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Power, Timidity, and Irresponsibility in Global Finance
Walden Bello
Focus on Trade, No. 37, August 1999
Asia's stock markets are soaring again. To some, that portends real economic recovery. To others, it is an ominous sign that the
Electronic Herd, as New York Times columnist Thomas Friedman calls it, is back in its Asian grazing grounds, happily snapping up
promising stocks and high-interest bonds now, but ready to move out tomorrow, perhaps in another furious stampede triggered by God knows what.
The herd, in fact, began moving in Manila the day after President Joseph Estrada's State of the Nation address on July 26, as the foreign funds that had been pouring into the country over the last few months reversed course, forcing the Philippine stock market index to drop 113
points to its three month low. Was the Philippine chief executive looking more besotted than usual, some asked?
One would have expected that two years after the outbreak of the Asian financial crisis, there would be institutions in place that would
prevent a repeat of the massive and rapid exit of $100 billion that triggered the collapse of the region's economies. After all, even the new US Treasury chief, Larry Summers, who holds the view that crony capitalism is theMain reason for Asia's troubles, now admits that a strong case can
be made that excessive capital inflows may have contributed importantly to the recent problems in emerging markets.
A quick look around shows, however, that Chile has lifted its controls on foreign capital inflows, while Malaysia has withdrawn the
controversial restrictions on foreign capital outflows that it imposed last year. These moves certainly do not stem from the fact that national-level mechanisms have been rendered superfluous by the erection of serious capital controls at the international level. For all its brave talk about creating a new global financial architecture, the G7 at its summit in Cologne in mid-June gave birth to a mouse-to a program that put the emphasis on voluntary disclosure of financial information by hedge funds and other financial mechanisms and voluntary risk management by the private sector.
Cologne also produced another ironic result - a stronger International Monetary Fund to exact economic reforms from emerging economies, but without the organizational reforms in terms of greater transparency, greater accountability, greater consultation, and a more self critical approach to its programs that the Fund's many critics have long demanded.
The Cologne program bears the stamp of the Summers and his predecessor Robert Rubin. Alternative proposals within the G7, such as target zones to reduce fluctuations among the euro, dollar, and yen, practically vanished when the controversial Keynesian Oskar Lafontaine resigned as Germany's Finance Minister in March. The remaining potential counterweight to US domination of the financial agenda is Japan, but it has refused to play the role of Washington's fiscalizer.
Indeed, Japan has proven to be a very big disappointment to many people and governments in Asia.
The first big letdown occurred a few months into the crisis. In what was then seen by practically all Asian countries as an innovative
response to the currency crisis, Tokyo proposed the establishment of the Asian Monetary Fund (AMF), which would have been capitalized to the tune of $100 billion from the reserves of Japan, China, Taiwan, and Hongkong. The AMF was conceived as a multipurpose, low-conditionality, quick-disbursing facility from which governments whose currencies were under attack could have drawn cold cash to counter the speculators. But the US Treasury and the Fund opposed the idea on grounds that it would weaken the ability of the IMF to extract reforms. Moreover, as analyst Eric Altbach has noted,
Summers and the Treasury saw the AMF as more than just a bad idea; they interepreted it as a threat to America's influence in Asia.
Japan backed down, the opportunity to stabilize the situation early on with an inter-governmental united front backed by hard reserves
passed, and key Asian economies plunged into spiral accelerated by Washington-backed contractionary IMF programs.
Since then, Japan has largely danced to the American tune. No concrete proposals have come from Tokyo on global capital controls,
though Finance Minister Kiichi Miyazawa and other Finance Ministry officials have rhetorically targeted hedge funds on occasion. Tokyo has also made critical noises about the IMF but it has not followed these up with actual proposals for institutional reform.
The vaunted Miyazawa Plan has, in fact, elicited US approval, largely because it provides aid that is conditioned on advancing Washington's agenda for Asia-that is, rapid liberalization, deregulation, and privatization. In the Philippines, for instance, Miyazawa money has been made contingent on Manila's implementing two things: the privatization of the National Power Corporation, which has been a longstanding demand of the World Bank and the IMF; and the opening up of retail trade to foreign participation, of which the American Chamber of Commerce has been a prime advocate.
It is not that Japan lacks the clout to stand up for an alternative paradigm of global financial stabilization. For when it comes to issues that bear on its domestic economy, Japan has not hesitated to take decisions that Washington protested but could do nothing about, like Tokyo's refusal to open up its forestry and fisheries sector and its move to restrict the short-selling of stocks. What Japan has studiously avoided is filling a leadership role for Asian interests.
Unchallenged by Europe and Japan, the US has dominated the global financial agenda. This agenda has been fairly consistent. The reason that Washington has felt uncomfortable about attaching urgency to controlling global flows of speculative capital is that, as a New York Times series earlier this year revealed, Treasury's push for rapid, indiscriminate liberalization of the capital accounts of the Asian economies was a central cause of the crisis. And as the crisis developed, Washington's agenda, as former Federal Reserve Governor Lawrence Lindsey has pointed out, has been to take advantage of the situation to push its longstanding bilateral agenda of opening up trade and financial markets.
Now it is true that today, Larry Summers talks about properly paced liberalization, but it remains the case that capital account and trade liberalization in the emerging markets continues to be the central thrust of its program for global financial reform. Washington's main antidote against global financial instability is not international measures to throw sand in the wheels of speculative capital but more liberalization at the national level. Summers revealed the logic behind this approach in his comments on Argentina in a recent speech: Today, fully 50 per cent of the banking sector, 70 per cent of private banks, in Argentina are foreign-controlled, up from 30 per cent in 1994. The result is a deeper, more efficient market, and external investors with a greater stake in staying put. To put it in the curious algebra of the US Treasury, financial liberalization equals financial stability
equals the global interest.
In sum, five years after the Mexican financial crisis and two years after outbreak of the Asian financial crisis, Washington's single-minded pursuit of its financial agenda and European and Japanese timidity have ensured that the world remains without a serious system of defense against the periodic stampedes of the Electronic Herd. This is irresponsibility of the highest order.
Copyright 1999 Focus on the Global South
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