"Crazy currency fluctuations. Recession? Depression?"
October 25, 1998
A quick guide to tackling the global economic crisis
Experts disagree on just what kind of mess we're in
By David Israelson Toronto Star Business Reporter
Global uncertainty. Gut-wrenching markets.
Crazy currency fluctuations. Recession? Depression?
Does anybody have any bright ideas as to
how the world's economy got into this mess
- or how to fix it?
The answer is, yes. But that may not be
much help.
''In a lot of cases, there's really not a
lot you can do in the short-term that can
help,'' says Douglass North, an economic
historian and Nobel Prize winner who spoke
at a symposium at the University of
Toronto's Rotman School of Business last
week.
There's not even any consensus as to what
kind of mess we're in.
''I believe that we are in the most
serious financial crisis since World War
II,'' warned William McDonough, chair of
the New York Federal Reserve, the state
central bank.
Yet even as our dollar fell to record lows
in the summer, Finance Minister Paul
Martin was telling us that ''you've got to
feel very confident about the fundamentals
of the strength of the Canadian economy.''
The trouble is that McDonough and Martin
may actually both be right. Canada's
economic picture, while not ideal, is
indeed relatively sound right now, at
least compared with the way things were
five or six years ago.
Meanwhile, though, there's no denying the
global economy has turned into something
of a crapshoot. Investors have noticed;
once-hot mutual funds are now reporting
''net redemptions'' (more people
withdrawing cash than putting money in),
and earlier this month, U.S. Federal
Reserve head Alan Greenspan remarked on
''a marked shift in investor psychology
away from risk and toward liquidity and
safety.''
So what on earth is actually happening?
And what are the different plans to fix
it? Here's a quick guide to what's on the
shelf in the marketplace of ideas.
* How bad is it? Samuel Brittan, highly
respected writer with the Financial Times
of London, says that around the world,
manufacturing production is in decline
right now, which would mean that we're
entering a recession. But manufacturing in
the Western industrial world is only about
a quarter of the economy, actually a bit
less in North America.
Canada, for example, is still heavily
dependent on exporting raw materials such
as timber and minerals. But that's not
necessarily good either, because world
commodity prices are really low right now
- which puts pressure on our dollar.
To make matters worse, Brittan's analysis
doesn't include the point that, in Canada,
the manufacturing jobs now in jeopardy
tend to be ''quality'' jobs - with good
wages and good benefits.
The weird thing perhaps is that it doesn't
actually feel so bad just yet. While fear
has swept through Bay St. brokerages and
some companies have laid off employees,
the Canadian economy is actually expected
to grow by 3 per cent this year and 2 per
cent next year, says Royal Bank chief
economist John McCallum.
------------------------
'We are in the most
serious financial
crisis since World War
II'
William McDonough
Chair, New York Federal
Reserve
------------------------
But in already-stricken countries in Asia,
Latin America and Eastern Europe
(especially Russia), the meltdown ''is
only just beginning,'' he warns, in the
bank's just-published fall economic
outlook. ''Consensus has been trending
downward for months and there's no hard
evidence that these forecasts have reached
bottom yet.''
* How did we get here? According to
conventional wisdom, the '90s economy was
red hot until July, 1997, when investors
suddenly got worried about Thailand.
Investors decided their stake in Thai
economy, which had been one of the Asian
''tigers,'' was overvalued, and they began
pulling out their money.
The Thais devalued their currency, the
baht, and then similar investor fears
spread to Malaysia and its money, the
ringgit. The same thing started happening
in South Korea, Brazil and Mexico. By
fall, newspapers were referring to what
started in Thailand as the ''Asian flu.''
------------------------
'There's really not a
lot you can do in the
short-term.'
Douglass North
Economic historian
------------------------
Problems also occurred in Japan and Hong
Kong, but the situation in these places
was slightly different. The Japanese got
hit because they're Asia's big investors -
they were caught in the same position as a
Toronto-area homeowner who paid $300,000
for a house in 1988 and discovered that
prices had fallen drastically by 1991.
Hong Kong got hit because its stock market
took a deep dive. The Hong Kong government
has since intervened by actually buying
shares on the market, but in the meantime,
the crisis of confidence has already
spread to markets here, including Toronto
and New York.
* Why didn't we help? Actually, we tried.
Last year the Western industrialized world
thought a few hard-nosed chats with Asian
financial authorities, some loans and some
reassuring comments about the many
still-positive aspects of the economy
would get everything back on course.
South Korea, the world's 11th largest
economy, received a $20 billion (U.S.)
emergency package from the International
Monetary Fund last fall. But experts
quickly observed that this was just a
fraction of what would be needed to help
Asia, or even Korea - the Japanese banking
system alone had $70 billion (U.S.) in
loans outstanding in Asia.
* What to do now? Most experts agree that
one good step would be institutional
reform. The U.S., for example, has called
for activating an IMF ''standby'' fund,
which could be used as a line of credit
for troubled countries such as Brazil.
Malaysian Prime Minister Mohammed Mahathir
has slapped on currency controls - a move
that was ridiculed by others a few months
earlier but which now is being looked at
with some seriousness elsewhere.
There's also something called the ''Tobin
tax,'' named after its inventor, economist
James Tobin. It would slow, but not halt,
international currency movements by taxing
each transaction. It would also be
difficult to enforce internationally.
Martin wants to set up teams of experts to
go to different countries and make sure
their financial laws are fair and properly
enforced.
IMF managing director Michel Camdessus
says that ''markets operate better when
information is abundant, institutions are
strong, legal underpinnings are enforced
and transparency and accountability
prevent decision makers from favouring
particular groups at the expense of the
community at large.''
While that may sound sensible, Douglass
North's economic theories, which won him
the Nobel in 1993, suggest the
institutions themselves aren't as
important as the actual behaviour of those
in charge. Look at China, for example, he
argues.
''None of the requirements for typical
economic growth exist. They don't have
property rights, they don't have the rule
of law (as Western countries understand
this concept,'' North points out. Yet
China, still nominally communist, has one
of the fastest growing economies, because
they develop rules as needed ''on an
ad-hoc basis.''
Unlike most experts.
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