One thing is clear: The West cannot shrug off a fundamental shift away from free markets in a majority of the Third World.
Market Features Hello, Karl? Despite Recent Setbacks, Fears of a Free-Market Retreat are Overblown By Peter Eavis Senior Writer 8/27/98 8:05 PM ET
The declines in the emerging markets have been so steep and persistent during the past 18 months that some are starting to suggest capitalism's days are numbered in the developing world.
That's unlikely, but we're definitely entering an era in which the Third World will be divided into countries that stick with open, free-market economies and those that don't.
One thing is clear: The West cannot shrug off a fundamental shift away from free markets in a majority of the Third World. One of the main assumptions behind the U.S. bull market -- and, more importantly, the post-Cold War peace -- was that the developing world was done with socialism, and anything that resembled it.
In an October keynote address at the Cato Institute, Alan Greenspan warned of the dangers to the global markets if developing countries went back to irresponsible, old-style interventionist policies.
In his typically understated fashion, Greenspan made this warning: The recent financial turmoil in some Asian financial markets ... confirms that in a world of increasing capital mobility there is a premium on governments maintaining sound macroeconomic policies ... Al may be worried, as much evidence suggests that those "sound macroeconomic policies" are history in some countries.
Take Russia. After the country's panicked devaluation and default last week, the free-market reformers have been swept off the board. Boris Yeltsin has been rendered powerless and could go any day now. Acting prime minister Viktor Chernomyrdin, whose distaste for western-style free markets is well known, is now at the helm. One insight into his lack of understanding of the crisis was his angry accusation Thursday that the IMF, Russia's soft-touch sugar daddy for the past six years, caused the whole mess.
Meanwhile, the Communist-dominated Duma, now likely to have much more of a say in the way Russia's run, Thursday announced that it wanted to nationalize chunks of industry, expand money supply and implement measures to protect state monopolies. Who knows, it's possible Russia may not have a public equity market by the end of the year. The new model for Russia is one in which robber barons hang on to anything profitable and the state is shouldered with the money-losing rump.
Yes, Russia's an extreme example. But consider the following. China has stopped all restructuring of its enormous state-owned sector. Essentially, the country's leaders are scared that more reforms will mean higher unemployment and public discontent, which will increase the chance that they go the way of Suharto.
Hong Kong and Malaysia are using government money to support stock prices, which is a kind of stealth nationalization. Beijing is fast turning Hong Kong -- ranked number one in the 1998 Heritage Foundation's Index of Economic Freedom -- into one of its shoddily run special economic zones.
Over the past three years, Mexico and Argentina have passed no significant structural reforms for fear of upsetting entrenched interests. And Brazil's government -- despite sporting the largest budget deficit in the western hemisphere -- has embarked on a pre-election spending splurge that would make the country's 1980s spendthrifts blush.
This all sounds terrible. But while Russia and China are really in deep trouble, evidence suggests that most other emerging nations will stay on the reform road -- just. That means equity markets in these countries will recover -- but grinding recessions could delay this for some time. Most heartening is the progress made in Southeast Asia since the region blew up last year. Thailand -- in a move that would have been unthinkable a year ago -- is selling off or closing large parts of its banking sector. And together with the IMF, South Korea has managed to prevent its crisis from escalating into a full-blown disaster. Now, South Korea is slowly -- and painfully -- laying the foundations for lasting economic stabilization.
While Brazil and Argentina may see their dollar-pegged exchange rates destroyed by the end of the year, they will almost certainly not reverse many of the free-market reforms of this decade, as their populations all too clearly remember recent hyperinflation. As long as the leftist opposition PRD doesn't look like its going gain power in the 2000 elections, Mexico should hold on to its reforms, too.
In the final analysis, you have to understand why most emerging nations ever bothered moving towards capitalism in the first place: Dollars.
Consider these numbers. In the second half of the '80s, when socialism was still entrenched everywhere except Southeast Asia, average annual net private capital flows into the developing world totaled a mere $15.2 billion. So far in the '90s, that figure was 10 times higher at $150 billion, according to the IMF.
Fear of losing those greenbacks is perhaps the only thing preventing a mass exodus to the bad old days.