Washington conflict -- not consensus -- over global financial management
Patrick Bond
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The more the world economy affects South Africa's fortunes, the less clear we seem to be about the balance of forces affecting its underlying dynamics. A quick scan demonstrates the contending ideas.
At one extreme, the only real prospect for resolving the current gold crisis would be another bout of global financial crisis, according to even straightlaced economist Azar Jamine (talking to Chris Gibbons on SABC Newshour last week). I tend to agree, for no amount of impassioned begging in London and Washington can undo gold's current double whammy: portfolio restructuring plus speculative short-selling.
Thus, could South Africa once more, as in the 1930s, acquire the moniker "prosperous undertaker during a plague" thanks to investor gold-hedging? No, not if funds managers react to scares by acquiring dollar-denominated, interest-bearing assets -- as happened so vividly in the wake of the October 1987 equities crash.
But if a preposterously overexuberant Wall Street teetered, might smart money instead migrate from the deformed US economy -- with its $2 trillion in foreign liabilities, rising trade deficit, huge consumer debt and low real financial returns (perhaps negative if the dollar finally corrects) -- into a metallic store of value?
We may find out, says Harvard economist (and 1929 expert) John Kenneth Galbraith. In late June, he advised an audience at the London School of Economics, "When you hear it being said that we've entered a new era of permanent prosperity with prices of financial instruments reflecting that happy fact, you should take cover. Let us not assume that the age of slump, recession, depression is past."
But many do just that, judging by recent emollient proclamations from sites of international financial power. After a year of sweating through discrete but severe hazards (the Russian default, hiccups on Wall Street, Malaysian capital controls, Long Term Capital Management's bankruptcy, Brazilian and Ecuadorean currency meltdowns), G-7 leaders who met in Cologne a month ago were cocky.
To understand why this attitude is terribly dangerous, and also hotly contested, entails a (two-part) scan of five key tendencies that have emerged in global political economy since the crisis surfaced in mid-1997. Considered from right to left across the political spectrum, we can label these tendencies a) "Old World Order," b) "Washington Consensus"; c) "Post-Washington Consensus"; and -- in tomorrow's column -- d) "Third World Nationalism"; and e) "New Social Movements."
The most powerful remains the status quo Washington Consensus, whose backers unreservedly promote free trade, financial liberalisation and foreign investment incentives, business deregulation, low taxes, fiscal austerity and privatisation, high real interest rates and flexible labour markets. If there are problems outstanding in the world economy, they are temporary (and the worst is now over), according to the Consensus, to be overcome by more IMF bailouts (embarrassingly generous to international lenders/investors though they are), intensified application of "sound" macroeconomic policies, greater transparency, a touch more financial sector supervision and regulation, and less Asian cronyism.
The Washington Consensus relies upon a very few, very powerful men. Providing political cover for the status quo are Bill Clinton and Tony Blair. Operational support comes from US Treasury Secretary-designate Lawrence Summers, US Fed chair Alan Greenspan, IMF Managing Director Michel Camdessus and his deputy Stanley Fischer. Behind them stand transnational corporations, banks and allied think-tanks.
Secondly, amongst those now scornful of the Consensus are traditional cultural conservatives, largely based in reactionary pockets of the United States. But it would be a mistake to discount Jesse Helms, Trent Lott, Pat Buchanan and their ilk as mere populist rednecks.
Their critique of the taxpayer bailouts enjoyed by New York bankers is backed by think-tanks like the libertarian Cato Institute and is closely paralleled by elite-conservative concerns -- notably of former US cabinet ministers George Shultz and Henry Kissinger (who lost his old ally Suharto in the 1998 financial whirlpool).
Together, they represent a formidable attack on the IMF. To illustrate, the Treasury Department's request for $18 billion in further IMF funding was nearly rebuffed late last year -- until Clinton spooked some opponents with talk of a resulting financial meltdown, and bought off others by agreeing that loan conditionality will become even more fierce, through shortened repayment periods and higher interest rates on future emerging-market loans.
Xenophobia and isolationism are logical political threats from this current. Economically, claim Washington Consensus advocates, the resulting banana wars and protective tariffs could kick off a downward trade spiral reminiscent of the early 1930s.
Thirdly, there appears an emerging reform position selfstyled as a "Post-Washington Consensus," in the words of World Bank chief economist Joseph Stiglitz. Aiming to perfect capitalism's "imperfect markets," Stiglitz cites organic problems like asymmetric information in market transactions (especially finance) and anti-competitive firm behaviour as key contributors to the present instability. Likewise speculator George Soros has attributed volatility to bankers' "herd instincts."
Others from a neo-liberal economic background who jumped the sinking Washington Consensus ship include Harvard's Jeffrey Sachs (formerly known as Dr Shock Therapy, now flailing a rapid retreat leftwards) and Massachusetts Institute of Technology economist Paul Krugman (who claimed a temporary fondness for capital controls to halt speculative runs).
More durable than the growing chorus of reform-oriented neo-classical economists are the institutions which have an actual material stake in promoting human welfare, such as several United Nations agencies.
Still more significant, however, are shifting political sands of social-democratic (and Green or otherwise left-leaning) party politics in Germany, France, Italy and Japan. The March departure of Oskar Lafontaine represented a profound setback for the Post-Washington Consensus, as it realigned Germany away from France (at least Jospin's wing of Socialism) and towards Britain, matching the failure of the Japanese to withstand a US veto on its proposed Asian Monetary Fund.
Indeed, a telling indication of how little is really changing is an IMF plan to unite foreign bankers so as to avoid fracturing their power in forthcoming bankruptcy negotiations with sovereign states. Camdessus spelled out -- behind-the-scenes in a March 1 speech to the Institute of International Bankers in Washington -- the need for new "creditor councils" to discipline "individual `dissident' creditors" who catalyse "panic-stricken asset-destructive episodes" through too-zealous foreclosure actions.
Against this array of power, Third World rulers and social movements have not merely watched from the sidelines. Ranging from Mahathir's clever and successful capital controls, to Boris Yeltsin's default, to the self-destructive antics of Robert Mugabe, to more expansive demands for debt cancellation and global financial taxes, we shall consider, tomorrow, those who advocate reforms not likely to be condoned by Washington.
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