BOSTON — Politicians and economists are exploring ways to avoid another Asia-style financial crisis.
Already, more than $100 billion has been raised to bail out Thailand, Indonesia, and South Korea.
"What happens if Brazil follows, or Russia?" asks Barry Herman, a United Nations economist.
The problems don't stem only from policy mistakes in Asia's crisis nations, he says.
The international system is at fault, too, he contends.
"Something appears to be amiss in the international economy," notes a United Nations report on the world economy, which he coordinated.
His big complaint is that the austerity imposed by the International Monetary Fund (IMF) bailouts is causing "unnecessary" hardship.
That's not to say the entire world economy is in shambles.
Global output will grow 3 percent after inflation in 1998, the UN predicts. That's only a bit slower than this year's 3.2 percent rate.
But in East Asia, the slowdown looks dramatic. The IMF forecasts growth plunging to 2.5 percent in Korea, 2 percent in Indonesia, and zero in Thailand.
An offer they can't refuse
Since these nations have deficits in their international payments, they have no choice but to go along with the government spending cuts, tight credit policies, and other austerity measures demanded by the IMF. Those deficits need financing.
What has happened is that these three countries were flooded with money from abroad. Eager foreign investors bought stock. Banks and other financial institutions in the US, Japan, and Europe loaned tens of billions of dollars at good interest rates to companies and banks.
Many local institutions lacked the sophistication and financial reserves to manage such inflows safely.
Cronyism, or worse, between bankers and politicians didn't help.
"There is too much money floating around for these countries to handle," says Herman in an interview. "We have created vulnerabilities that seem unnecessary."
Fast-growing countries like these need lots of money - more even than their thrifty citizens provide. But the money stays only if there is confidence it will make a profit.
"Markets can be forgiving of many policy excesses on one day and forgive none the next," Herman notes.
Foreign investors have been selling their stock. Some lenders have refused to roll over their short-term loans.
"Assassinations with stock markets have gotten out of hand," Herman says, half joking.
The rescue packages aim to cover the financial gap, and, as important, to restore confidence in financial markets. Reforms of domestic banking systems are much needed.
What's to be done?
Herman holds that nations and the IMF must better oversee short-term lending and other capital flows. The 182-member IMF already has the right to review any member nation's current account - its balance of international payments in trade, tourism, worker remittances, profits, and interest.
Under consideration is an amendment to the IMF constitution allowing the group to look more deeply at each nation's flows of foreign exchange, investments, short-term loans, and other credits.
Some nations, he maintains, are not ready for the rapid liberalization of capital flows in the world - flows not envisioned when the system was set up 50 years ago. "The timing and sequencing of liberalization measures is vital," he says.
These troubles aside, most countries will do fine.
Output per person - the amount of food, clothing, hair cuts, etc. - will grow in 131 of 143 countries monitored next year, the UN predicts. Only 120 nations saw gains in 1997 and 67 in 1996.
The US economy should grow about 2.5 percent, down from 3.7 percent in 1997.