Global Market Sneeze: It's just the flu

AND so in the markets, this was official. It took finally a word from the FederalReserve Board of the US to restore balance—and with it hundreds of billions ofdollars—to the mighty Dow Jones stock index on Wall Street and markets around theworld. Chairman of the Board Alan Greenspan had merely announced that the Fed wouldintervene if necessary to steady the upheaval in the markets. That ultimate champion offree markets too had needed the steadying hand of government. Raising critical questionson the future of the world markets and their relationship with governments.

In fact, last week US president Bill Clinton took time off from hispersonal political crisis to tell the American citizen to wake up and smell coffee.Emphasising that their economic well-being hinged on the "biggest financial challengefacing the world in a half-century", he exhorted: "With a quarter of theworld’s population in declining growth, we must recognise we cannot forever be anoasis of prosperity."

Indeed, as global economies collapse like ninepins and fear of a sequel tothe Great Depression of 1929 sends shivers down the seemingly ever-resilient Americaneconomy, economists, institutions and governments around the world realise that marketscannot be abandoned to their own ways any more. And this is not true just of Malaysia andHong Kong. Even as they search for the golden mean somewhere between Marks & Spencerand Marx, they realise that the debate is no more about socialism and capitalism. On WallStreet or in London, in Buenos Aires or Moscow, the mantra has changed: the triumphs offree-marketism are now the troubles of free-market fundamentalism.

"The view is definitely changing," says Dr Attar Hussain,director of research at the Asia Centre of the London School of Economics. "We allthought liberalisation is a good idea, but the cost of liberalising short-term capitalflows outweighs any advantages." After the massive hits on economy from currencyfluctuations, he says governments are thinking of "imposing quantitative controls, ofdelinking economic policy from currency fluctuations".

Clinton’s televised appeal before the powerful Council on Foreign Relations, aManhattan-based think-tank, was in stark contrast to the American politicalleadership’s frame of mind one had witnessed a little over a year ago in June of 1997at the G-7 meeting in Denver, Colorado. At that conclave, then prime minister of JapanRyutaro Hashimoto gamely tried to draw America’s attention to the financial crisisbrewing in Thailand. No one was prepared to listen about Bangkok’s bubble bursting.Instead, G-7 leaders were busy appreciating the cowboy hats Clinton had handed out; andthey were enjoying the music of the ’70s, including Fleetwood Mac.

Just a few days later, Bangkok’s baht bubble exploded. And that was the triggerfor a chain reaction "in politics and financial markets that has now brought us to acrisis point in the post-Cold War era," says Richard Medley, managing partner ofMedley Global Associates that provides political intelligence to financial institutions.

The financially crippled list now includes Japan and most of the rest of east Asia. AndRussia’s internal bankruptcy has given a new dimension to the emerging market crisis.Now the contagion appears to be spreading to East Europe, South Africa and Latin America,says The Economist. According to noted economist Jeffrey Sachs, director of the HarvardInstitute of Development, who has long argued that the IMF is mishandling the crisis,"It’s hard to believe that just a year ago the IMF was trumpeting a new globalcommitment to unfettered capital flows. Almost all observers now concede that prematureliberalisation of capital markets (often pushed by the IMF itself) was one cause of thecurrent crisis."

Adds India’s very own Jagdish Bhagwati, Arthur Lehmann professor of economics atColumbia University: "Wall Street has exceptional clout with Washington for thesimple reason that there is a definite networking of like-minded luminaries among powerfulinstitutions and this powerful network is unable to look much beyond the interest of WallStreet, which it equates with the good of the world. Thus, the IMF has been relentlesslypropelled towards embracing the goal of capital account convertibility." With thestandard Washington consensus finally failing to be the cure-all, selective stateintervention seems to be back in fashion. In Malaysia, prime minister Mahathir Mohammadmade the ringgit non-convertible and imposed a volley of capital controls to stopoutflows; in free-market Hong Kong, the government intervened to stabilise the stockmarket; in Chile, investors have been asked to make a heavy deposit at zero interest withthe central bank for at least a year before they begin to play the market. Even the mightyPaul Krug-man, Ford International Professor of Economics at MIT, has endorsed controls oncurrency. This, he says, is aimed at enabling a country to loosen its monetary policieswhen it needs to in order to fight off recession without fear of setting a flight ofdollars, which no longer could be pulled out of the nation upon demand.

In a recent open letter to Mahathir, Krugman wrote: "The purpose ofcurrency controls is to allow adoption of more expansionary fiscal policies, and hence topromote a recovery of the real economy. Such a recovery will, if all goes well, reduce theproblems of insolvency in the corporate sector and non-performing loans in the bankingsystem." On the face of it, this rethinking seems to match Indian government thinkingthrough its recent—many say half-hearted—attempts at liberalisation, especiallyits staunch no to capital convertibility. Suddenly, the Indian view is being claimedfarsighted rather than anachronistic. Fund managers point to steady inflows of foreigncapital into India as a sign of renewed faith in the relatively protected system. "Weare beginning to see what we thought of as India’s disadvantages, as itsadvantages," admits a senior banker with an American multinational investment firm.Even Bhagwati has termed it an unexpected plus point for India’s economy, consideringthat it managed to keep out of the Asian crisis.

But, Bhagwati sagely explains, "the overwhelming majority of tradeeconomists judge the gains from free trade to be significant, coming down somewherebetween Krugman’s view that they are too small to be taken seriously and Sachs’opinion that they are huge and cannot be ignored. None of the solutions currentlypropounded can really rid the system of free capital mobility of instability."

THE Chilean model is the nearest that works with regulation arisingfrom market means rather than the government. Protectionism is still a dirty word. Thereviews under way everywhere have revived a study of the Tobin tax proposed in the’70s, intended to discourage speculation but keep currency exchange workable. "This tax on short-term capital flow is the only tried model other thanadministrative controls," says Hussain. There’s also a third way being explored.By Giddens, which though fairly far from the Indian way to hold the right to intervenefreely in the free market, explores regulatory ways and a form of global governance thattunes into national and local needs (see interview).

But there’s a wide agreement that the government cannot remain aspectator to the market goings-on. Anatole Kaletsky, the leading commentator on economicissues in The Times, reads in the current interventions by the government the lesson that"capitalism can prosper only with the support of sound government—that politicalinstitutions have a legitimate and indispensable role in managing the capitalistsystem." The global dominance of free-market fundamentalism is "now in fullretreat" because "governments must accept responsibility for preservingstability and managing macro-economic demand."

The Chinese have drawn in far more investment than India "and bothhave systems of government intervention," says Hussain. Government control is notseen as the answer. "It is not in this that you will find the answer to thedifferential between the two—the fundamentals are more important," says Hussain.The protection of the Indian market from the global turmoil is seen as a product ofmarket-like decisions to limit short-term borrowing and exposure to speculation in realestate.

It can be hard to draw the line between protection and protectionism. China and Japanhave done more or less fine, though less now than before, without capital accountconvertibility. But India is not necessarily going to fly protectionist banners. Thesuggestion by Yashwant Sinha for international consensus to "prevent rogue elephantswho roam international financial markets from trampling on national concerns" in this"law of the jungle" is in line with ‘the third way’ that is under suchactive discussion. Yet, globalisation is certainly not in retreat.

SAYS Sachs: "Even with all of the turbulence and value destruction of the pastyear...no developing country is closing its door on markets and globalisation. Even inMalaysia and Russia, policymakers know that technology and capital can come only fromoutside, and they know that only markets can deliver the chance of sustained growth."Adds Krugman: "(Capital controls) will by no means eliminate these problems; thebreathing room given by controls should be used to accelerate, not slow, the pace offinancial clean-up."

바카라 웹사이트As the post-cold war scenario reshuffles to create a new economic order, thestruggle to find the golden mean may have just begun. Says Sachs: "After four decadesof experimentation, almost all countries have realised that the national market is simplytoo small to permit efficient levels of production. The nation is no longer their economicprotector, and in peaceful regions, the national government is no longer seen as acritical instrument of security. Consequently, regions as far-flung as Catalonia, northItaly and states in India have taken globalisation as their cue to pursue greater autonomywithin the state. All these issues are new, urgent, and likely to loom large on theresearch radar screen."

Adds Richard N. Hass, director of the Program in Foreign Policy Studies at theBrookings Institution, Washington, D.C.: "The real choice is not how to fightglobalisation but how to manage it. It is ironic: the age of globalisation may well bedefined in part by challenges to the nation-state, but it is still states that willdetermine whether we exploit or squander the potential of this era."

바카라 웹사이트The knowledge seems to have struck the US too. James K. Glassman of theWashington D.C.-based American Enterprise Institute warns: "The recovery from thelast recession began at the end of 1991, and the summer of 1998 could prove the lastblowoff for a while—the end of the biblical seventh fat year. One-third of the worldis in recession, and something called deflation is moving west with the night."It’s a fear that may move the world towards a concerted solution of the crisis. Andemerging Asia may well bounce back after its long, hard winter.