Wall Street Journal - 10/06/98
By MICHAEL M. PHILLIPS Staff Reporter of THE WALL STREET JOURNAL
WASHINGTON -- This week was supposed to mark a turnaround for the global economy, as the U.S. and other economic powers
finally began to beat back the worst international financial crisis in half a century. Instead, it is shaping up to be a disappointment.
The U.S. and others in the Group of Seven, a coalition of major industrialized nations, this weekend outlined modest plans for
stopping the financial contagion that has infected economies from South Korea to Brazil. And, at meetings of the International
Monetary Fund and World Bank that formally open Tuesday officials from dozens of nations will voice enthusiasm for
growth-oriented policies.
But many with a stake in the emerging markets fear those steps will prove too little, too late.
"We certainly haven't seen the bottom of the crisis. It's going to get worse before it gets better," said Mark Daniell, managing
director of Bain & Co. (Asia), a consulting firm. "Looking at the outcome of the G-7 and looking at the agenda for the upcoming
meetings, I don't think we'll see coming out of this a clear and actionable strategy to support the recovery of Asia."
Financial markets echo that. After digesting the weekend's developments, U.S. stocks fell Monday. Traders pointed to
disappointment over the result of the G-7 gathering. The Dow Jones Industrial Average, down more than 200 points earlier in the day,
closed at 7726.24, down 58.45.
Talks With Brazil
Perhaps the most reassuring step for world markets would be an international aid package to help Brazil, which is seen as key to
stopping the crisis from spreading to the rest of Latin America. Brazilian officials have been in talks with the IMF and other lenders,
who express willingness to help even though Brazil hasn't formally asked for money.
U.S. Treasury officials portray their proposals as major advances, while stressing that the crisis won't ebb immediately. "I think that
what is important is policies, not pronouncements. I think what you saw out of the G-7 is a shared recognition that I suspect will be
translated into their policy steps over time," Deputy Treasury Secretary Lawrence Summers said Monday. He added that
industrialized countries, especially Japan, should pursue pro-growth policies, developing countries should expand their economic
reforms and all countries should stick to their commitment to open markets.
To many, the statement had a familiar ring. Furthermore, the core U.S. initiative -- a contingency fund for well-behaved countries
whose currencies are under attack combined with stepped-up aid from the World Bank -- depends on congressional approval for $18
billion in promised IMF funding.
High Expectations
One reason for this week's disappointment may be unrealistically high expectations, fueled by President Clinton's calls for urgent
action. Monday the president took the unusual step of attending a detail-filled meeting where international economic bureaucrats
worked through complex proposals for redesigning the global financial system.
Yet the solutions the U.S. and the rest of the G-7 have offered will take time to implement, and even more time to have a noticeable
effect. There are no instant solutions, officials say. "You cannot expect us to pull out rabbits that dazzle us with their white fur and
settle the situation overnight," complained Dominique Strauss-Kahn, the French minister of economy, finance and industry.
In fact, the meeting that President Clinton attended was designed specifically to prevent future crises and contagion, not to address
the current meltdown. The members of the Group of 22, the G-7 combined with 15 major emerging-market governments, discussed
ways to restructure the global financial system over the long run. Among many other steps, the group urged governments and
businesses to be more forthcoming with financial data, so that investors won't be spooked by the sudden announcements of bad
news. The officials also outlined steps to strengthen banking systems through enhanced standards and supervision, and to
formalize international bankruptcy procedures to ease debt workouts.
"The world is still grappling with the financial instability of the past year, but it is not too soon -- indeed it is past time -- to move
boldly ahead with those steps that we know are integral to a durable solution," Treasury Secretary Robert Rubin told a World Bank
gathering Monday.
Separately, the World Bank's chief economist said he thinks it may be a dangerous idea for countries to open their economies to
free capital flows -- even though leading industrial countries are calling for just that. In a speech at the Brookings Institution, Joseph
Stiglitz said studies have shown no correlation between capital-account liberalization and economic growth. But he said such
liberalization is often associated with financial crises and increases in income inequality.
Over the weekend the G-7 ministers said: "We must continue our efforts to strengthen the open world trading system, with free
trade flows and open capital markets," though it said that opening must occur in an "orderly" manner.
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