Take power away from the global gamblers
 
Philip Bowring International Herald Tribune
Monday, June 24, 2002
Financial crises
 
HONG KONG Mexico. Thailand. Indonesia. Korea. Russia. Turkey. Argentina. South Africa barely escaped. Now Brazil may be about to join the list of major middle-income countries that have suffered wrenching economic crises in the past seven years. These crises have been brought about by unstable international capital markets, yet instead of looking at the flaws of a system that has brought undemocratic power and huge profits to its promoters, analysts' attention is primarily paid to the supposed domestic flaws of the crisis countries.
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In the case of Brazil it is widely admitted that there is nothing seriously wrong with its economic policies, nor its foreign debt levels. Nor has the opposition presidential candidate Luiz Inacio "Lula" da Silva made any wild or radical promises. But the mere thought of a leftist president in Brazil has been enough to send Wall Street commentators and analysts into potentially self-fulfilling prophecies of doom, causing an exodus of capital and a sharp rise in interest rates and so further doubts about national solvency.
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The three crises of the past year make it plain that the international financial community has learned nothing from the Asian crisis. Despite the domestic disgrace into which Wall Street has fallen, thanks to years of excessive greed leading to recent multiple major scandals, the nexus between Wall Street, Washington and the International Monetary Fund may have even been strengthened.
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Looking at the potential wreckage of what had been a decade of economic progress in South America, it is worth remembering how Prime Minister Mahathir bin Mohamad of Malaysia was vilified for not following the dictates of Wall Street and the IMF. Yet he was right in two assumptions about the IMF: First, that it lacked sufficient resources to rescue even those countries it viewed favorably from panic or speculative attacks by traders in London or New York. Second, that it would use loan conditions to push microeconomic and political objectives that went far beyond its remit.
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The latest Latin crisis has implications that go well beyond individual countries, or even global financial institutions. It strikes again at the ability of middle-income countries, particularly those with relatively youthful populations, to act as an engine of global growth - something the United States can no longer do, thanks to its own debt levels, and which is also beyond the ability of the aging societies of Europe and Japan.
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Indeed, it is now clear that the best hope for reigniting medium-term growth rests with the poor but very large countries, China and India. Their persistent refusal to follow Wall Street mantras and IMF ideology and fully open their capital markets has kept them relatively untouched by crises elsewhere. In fact, China's banks are in worse shape than Argentina's, and India's domestic public debt is worse than Brazil's. But capital controls and state ownership of banks provide a measure of stability for countries with immature financial or legal institutions - and without the money-printing ability of reserve currency nations.
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Revived East Asian countries headed by South Korea may be able to provide continued global stimulus. But each national crisis increases the pressure on others to increase their reserves at the expense of growth-oriented policies, and follow beggar-thy-neighbor trade policies.
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Direct and portfolio investment flows remain important for most developing countries. But just as Wall Street in the 1990s came to be dominated by get-rich-quick schemes, so international short-term capital flows have continued on a massive scale, to the benefit of no one except the intermediaries.
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As in Asia, those who promoted excessive inflows also benefited from capital flight - and then from IMF bailout packages which, like Alan Greenspan's rescue of Long Term Credit Management, add to moral hazard and protect the financial sector at the expense of the real sectors of the economy. As Maynard Keynes wrote: "When the capital development of a country becomes the by-product of the activities of a casino, the job is likely to be ill-done."
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At home, the United States is, in its typically self-renewing way, starting on a radical reform of Wall Street. But how many more Argentina-style crises will it take before the world learns the wisdom of taking power away from the casino operators, the investment banks, and handing it back to elected governments?
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