>I may be tardy in joining any discussion of Enron. But I am hearing
>several voices in the mainstream that are questioning the legitimacy
>of a core tenet of the dominant neoliberal ideology---namely,
>privatization/deregulation. At the same time, we are also seeing a
>series of reports that question the legitimacy of US democracy under
>capitalism in the transnational phase.
Financial Times - February 6, 2002
America's crony capitalism Enron's collapse could prove more damaging to the US market than the crisis in Argentina, writes Caroline Atkinson
Argentina's financial collapse looks at first like a blow to the "Washington consensus" brand of market-based economics. The biggest sovereign default was from a country that not long ago was a darling of the markets and lauded by the International Monetary Fund and the World Bank. Surely the crisis would give other countries pause before embracing open markets and global integration.
But another record bankruptcy - Enron - could be a bigger and more insidious threat to the Washington consensus. Argentina is important as an emerging market borrower. But its problems have been relatively contained so far and are widely seen as home-grown. Enron's demise, amid daily revelations of misdeeds and questionable accounting, strikes at the heart of American capitalism.
The political and economic debacle in Argentina is far from over and the huge social costs must be dealt with. But the feared contagion to other emerging markets has not materialised. If anything, the chaos there is likely to warn governments not to stray from the fold.
Argentina's widely signalled collapse was precipitated by the kind of policy conflict that the IMF and others have long warned against: an attempt to maintain a fixed exchange rate that was incompatible with the growth needed for political survival. The international community can be faulted for financing this attempt for too long, or for going along with a series of unrealistic fiscal targets as market financing for the budget dried up. But the decision to stick with the currency board was made in Buenos Aires, not dictated by Washington.
What about Enron? This company was also cheered on by commentators, analysts and investors, not to mention politicians. It was lauded as an example of the ingenuity of US entrepreneurs and the ability of US financial markets to provide capital for innovation.
The US recession and stock market decline contributed to Enron's undoing. But, as we now know, the good times for Enron were a myth. Its earnings were "almost $1bn higher than should have been reported", as high-level executives were "enriched" by tens of millions of dollars that "they never should have received", in the devastating words of a special report of Enron's board. Ordinary employees, meanwhile, were in effect robbed of their savings.
The sorry tale that is emerging of special deals and dishonest dealing hits squarely at the reputation of the US capital markets. Executives, external directors, supposedly independent auditors, bankers, lawyers and market analysts apparently all fell short. And the system of corporate governance and market scrutiny that is supposed to allow free markets to flourish to the benefit of all, not just the privileged few, failed.
Why is this more than just a very big business failure? Because the US markets, and the array of institutions that constitute them, are supposed to be a model. When the Asian crisis hit, crony capitalism took much of the blame. The definition of sound policies was broadened to include a call for countries to put into place strong market infrastructure, including more rigorous accounting standards, better regulation, stricter disclosure and stronger corporate governance. As the international community struggled to define this new consensus, it was often to US examples that it turned, albeit grudgingly. And where there were big differences, those of us representing the US were typically reluctant to cede the case. This is harder to justify now.
Contagion from Argentina has been limited in large part because there are no other obvious similar cases. But the spill-over from Enron has been quickly felt in US markets. Investors and analysts are looking sceptically at companies with complicated accounting structures. Spectacular profit performance is suspect. Bank regulators have moved against aggressive accounting.
The closer scrutiny has already led to some casualties, from Tyco's precipitous stock price decline to Global Crossing's bankruptcy. But it is this scrutiny that offers the best hope for redeeming the market's reputation. Some strengthened regulation is likely, although the lobbying skills of the corporations, accounting firms, investment banks and others that stymied earlier efforts should not be forgotten. Market pressures will also - for at least a while - encourage better behaviour.
Enron's collapse offers a cautionary tale for American capitalism. Even if aberrant criminal behaviour turns out to have been at the root of the problem, the system was too slow to catch it. There are some signs of underlying strength: Enron was allowed to collapse, its practices are being investigated with vigour, and accountants and others are scrambling to reform. The changes must be convincing if the Washington consensus is to retain its authority in the eyes of the wider world.
The writer is a senior fellow at the Council on Foreign Relations and a former senior deputy assistant secretary at the US Treasury