The Asian
Crisis Suggests
We Should Bring Back Keynes
By JONATHAN POWER
COPENHAGEN--The most peculiar aspect
of the Asian economic crisis so far is that no one has
mentioned the three words, John Maynard Keynes. Yet the
response both from national governments (in particular
Japan), the International Monetary Fund (IMF), Washington
and, now with Monday's meeting in New York, the commercial
banks joined by the securities houses, has been utterly and
totally Keynesian--prime the pump.
Keynesian economics, intellectually
derided by the Chicago school, in particular Milton
Friedman, and politically rubbished by Margaret Thatcher and
Ronald Reagan, has had its comeback. "Signs of solution are
at last beginning to emerge where it matters most, in
Japan", editorialized the Financial Times approvingly on
Monday (but without mentioning the word Keynes), "the use of
public funds to support the banking system and a readiness
to put fiscal policy on an expansionary track".
Yet, even now, elements of
anti-Keynesianism persist in the current economic doctoring.
The IMF has insisted too much on monetary tightening in
Thailand, Malaysia, Indonesia and, in particular South
Korea. And it has shied away from criticising military
expenditures, thus allowing governments to focus their
cost-cutting on social expenditures whose greatest impact is
as always to hurt the less fortunate.
These, important errors though they
be, are minor flaws compared with the refusal to open the
door to a wider intellectual appreciation of Keynesian
teaching on the need for greater liquidity resources for the
IMF.
If the IMF had had the resources
Keynes envisioned, argues Mahbub ul Naq, the former finance
minister of Pakistan and a constant campaigner for
resuscitating Keynes' intellectual legacy "then the Asian
crisis would have been avoided". "South Korea's economic
condition", he told me over the phone from Islamabad, "has
been blown up out of all proportion to its fundamental
strength. What South Korea has is not so much an economic
crisis as a liquidity crisis".
Just before the end of the Second
World War the western powers decided to rethink the
international financial system. Meeting in July 1944 at
Bretton Woods their top experts, including Keynes, discussed
a new world order, convinced that the global system could
not be left to the mercy of unilateral action by governments
or to the unregulated workings of the international markets.
Thus emerged the IMF and the World Bank. It was at the one
and the same time a great achievement and a great
disappointment. Over the last five decades both institutions
have been invaluable but this success only begs the question
what might they have done if Keynes' original vision had not
been cut down to size.
Keynes proposed an IMF whose resources
would be equal to one half of world imports. In practice the
IMF today controls liquidity equal to only 2% of world
imports. It can impose only a modicum of the financial
discipline necessary in an age when speculative private
capital movements crossing international borders are of the
order of $650 billion every 24 hours.
Keynes saw the IMF evolving into a
world central bank able to issue its own reserve currency
sufficient to meet the needs for expansion whenever and
wherever needed. The IMF does have so-called Special Drawing
Rights but they amount to only 3% of world liquidity. In the
mid 1990s the IMF's managing director, Michel Camdessus,
campaigned hard for a modest increase in these and also for
an increase in quotas to strengthen the IMF's capital base,
but Washington and Bonn rebuffed him.
Keynes regarded balance of payments
surpluses as a vice and deficits as a virtue. It is deficits
that sustain demand and generate increased employment. He
went so far as to argue that outstanding trade surpluses
should be penalised by an interest rate of 1% a month. Thus,
in Keynes' vision, there would be no persistent debt
problems as surpluses would be used by the IMF to finance
deficits.
Keynes would have had no time for the
present gambler's paradise--private investors' speedy entry
into and exit from financial markets in search of quick
gains. This not only precipitated the present Asian crisis
but it has seriously undermined longer-term investment. In
an age when the combined reserves of all central banks
amount to one day's worth of foreign exchange trading, the
ability of individual countries and the IMF to stop a quite
irrational haemorrhaging of the proportions we have just
witnessed is totally undermined.
Besides more available PUBLIC
liquidity we are in urgent need of some sort of breaking
system when the PRIVATE liquidity system spins too fast.
Hence the renewed interest in academic circles of the
proposal of the economics Nobel prize winner, James Tobin of
Yale University, for a tax of 0.5% on international currency
transactions. This would curb excessive speculation, while
yielding around $1.5 trillion a year for health and
educational development.
So who among the greats of the new
year of 1998 will dare resurrect the name of John Maynard
Keynes? "Ring out the false, ring in the
true"!
December 31,
1997, COPENHAGEN
Copyright © 1997 By JONATHAN POWER
Note: I can be reached by phone +44 385 351172
and e-mail: JonatPower@aol.com
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