> I am not sure whether I properly grasped the context of Jiang's statement
> first time round. Should I understand from your comments that China as a
> whole does not have much to fear from Soros, but that Hong Kong remains
> vulnerable to raiders in one form or other, and Jiang at this reception for
> Hong Kong representatives, was publically demonstrating that China as a whole
> would try to extend a protective shield to Hong Kong at least by warning
> raiders on Hong Kong that they would suffer financial consequences to their
> other interests in the whole of China?
Hong Kong prides itself as the most open free market economy in the world. Yet it has been forced since July 1997 by events to adopted interventionist government policies to protect itself from the financial tumults of the Asian crises. China has repeatedly praised Hong Kong for its interventionist measures since August 1998 against Western hedge funds attacks on the overvalued HK$. China has openly pledged its substantial foreign reserves (US$160 billion) to back HK in maintaining its fixed exchange rate if necessary. HK has been highly vocal in supporting a call for a new international financial architecture, in concert with Japan and Europe, to which Washington gives only lip service by insisting on market fundamentals.
Jiang, through the direct experience of Hong Kong, was reaffirming the views of Mahathir, the first Asian political leader to criticize Soros by name was Mahathir. The prime minister of Malaysia, a anti-Communist during the Cold War, is emerging as a leading voice in Asian economic nationalism: "At the worst point of the crisis, the Malaysian Ringgit was devalued by the currency traders by some 60% against the US Dollar while our stock market lost two thirds of its capitalization, i.e., more than US$200 billion. As a nation and a people, we have become impoverished. Our banks and corporations almost collapsed." (HANOI, VIETNAM, 15/12/1998, THE 6th ASEAN SUMMIT.)
Mathathir's views, branded as demagoguery at first in the West, are vindicated increasingly by events. Some of these views, summarized from his various speeches, are widely held in Asia.
Since July 1997, the risks of protracted global deflation seems more real than ever. Neither the IMF nor the G-7 have been able to deal effectively with the twin problems of the artificially strong dollar and the large and spreading manipulated devaluations of national currencies around the globe. For the affected nations, the combination of massive short term capital flight and stock market collapses, exacerbated by IMF conditionalities of high interest rates and austerity programs, sharp devaluations have led to tragic destruction of hard-earned wealth and a severe drop of living standards. Certainly market forces have not created Smith's "universal opulence which extends itself to the lowest ranks of the people". The only trickling down has been poverty and misery. In a world of 6 billion people only about 1000 currency traders and a few rich investors in their funds seem to enrich themselves further through the unbridled manipulation of the free market.
This view is now shared by increasing numbers across ideological spectrums.
The pat IMF prescription for all economic ills of nations -- high interest rates, balanced budget and current external payments adjustment -- have proved ineffective and destructive. It is shortsighted and lacking in consideration for the great differences in the economies of different countries. To these have been added banking reforms calculated to increase failure rates and to protect Western creditors at all cost. To the IMF, the demands of the lenders are treated as sacrosanct while the destructive impacts on society are regarded as irrelevant. The concept of lender liability does not apply in the Third World. Thus those who dutifully implemented IMF prescriptions saw their economies worsened to the point where recovery may now take decades, and only if the poisonous IMF medicine is quickly withdrawn. The IMF has now admitted that it had made a "slight mistake" in dealing with the Asian economies. It may be slight for the IMF but the cost to the countries of Asia is horrendous. Trillions of dollars of hard-earned assets and economic capacities have been destroyed, lost forever. In fact, lives have been lost, families ruined, governments fallen and ethnic animosities intensified. The cooperative partnership between neighboring countries has been undermined and regions destabilized.
The abuse of the free market by a few capitalists from developed countries have earned them quick and mind boggling profits amounting to billions but the destruction they wreak on their victims is far greater than what they make for themselves. There is a massive net loss for so little gain on the part of the capitalist manipulators. This is far more vicious than skimming 5% off the top by organized crime, or the exploitation of old time capitalism. There is an emerging consensus that there must be better ways to promote any economic system, even if it is capitalistic, than to destroy whole countries and regions and to cause untold misery for millions of people. Free market is not worth such fatal pain.
The so called creative destruction (Schumpeter) indulged by the powerful Western economies is not creative at all in the current global context. Creative destruction is nothing more than an attempt to explain away a destructive self-serving act, an attempt to justify the unjustifiable reality.
All over the world, the imposed devaluation of the national currency and the manipulative fall in share prices render local companies and banks attractive for takeovers by foreign capital. Since one of the conditions for IMF/Western rescue is to open the country to unrestricted foreign investments, foreign capital can acquire at firesale prices distressed local companies including basic utilities, telecommunication and energy. It is also possible for foreign investors to set up wholly foreign owned banks, utility companies, land and sea transport, etc., to control Asian economies.
It is argued by IMF that since the foreign companies moving in are richly capitalized, market confidence would be regained, resulting in the appreciation of the currency as well as recovery of the stock market. In other words, the takeover of the economy by foreign companies would result in economic recovery, at great profit to the foreigners who would come in cheap at the lowest point and stay rich thereafter.
In the heyday of blatant capitalism, i.e., in the second half of the 19th Century and the beginning of the 20th Century, exploitation of poor workers was considered as a matter of right in captured markets. Political suffrage was confined to property owners only and workers should consider themselves lucky if they could find jobs with low pay. Without capital to provide jobs, the helpless poor would only starve. The rich took everything for themselves with doctrinal righteousness.
Marx argued that the wealth produced was the result of the labor of the working class. It was an injustice to deny workers the full benefits of their labor. Marx's real argument was moral, the material dialectic was a scientific observation based on the penchant of human instinct to evolve toward a higher plain. Marx felt that workers should own the means of production because worker are the creators of value while capital was merely a passive storer of value. Dictatorships of the proletariat is the political vehicle for restructuring the proper and just economic relationship, with the means of production placed in public ownership.
Apprehensive of the danger of worker revolutions and violent takeovers of the governments, Western capitalists/imperialists decided to show a friendlier face to their workers and colonial subjects. The rights of worker to form unions, to have living wages and incentive bonuses, to shorter working hours and paid holidays, to decent housing and medical treatment were recognized and granted in the advance economies. Oppressive and dirty work conditions were shifted overseas to the emerging economies. In some advanced countries, such as Germany, worker representatives even sit on management boards of companies. Many socialistic practices were adopted in advanced economies in order to placate workers and to moderate the adverse impacts of business cycles.
Since WWII, the term capitalism has been gradually displaced by more the more benign label of the free market. Capitalism ceased to be mentioned in economic literature. In the process, economists also squeezed out the word capitalism in official dialogues, the once traditional name for the market system, with its subjective connotation of class struggle between owners or managers and workers and with its suggestion of the privileges that go with various levels of wealth. The word capitalism no longer appears in textbooks for Economics 101. N. Gregory Mankiw, a 40-year-old Harvard economist and author of a popular new textbook, "Principles of Economics," told the NY Times: "We make a distinction now between positive or descriptive statements that are scientifically verifiable and normative statements that reflect values and judgments. Ownership of companies was spread to the middle class and working class through the public limited companies. Altogether businesses became more democratic." A whole new generation of economists have grown up associating capitalism only as a historical term, like slavery, unreal in the modern world.
The ugly capitalist image of private corporations has been replaced by a much more friendly professionally managed public listed companies. The new capitalists successfully contributed to the growth of their countries' economies. In the war against the National Socialists, the capitalists actually collaborated with the communists in order to defeat the dictatorships of the fascists. After WWII, through a series of astute capital management including a stable exchange rate system crafted by economists led by Keynes at Bretton Woods, the Western neo-capitalists or free marketeers were able to rebuild their economies using a combination of capitalist and socialist approach. But the underlying greed of the capitalist never really disappeared.
The communists, on the other hand, did not do so well economically. The idea that with everyone receiving the same pay and subsidies they would work just as hard and be equally happy had not been supported by reality. Productivity and wealth decreased and the working classes no more appreciate their own dictatorship as they would capitalist dictatorship. The reasons for this are complex, but there is no denying that the versions of communism, as it had been practiced since WWII, had not lead to results as envisioned.
Eventually the Communist system collapsed for reasons that cannot adequately be discussed in the post. But collapse it did. While communism was around, it provided a counter-balance to capitalism of the West. Free of the threat of communism, capitalists now feel uninhibited in doing as they please. And small countries have no choice but to accept the economic domination of the big and the powerful economies.
Accordingly, capitalists no longer feel the need to show a human face. With advances in communication, their field of operation has become enlarged. Instead of just aiming for acquisition of the national wealth, they can now go for the wealth of the whole world. But to do this, certain concepts and values that they had preached in the past had to be reversed.
The concept of nation states and their independence had to be debunked as obstacles to globalization. Non-interference in the internal affairs of nations must give way to the right of the powerful nations to intervene in order to ensure global standards. Local interest has to be sacrificed in favor of market forces in determining policies and government leadership.
Carter was the first to claim the right to intervene in any country where human rights are alleged to have been violated. This was followed by attempts to use GATT and WTO to link trade with human rights records. Workers' rights (specifically low wages and humane working conditions in countries serving the developed economies), the environment etc., are ignored as necessary transitional conditions. Political human rights is singled out because its promotion weakens national government authority to resist globalization.
The developing countries saw through this scheme and tried to oppose it in the GATT and the subsequent WTO. The opposition was muted however, as the poorest countries were not involved as they were not producing anything to trade with the developed countries. Besides most of these countries are under obligation to the developed countries from whom they had obtained aid or loans.
The advent of the Information Age and instant communication brought forth the idea of the world without borders, a world in which not only information but capital, goods and people could move freely and exploit business potential without regard for citizenship or loyalties. It is a good notion if it were not for the fact that it has been distorted by the developed economies to exploited to enhance their narrow national interests. In a race fixated world, free immigration for workers remains a non-negotiable item for advanced (mostly white) countries. Until that happens, globalization remains a sham.
The exploitation of business opportunities by people with capital and know-how in most countries has historically been restricted by national laws which protect the citizens of a country. But because the citizens of the Third World are poor and do not have the necessary know-how, these opportunities have not been and cannot be fully exploited as the global economy expands. Neo-liberals argue that if opportunities and potentials are to bring maximum benefit to the people, then laws and regulations which favor locals must be done away with. In other words, there should be massive deregulation in the emerging economies.
With such deregulation, there would be no more economic borders to hinder the activities of those with capital and know-how from the advanced and rich countries. The whole world would be just one open market, open to everyone who can exploit business potentials to the maximum. Thus a corollary to globalization, there must be deregulation.
The developing countries were told that deregulation and globalization would be good for their people. Without these, they would forever be saddled with incompetent and poorly capitalized local business people usually the cronies of the leaders, who would provide inferior goods and services at exorbitant prices. What they were not told was the under financial capitalism, the appropriation of financial assets is many folds more exploitative than traditional industrial imperialism. In a matter of a few weeks, entire nations can be acquired by foreigners with at 20% of its previous market value in a market whose collapse had been caused by the same foreigners who took their money out. Simply by moving their money out and then reinvesting the same funds a few weeks later, foreigner stand to increase their holdings by some 60%. That is robbery by any standard.
Obviously only the biggest corporations can dominate the world. In preparation for this global domination the big corporations and banks in certain countries are already taking steps through mergers and acquisitions to grow bigger. It is felt that in any one field of business there needs to be only a few giant corporations -- three or four for the whole world would be ideal. The small national corporations must allow themselves to be acquired or to perish in the one-sided competition.
Unfortunately for the powerful advocates of globalism and deregulation, the most highly developed of the developing countries are not taking too kindly to these ideas of deregulation and globalization. They do not reject them completely but demand time to strengthen their companies and banks. Their delaying tactics merely make the giant countries and their corporations impatient. Somehow they must be forced to speed up, or be penalized with sanctions.
The powerful economies of the West and their giant corporations might not have actively conspired. But the opportunity was thrown into their laps when currency traders attacked and devalued the currencies of all those developing countries which were delaying globalization. The short term investors in the share markets of the countries attacked by currency traders then abruptly pulled out their capital causing a drastic fall in share prices and aggravating the economic situation.
Faced with this unprecedented financial crisis in which the national wealth was at least halved, the governments of these developing countries had to ask for the help of the IMF. As the IMF believed that recovery could only be brought about by foreign companies taking over partially or completely the local companies distressed by the falls in the currency and shares, one of the conditions insisted upon by the Fund was the removal of the restrictions on ownership of local banks and companies by foreign investors. As a result of the countries accepting this condition foreign companies could acquire all the big and profitable companies or hold controlling interest in them. These foreign companies would be giants which operate globally. Their funds would be huge and they would dominate the world.
There was a time when big American companies own huge banana plantations in some of the poor Latin American republics. The revenue of the governments of these republics came almost exclusively from the banana plantation companies. If the companies fail the republics would be in grave trouble. It was in the interest of these republics to accede to the demands of the companies, including political adjustments. It is flows that the giant corporations which operate in the countries which have been persuaded to open up will have the same influence over the governments. These are the new banana republic on a larger scale.
It has been pointed out that currency traders can devalue any nation's currency at will. Currency trading is done not by hedge funds alone, but also by the big banks. One of these banks is capitalized at over US$600 billion. It is believable that between these banks and the currency traders they have almost US$30 trillion. They do not work in concert of course. Nor do they enter into a conspiracy. But they do behave like herds. Thus when one of the more important members swing in one direction, the other will follow. The effect is not unlike acting in concert. It is an unspoken systemic conspiracy.
Currency traders deny that they have anything to do with the devaluation. But whoever may be guilty, the fact is that the currencies have been devalued massively, in one instance by 600%. What is fact however is that the countries whose currencies have been devalued suffer economically, socially and politically. If because of their profligate
ways they were unable to pay their foreign debts, after
devaluation they became even less able to pay their debts. This will awaken them to their poor skills in managing their companies and they would be more willing to accept the capital, services and control by foreign companies.
The net result of the globalized deregulated world would be the emergence of huge corporations and banks with branches in every country in the world. Their numbers would not be too big as all the small companies and banks would have been acquired or absorbed in one way or another.
In the old capitalism, the rich controlled the wealth in one or two countries and exploited the poor workers in these countries only. Their markets were the political empires that their governments had acquired. These were captive markets, which not only bought all the manufactured products at whatever price that was fixed, but also supplied all the raw materials at prices which were fixed by the rich industrialists in the metropolitan countries.
This arrangement was neat. Unfortunately in the post-war years, the empires had to be dismantled. Preoccupation with the Cold War and the need to retain the allegiance of the newly independent countries kept the Western capitalists at bay. But once the challenge posed by the Communist bloc was overcome, the Western capitalists were let loose with government encouragement and often subsidy.
Today, it is not the exploitation of local labor that is the focus of the new capitalists. That nasty business is left to national capitalists who have been financially acquired by Western capital. For Western capital, it is the financial exploitation of the emerging countries worldwide that promises unlimited gains. Hence the push for deregulation and globalization.
These Western capitalists do not talk of millions of dollars of profits. They talk of billions of dollars. They cannot wait to do ordinary businesses involving time-consuming research, manufacturing and exporting. That is left to their local subsidiaries. They want to make their billions overnight over telephones. And currency trading provides them with this mind boggling profits.
With trillions at their disposal they have become a force that no government of developing countries can go against. Control of the media enables them to shape public opinion, censor criticism and generally promote the legitimacy and the wholesomeness of their concept of the new world order. If they say globalism is good then the whole apparatus will say so and no one will be allowed to say otherwise. Those who try are branded as demagogues or just plain ignorant.
In the globalized deregulated world the future of Asia will be so closely inter-twined and interlinked with that of the rest of the world that it cannot be distinguished from the world's future.
Asian countries will prosper again but not as free countries. Their economies would be dominated and run by the huge foreign corporations, practically all owned and managed by non-Asians. Southeast Asia will provide a base for the production of low-cost products to compete with those of certain large Asian economies which refuse to be controlled. In the end, these countries too will give in.
Governments will submit because they know they are up against forces which they cannot defeat. But the people will show their resentment against those outsiders who will lord it over them once again with the new financial imperialism. Bitter over the takeover of their national corporations, they will show their feelings in many ways. Sooner rather than later, they will yearn for regaining control over their economies. They will regard this as a new war of liberation. Even if they want to avoid violence, violence must come as the new Western capitalists and their local compradors dismiss the warning signs.
There will be no full scale wars of independence of course. But there will be guerilla wars which will not be good for anyone.
Maybe this will not be the future of Asia. Maybe Asia will extricate itself from the present situation intact. Maybe the healthy economic competition between Asia, Europe and America will be restored. But the new Western capitalists would not resist the opportunity to dominate the world at great profit.
It is easy for analysts to slip into the view that currency movements are purely the function of fundamentals. The market fundamentalists tell us this is so with incredibly sincere conviction, however loudly the speculators chuckle all the way to the bank. Since, according to the theology, currencies cannot fall unless the fundamentals are weak, and since the Asian currencies have fallen so dramatically, then ipso facto the fundamentals must be weak even if experts have said that they were strong immediately before. The truth is that the currencies plummeted even though the fundamentals were very strong. The truth is that, ipso facto, the fall of Asian currencies were not a function of basic fundamentals.
On June 17, 1997 -- just two weeks before the July 2 collapse of the Thai Baht which resulted in a horrendous collapse of the regional currencies, Mr Michel Camdessus, Managing Director of the IMF, was handing bouquets to Malaysia for sound economic management, for superb economic fundamentals. He told an international conference on Global Capital Flows in Los Angeles: `Malaysia is a good example of a country where the authorities are well aware of the challenges of managing the pressures that result from high growth and of maintaining a sound financial system amid substantial capital flows and a booming property market.' He noted: `Over the last year, output growth has moderated to a more sustainable rate, and inflation has remained low. The current account deficit -- which is primarily the result of strong investment spending -- has narrowed substantially. The increase in the fiscal surplus targeted for this year is expected to make an important contribution towards consolidating these achievements'.
As for the banking and financial sector, Mr Camdessus said: `The Malaysian authorities have also emphasized maintaining high standards of bank soundness. Non performing loan ratios of financial institutions have fallen markedly in recent years; risk weighted capital ratios are above Basle recommendations'.
In 1988, the non performing loans in the Malaysian banking system had stood at 32.5 percent. In June 1997, just eight years later, its non performing loans stood at a historic low of 3.5%. This is as dramatic a performance as one can get. Perhaps this was why the IMF was so impressed and so complimentary.
At the international level, the entire issue of reform of the international financial system to ensure currency stability and to contain the activities of those who buy and sell money for no other purpose than to make profits. The US remains the main opposition to any scheme to stabilized the world's major currencies. Currencies need to be changed if there is going to be international trade. That is why the leaders of the Western nations met to draw up the Bretton Woods Agreement, the purpose of which was to agree on a mechanism for determining the value of one currency against another. The system worked and enabled the countries bankrupted by the war not only to recover but to prosper as well. Of course, the Marshall Plan and the opening up of the American market to Japan played a key role. But if there had been no system for stabilizing currency values, all the plans in the world would not have succeeded.
But then some countries in the West decided to devalue their currencies in order to enhance trade competitiveness. Very quickly a currency market emerged which took advantage of the mildly unstable exchange rate. True speculation took place because the funds were relatively small and depended on intelligent guesswork as to the movements of the exchange rates.
But soon the funds grew huge and were in fact able to move the exchange rates through their interventions. The famous herd instincts replaced economic fundamentals. With the invention of arbitrage and futures trading, the need for exchange rate stability for the purpose of trading gave way to the desire of currency traders to make massive amounts of money in the shortest possible time. An artificial system of devaluation and revaluation of currencies was devised which enabled currencies to be appreciated or depreciated literally within seconds. Thus the Indonesian Rupiah was at one time devalued by more than 600%, then in the space of a few days recovered by 200 percent. It is still moving up and down by 100 percent to 200 percent in the space of one day or even half a day.
Paul Volcker in a speech in Hong Kong stated: "An exchange rate system that produces a 60 percent swing in the yen/dollar rate over a period of 18 months cannot reflect the fundamentals in any sensible sense". The Indonesian Rupiah moved 600 percent in the space of five months. Can it be that all the assets of that huge country with 220 million hardworking people are suddenly worth only one-sixth of its previous value? What indeed is the worth of a nation if suddenly someone can devalue and even bankrupt it?
If currencies can be made useless so easily then, what is the point in a country issuing its own money? We should go back to barter trading.
It is said that the currency will strengthen if confidence is restored. But there is no certainty as to what will bring back confidence. Who is monitoring what and who determines whether confidence should return or not. There is a lot of talk about market forces. But who constitute market forces and how do market forces determine what value to give to each act of a government or an economy under attack.
All in all, the present system, if there is a system at all, is messy, unreliable and destructive. Can world trade depend on these shadowy market forces whose methods are not known to anyone except themselves? True, through hedging the effect of the fluctuation in the exchange rates can be minimized. But again, this hedging profits only the hedge funds, adding to the cost of goods and services. If exchange rates are minimally volatile, hedging and the profits for the hedge funds, would not be necessary at all.
There is nothing to indicate the need for currency trading other than the vast profits that can be made by currency traders. On the other hand, we now know the extent of the damage to the economies of whole countries and regions that currency trading can inflict.
The excuse that currency trading provides market forces with the means to discipline governments is totally unacceptable. Currency traders thrive on unstable currency. It is ridiculous to suggest that they would discipline governments and reward them with exchange rate stability when such stability will deprive the traders of the opportunities to make money. Governments do need to be disciplined but the international financial regime must be bankrupt of ideas if it cannot find other ways which are less destructive to discipline governments.
Everything points to the need for an international financial system which will bring about stability of exchange rates among other things. Admittedly we cannot bring back the Gold Standard or the Bretton Woods system. Fixed exchange rate is no longer possible or realistic. Obviously the political, economic and social performance of a country will have an effect on the value of its currency. As for the economy, there are various indices which can be given points indicating the strength of the economy and therefore the currency.
There is a belief that when currency depreciates the goods produced by the country concerned become cheaper and more competitive in the world market. It may do so but the reduction in cost is always far less than the percentage of depreciation. This is because all imported inputs will cost more in local currency and will negate the devaluation of the currency. Imported inflation will push wages and other domestic costs up reducing further the advantage of currency depreciation. In the end the lowered cost is hardly detectable. The products of countries with a depreciated currency are no more competitive than they were before. In at least one case the capacity to import foreign inputs is lost altogether because of the extreme depreciation of the currency.
Individual devaluation or revaluation are not the answers to the world's economic problem. Improvements in productivity are and such improvements can be achieved through greater skills, better management and continuous technological improvements.
Globalization, liberalization and deregulation are ideas which originate in the rich countries ostensibly in order to enrich the world. But so far the advantages seem to accrue only to the rich. True, the poor countries can gain access to the markets of the rich, but then they do not have many things to export to these markets. The raw materials which they produce are controlled by commodity markets in the rich countries. The terms of trade for these keep on deteriorating.
In preparation for globalization the pace of mergers and acquisitions have been stepped up. Super large banks and corporations are being formed in the developed countries which will dominate the world. There will be no room for the small companies in the poor countries to exist, much less to expand and spread into the rich markets now opened to them.
These are the realities. Yet the Finance Ministers of
the rich North and assorted leaders lauded the currency manipulation as an integral part of the free trade system. They demanded that Asia accept impoverishment as evidence of how good free trade is. They demanded that these countries open wider their countries to other potential manipulators.
Marxist economist have not had much to say about the global exchange rates regime and its role in promoting the expansion of finance capitalism. The embrace of Marxist ideas by the Third World after WWII was directly related to Lenin's linkage of capitalism to imperialism. The new financial imperialism is creating widespread opposition toward finance capitalism. Yet Marxism has been slow in filling the new need.
Henry C.K. Liu