By Yong Kwon
Since the news broke that Larry Summers is advising the Biden campaign, several progressive commentators and organizations have called out the former Treasury Secretary’s regressive politics on income inequality and environmental regulation. And, of course, his past sexist remarks on women, science, and math will haunt him forever.
Adding to this growing list of reasons that disqualify him from shaping the Democratic Party’s policy platform, Summers’ approach to international economic policy compromises the welfare of workers. He also lacks the vision to coordinate a much-needed international response to recurring global crises. His actions during the 1997 Asian Financial Crisis showed remarkable apathy toward marginalized communities, especially women. Moreover, his poor stewardship of that financial maelstrom directly contributed to the 2007 global financial crisis. It is time for Democrats to move on to thinkers who rightly focus on international solidarity and economic justice everywhere.
Larry Summers has an exceedingly poor record in crisis management. In 1997, as US Deputy Secretary of the Treasury he led Washington’s effort to contain the financial panic that was sweeping East Asia. Foreign investors were withdrawing money from the region, exhausting reserves of US dollars in countries like South Korea and bankrupting local companies that relied on international loans.
Summers and the International Monetary Fund (IMF) shared the view that the afflicted economies were struggling because unsophisticated regulators had allowed corrupt banks to lend irresponsibly to bloated companies (not something that could ever happen in the West, of course).
Reflecting this disdain, the IMF demanded onerous concessions from afflicted economies as preconditions for receiving emergency loans. These included not only demands for more stringent regulation of the financial market, but also relaxation of employment protections. The right of workers to collective bargaining and protections from arbitrary layoffs were seen as impediments to companies’ ability to generate profits and pay back Western lenders.
This was an unconscionable demand. At the time, 48% of South Korea’s labor force (approximately 6 million workers) already worked in jobs with an employment contract of less than one year. These “irregular contract workers” were paid less than their peers with full-time contracts while doing similar work. The growing number of these irregular workers suppressed wage growth.
Nevertheless, Larry Summers defended the IMF’s insistence that Korea allow corporations to more easily terminate employment contracts – suppressing wage growth even further. Workers who were already marginalized were disproportionately dispossessed of stable employment and faced wage repression as irregular workers. Between 1997 and 2000, the number of workers without full-time contracts increased by over 800,000. More than half of the entire labor force was employed on an irregular basis. Female workers in particular faced greater hardships as the IMF forced Seoul to lift labor laws that acted as a check on gender discrimination.
The presence of a large irregular workforce remains a serious social and economic challenge in South Korea today (and a central theme in the Academy Award-winning film Parasite). It is an economic problem because their low wages inhibit the growth of a more dynamic consumer market; and a social obstacle as women and other marginalized groups are relegated to irregular contract work – and the resulting economic insecurity exposes them to further abuse and exploitation. During the 2007 global financial crisis, 75% of the jobs that were eliminated in South Korea belonged to women.
No International Solidarity
While the US Treasury ultimately succeeded in stopping capital flight by coordinating an IMF bailout and asking US banks to roll over their loans to the region, the fumbled response to the Asian Financial Crisis sowed the seeds of the Great Recession.
The IMF bailed out Asian economies too late to forestall the worst of the damage, but still expected local governments to implement painful structural adjustments. This was accompanied by other counterproductive recommendations like raising interest rates that made credit even more scarce.
Figures like Summers displayed no concern for their social consequences, leading to the widespread view among East and Southeast Asian governments that they could not rely on international solidarity to address future crises. And to hedge against future shocks, post-crisis Asian governments began building up their reserve of US dollars.
This response had two consequences. First, East Asian economies committed less resources to public investments because they diverted export earnings to purchase US treasury bonds as insurance against a future crash.
Second, Asia’s heightened demand for US financial products depressed the cost of borrowing in the United States and fueled the housing bubble that popped catastrophically in 2007. While not the principal cause of the global financial crisis, Asia’s appetite for American securities amplified the problem by delivering more capital to irresponsible actors on Wall Street who were making risky bets on the US housing market.
Not the Right Guy
It is, therefore, deeply ironic that the Obama administration sought out Summers when it was addressing the 2007 financial crisis. Larry Summers remains unrepentant about his approach to the Asian Financial Crisis, characterizing the US/IMF response as “successful.” And under his stewardship, the financial sector came out of the Great Recession practically unscathed while millions of Americans never recovered.
Turning to Summers for advice again in the ongoing economic crisis would be turning a blind eye to his repeated failures to protect the most vulnerable members of our community and create a collective response to prevent these recurring crises from overwhelming countries.
Larry Summers succeeded in establishing an austere world order where pervasive economic insecurity crushes marginalized workers. At a time when we have our own precariat, he is definitely not the man of the moment. He also failed to build a collaborative environment where governments do not undermine the financial stability of other countries to hedge against unforeseen risks. Given this record, the electorate is right to demand that the presumptive Democratic nominee choose new economic counsel. The Biden campaign would be wise to do so if it intends to build a more equitable society.
But it is not sufficient to relegate Larry Summers to the dustbin of failed economic policies. The next administration must proactively pursue an international economic policy that rejects austerity and reorients policies toward protecting the most vulnerable members of the global community from penury and abuse. There is much work to be done.
Yong Kwon studied economic history at the London School of Economics and moderates the subreddit r/EconomicHistory. He is currently the Director of Communications at the Korea Economic Institute of America. Views in this post are his own and do not represent the official position of the Korea Economic Institute of America.