seemed, was their future. But, as if to symbolize how bumpy the road to fast growth could be, they found themselves booked into a not-quite-finished luxury hotel in which the water supply was quite unpredictable.
After four days of discussion in Jakarta, they agreed to raise their production quota by two million barrels per day. This decision was intended to end the wrangling over quotas and overproduction among members. It was read by some as a bet on Asia’s future, but it also had another, much more specific purpose. Some of the countries, notably Saudi Arabia, were quite aggravated that other countries, particularly Venezuela, were producing at their maximum capacity, not at their quotas, and thus taking market share at Saudi Arabia’s expense. Raising the quota at Jakarta would level the playing field. Now all the exporters could officially essentially produce at their maximum. Market conditions seemed to necessitate the increase. World consumption had risen more than two million barrels per day between 1996 and 1997, and the International Energy Agency was predicting that the world’s consumption would rise by another two million barrels per day in 1998. “Price will hold up,” the oil minister from Kuwait said confidently after the decision was announced. “The rise is a very reasonable one.”
That judgment was widely shared. An observer described market conditions as nothing less than “the alignment of OPEC’s economic stars.” But, in the heavens above, the stars were silently moving.2
“ESSENTIALLY ALL GONE”: THE ASIAN FINANCIAL CRISIS
During the course of the Jakarta conference, two of the delegates to the meeting were taken to dinner by the head of the local International Monetary Fund office. He told them in no uncertain terms that the currency crisis that had begun a few months earlier was only the beginning of a far more devastating crisis—and that the Asian economic miracle was about to crash on the rocks. The two delegates were shaken by what they heard. But the decision to raise production, based upon an optimistic economic scenario, had already been taken. It was too late.
“Asia was the darling of foreign capital during the mid-1990s,” and it became the beneficiary of a “capital inflow bonanza,” a great flood of lending by international banks. As a result, Asian companies and property developers had taken on much too much debt—and much of it dangerously short-term and denominated in foreign currency.
It was overleverage in the overheated and overbuilt condo and office building sectors in Bangkok that caused the collapse in July 1997 of Thailand’s currency, which in turn triggered the fall of currency and stock markets in other Asian countries. By the end of 1997, a vast panic was raging over large parts of Asia. Companies tumbled into bankruptcy, businesses closed, governments teetered, people were thrown out of work, and the high economic growth rates gave way to a virtual economic depression in many countries.
At the end of 1997, Stanley Fischer, the deputy director of the International Monetary Fund, hurriedly flew to Seoul. He was taken into the vault of the South Korean central bank so he could see with his own eyes the state of the country’s financial reserves—that is, how much money was left. He was stunned by what he discovered. “It was essentially all gone,” he said.
By then the panic and contagion was spreading beyond Asia. In August 1998, after teetering on the edge of crisis, the Russian government defaulted on its sovereign debt, sending that country into a sudden downward spiral. The ruble plummeted in value, and the Russian stock market fell by an astounding 93 percent. The new Russian oil majors could not pay their workers and suppliers. Salaries were slashed; some of the most senior managers were down to $100 a month.
Wall Street teetered on the edge when the highly levered hedge fund Long-Term Capital Management collapsed. Panic in the United States was averted by fast action by the New York Federal Reserve. In early 1999 the contagion seemed about to sweep over Brazil, threatening what U.S. Treasury Secretary Robert Rubin called an “engulfing world crisis.” An immense rescue effort, mobilizing very large financial resources, was mounted to prevent Brazil from going down. It worked. Brazil was spared. By the spring of 1999, the panic and contagion were over.3
THE JAKARTA SYNDROME
The Asian financial crisis had generated enormous economic ruin. As a result, the assumptions at the end of 1997, embodied in the Jakarta agreement, were all wrong. By implementing the Jakarta agreement, OPEC had been increasing its output—just as demand was falling.
Now