May 30, 2020
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Global Market Sneeze: It's just the flu

In the face of a global meltdown, experts now call for some government control

Global Market Sneeze: It's just the flu

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

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

Indeed, as global economies collapse like ninepins and fear of a sequel to the Great Depression of 1929 sends shivers down the seemingly ever-resilient American economy, economists, institutions and governments around the world realise that markets cannot be abandoned to their own ways any more. And this is not true just of Malaysia and Hong Kong. Even as they search for the golden mean somewhere between Marks & Spencer and Marx, they realise that the debate is no more about socialism and capitalism. On Wall Street or in London, in Buenos Aires or Moscow, the mantra has changed: the triumphs of free-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 all thought liberalisation is a good idea, but the cost of liberalising short-term capital flows outweighs any advantages." After the massive hits on economy from currency fluctuations, he says governments are thinking of "imposing quantitative controls, of delinking economic policy from currency fluctuations".

Clinton’s televised appeal before the powerful Council on Foreign Relations, a Manhattan-based think-tank, was in stark contrast to the American political leadership’s frame of mind one had witnessed a little over a year ago in June of 1997 at the G-7 meeting in Denver, Colorado. At that conclave, then prime minister of Japan Ryutaro Hashimoto gamely tried to draw America’s attention to the financial crisis brewing 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; and they were enjoying the music of the ’70s, including Fleetwood Mac.

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

The financially crippled list now includes Japan and most of the rest of east Asia. And Russia’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 Harvard Institute 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 global commitment to unfettered capital flows. Almost all observers now concede that premature liberalisation of capital markets (often pushed by the IMF itself) was one cause of the current crisis."

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

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

But, Bhagwati sagely explains, "the overwhelming majority of trade economists judge the gains from free trade to be significant, coming down somewhere between 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 currently propounded can really rid the system of free capital mobility of instability."

THE Chilean model is the nearest that works with regulation arising from market means rather than the government. Protectionism is still a dirty word. The reviews 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 than administrative 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 intervene freely in the free market, explores regulatory ways and a form of global governance that tunes into national and local needs (see interview).

But there’s a wide agreement that the government cannot remain a spectator to the market goings-on. Anatole Kaletsky, the leading commentator on economic issues 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 political institutions have a legitimate and indispensable role in managing the capitalist system." The global dominance of free-market fundamentalism is "now in full retreat" because "governments must accept responsibility for preserving stability and managing macro-economic demand."

The Chinese have drawn in far more investment than India "and both have systems of government intervention," says Hussain. Government control is not seen as the answer. "It is not in this that you will find the answer to the differential 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 of market-like decisions to limit short-term borrowing and exposure to speculation in real estate.

It can be hard to draw the line between protection and protectionism. China and Japan have done more or less fine, though less now than before, without capital account convertibility. But India is not necessarily going to fly protectionist banners. The suggestion by Yashwant Sinha for international consensus to "prevent rogue elephants who 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 such active discussion. Yet, globalisation is certainly not in retreat.

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

 As the post-cold war scenario reshuffles to create a new economic order, the struggle to find the golden mean may have just begun. Says Sachs: "After four decades of experimentation, almost all countries have realised that the national market is simply too small to permit efficient levels of production. The nation is no longer their economic protector, and in peaceful regions, the national government is no longer seen as a critical instrument of security. Consequently, regions as far-flung as Catalonia, north Italy and states in India have taken globalisation as their cue to pursue greater autonomy within the state. All these issues are new, urgent, and likely to loom large on the research radar screen."

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

 The knowledge seems to have struck the US too. James K. Glassman of the Washington D.C.-based American Enterprise Institute warns: "The recovery from the last recession began at the end of 1991, and the summer of 1998 could prove the last blowoff for a while—the end of the biblical seventh fat year. One-third of the world is 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. And emerging Asia may well bounce back after its long, hard winter.

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