Grave
Mistakes in the Global Financial Crisis
By JONATHAN POWER
LONDON---When commercial shortsightedness is compounded
by lack of effective inter-governmental institutions and
reinforced by ideological rigidity and then, by lack of
compassion, made dangerous and deadly, it s difficult not to
have sympathy for those like prime ministers Mahathir bin
Mohamed of Malaysia or Yevgeny Primakov of Russia who, in
effect, are telling western governments and their financial
fireman, the International Monetary Fund, to go take a run
and a jump. They are wrong but their wrongness is nothing
compared with the West s.
Whether it be the loose talk about the need for moral
hazard to serve the bankers and investors right (the U.S.
House of Representatives economic experts are hot on this
one); or the refusal by Alan Greenspan, chairman of the U.S.
Federal Reserve Board and Hans Tietmeyer, president of the
German Bundesbank, to countenance an interest rate cut
(still fighting the inflationary demons of yesteryear); or
Chancellor Helmut Kohl (according to the IMF) balking at
another Russian bail-out a month ago when the pro-capitalist
reformers were still in power and were beginning to make
progress on Russia s main fiscal problem, the
undercollection of taxes; or ... one could go on.
As if we didn't know what the cost is going to be. We
need go no further back than the great debt crisis of the
1980s. According to UNICEF half a million child deaths, two
thirds of them in Africa, were directly caused by the 1980s
recession and the debt crisis. By the end of the decade
urban real wages in Latin America were 20% to 40% below 1980
levels. In Uruguay, Peru and Argentina they were below 1970
levels.
This crisis already has wrecked nearly as much damage in
Thailand, Indonesia, South Korea and Russia, and the
hurricane is still on the move. If, as many predict, it
spills over into Latin America and Africa and then into the
Western world itself, it will drag half the world down and
the poorest 20% not only down but effectively out.
One of the ironies of the present situation for a
columnist who covered the debate about the New Economic
Order in the 1970s is to recall the uphill battle to try and
convince western capitals and financial markets of the
economic potential and possibilities of the Third World. Now
this once underdeveloped world smacks a collective punch
that can send the West reeling and perhaps--we don t know
yet--bring it down on the mat for a good count.
The argument then was about lowering trade barriers to
make the world an equal opportunity employer; about
encouraging investment and priming the educational, health
and infrastructure pump with aid. In the end much was done
by western institutions and investors but we should never
forget the developing countries did most of it themselves.
Even in the 1990s capital inflows from outside amounted to
only 10% of domestic investment in emerging markets.
Nevertheless, the process was unnecessarily slow and many
opportunities were missed to speed it up. Success could have
come sooner and with less pain-- and it would have been
better for the West too, because these new market places
could have mushroomed earlier.
Again to go back to the 1980s debt crisis whose main
sufferer was Latin America--they called it the lost decade
--the pain was at least 75% unnecessary.
Professor Paul Krugman of the Massachusetts Institute of
Technology wrote a very clever piece at the time in favour
of debt write-offs, so that Latin America could escape the
strait-jacket it was bound in. He argued that if half the
debt were written down to 40% of its face worth the
investors would be better off in the long run. The borrowing
countries would then more quickly recover and thus be
enabled to pay a higher percentage than 40% on the remaining
half.
The same thought must be entertained today. What does the
West gain from punishing yesterdays mistakes--the banks and
investors who lent too much or the developing countries who
encouraged an overdose of inward investment and didn t
monitor its use more carefully? Punishment means widespread
poverty and political unrest for them and nerve-racking
economic insecurity for the West. It is a zero sum game.
Indeed it could be worse than that in Russia where increased
chaos and increased nationalism is nuclear armed.
For the future, to avoid more such crises it must be Back
to Keynes . Back to what he tried to do in 1944 at the
Bretton Woods conference but was overruled by America s
shortsightedness. Keynes proposed an IMF whose resources
would be equal to one half of world imports. In practice
today the IMF controls liquidity equal to only 2% of world
imports. In an age when the combined reserves of all the
world s central banks amount to one day s worth of foreign
exchange trading, the ability of either the IMF or western
governments to stop a quite irrational haemorrhaging of the
proportions we have recently witnessed, and could come to
see in Latin America, is totally impossible.
Moreover, Keynes would have had no time for the present
gamblers paradise--the speedy entry into and exit from
financial markets with no supervision or braking system. We
need a tax of say 0.5% on international currency
transactions. This would give useful second thoughts to
volatile investors and thus dampen down the lemming-like
instincts of the short-term investors. Also it would produce
a revenue of $1.5 trillion a year for the IMF.
When Kim Dae Jung won the presidency of South Korea last
year as the east Asian financial storm gathered speed, he
observed, My country is standing between stagnation and
rebirth . Absolutely right and absolutely right for the rest
of the world too.
September 23,
1998, LONDON
Copyright © 1998 By JONATHAN POWER
Note: I can be reached by phone +44 385 351172
and e-mail: JonatPower@aol.com
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