September 4, 1998
The I.M.F. Could Save Your 401(k)
By ADAM S. POSEN
WASHINGTON -- Until recently, the average American investor didn't see much reason to be concerned with the Russian financial crisis. But now that this crisis and the uncertainties in Asia have created turmoil in the United States stock market, investors have become wary of emerging markets. And the instability has also caused some to wonder whether we should continue to support the International Monetary Fund.
But like it or not, emerging markets are crucial to American investors. And ending support for the I.M.F. could hurt all investors, even the smallest ones.
Why? As our society ages, more and more Americans will be living off their savings and investments -- especially in 401(k) plans and individual retirement accounts. For these plans to provide adequate income at least part of their investments must offer high returns for decades to come.
But our mature, service-heavy economy is probably not going to provide those high returns. Companies in the United States are increasingly involved in managing production rather than manufacturing goods within our borders. Therefore manufacturing, and the large sums of investment capital that accompany should -- and are -- going not here, but abroad. Moreover, as our population continues to age, our demand for consumption goods will grow more slowly, meaning that we need to look for markets in other countries as well. In short, we need new places to produce our products and new markets for our goods in order to insure our comfortable retirements.
Emerging markets -- meaning, countries that are being industrialized and modernized -- are the best to expect high returns. Countries like Mexico and Thailand have younger populations and an emerging middle class, which make them a source of both labor and expanding consumer demand. To employ this labor and feed this demand, they need investment capital. And where supply of capital is low, an investor's return is high. This is what happened in the United States in the 19th century, when our developing economy presented new and large investment opportunities, albeit with occasional crises.
So, like it or not, Americans need emerging markets in order to prepare for their retirements. The problem, of course, is that these investments, like all investments, involve some risk. And that's where the International Monetary Fund comes in. The role of public policy is to minimize the risks of the economic system in general, so individual investments can be judged on their own merits.
Within the United States, investors have access to the information they need because our Government regulates insider information, sets standards for accounting and disclosure and openly announces its laws and economic policies.
Most emerging markets do not operate this transparently, however. Corruption, lax financial supervision, secret deals between governments and corporations or a simple lack of reliable information can make it difficult for financial managers to track how companies or even how whole industries are performing.
Investors, therefore, tend to watch one another. In times of panic, investors may withdraw their money from countries that have sound economic policies simply because other investors have fled. This is what happened last week, when the crisis in Russia caused investors to pull out of Argentina and Hong Kong, even though both of those countries have well-managed economies that are not tied in any way to Russia's.
The I.M.F. is the best means we have of reducing this sort of contagion. The I.M.F. limits the impact of outright panic by requiring sound policies from borrowing countries. If a country meets the terms of a loan, that means its policies are sound. If a country doesn't meet those terms -- as Russia failed to do earlier -- then investors know they should pull out. The I.M.F. doesn't only deal with panics after they happen. It also protects against them by encouraging governments to be more open about establishing policies and regulating markets.
For example, before making loans to stem the economic crisis in East Asia, the I.M.F. required those countries to supervise their banking systems more closely and to provide fuller disclosure of both government and corporate accounts. And thanks to the data collection efforts of the I.M.F., foreign investors can get daily access to consistent and dependable economic statistics.
The I.M.F. is not and cannot be an international financial regulator or a full lender of last resort in a world of independent states. And granted, the I.M.F.'s loan conditions are not always perfectly suited to the situation. Nor can the I.M.F. prevent every crisis.
But what other organization could possibly do its work? No country could impose conditional loans on another country. But because the I.M.F. is a multinational institution, it can impose discipline on sovereign states without completely offending their sense of independence. And, as the recent contagion has demonstrated, the I.M.F.'s conditional loans are needed because markets left to themselves don't always separate solvent from insolvent countries.
Without investments in emerging markets -- and without the I.M.F. to minimize the risks -- American investors stand to lose far more than they lost this week. In the years ahead, ordinary Americans will increasingly rely on foreign governments' policies to keep their investment returns high. That means we will need the I.M.F. more than ever.
Adam S. Posen, a research fellow at the Institute for International Economics, is the author of "Restoring Japan's Economic Growth."
Copyright 1998 The New York Times Company
Louis Proyect
(http://www.panix.com/~lnp3/marxism.html)