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When I first read this I thought it was a pollyanna rant against FEAR. Upon a second reading I noticed the writer gets to the heart of the matter by citing the recent World Bank survey indicating only 10 out of 119 developing countries have started remediation programs suggesting the flight to safety is hardly irrational.
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Y2K fears could hit Third World hard
By Juan Enriquez, 02/07/99
Throughout 1999 Americans will become increasingly aware of Y2K, a programming glitch that makes computers read the year 2000 as if it were 1900.
Countries like Brazil, Indonesia, Russia, and Mexico will continue to focus on other crises: When your economy faces an immediate meltdown, remedying an obscure computer glitch is not a priority. But the folks who manage the flow of world capital are worried about Y2K.
Around the middle of this year, they are going to start thinking about finding safe harbors for their money. This could have a devastating effect on developing countries. Massive institutional capital flight means simultaneous financial meltdowns in many emerging markets.
Whether or not Y2K eventually turns out to be a major problem, many Americans are alarmed. There is a great deal of hype, fear, and precautionary investment. The Federal Reserve guesses that it will cost at least $50 billion to sort out computer errors in America's private sector. The 10 largest US banks are spending more than $2 billion to keep their systems running. Many individuals will put aside substantial supplies of food and cash. Even the most sanguine are likely to think twice before boarding an elevator or plane at midnight next New Year's Eve. Despite years of concern, and some action, an article in the January 1999 Scientific American argues that in the best case, there will be severe disruptions.
As the year draws to a close, many will increase liquidity within their portfolios. Playing it safe, some money managers will shift capital to regions with strong laws, institutions, and technical support and will reconsider their positions in countries that are unaware of or unable to address potential Y2K malfunctions.
In the United States or Europe, investors can find lawyers to sue, courts to arbitrate, and geeks to rescue data. But what if computers crash in Indonesia? Fear may lead to massive retrenchment. This means that from midyear on, many countries could experience widespread capital flight.
As people flee to quality, the US market, particularly blue chip stocks or bonds, may boom, but much of the developing world could bust.
This is not a minor problem. Net private capital flowing into developing countries exceeded $184 billion in 1995. Temporarily reversing even one-10th of the cash flows that have occurred in the last decade could lead to a severe global liquidity crunch. Yet many treasury departments in developing nations remain complacent, pointing to significant reserves. This is false comfort. In financial meltdowns, portfolio investments act like short-term debt. Investors simply take their cash out. This can devastate a country's finances in days - witness Brazil, Mexico, and Malaysia.
Emerging markets are already under siege. Over the past year, the S&P 500 index rose 32 percent while the World Bank index of developing country stocks (IFCI) fell 24 percent. The temptation to flee, for both locals and international funds, is already there. Few consider Asia, Latin America, or Africa a safe bet. After a $45 billion bailout, Brazil still keeps treasury officials throughout the world awake at night. In the last year, Mexicans increased their deposits in the United States by $4.5 billion. Russians have helped fund a Swiss financial renaissance. Now we could face simultaneous, large-scale crises in many developing markets. Financial collapses in individual Latin American and Asian countries have already strained the resources of developed nations and emptied the coffers and credit lines of lenders of last resort like the International Monetary Fund, the Commodity Credit Corporation, and the Bank of International Settlements. There is little patience, and even less money, for large bailouts.
Fear of Y2K could be more devastating than its direct effects. Estimates of what it will take to fix the problem globally range anywhere from $100 billion up to $1 trillion. Electoral conflict and lack of leadership will increase uncertainty. While developing economies bleed, the United States will be immersed in a contentious presidential transition.
Mexico, Indonesia, Russia, and Chile will also be involved in complicated elections and in some cases, perhaps, civil unrest. Europe will still be digesting the euro. Japan is unlikely to take a leadership role while its own economy and politics remain so fragile.
The world's governments and financiers do not have much time to act, and they have to act before money starts flowing out, since a large-scale economic collapse could be driven by uncertainty even before any machines malfunction. A World Bank survey released Jan. 19 shows only 10 out of 119 developing countries had even started Y2K remediation programs. The IMF and the Bank of International Settlements should put aside a large contingency fund.
Backup data repositories should come on line to provide photographs of financial transactions through December 1999. An international antifraud unit should be set up to ensure transparency. Additional measures will surely be necessary. Finance ministers in Africa, Asia, and Latin America should take what may seem like an obscure issue very seriously indeed. Individual investors may want to do likewise.
Juan Enriquez is a researcher at Harvard University's David Rockefeller Center.
This story ran on page C07 of the Boston Globe on 02/07/99.
© Copyright 1999 Globe Newspaper Company.
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