Absoutely, important Strafor "stuff". Hello Mike. I trust you are well and thriving. am sure you have seen this but it is an absolute riveting pice from Stratfor
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(C) Stratfor
Global Intelligence Update
Red Alert
February 24, 1999
The G-7 Finance Ministers Meeting Drifts into Irrelevancy
Summary:
Few will remember the February meeting of G-7 finance ministers.
Nothing of importance was accomplished or even discussed. That is
what makes this meeting extraordinarily important: nothing
happened or was expected to happen. After 18 months of global
financial crisis, the G-7 met and no one expected it to matter.
This means that there is no Asian crisis any longer. That is not
to say that all of Asia's problems are no longer there. Quite the
contrary. But it does mean that it has ceased to be a crisis and
has become the normal condition of Asia. The meeting also
signaled the absolute triumph of U.S. policy makers. The U.S.
opposed any new multinational initiatives in favor of interest
rates cuts, and that is precisely what took place. Some of Asia
is beginning to recover. The major Asian powers, China and Japan,
are not recovering but sinking deeper into the morass. That is no
longer a crisis either. The important news this week was being
made by foreign ministers and generals. The G-7 finance ministers
were ignored. We are now fully into a new era, which for want of
a better name, we'll call the post-post-Cold War era. It is also
the post-Asia crisis era.
Analysis:
The G-7 finance ministers met in Bonn this weekend. The important
news from the meeting was that there was no news. The meeting was
best symbolized by the single concrete proposal that emerged from
it, which was the creation of a "Stability Forum" consisting of
members of various multinational bodies, whose mission it would
be to sound the alarm in the event of financial instability.
Since the body is supposed to meet only twice a year, the
probability of catching an impending crisis is fairly low.
Clearly, the proposal is not intended to be taken seriously. It
is at most intended to be a symbolic gesture to those who, only a
few months ago, were vociferously calling for the creation of an
international regulatory body to oversee and control financial
flows.
What the weekend meeting really represented was the utter victory
of the American position on managing international financial
crises, at least within the elite G-7 group, and therefore within
the secretariats of the IMF and World Bank. The American
position, consistent throughout the crisis, was that the free
market should be allowed to work itself out. Indeed, from the
American standpoint, many of the international problems stemmed
from state intervention into markets and therefore required a
relaxation of controls, not an increase. At the most, the U.S.
was willing to countenance interest rate cuts by central banks.
Indeed, the U.S. view is that the massive rate cuts by the U.S.
Federal Reserve staved off a global crisis and stabilized the
Asian situation as well.
Just a few months ago, serious discussions were being held about
increasing the power of the IMF to regulate international credit
markets. The Japanese, as well as the French, seemed in favor of
the proposal. The Germans, after the election of their new
leftist government also seemed willing to consider the view. What
used to be called the Anglo-Saxon countries (U.S., Canada, and
UK) were fairly well isolated in opposing this. Yet they won the
day. There was no serious talk about a super-IMF. Indeed, there
was little talk about a systemic international financial crisis.
What concern there was focused on Russia and the danger of
default there. The solution, as one could expect, is increased
deregulation and an ongoing commitment to reforms.
The G-7 did, in fact, predict slower global growth. Now, G-7
predictions on growth in the past have been wildly inaccurate, so
the prediction may or may not be true. What is interesting is the
calmness with which the ministers and governors took the
prediction. The collective view was that the normal process for
stimulus should be taken by each nation as deemed appropriate.
There were no calls for concerted, coordinated action on interest
rates. Rather, there was the general view that the normal
processes that have governed the international system are
working. The U.S. did manage to get into the communiqué the
demand that Japan and Europe increase domestic demand, but the
Japanese were delighted that there were no resolutions and hardly
any pressure on Japan on trade issues. Everyone left happy,
except the Russians, and nothing could be done about them.
This was, therefore, an extraordinary meeting. What just a few
months ago would have been a tense encounter with the financial
markets hanging on every word, became an exercise in
unimportance. How did we get from there to here?
In part, the transformation represents the sheer political power
of the United States. By blocking all of the panicky proposals
floated over the last year, the United States rendered them
irrelevant. The fact was that even when totally isolated, the
United States had the ability to block any major initiative
simply by refusing to participate in it. The U.S. created a
policy gridlock by refusing to entertain any fundamental changes
in the international economic regime. At the same time, the U.S.
did cut its interest rates, which stimulated the global markets
decisively, while also strengthening foreign currency prices. In
doing this, the U.S. partly mooted the discussion of reform.
The second element had less to do with the U.S. than with Asia
itself. The willingness of some Asian countries to impose
meaningful reforms also made a major difference. South Korea in
particular moved decisively to restructure its internal economic
relations. It was joined in this by countries like Thailand,
Malaysia, Singapore and the Philippines. Each did very different
things, and some did things that were quite opposed to U.S.
wishes. Nevertheless, their willingness to shake things up,
coupled with the natural resiliency of their economies has
created something of a recovery in Asia.
As Asia recovered, Japan suddenly found itself isolated. Its
economy, far from recovering, continues to deteriorate in very
dangerous ways. Apart from its recent interest rate cut, which
was designed less to stimulate domestic consumption than it was
to decrease the pressure on business firms very close to the
line, Japan has done nothing to restructure fundamentally its
economy. For reasons we have discussed extensively in the past,
Japan cannot carry out a fundamental restructuring. The gridlock
is not political but structural. Higher interest rates will smash
huge numbers of businesses; lower interest rates postpones the
problem and thereby worsens it. Between a crisis now and a worse
crisis later, Japan has chosen a worse crisis later. This is
sensible, simply because the crisis now would be devastating and,
after all, something unforeseen could still occur to save Japan.
Miracles do happen. Under the circumstances, the best the
Japanese could hope for was reduced pressure on trade issues--and
that they got.
And so, with the Russians marginalized and the Chinese not
invited, it was back to business as usual for the G-7. This
means, in a way, that Asia has now passed from a crisis to a way
of life. It also means that the Japanese and Chinese are
officially on their own. Since there is no crisis, there is no
need for concerted international help. Moreover, since the only
immediate problem is a general deterioration in international
economic growth, attributable as much to the general business
cycles as to secular shifts in Asia's economy, in other words not
a crisis, the expectation is that normal economic policy measures
will be sufficient to cope with the problem.
We are now in the post-Asia crisis world. It is a world in which
the major Asian powers, Japan and China, continue to wallow in
major economic problems while the rest of Asia slowly emerges
into a long-term, low-grade malaise. It is a world in which U.S.
power is dramatically increased and in which the U.S. is under
even less pressure to make serious economic concessions. It is
also a place in which Asia, which had been groping toward a
regional identity under the pressure of the crisis, is fragmented
into national and sub-regional interest blocs, which are
generally unable to forge a coherent strategy.
Perhaps most important, it is an Asia and a world in which
economic problems are relatively less important that politico-
military problems. This is the most startling aspect of the G-7
meeting. For several years, a meeting of G-7 finance ministers
was infinitely more important than a meeting of G-7 foreign
ministers. That is no longer the case. With the Kosovo issue on
the table, along with Iraq and Korea, with Russia reversing its
foreign policy course and China becoming increasingly
unpredictable, finance ministers are much less interesting than
foreign ministers. The G-7 finance ministerial meetings were
trivial precisely because they dealt primarily with financial
issues. The name of the game today is much more political and
military.
This is not only true on a global level; it is also true within
Asia itself. We have become used to dealing with Asia on
primarily economic grounds, during good times and bad. Today, the
most important decisions in China are political rather than
economic. Many of the decisions that have increased the economic
health of the rest of Asia rested on political will rather than
economic processes. In Japan, where an economic reality is being
set in stone, the central focus is on political matters. Politics
is once again at center stage.
Few people will remember the G-7 finance ministers summit of
February, 1999. Nothing much happened there. But that is
precisely what made it so important. After 18 months of financial
crisis, the February meeting established that the crisis had not
gone away but had ceased to be a crisis. Instead, it was the
normal condition of Asia. Moreover, it signaled the fact that the
set of policies advocated by the U.S. had triumphed. Finally, it
signaled the further decline of purely economic policy
considerations and the growing importance of political and
military considerations. The latter will be the hardest for Asia
to get used to. |
