By Paul Blustein
Washington Post Staff Writer
Friday, September 4, 1998
As the crisis roiling global financial markets spreads and intensifies, signs increasingly suggest it could deal a historic setback to the advance of Western-style capitalism.
The most obvious illustration is Russia. After the virtual collapse of the country's economy last month, pro-Western forces are in full retreat and speculation abounds that socialist policies will be revived.
Another example is Malaysia, which this week effectively cut itself off from global financial markets by imposing tight controls on the flow of capital across its borders. The country had thrived over most of the past decade by welcoming investments by U.S., Japanese and European firms. But Prime Minister Mahathir Mohamad, furious over the selling wave that has sunk the Malaysian currency and stock market, decreed that the currency – the ringgit – could no longer be freely traded.
Even in Hong Kong, hitherto proud of its reputation as the world's most freewheeling market, the government launched a vigorous effort last month to bolster the Hong Kong Stock Exchange by using billions of dollars' worth of public funds to buy shares.
Up until a couple of months ago, the crisis appeared to be forcing economic policy in many countries in a market-oriented direction – so much so that Michel Camdessus, the managing director of the International Monetary Fund, often referred to the financial turmoil as "a blessing in disguise."
Together with his backers in the Clinton administration, Camdessus saw potential long-run benefits resulting from the Asian crisis: Even though crisis-ridden countries such as South Korea and Thailand were sinking into painful recessions, they were moving toward more Westernized, free-market models as they met IMF demands to scrap the "crony capitalism" and policies of heavy government intervention in the economy that had undermined their long-term growth prospects.
But the words "blessing in disguise" have disappeared from Camdessus's public utterances lately, underscoring growing fears among Western analysts and officials that the crisis may prove an unadulterated curse.
"I think of it as a backlash against globalization, and you're getting more and more episodes that move down the same track that make this whole dimension of the crisis very worrisome," said C. Fred Bergsten, director of the Institute for International Economics, noting that Taiwan and Japan have also been resorting to government-backed stock purchases as their markets weaken.
Robert B. Zoellick, a top official in the Bush administration, said the latest developments have deepened his concerns that Washington is failing to aggressively consolidate the gains the U.S. system had achieved at the end of the Cold War. "Now we're moving beyond the risk of missing opportunities, to the risk of retrogression," said Zoellick, president-designate of the Center for Strategic and International Studies. "In the long view, you can argue that markets and capitalism will eventually dominate because people will discover the benefits of an efficient production system. But as we saw in the 1930s, the long run can last a long time."
Remarkably few restrictions have been raised during the crisis on imports or exports of goods and services, so the dangers to capitalism shouldn't be exaggerated. So far, most of the government interference, including Malaysia's, has been limited to the markets for money.
Throughout much of the post-World War II period, many countries – including advanced industrial powers in Western Europe – maintained controls on capital. In some ways, government intervention in the capital markets now can be viewed as an effort to correct the excesses of a decade-long experiment in which money was free to fly virtually anywhere on earth at the touch of a computer key.
Clinton administration officials, while deeply alarmed about the recent turn of events in Russia, profess to see Malaysia's move as less of a threat to the economic model they espouse. They predict that Malaysia's economy will undergo an even more wrenching downturn as the inflow of foreign money dries up in response to the government's restrictions on taking capital out.
"Malaysia's going to provide a good negative example to everybody, and in that sense what they've done may turn out to be a constructive contribution," a senior administration official said.
So far, however, Malaysia's stock market – after gyrating wildly – has posted gains since the controls were imposed. And a number of economists have acknowledged that the country may be making a sensible trade-off – a lower chance for strong growth over the long term, in exchange for lower vulnerability to crippling withdrawals of funds from abroad.
Even Britain's staunchly free-market Financial Times editorialized this week after Mahathir's move that capital controls, though "dirty words in today's economic orthodoxy," must be considered as an option by some countries because "unfettered movements of capital can have devastating effects." Paul Krugman, an apostle of globalization at Massachusetts Institute of Technology, argued in Fortune magazine last month that the crisis had reached the point where capital controls had become necessary. (In an open letter to Mahathir this week, Krugman fretted that the Malaysian controls may prove excessive, especially if they shield the government from needed reforms.)
All this is a far cry from the atmosphere earlier this year, when the IMF and the U.S. Treasury were exulting over how South Korea and Thailand were embracing Anglo-Saxon principles such as clear accounting rules and the breakup of cozy government-corporate linkages.
U.S. and IMF officials still point proudly to the Korean and Thai examples and predict that the markets will "differentiate" them as good performers. But they had hoped to make the case for a new global financial system that would involve even greater openness in capital markets – a dream that appears to have been rapidly overtaken by events.
In their worst nightmares, free marketeers imagine how the crisis could fuel anti-globalization sentiments in the United States as well, as cheap imports flood in from Asia and U.S. exports shrink.
"You could get this linkage – the Asian crisis adds to our trade deficit, which pushes people here to back away from free trade, and that fuses with the Asian moves on the capital side," Bergsten said. "Then the fat would really be in the fire. That could really start to unravel the structure of the international economy."
@Copyright 1998 The Washington Post Company
Louis Proyect
(http://www.panix.com/~lnp3/marxism.html)