Lee Kuan Yew, Abstraction, and the Limits to Human Knowledge

1997—Amid cheers, wails, toasts, tears, triumphs, and treachery, the financial battle between Thailand’s government and the world’s hedge funds had been settled.

The hedge funds had won. As their managers and clients toasted to newfound wealth, Thailand and much of Asia was sent reeling into one of the worst economic recessions of the century.

Stanley Fischer of the International Monetary Fund was one man amongst many who watched the chaos unfold. As he recalls, “I went to Bangkok in 1997 […] Thailand had fixed the value of its currency in dollars [and] people began to wonder ‘do they really have enough dollars to always be able to give me dollars in exchange for the baht, the Thai currency I have?,’ and when they begin to wonder about that, they start asking for the dollars, and then they attack the currency.”

And attack the Thai currency they did. The method? Shorting—an investing practice of “selling” something you don’t have and promising to buy the original amount later. People shorted the Thai baht in large droves, testing the Thai government’s limits. Investors all across the world who shorted the Thai baht placed a bet that the Thai government wouldn’t have enough foreign reserves to keep the baht pegged to the dollar.

Overwhelmed, the Thai government was forced to unpeg the baht. Investors, who could now “buy back” the baht at a steep discount, made millions. To use Thomas Friedman’s words, the “electronic herd” had pounced upon the baht mercilessly.

But the story didn’t end there. The collapse of Thailand’s economy—a very small portion of the global economy—made perky investors wary of neighboring countries. If Thailand’s currency was destabilized, what about all the other South-East Asian countries?

As Lee Kuan Yew, the senior minister of Singapore lamented, “the fund managers didn’t know the difference between Indonesia and Malaysia, Thailand, Singapore. They just said, ‘I want out.’ Property prices collapsed; companies collapsed. And in the case of Indonesia, the social fabric collapsed. Churches have been burnt; mosques have been attacked; they have killed each other. This will take years to heal.”

What began as a scheme by investors to create a rupture in market stability and earn easy money triggered a regional phenomenon. Millions of people in Asia saw their livelihoods change for the worse.

It would be easy to say that this episode is just another example of investors’ greed and seemingly mechanical lack of empathy.  But as Lee Kuan Yew so perceptively saw, there’s more to the story. To investors, “South East Asia” wasn’t a cartographic area demarcating an area brimming with a variety of different dialects and distinct cultures.  In their eyes it was a homogenous bloc—a lump of countries of little notable differences—and when Thailand went sour, they were quick to assume that others would too.

What’s particularly frightening about the Asian financial crisis is the limit of human knowledge. No matter how cautious investors are, they must accept some level of abstraction because it’s impossible to know everything about a particular country. In fact, from an epistemological perspective, people make abstractions every day for the sake of molding their knowledge into something that’s easy to organize and understand.

As many economists and politicians are already aware, the 21st century will see a rise in Asia’s growing importance in the world. Thus it is more important now than ever before to realize the differences between each country, each region, prefecture, city, town, and village—no matter how daunting the task may be—lest we dare trigger a catastrophe of even greater proportions.

Japan is no anomaly in the matter. Eisuke Sakakibara, commonly known as “Mr.Yen” notes: “one sector of the Japanese economy is an export-oriented sector which is highly competitive, consisting of Toyota’s and Sony’s. And the other is [the] domestic manufacturing sector which is extremely uncompetitive. We have a market-oriented capitalistic system on one hand; we have a very socialistic, egalitarian sector on the other.”

While most of the world only knows the former aspect of Japan, it is precisely the latter that has derailed Japan from its phenomenal growth in the 80’s and continues to be a nagging problem today. Japan is still an industrial giant, but at the same time it also has highly inefficient domestic industries. Both are part of Japan, but eventually Japan will have to pick one course over the other. This is one particular kind of diversity that Japan cannot afford to harbor for long.


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