Background to the Global Financial Crisis

11 စက်တင်ဘာလ 1998

On the day that this paper was initially drafted, September 11, 1998, media soundbites trumpeted crashing commodity prices, the collapse of Brazil's currency, and the growing crisis in leadership in the United States, Japan, and Russia. That day's financial pages revealed that in the preceding 24 hours, stock prices plunged 15% in Brazil, 10% in Mexico, 7% in Spain, 5% in Italy, the Netherlands and the Philippines, 4% in Germany and France and 3% in the United States and United Kingdom: a typical day in the new volatile world economy.

Headlines the world over announce what has long been obvious to ordinary people: the global economy is in deep crisis. The major current manifestation of the crisis is financial. Capital is racing in and out of countries at lightening speed - fueling false dreams as it enters and ruining lives and ecosystems as it exits. What can only honestly be labeled a global financial casino is reaping rewards for the few at a devastating cost to the many. An economic, social, political, and ecological crisis which, in this century, rivals only the Great Depression in its impact, is engulfing the planet.

As the crisis gathers speed, thousands of individuals and groups that have been the victims and critics of corporate-led globalization, including the International Forum on Globalization (IFG), have been analyzing the crisis, its roots, its effects, and its remedies. We do so as the architects of this crisis in the International Monetary Fund (IMF), the Fortune 500, and the governments of the industrial world offer mendacious and misleading explanations of the crisis and cobble together feeble piece-meal solutions.

They, the architects, said this crisis could never happen. Technology and globalization, they promised would spur growth, prosperity and democracy the world over. Besides, they told us, globalization is inevitable. "Not so", we responded in concert with millions of workers, environmentalists, farmers, women and others. Corporate-led globalization is plundering natural resources, creating insufficient and often undignified jobs, spreading hunger as food travels longer distances from producer to consumer, destroying cultural diversity, and widening the gap between rich and poor. No, we said, economic globalization is not inevitable; it is the result of man-made rules that can be re-made. And, we concluded years ago, forcing countries to pry open capital markets is playing with fire.

Today's news suggests who was right and who was wrong.

As we sift through the mounting evidence of the crisis from country to country, we conclude the following:

  1. The crisis has exposed the crippling volatility of the new global economy and it has spawned crises in the real economies of numerous nations and eroded the political legitimacy of governments from the United States to Russia, from Brazil to Indonesia.
  2. The financial crisis is a logical outgrowth of a corporate-led economic globalization that is also devastating workers, the environment, safe food systems and cultural diversity.
  3. The official explanation of the crisis is wrong and has led to new actions by governments that, at best, are piecemeal, and, at worst, have exacerbated the panic.
  4. Countries, regions, communities, and citizen organizations are beginning to craft and implement effective solutions to the crisis that redirect finance toward meeting the needs of people, communities, and the planet.

This paper, representing some of the work of members of the IFG, seeks to amplify these points and contribute to a vital and vibrant debate worldwide over the rules and direction of economic globalization.

The Crisis

As we write, the financial architects of the global economy have left in tatters a global map that only recently featured what they called the Asian Miracle, the promising new market economies of Eastern Europe, the rebound of Latin America, and the prosperity of Europe and North America. Consider the following:

  • The currencies, stock markets and real economies of the world's fourth and fifth most populous nations - Indonesia and Russia - are in a free fall. Millions in these countries are going to bed hungry as forests are being ravaged to expand plantations or wood product exports. Ordinary people are resorting to barter, growing their own food, and recent reports chronicle people returning to forests to pick berries and mushrooms.
  • Skyrocketing unemployment and insolvent banks are traumatizing the populations of South Korea, Thailand and Mexico.
  • Hammered by plunging commodity prices, Brazil and Venezuela are dragging Latin America into recession.
  • Many other developing countries from the Philippines to South Africa are watching hopes evaporate as capital flight narrows the options of millions of people.
  • In recent weeks, stock market panics have spread to North America and Europe as leaders' inept responses have deepened public distrust of government.

In this context, we note with no surprise that the countries that are surviving the crisis best are those that never removed most capital controls - India and China - and nations which have never integrated fully into the global economy in much of Africa.

The Real Roots of the Crisis

The current financial crisis should come as a surprise to no one. It grew inexorably from deliberate policies of the global economy's architects, policies whose recklessness was pointed out at the time.

The most immediate policy dictates that fueled the financial crisis were demands in the early and mid-1990s by the IMF, GATT, and the US Treasury Department that developing countries open up their stock and financial markets to international financial flows. It should be pointed out that these dictates flew directly in the face of the original mandate of the IMF as spelled out in the Bretton Woods meetings of 1944 that lay the original groundwork for the post-war global economic institutions. The original framers of the postwar architecture were clear that while they advocated free trade, capital movements should not be free. Article VI of the IMF Articles of Agreement authorizes members "to exercise such controls as are necessary to regulate international capital movements" and mandates the IMF to ask for such controls.

This prying open of capital markets is, hence, a violation of Fund's Articles of Agreement. This opening was particularly dangerous because it occurred at a time when hedge funds, mutual funds, pension funds and other short-term speculative financial instruments were growing by leaps and bounds. Between 1990 and 1996, the amount of private financial flows entering poorer nations skyrocketed from $44 billion to $244 billion. Roughly half of this was long-term investments; most of the rest was footloose, moving from country to country with the tap of a computer keyboard.

The opening of Korea, Mexico, Malaysia, Indonesia, Brazil, Russia, and other countries to this global financial casino created massive profits for what free trade economist Jagdish Bhagwati calls the "Wall Street-Treasury Complex", but vastly increased the vulnerability of countries to events beyond their control. When short-term investors panicked in Asia in the last half of 1997, $102 billion left that region and economies were devastated.

Beyond the spawning of the financial casino, the roots of the crisis lie in the deliberate policies of the World Bank, the IMF, and the WTO to remove barriers to corporate flows of trade and investment and to codify corporate "intellectual property rights". Since the fall of the Berlin Wall, government negotiators have passed new global and regional trade rules (via NAFTA and the WTO) and proposed even more sweeping ones in a Multilateral Agreement on Investment whose intent is to expand trade and investment, bust open new markets, and drive down farm and commodity prices. The resulting environmental and human damage leave traumatized populations vulnerable to the dangers of financial liberalization.

The financial crisis has spawned crises in the real economy of many nations and those crises are spreading poverty, unemployment, hunger, and social tensions at alarming levels. In turn, the spread of economic ruin is undermining the political legitimacy of many political leaders who now search to place blame for the crisis on the shoulders of the crisis' victims. In this political crisis of legitimacy, we fear that rather than globalization fostering democracy, it is leading in some countries toward more totalitarian forms of rule.

We also point out that the rules of globalization are geared to reducing us all to consumers greedy for a global basket of goods or workers competing in a brutal global economy. In the process, globalization has run roughshod over the environment, converted lands from crops that local people eat to luxury commodities for those who can buy overseas, and undermined the quantity and quality of work. The United Nations International Labor Organization estimates conservatively that 20 million workers have lost their jobs world wide since the crisis broke out in July 1997.

The Official Explanation

From the very first signs of financial crisis in Asia in July 1997, the architects of globalization have obscured the real roots of the crisis and hence, have offered inadequate or dangerous remedies. The debate has gone like this:

The first line of official argument was that the "free market of globalization" model had not failed - it was the faulty implementation of the model in countries ridden with cronyism and corruption. We do not deny that cronyism and corruption stifle human opportunity the world over. We do ask what could be a clearer manifestation of crony capitalism than an IMF bailout of Western banks. We also point out the existence of corruption in Asia coincided with boom years for most of the past two decades. It was the prying open of markets that precipitated the crisis.

A corollary to this first line of argument is that countries should open their markets even further. This is the rationale for the new government campaigns to pass fast track, sign the MAI, spread NAFTA to Latin America, and enhance the power and measures of the IMF.

The architects spread another myth. Inasmuch as they acknowledge that a crisis exists in some countries, they argue that it is merely lowering people to their economic positions of the past. They obscure the path whereby globalization (in some countries over decades; in other countries centuries) has disrupted once functioning local economies, ejected millions from the land, and destroyed fragile ecosystems. Hence, many people in Indonesia, Russia, Korea and elsewhere are being slammed into new lives far worse than those of their forbears.

Anxious to quell rising public anger and insecurity, the US Treasury Secretary Robert Rubin and other architects of globalization have found it fashionable to call for "a new global financial architecture". Closer examination of their emerging proposals reveals a few piecemeal measures to improve financial data collection and erect so-called "early warning systems", all in the context of further opening up the global economy.

President Clinton and British Prime Minister Tony Blair are also trying to re-establish legitimacy by launching a new "third way" approach to economic problems which, they claim, can create new partnerships between the best of the market and the best of government. Again, closer examination reveals their continued adherence to free market solutions clothed in cosmetic social language.

The Way Out

A rising citizen's movement of workers, environmentalists, farmers, and others is beginning to pave the alternative paths toward rejuvenating healthy economies that meet the needs of the majority of people and the health of the planet. Those groups have gone far toward slowing the manic rush toward globalization over the past year by:

  • Killing a measure to give the US President an undemocratic "fast track" authority to negotiate trade and investment deals.
  • Shining light on the secretive MAI negotiations so brightly that governments had to shift the negotiations underground; and
  • Raising enough concerns about the IMF that the US Congress delayed funding of the IMF for over a year, refused to grant the IMF "MAI-like" powers, and conditioned its funding upon reforms at the IMF which include an end to secrecy.

These advancements take place in a global context where millions from India to France to Canada have become increasingly emboldened to say no to corporate-led globalization initiatives. Economies and economic rules everywhere will fail as long as they are constructed without democratic input of such groups.

As citizens pressure their governments to construct new rules to govern finance and real economies, the are putting certain basic principles on the table:

  • Scale is important to economies. Small units of production are more accountable and pose less danger to the environment.
  • The shorter the distance between producers and consumers, the less the adverse impact on the earth.
  • New approaches need to subsume the market to democracy, not vice versa.
  • Economies should enhance cultural diversity in a way that also respected universal human rights.

Within this broad framework, we encourage the fostering of financial systems that:

  • Direct savings toward productive investments, while discouraging speculative and other extractive forms of investment.
  • Limit the creation of financial bubbles that lead to the abrupt inflation and collapse of financial assets unrelated to underlying economic fundamentals.
  • Encourage equitable and broadly based participation in the ownership of productive assets by individuals and place-based communities, while limiting absentee ownership and concentrations of unaccountable economic power.
  • Reward those who internalize the costs of their private gains and penalize those who attempt to pass these costs onto the larger community.
  • Honor the essential role of economic borders in protecting the need and right of each nation and community to control its own system of finance.

We salute the creation of vibrant national debates on these issues and would like to direct readers to an exciting process of People's Inquiries being held across Canada that is spreading discussion on what Canadian activists are calling the "three Rs of Democracy":

  • what rights must be guaranteed in a democracy;
  • what responsibilities must corporations and governments assume; and
  • who sets the rules that govern economic activity.

Specifically in response to the financial crisis, we are heartened by the growing number of mainstream commentators that are calling for a new Bretton Woods conference to re-examine what institutions we need to govern the global economy and to replace a failed IMF. We are likewise heartened to see more and more people acknowledging the need for nations and comminutes to be able to place checks on financial flows in and out of their jurisdictions. Such calls have emanated from such unlikely sources as the World Bank in recent weeks. We point out that such proposals fly in the face of the logic of the MAI and the WTO and we encourage others to join the debate over how to prevent new global institutions from undermining the rights and responsibilities of governments to regulate financial activity.

Let us build on the experiences of Chile, Malaysia, India and other nations that have experimented with various capital controls. Let us halt the expansion of both the power or resources of the IMF until we carry out a thorough review of what kind of institution is needed in the new volatile global financial arena. Let us examine other measures to discourage speculative financial activity and to encourage financial flows that meet basic needs. And, above all, let us expand the number of people who are at the tables that determine the new architecture of the global financial system.

The IFG Finance Committee is dedicated to education around the growing global financial casino and the search for more just and sustainable financial systems. Some points in this paper were drawn from the writings of committee members Walden Bello, Martin Khor, and David Korten. Others were drawn from a discussion of the IFG Board in September 1998.

Copyright 1998 International Forum on Globalisation