Check out da Yen - 115.................
Will the Free Market Be a Casualty of the Economic Crisis?
Hint: keep using the word "contagion", chumps
The US Treasury has determined that a virus causes economic crisis, and will
soon require consenting economies to wear capital market condoms.
WASHINGTON - As the world's top financial officials wind up an extraordinarily somber and fairly inconclusive week of meetings here, it appears that the doctrine of Western-style free market economics risks becoming one of the key victims of the global economic crisis.
What the Group of Seven industrial nations have managed to agree on - together with many other participants at the annual meetings of the International Monetary Fund and World Bank - is that they need to take steps to avert a global recession and that more help is needed if countries like Brazil are to escape the tidal wave of contagion caused by indiscriminate financial markets.
But fears among developing nations that large segments of their populations are on the verge of slipping back below the poverty line have proved a powerful force. The recent moves to impose capital controls - either banning or severely limiting the transfer of money across borders - in countries as disparate as Malaysia and Russia, and increasing talk of new protectionism, are a direct result of the crisis.
''What seems to be coming,'' said a senior international Reader's Services financial official who asked not to be identified, ''is a growing cultural clash over the economics of Western-driven globalization.''
This official warned that even though many developing nations know they cannot escape the need to reform their financial and regulatory systems, ''they still feel betrayed, and I think this crisis will create a backlash, a nostalgia for the good old days of statism, protectionism, and interventionism, so much so that we may lose much of the progress of the last 15 years toward free markets.''
Renato Ruggiero, director-general of the World Trade Organization, took a similar position. In an interview here he said that numerous ministers from developing nations ''told me that they hope the crisis will not go on for too long because otherwise they will not be able to resist protectionist pressures.'' Mr. Ruggiero said he was ''very worried'' that ''the victim of this global turmoil could well be free trade.''
Kofi Annan, the United Nations secretary-general, told Treasury Secretary Robert Rubin this week that the current global crisis was too big for a small group of finance ministers to resolve by themselves. Mr. Annan on Tuesday night expressed his concern that unless IMF programs were more flexible, other nations would emulate Malaysia's capital controls.
Calls from the United Nations and from poorer nations for more of a voice in international decision-making are not new. Yet what has changed is that the industrialized world is beginning to realize that against the backdrop of a crisis likely to continue for several months more, it is in its self-interest to devote more resources to creating what President Bill Clinton called ''a social safety net'' for the most afflicted emerging markets.
James Wolfensohn, the World Bank president, has emerged as the most vociferous advocate of moving beyond the confines of IMF economic adjustment programs and focusing more resources on socially oriented and pro-democracy policies. ''Unless ordinary people, ordinary citizens, are brought along with financial solutions, you have no long-term solutions,'' he said in an interview.
Mr. Wolfensohn's stance, along with his resistance to seeing World Bank money diverted for emergency cash rescues, has brought him into conflict with the IMF and the United States. The IMF managing director, Michel Camdessus, has meanwhile made a point of making repeated statements about the social consequences of the global crisis, but a number of officials here feel that the IMF is playing catch-up with political realities it had not previously foreseen in places like Indonesia.
''If we do not have greater equity and social justice, there will be no political stability, and without political stability no amount of money put together in financial packages will give us financial stability,'' Mr. Wolfensohn said in a speech here Tuesday.
Kenneth Courtis, a Deutsche Bank AG economist, said the crisis was forcing developing nation leaders to take domestic suffering into account as they reconsider what until now has been the belief that globalization and free markets would bring them benefits.
''Put yourself in the position of an Indonesian bricklayer,'' Mr. Courtis said. ''You have never invested in stocks or bonds. All you know is you work six months a year on an urban construction site and then you go back to the countryside and work on crops. Now you have lost the urban job and the crops won't sell. So the answer is it is all the fault of Western hot money, and the political leaders will act accordingly.''
In this context, Prime Minister Mahathir bin Mohamad of Malaysia has put up the shield of capital controls, which economists say may bring short-term benefits, but can be ruinous over time. ''It is dubious that the Malaysian actions will work,'' said C. Fred Bergsten, head of the Institute for International Economics.
Mr. Bergsten, along with the IMF and even some U.S. officials, has conceded that the protracted crisis means that certain capital controls may be appropriate, though only as a short-term firewall.
''There are capital controls, and there are capital controls,'' Mr. Bergsten said, citing the case of Chile, which since the early 1990s has used taxes on capital inflows to make it costly for local borrowers, while allowing more long-term direct investment to enter the country freely.
Reluctant Western officials are beginning to see the Chilean model, as opposed to the more panicky Malaysian type of controls on capital flight, as a possibly necessary evil in the maelstrom of the present crisis.
International Herald Tribune, October 8, 1998 |
