further announced a $30 billion package (the “Miyazawa Plan”) to support the economies of selected Asian countries and help restructure weak financial sectors in the region.
Some argue that Japan can help most by stimulating its own economic engine to increase imports from the region. However, the increase of Japanese domestic demand will not be as great as expected, and relying solely on Japanese expansion will not be enough to pull regional economies through. Japan’s share of Asian exports decreased to around 13 percent in 1995 from 20 percent in 1980, while the weight of intra-regional trade grew to 40 percent.
That said, the second immediate policy goal for Japan must be to proceed with its structural reform. The Japanese economic and social systems are, in short, outmoded for an age symbolized by the rapid development of information technology. The Japanese system with such characteristics as lifetime employment and a seniority ranking system, long-term relationships among firms with cross share holdings, and a tax system in favor of larger firms, functioned well to develop manufacturing industries during the “catching-up” era. However, the system is ineffectual and even detrimental today when flexibility and speed count most. One of the lessons learned from the Asian economic crisis must be to control the market mechanism wisely, but that Japan should not slow down or reconsider policies for structural reform.
Nevertheless, these policy measures will not proceed smoothly, and may have some negative effects. For example, even though Japan embarked on various reform efforts in the 1990s-administrative reform, financial reform, political reform, and social reform-the economic crisis in Japan has now caused a backlash. Financial reform, which preoccupied every recent cabinet, has given way, at least temporarily, to a series of Keynsian stimulus packages. Administrative reform seems to have lost its momentum and become overshadowed by economic measures to combat recession and legislative and fiscal measures to rescue the banking system. In the short run, the current crisis has necessitated a larger government role, and “big government” seems revitalized. Regrettably, the reform effort and the economic crisis occurred simultaneously in the mid-1990s, making real reform difficult for both political and practical reasons.
Reform policies are also hindered by the fractious political system in Japan. Following devastating election defeats for the Liberal Democratic Party (LDP) in 1996 and 1998, Japan is now without a strong majority party. In search of stronger political leadership, politicians have sought a realignment of political parties once again. Prime Minister Obuchi and the LDP leadership, seemingly motivated by policy-oriented concerns, seeks to build alliances with Ichiro Ozawa and his Liberal Party. The question is whether this is a welcome sign of swift action or wavering in face of tremendous tasks ahead. At a minimum, it is not reform, but a reversion to the LDP-oriented “1955 System”. Some might argue that firm policies, not political in-fighting, are needed today. But necessity is the mother of invention and politics is a game of majority rule. Bold policy measures can only be taken by the power of a majority, meaning coalition- and consensus-building is all the more necessary. A concrete example of the problem concerns the rescue operation process for the Japanese banking system. It required a full two months before the Diet approved the necessary legislative measures to help the banking sector deal with the impact of the Asian financial crisis. This poses serious questions about the ability of Japan’s leaders to manage future economic crises.
Given these difficult conditions and hesitant responses, the Japanese are justifiably pessimistic about their future. According to a 1998 Asahi opinion poll, 79 percent of respondents are worried about their future, an increase of 10 percent over the previous year. Ironically, 65 percent expect the government to resolve the crisis, but 63 percent are unsure of its reliability. Some 95 percent want reform of the fundamental political and economic systems of Japan.
Japanese people have lost confidence in social, economic and political institutions. The “big is good” myth disappeared with the bankruptcies of big-name companies such as Yamaichi Securities and Long Term Bank and Trust. People have also lost confidence in a government that failed to promptly implement fiscal measures in the 1990s. People were deeply disappointed with the way the political leadership managed the economic downturn.
The crisis has also put Japan’s much-vaunted bureaucracy in the spotlight. Japanese bureaucrats have been harshly criticized domestically and abroad as an obstacle to reform, and a series of corruption scandals in the bureaucracy delivered a devastating blow to its reputation. Their perception about their role has changed considerably thanks especially to the progress of globalization. For example, at the Ministry of International Trade and Industry, protecting existing industries and firms does not mean much any more. What is important is to build an environment where businesses, irrespective of their nationality and sizes, find it worthwhile to locate themselves in Japan. In the process of deregulation, it is inevitable that bureaucrats’ roles will decrease further. It is a sound trend that Japanese politicians, instead of bureaucrats, play a larger role in policy decisions. Even so, the role of bureaucrats remains important because alternatives outside of government, such as think tanks, are not yet well developed.
Japan’s foreign policy activism might also suffer as a result of the Asian financial crisis. As a result of the diminishing degree of confidence among the Japanese people, Japan has become more inward looking. Foreign affairs are no longer a leading topic of conversation. Decreasing national income will force the national budget to be cut across the board for the next several fiscal years, and as a consequence official development assistance (ODA) will be one of the first victims. Serious discussion may question Japan’s annual contribution to the United Nations, which now accounts for 20 percent of the total UN budget. An influential Japanese politician recently noted, “Japan used to think seriously about how Japan should make contributions to the world as a responsible member of the international community. Now we have to think how we should avoid being an obstacle to the world.”
Finally, the socio-economic problems of Japan, exacerbated by the Asian financial crisis, give even greater weight to a perennially troublesome social issue. Japan’s most fundamental challenge is the fact that its population is rapidly aging while fewer children are being born. The total fertility rate (average number of births per woman) dropped rapidly, and stood around 1.39 in 1997. As a result of low fertility and long life expectancy (Japan has the highest life expectancy in the world), the Japanese population is aging at a rate no other country has ever experienced. The share of population aged 65 or over, which was 7 percent in the early 1970s, increased to about 15 percent in 1995. It is expected to reach 27.4 percent in 2025 and 32.3 percent in 2050. The average annual rate of increase of Japanese population is about 0.2 percent nowadays, and will turn negative after 2007. In 2050, the Japanese population will be around 100 million, decreasing by about 27 million. As the Japanese population is aging, people tend not to spend money preparing for an uncertain future. The savings rate remains high even after the government announced a series of economic stimulus packages. Ironically, even in the face of a deflationary economy, the Japanese, still stunned by the “burst bubble,” are more concerned with saving than spending.
In the end, Japan must work to make its social, economic, and political systems and institutions far more flexible and effective. It will be a long process. Even after the worst of the economic situation is past, Japanese people will still face an uncertain future. But hopefully, the Asian economic crisis, to the degree it accelerates reforms to meet these challenges, may have a silver lining for Japan over the long-term.
Regarded as an economic success story, the Republic of Korea (or South Korea) experienced a tremendous setback as the Asian financial crisis reached its shores in November 1997. Per capita GNP plunged from US$10,307 in 1997 to US$6,823 in 1998 as economic growth contracted by 5.8 percent in 1998. Real wages dropped more than 14 percent within a year and the unemployment rate soared up from 2.1 percent in October 1997 to 8.7 percent by February 1999.
Politically, the Asian financial crisis helped precipitate the shift in power to the opposition party in the December 1997 presidential election, bringing Kim Dae-jung to the Blue House. Some have argued that it was the nasty, mud slinging campaign that scared off investors skittish about domestic political stability. Either way, after the crisis, South Koreans sought an explanation. At first, Koreans blamed the IMF or high government officials of the previous government. But before long, they realized that things were not that simple, and soon turned to seeking effective solutions to the crisis.
Confronting this crisis has raised profound economic, social, and political questions for South Korea’s modernization and democratization process. The political leadership must balance the twin aspects of the “crisis”-defined in Korean as both “risk” and “opportunity”-to avoid worsening economic and social conditions. To do so, South Korea’s leaders will need to present a coherent vision for future development, accelerate assistance to those hardest hit by the crisis, work to build consensus with opposition political voices, and eschew politics in the pursuit of much needed institutional reform based on rational economic calculations.
At the governmental level, the newly elected leadership under Kim Dae-jung confronted four policy challenges. The first concerns laying blame for the crisis. One group in the new government sought to blame the previous Kim Young-sam leadership. Another group advocated national unity and argued against finger pointing. With the former group gaining the advantage, in early 1998, the new government put two high officials of the previous government in jail for mismanaging economic policies. The current government held politically rancorous congressional hearings, rather than rational, problem-solving efforts. This finger-pointing strategy might have eased the psychological stress of people to some degree and diverted people’s anger away from the new government, but this unprecedented and harshly political strategy triggered two side effects. First, government officials became passive and even reactive in taking policy initiatives, since a policy mistake could be treated severely in the future. Second, the new government lost political support from groups associated with the past government.
The second challenge confronting the new government was handling vested interest groups. Family-owned, large business conglomerates, known as chaebols, are among the most difficult of the vested interests to address. Chaebols have a strong influence over the media, and can strongly influence public opinion. At times, their influence comes from their direct ownership, but in many cases arises from their position as dominant advertisers and shapers of public opinion. Chaebol groups enjoy great influence with politicians, bureaucrats, journalists and academicians. Moreover, market forces work favorably toward chaebol groups. Even after the financial crisis, they have been relatively well funded, netting an increase in bank loans. Small and medium size industries have suffered from loan cutbacks. Since the chaebols’ role in the Korean economy is so great, even their “passive sabotage” could generate tremendous repercussions for the economy in the form of soaring unemployment and rising bankruptcies of small and medium industries related to chaebols as subcontractors. For example, the combined sales of the five largest chaebols (Hyundai, Samsung, Daewoo, LG, and SK) accounted for 37 percent of Korea’s gross output and their exports were 44 percent of the country’s total exports in 1998. Chaebols have already grown not only too big to fail, but also too big to reform. Many people argue this may be the last, best chance to reform the chaebols. Thus far, chaebol reform has been sluggish.
The third political challenge to the new government is how to insulate economic reform from political interference and excessive government intervention. For example, non-performing bank loans are estimated to be about 150 trillion won or 35 percent of GNP (around US$150 billion). As such, the Korean financial crisis implies first and foremost a need for new capital. The government will re-capitalize most banks to rescue them, but in this process the government could wind up controlling the banks. Similar relations exist between banks and corporations. The average debt-equity ratio of Korean corporations is very high. The average debt-equity ratio of the top 30 chaebols hit 802 percent at one point in the summer 1998. In the process of corporate restructuring more corporations will inevitably come under the control and supervision of banks. Thus, the government’s direct control over banks and indirect control over big corporations will be accelerated. Ironically, to overcome the current economic crisis Korea should move towards a more market-oriented system, but on the way should pass an interim period of more government domination over the economy. Government influence in the process of banking and corporate sector reform will open new possibilities for intervention and political favoritism. Political patronage will hinder economic restructuring and could spark political tensions. Separating politics and structural reform will be especially difficult in 1999 and beyond: the biggest political debate for the future-plans to change South Korea from a presidential to a cabinet-style system-will likely hinder progress on economic reform.
The fourth political challenge is how to build a national consensus to achieve these much-needed reform measures. In this regard, the first target must be to overcome a government divided at the executive level and at the legislative level. The executive is divided between two parties, that of reformist Kim Dae-jung and that of traditionalist Kim Jong-pil, leader of the third major party. Starting as a minority party in the legislature, the new government succeeded in becoming the majority. But in the process, they faced strong resistance from the opposition party and criticism from the public. As its honeymoon period fades, the new government must build a broad political coalition for reform at executive, legislative and national levels.
The rise in South Korean unemployment has been quite dramatic since the crisis began. Before the crisis, the unemployment rate was relatively stable, ranging between two and three percent. But it has since jumped to seven and eight percent. However, this figure does not include discouraged persons leaving the labor market due to poor job prospects. With those workers, the rate amounts to at least 10 percent of the total labor force, well over 2 million people. The rate will almost certainly continue to rise as the chaebols and public enterprises begin their restructuring and downsizing. Unskilled manual workers, middle-aged household heads, males and temporary and day workers are those most severely hit by unemployment.
In response, the government should carefully consider two enhanced policy packages. One is extending the unemployment insurance program and the other is expanding the public assistance program. Even though there is an extended unemployment insurance program, unemployment benefits still cover only a small fraction of the unemployed. Moreover, the initial program tended to benefit relatively well off workers unemployed in large-scale industries. As of June 1998, among the 1.5 million unemployed persons, only 7 percent (about 105,000) received unemployment benefits. In addition, the duration of the period of unemployment benefits is too short and the level of benefits paltry. For most unemployed persons, the benefits only last two to three months and the minimum level of benefits equal to about 70 percent of the minimum wage.
Secondly, for those who are not covered by unemployment benefits the only social safety nets available are public assistance programs, but very few workers are eligible. Owing to a strict eligibility test, as of June 1998, only about 8.8 percent of the unemployed were receiving public assistance. The only alternative protection is private safety nets, namely private savings and help from relatives and friends. Workers covered neither by unemployment benefits nor by public assistance programs amounted to about 85 percent of the unemployed in June 1998. To reduce this problem, the following policy package should be explored. First, the expansion of unemployment insurance coverage should be accelerated and the duration of the benefits should be significantly extended to at least six months or one year without any conditions. Second, the eligibility test of the public assistance program should be relaxed. Third, a public works program, such as the one proposed for the 1999 budget, should receive more attention. Finally, new administrative resources and institutions should be created to deal with unemployment, a relatively new and previously little known problem for South Korea.
Another important social issue is related to the strength of labor unions in South Korea, and their willingness to accept industrial restructuring. Union leaders, including radical ones, are very practical. They are not ideology-oriented. Their prime goal is the improvement of living standards for their rank-and-file. Rank-and-file members support economic unionism, not political unionism. Thus the unions are not likely resist industrial restructuring too strongly. As indicated in Table 1, union membership, penetration, and disputes have declined considerably since their high points in the late 1980s. There has been no significant departure from this trend since the Asian financial crisis began. Currently, unions are worried that the burden of restructuring may be imposed unfairly in the form of massive lay-offs. Unions complain that corporate and public sector reform proceed too slowly, and that business and government are not sharing the burdens of restructuring. Unions will accept lay-offs grudgingly, if burden-sharing is distributed fairly.
To encourage further cooperation with labor, the government should reactivate the Tripartite Commission. The Commission was established in January 1998, and labor, management, and government together discussed ways to overcome the economic crisis. However, following some initial agreements in February 1998, the Commission lost momentum. A reactivation of the Commission would mark significant step toward the political inclusion of labor, which is indispensable not only for successful economic restructuring but also for the advancement of democracy in Korea. In following these steps, industrial and labor relations should not be a big hurdle for the restructuring of the Korean economy.
Table 1: Indicators of Labor Relations in South Korea, 1980-1998
* For 1998 figures: union membership not official, but declarations by unions; labor disputes as of September 1998. Source: Ministry of Labor, Republic of Korea
The Asian economic crisis indirectly affects Russia as the global financial contagion exacerbated already difficult economic times for the country. In many ways, Asian economic problems marginally influence the larger strategic and political considerations of Russia in its relations with the key actors in the region. In particular, for Russia’s Far East the Asian economic crisis undermines what little prospects existed for the region to take advantage of integration with formerly burgeoning Asia-Pacific economies. In this context, the future social, political and economic viability of the Russian Far East will greatly depend on its ties to Japan and China, and, to a lesser extent, other important economies of the region.
Notwithstanding Russia’s presence in Northeast Asia as a superpower in the recent past, Russia’s ties with the region in trade, finance, information, demographic and other economic areas-with the exception of China-are very limited. Basic statistics convincingly illustrate this: in 1997 Russia’s share of total trade within the Asia-Pacific region was less than 1 percent; in 1992-1997, direct foreign investment to the Russian Far East was only US$2.8 billion.
For the last couple of years, the Russian economy and society has undergone a troublesome, uneven but still evolutionary and relatively peaceful transformation of its centrally planned economy to a market-oriented economic model, with an expanding share of private and corporate property. This multidimensional transformation is unprecedented in history, given Russia’s massive economy, large population, ethnic and territorial diversity, and historical and ideological heritage. Late in the summer of 1998, the Asian financial contagion reached Russia, and this transition evidently entered into a new, critical phase: the ruble was devalued, triggering an abrupt rise in inflation and the budget deficit grew to record heights, pushing the government to default on most of its internal and external obligations.
During these transition years, Russia has relied substantially on borrowing from the West. Financial aid provided either on a bilateral level or through international financial institutions, turned out to be an essential (if not the primary) form of economic relations between the world’s leading market economies and Russia. Given this background, the most negative impact of the Asian financial crisis on Russia lies in the fact that the growing “introspection” of Asia’s economic powers mostly affected by the crisis-Japan and Korea in particular-and their preoccupation with rehabilitation and domestic restructuring will seriously diminish their capacity to help support Russia as financial donors or investors. Others in the region will likewise be cautious as investors given their own domestic and regional concerns in the wake of the crisis.
In light of the financial situation, Russian policymakers face numerous policy challenges. Two in particular relate to Russia’s ties to East Asia. One involves responding in ways which leave the door open to improved economic and political relations with Japan. Of all the Asia-Pacific states affected by the crisis, Japan is potentially the most capable of investing and most likely to benefit (in a long term perspective) from an economic presence in Russia’s Far East. Prior to the Asian financial meltdown, however, Japanese government and business entities were already refraining from substantial investments and were not very active in international aid programs for Russia. The Japanese stance was motivated partly by the former Soviet Union’s debts to the Japanese commercial banks, but mainly by “political obstacles”-the stumbling block of the “Northern territories” issue. The settlement of this problem, sensitive to both countries, was considered by the Japanese government as a necessary prerequisite to any substantial investments or serious economic aid to Russia.
In April 1993 Japan hosted the G-7 special conference on aid to Russia during which the total sum of US$52.2 billion was pledged through various channels, but only less than half of this figure-US$ 23.4-eventually came to Russia by the end of 1998. In the summit’s final communiqué, Japan avoided reference to the “Northern Territories,” the first time since the 1990 G-7 summit that such a passage was not included. More recently both countries showed greater flexibility in their approach to the issue of the “Northern Territories”. The main outcome of three Russian-Japanese summits in 1997-1998 was an announced intention to sign a peace treaty by 2000.
While this may raise the prospects of Russia-Japan political and economic ties, the economic difficulties of Japan, and the obvious constraints they have for international aid and investment programs are now turning out to be new, serious impediments for improved relations between the two countries. It is difficult to forecast how serious these obstacles will be, or how long it will take the Japanese economy to recover, though it is certainly likely to be several years. Gaining “investment activism” strong enough to brave the risks of the Russian economy will take even more time. Meanwhile it can negatively affect peace treaty negotiations, weakening the arguments and positions of those forces inside Russia-especially in the Duma-which support Moscow’s concessions on the islands issue.
There are also many reasonable arguments that even with a peace treaty, Japanese-Russian economic cooperation is unlikely to boom in the short term. First, the investment environment in Russia-its political, legal and economic dimensions, especially in the wake of the ongoing financial crisis-will not be attractive to serious Japanese consideration for a long time to come. Second, Japan’s main priorities in economic cooperation with Russia are energy and resources. These projects are costly, long term and require government guarantees-all factors hindering swift implementation. Third, during the last several decades of stalemate with Russia, Japan invested in many energy projects in the Middle East, Indonesia and recently in Central Asia. As a result, there is no immediate, direct need for Russia’s energy and resources.
A second major policy challenge for the Russian leadership vis-à-vis East Asia involves integrating the Russian Far East more directly into the region. The Asian economic crisis-especially if the period of recovery of ailing economies is prolonged-will obviously impede Russian economic “proto-integration” with the Asia-Pacific. While this is negative for any country, it will affect “outsiders” such as Russia the most. The optimistic possibilities that were looming in front of Russia after her admission to the Asia Pacific Economic Cooperation (APEC) group in 1997 are now on indefinite hold. More than that, the slowing of Asian integration can influence not only the pace but also on the “geoeconomical” direction and model of Russia’s interaction with the Asian Pacific economies.
There are two main points of view regarding Russia’s ability to “plug into” Asia’s economic and political network. The first stipulates that Russia’s “direct” connection to the Pacific through a rather narrow zone in Russia’s Maritime Province with its ice-free ports (Vladivostok, Nakhodka) is the only route and the one most favorable to Russian long term political and economic interests. Notwithstanding its geographic remoteness and vulnerability, the area is potentially capable of becoming Russia’s gateway to the Pacific region. However, beyond this zone the bulk of Russia’s Far East is underpopulated, semi-arid land, lacking any significant transportation or economic infrastructure. It is connected to Russia’s core by two main railway routes, and boasts only a minimal economic and energy infrastructure to support its chain of military-oriented enterprises.
The proponents of this viewpoint argue that in order to be linked to Asia’s Pacific economies, Russia should use to the utmost the positive experience of China’s Special Economic Zones (SEZ). Even though Russia is lacking the two main cornerstones of Chinese SEZ success-an abundance of cheap labor and capital from compatriot’s abroad-it has some alternative strong points that can be of relative interest to foreign investors. Russia’s labor force is generally more skilled, giving better opportunities for high-tech oriented joint ventures and a possibility to find certain niches in the Asia-Pacific market. The facilities of relatively advanced, converted defense industries in the Far East could be an asset for such high-tech oriented export strategies.
A contrary view argues the unfeasibility of Russia’s “direct” outreach to the Pacific through its ice-free ports. Proponents question the ability of the Russian Far East to attract substantial foreign capital. To do so, the argument goes, Russia needs serious national programs to develop regional infrastructures and encourage eastward migration. However, such costly programs are overly-ambitious for the near future.
Thus, a third policy possibility arises for Russian political and economic integration in the region: striving for the economic “permeability” of China and Chinese ports on the East China and South China Seas. This scenario implies a very high level of political and strategic cohesion between Russia and China-expanding trade, capital and know-how exchanges over the now-friendly border, realization of the mutually advantageous compatibility of both countries economies and development of higher economic and political interdependence. Though not readily apparent, this compatibility already exists in terms of labor force, technical capabilities and sufficiency of energy resources.
This scenario, though weak in some respects-the most obvious being Russian geoeconomic vulnerability and dependence on China-should be seriously considered as a feasible policy alternative. Proponents of this approach argue that Russia’s effective potential presence in the Pacific-both economic and political-will never be possible if they are in confrontation with Chinese interests. Moreover, such a policy approach can take advantage of the current positive state of bilateral relations between Beijing and Moscow. With diminishing possibilities of substantial capital and investment flows to Russia from Japan or Korea, the crisis tends to favor a near- to medium-term China-oriented scenario as a Russian policy strategy for its Far East.
This approach also recognizes Chinese motivations. First, Russia’s growing weakness, the prospects of its subsequent degradation, and even territorial disintegration, are not in China’s long-term interests. Due in part to its internal evolution, but mainly to its preoccupation with economic reforms, Russia is no longer viewed by Beijing as a threat or rival. On the contrary, Russia and China, being two states that are reforming their societies and economies in a pro-market direction while possessing a system of “nonwestern” political values and priorities, are sharing more and more similarities in their interactions with the outside world. Numerous recent signs of growing geopolitical and diplomatic ties between Moscow and Beijing confirm this.
Second, Russia’s possible geoeconomic connection through China to Pacific Asia coincides with China’s own geostrategic orientation. Many obvious factors indicate that China’s geostrategy now is oriented toward the south and southeast-the region where the most economically dynamic provinces are situated. This is the direction of the most important financial, transportation and raw material flows to and from China. The southeastern coast plus Taiwan is a strategically important region for China and also its most vulnerable area, given the relative weaknesses of China’s fleet and vulnerability of its sea communications. With these southward oriented priorities Beijing would seek to stabilize relations with it northern neighbor. Last but not least, any development scenario for China’s economy envisions a growing demand for imported resources and energy. According to various estimates, China’s aggregate energy consumption will range from 10 to 20 percent of the world total by mid-century. Because of China’s efforts to diversify its energy sources, less costly and less strategically vulnerable sources in Russia and Central Asia will likely be given a high priority in Beijing.
It goes without saying that, given the current economic troubles of Russia, a Russian-Chinese geoeconomic convergence is more a scenario for the future rather than today. Russia’s current agenda is halting the further degradation of Russian territories to the north of the Russian-Chinese border rather than acquiring “permeability” of Chinese territories. Economic and energy shortages in the Russian Far East have triggered migration flows back to the center of Russia, exacerbating the underpopulation problem of the region. The Maritime Province, to name only one example, is seriously weakened by prolonged conflicts-both personal and political-between the governor of the province and the Vladivostok city mayor. The governor of the province criticized Moscow’s flexible territorial policy with China and in so doing negatively influenced bilateral normalization until the full demarcation of the border in 1998.
Russia’s economic and political stabilization is a necessary prerequisite to its sound economic positioning in Pacific Asia. This stabilization can be achieved mainly through internal efforts, and only then can Russia benefit from shared political and economic priorities with other states, be it China or its other Asian Pacific neighbors.
As a liberalized market economy, the Republic of China on Taiwan is not immune to any international financial crisis. Ever since the depreciation of the Thai baht in early July 1997, Taiwan was gradually drawn into this expanding financial storm. Proudly bearing the title of “economic miracle” for more than a decade, Taiwan’s threshold of tolerance for economic suffering has in fact become very low. Despite indicators and statistics showing that Taiwan is the best performing regional economy in the crisis, people on Taiwan still worry about a further downturn in the economic situation. On balance, one could describe Taiwan as alert, but not pessimistic.
Asian financial problems hit Taiwan in three general areas: finance, economics, and industry. The New Taiwan Dollar sharply devalued, interest rates were driven up, and the stock market plunged. Economic growth reached its lowest point in decades. Taiwan’s exports also suffered as other competitors in the region devalued their currencies far more than Taiwan’s, which in turn hurt Taiwan’s market share overseas.
A listing of certain economic statistics offer a good indication of how Taiwan has fared the outbreak of the crisis in mid-1997. To begin with, Taiwan’s economic growth declined to 5.1 percent in 1998, much lower than the goal of 6.7 percent. At the same time, Taiwan’s exports in 1998 decreased 9.4 percent from 1997, the steepest drop in 43 years. Imports also decreased 8.5 percent in 1998 below the 1997 figure. Consequently, the foreign trade surplus declined more than 20 percent to only US$5.9 billion, the lowest level since 1984. Industrial production in the first 11 months of 1998 was 4.3 percent higher than the same period of 1997, but the growth rate reached only half of the 1997 record. Owing in part to industrial growth, Taiwan’s unemployment rate was only 2.66 percent in the first 11 months of 1998, actually down 0.1 percent from 2.7 percent in 1997. Domestic prices in Taiwan remained stable as the wholesale price index and consumer price index in the first 11 months of 1998 was only about 1.6 percent higher than the same period in 1997. However, from the end of June 1997 to November 1998, the New Taiwan Dollar was devalued 14.2 percent, and over the same period Taiwan’s weighted stock index declined 20.5 percent.
The Taiwan government uses a five-color rating system to measure the country’s monthly economic performance based on nine major economic indicators. Since the Asian financial crisis, Taiwan remained in the green zone (steady growth) until March 1998. From March to September 1998, the rating went into the yellow-blue zone (economic slowdown), and since October 1998, the economy fell into the blue zone indicating a recessionary economy for 1999.
Thus, Taiwan has not been immune from the Asian financial crises and its economy has suffered to a considerable degree. Nonetheless, Taipei has been able to minimize the negative impact of the Asian economic meltdown due to sound economic fundamentals and effective policy measures. Taiwan had large foreign currency reserves totaling US$83.5 billion at the end of 1997. Such huge reserves provide Taiwan both confidence and credit to take on financial challenges. Taiwan’s current accounts are in good condition with only a small amount of foreign debt. Its public debt was only US$100 million while its private sector debt was US$30 billion against foreign assets of US$35.5 billion. In addition, Taiwan’s high savings rates have exceeded investment every year for the past 10 years; Taiwan has enjoyed a current account surplus for the past 10 years. Taiwan’s economy is largely based on small- and medium-sized enterprises, which have greater flexibility than large multinational corporations in adjusting themselves to cope with a changing economic environment.
Taiwan initiated its economic and financial liberalization measures, which have covered interest rates, exchange rates, and capital movement, almost 15 years ago. The early start in the deregulation and “re-regulation” of the banking system kept Taiwan’s financial institutions relatively healthy before the crisis broke out. Taiwan’s floating exchange rate system, in place since 1979, and the prudent policies of the Central Bank of China in allowing the exchange rate to be determined by the market since October 17, 1997, have eased the economy’s ability to adjust. Flexible foreign exchange rates, backed by timely and decisive central bank intervention, has ensured stable currency value.
Taiwan believes its economic foundation is in good shape and the policy of liberalizing financial markets has brought positive results. Consequently, the government’s measures in managing the crises are focused on “precision strike” solutions rather than reforming the country’s fundamental economic structure like other Asian economies. In defense of currency values, Taipei generally gave the market a free ride with a few selected interventions in foreign exchange markets in order to maintain the New Taiwan Dollar within a reasonable range. As for stock prices, Taiwan’s reactivated its “wartime” experience learned during the missile crisis in 1996 by mobilizing large banks and business conglomerates, together with the government, to form “stock market stabilizing funds” and intervened jointly to prevent an abnormal fall of the stock market. Other measures include providing tax incentives and low interest rate guarantees to first-time home buyers in order to overcome deflationary pressures in the real estate market.
In order to weather the financial storm in a more organized way, the Taiwan government adopted an economic package in August 1998 aimed at stimulating domestic demand by increasing public spending and by promoting private investment. To increase public spending, for example, the government is carrying out several plans including: public transportation systems, a high-speed railway across Taiwan and a public transit system between downtown Taipei and Chiang Kai-Shek International Airport in Taoyuan; 24 water conservation and environmental protection projects; an improved national information infrastructure including nation-wide information education, a global Chinese language network, and office automation in all local governments. According to the government, by increasing public spending in fiscal years 1999 and 2000, the Taiwan economy will increase its industrial output to US$12.5 billion, create more than 130,000 jobs, and raise an additional US$31.5 million in tax revenue.
To facilitate private investment, the government established a coordination center to promote 541 manufacture investment projects, eleven power plants, two large export processing and transshipment centers, and other investments in hotels, entertainment centers, and resort areas. In comparative terms, Taiwan has been able to minimize the negative economic impact from the Asian financial crises and keep the best performance record in the region.
Nearly two years into the Asian financial crisis, Taiwan’s financial misery index shows the island is the least affected economy in the region. The index represents the combined declines in a country’s foreign exchange rates and stock prices. The greater the change in a country’s score from the previous year, the more it has suffered from the region’s economic crisis. Taiwan’s index dropped 34.7 points between July 1997 and November 1998, the second lowest decline among all Asian economies after Hong Kong’s 31.4 points. Taiwan’s decline resulted from a drop in foreign exchange rates and a 20.5 point drop in stock prices. The world’s second-largest economy, Japan, saw its score tumble 35.5 points, while Singapore’s index dropped 42.1 points. Faring worse were the Philippines, Thailand, South Korea, and Malaysia. Indonesia performed the worst with a 114-point plunge between 1997 and 1998.
Economic indicators and statistics show that Taiwan was able to avoid the worst of the financial storm. In addition, developments on the social and political front provide further evidence that people in Taiwan responded to the regional chaos in a unique way. When the regional financial turmoil led to a change of government in countries such as Japan, Korea, Indonesia, and Thailand, the ruling Kuomintang (KMT) government in Taipei seemed unaffected. During the December 1998 general parliamentary elections, the Asian financial crisis and domestic economic problems never became a major subject of debate among candidates. The big victory of the ruling KMT in the election, in a way, represented general approval of the government’s ability in managing economic and financial problems. Of the top 10 domestic issues in 1998 highlighted by Taiwan’s national press club, President Clinton’s pronouncement of the “three noes policy” and the resumption of cross-Strait dialogue were the two dominant issues which caught the Taiwanese people’s attention. One may be surprised by the fact that Asian financial problems did not even make the list.
For Taiwan, the downside has been the inability of the government to capitalize on the country’s relatively good economic performance and financial capability to accelerate Taiwan’s participation and visibility in international economic fora. First, Taipei felt that the crises gave Taiwan an unprecedented opportunity to use its financial leverage to improve its bilateral relations with several Southeast Asian countries. But high level visits between Taiwan and Southeast Asian countries, even under the format of airport transits, were strongly opposed by Beijing and resulted in only minor accomplishments. Second, since Taiwan is denied membership in the International Monetary Fund, the only way to contribute to international efforts in managing the financial crises was to work through regional multilateral mechanisms such as APEC and the Asian Development Bank (ADB). However, the United States and some governments did not want non-IMF organizations to press financial reform in some Asian countries. Hence, Taiwan’s effort to increase its international visibility failed again.
In a third case, the United States invited the seven major industrialized nations and more than a dozen newly developed economies to discuss ways to deal with the global financial crisis. Unfortunately, with China’s strong opposition, Taiwan’s finance minister and central bank governor were not invited to Washington in the summer of 1998. In the most recent case, President Lee Teng-hui suggested in early 1998 that Taiwan and mainland China cooperate to deal with the Southeast Asian financial crisis, and Taiwan’s top cross-Straits envoy, C.F. Koo, suggested the idea again when he visited Beijing in October 1998. So far Beijing has not responded.
Based on statistics published by the government, since the Asian financial crisis, Taiwan’s first-year economic performance was excellent by Asian standards. In sum, in spite of the negative impact of the crisis, Taiwan continues to have extra energy and capital to weather regional financial problems, and offer assistance to neighbors in need.
The real issue here is whether China and Russia will be prepared to go into domains that until now they have not been prepared to enter and that very specifically concerns oil.
If the Chinese and the Russians both would be prepared to limit, or suspend outright, oil deliveries to the north, that's a very consequential step. It may have a much, much more potent effect than all of these issues related to sanctions.