"Power elite" faulted for East Asian Crisis.
Don't blame me for the financial crisis
by Jagdish Bhagwati
Professor Chalmers Johnson reminds me of Dr Mahathir of Malaysia. He is so furious with the sudden reversal of fortunes in Asia, from a miracle to a debacle, that he cannot keep himself from sacrificing a sober and realistic analysis (of which he is perfectly capable, as his admiring readers over the years know well) to a melodramatic set of accusations that span both people and an almost paranoid sense of conspiracy.
Dr Mahathir accused George Soros, while arguing that conspiring financial forces had undermined his country's indisputably remarkable progress under his stewardship. Professor Johnson blames "the Jagdish Bhagwatis and Ross Garnauts of this world", while alleging conspiracy by the US Pentagon, Treasury, hedge funds et al. to secure the "preservation of American global hegemony".
Let me therefore disabuse Professor Johnson of his astonishing preconceptions about me. I then rebut the charge of a US conspiracy by arguing instead how, in a nonconspiratorial way, the United States
is indeed at the heart of the Asian devastation, and why the Clinton Administration's pretensions of great success in international economic policy are belied by the facts that speak instead to a disaster.
I am accused of leading a "major ideological barrage" which was "launched to soften up the Asians". This barrage included "total laissez-faire, destruction of unions and social safety nets . . . indifference to pay differentials between CEOs and the ordinary
labour force . . . and totally unregulated flows of capital in and out of any and all economies".
Clearly, Professor Johnson has read little of my many writings. Familiarity breeds contempt; evidently, contempt does not breed familiarity! I do not believe in total laissez faire: as I argued in the Times Literary Supplement (November 21, 1997), market failures require fixing, markets need to be constructed by governments where they do not exist, and markets cannot be extended to activities where social norms rule them out.
I do not believe that social safety nets should be removed; instead, I have argued in Protectionism (1988) and in Chapter 1 of A Stream of Windows (1998) that exposure to the forces of globalisation requires the creating and adaptation of domestic institutions to deal with the sense or the reality of greater flux.
As for CEO pays, I am on record that widening differentials within the same plant or firm can be destructive of social harmony, especially when wages are stagnating or even falling.
And Professor Johnson is badly out of touch with reality if he thinks that I am for free capital mobility. Since I wrote an article entitled provocatively "The Capital Myth" in Foreign Affairs (May 1998), noting the asymmetries between the case for free trade (which is very strong and widely accepted in light of economic argumentation as well as the many post-war failures of inward looking trade strategies and the contrasting successes of countries on outward trade orientation) and the case for free capital mobility, and challenging the wisdom of the latter, I have been overwhelmed by worldwide attention.
Indeed, the editors of Foreign Affairs told me that this was possibly their most reprinted and translated article in economics in recent years. But clearly it passed Professor Johnson by!
But I have said enough of Professor Johnson on Bhagwati to convince the readers that it is the exact opposite in veracity to Boswell on Dr Johnson! On the substance of the charge of a conspiracy to
establish American hegemony too, I find Professor Johnson off the mark. Let me show this by providing a different analysis which nonetheless puts the United States in the dock.
First, led by the United States Treasury, which is headed by Secretary Rubin who comes from Goldman Sachs, the IMF, which is closely reflective of US views and Wall Street, pushed aggressively
for free capital mobility around the world. I have christened this group the Wall Street-Treasury Complex, to indicate how these (white, as Professor Johnson states) men go back and forth between Wall Street and the Washington institutions led by US Treasury but embracing the State Department, Commerce Department, the IMF, and the World Bank, forming a networking "power elite" in the sense first defined famously by the sociologist Wright Mills.
Mills was careful to say, as I am, that this is not a "conspiracy". The result was a hasty and imprudent freeing of the Asian economies to capital flows, resulting in an overexposure to short-term capital
inflows. This set up these economies for a gigantic financial and economic crisis resulting from a panic-driven outflow of funds. And these capital inflows indeed turned into a dramatic reverse outflow in 1997, amounting in a year to a net draining of resources estimated at over 10 per cent of the combined GNP of five of the afflicted Asian economies: Thailand, Philippines, Malaysia, Indonesia and South Korea!
Second, compounding the gigantic impact of these panic-driven outflows was the response of the IMF, fully supported by the United States, which turned out to be excessively deflationary. The IMF was
simply wrong, wicked in outcome but not in intention.
Third, the United States shot down the November 1998 Sakakibara Plan to provide up to $100 billion worth of funds for assisting the Asian nations. The explanation can only be in terms of US rivalry with
Japan for hegemonic reasons. The US wanted the IMF, which is under its influence, to remain the sole actor in the crisis; a saving role for Japan would also elevate Japan to a status in the region that
would violate US aspiration for economic penetration and influence. The effect was to deprive the afflicted nations of badly needed funds.
Any objective analysis of the Asian crisis therefore underlines how the United States created and deepened the Asian crisis with its enormous economic and social costs. It is therefore ironic that the Clinton Administration never tires of pointing the finger at Japan's failure to revive its economy as a major cause of the crisis.
It is also astonishing that, faced with a crisis whose origins are definitely in the rash embrace of substantially freed capital flows, the US spokesmen blithely keep talking as if the root causes of the
crisis were "crony capitalism" and "corruption" in these nations!
Professor Johnson would be justified in asking why these ill traits were fully compatible with more than two decades of phenomenal growth, and in remarking that it ill behoves a US Administration
mired in scandals, including the corruption of indiscriminate fundraising in the last election, to be lecturing to others about their corruption.
But then, it is surely the prerogative of hegemons to interpret events, and lay down prescriptions, that work to their own advantage. There, I agree with the broad sense of discontent that animates
Professor Johnson.
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Jagdish Bhagwati is the Arthur Lehman Professor of Economics at Columbia University in New York. He was economic policy adviser to the Director-General of the GATT between 1991 and 1993. |
