World Cools to Capitalist Ideals
As faltering countries put new controls on free markets, industrialized nations debate how to stem world recession.
BOSTON — Since the fall of communism, Washington has tried to encourage "emerging nations" like Russia and South Korea to adopt nearly unfettered capitalism. But the spread of the global financial crisis from East Asia to Russia to Latin America has created a backlash.
Several governments have moved to introduce barriers to the free movement of money across borders. They are putting controls on foreign-exchange flows and foreign capital.
While the moves hardly represent a revival of the ideas of Karl Marx, they do bespeak a world trying to figure out the right balance of free markets and financial control in an era when one country's falling currency can trigger another's economic chaos.
"It is an understandable overreaction," says Robert Litan, an economist at Washington's Brookings Institution, of the controls.
So far, the Group of Seven most-industrialized nations have discouraged any reversion to a less rigorous form of free enterprise.
A statement by the G-7 finance ministers and central bank governors this week only promised a "cooperative international approach" to support those countries hit by the turmoil in global financial markets.
That statement and the call Monday by President Clinton for a meeting of the G-7 in Washington within a month to craft long-term solutions to the financial crisis encouraged investors. Stock prices in New York and elsewhere advanced early in the week. "This is the biggest financial crisis facing the world in a half century," Mr. Clinton told the Council on Foreign Relations in New York. With a quarter of the world's population living in countries in slumps, "the industrial world's chief priority today plainly is to spur growth," he said.
But how to achieve this growth is the key question. Stock-market investors welcomed the move by the scandal-harassed president to emerge from his personal troubles and deal with the international financial crisis.
They suspected Clinton and the G-7 were hinting at a coordinated drop in interest rates to prop up the global economy. But Hans Tietmeyer, president of Germany's central bank, the Bundesbank, denied this interpretation. "In Europe, no reason can be seen to relax monetary policy," he said Tuesday.
Japan, however, already lowered interest rates slightly last week to boost its dormant economy. The government now talks of a further easing of monetary policy. In the United States, Federal Reserve Chairman Alan Greenspan earlier this month noted that the central bank is now more open toward a looser monetary policy. And Britain has hinted it would go along with any plan to lower interest rates.
The major technical problem under review, particularly for "emerging" nations, is the sudden flow of money - currency and capital - out of a country when domestic and foreign investors become nervous.
Treasury Secretary Robert Rubin told Congress yesterday, "Just as capital flowed into emerging markets indiscriminately, and that was a mistake, capital is now flowing out indiscriminately, likewise a mistake."
The "free market has failed disastrously," Malaysia's Prime Minister Mahathir Mohamad said earlier this month. He introduced strict controls over capital to protect the nation's currency.
Most would see that comment as an exaggeration. Yet critics of what has been called "capitalist fundamentalism" - the purest form of free-market ideology - are becoming more vocal.
Economists at the UN Conference on Trade and Development in Geneva, for instance, recently warned the West's attempt to bail out banks and creditors in troubled countries is contributing to the decline of the "living standards of ordinary people." UNCTAD economists estimate the cost of the East Asian crisis at some $260 billion this year, reducing global output by 1 percent.
Others see dangers in the unbridled flow of money. Paul Krugman, an economist at the Massachusetts Institute of Technology, has written an article in Fortune magazine calling for temporary exchange controls in crisis countries. Some critics believe the International Monetary Fund (IMF) - so much involved in trying to rescue crisis nations - has pushed developing nations too far toward laissez faire capitalism.
Mark Weisbrot, research director at the Preamble Center, a Washington think tank, charges that the IMF imposed on such nations as South Korea, Indonesia, and Thailand a policy of "extreme deregulation" of capital markets.
This allowed companies and banks in these nations to pile up short-term foreign debts to speculate in domestic real estate and stocks. When the crisis erupted, this money fled, disrupting financial systems and plunging their economies into deep recession.
A few governments have moved to temper capitalism, such as Hong Kong, Malaysia, Taiwan and Russia. But attacks on free-enterprise principles are relatively rare. There is no rash movement away from these principles, says Mr. Litan of the Brookings Institution. But, he says, the lesson from this crisis is the need to limit short-term borrowing in foreign currencies.
Searching for solutions
Even in official circles, the view is growing that too much freedom for short-term capital movements can be damaging, at least in developing nations with weak banking systems. "We must find a way to tap the energy of the world financial market" without exposing countries that run sound domestic policies into extreme instability, Clinton said.
Monday, an IMF official hinted the agency might reverse its position on controls of capital movements. Hubert Neiss, the IMF's Asia-Pacific director, predicted that talks on such regulations "will lead to some measures that will make it difficult for banks to run up short-term debts to foreigners," Reuters reported. This could be done through prudent regulation and taxes on foreign exchange deposits, he said.
What steps will be taken by major nations is uncertain. G-7 finance ministers and central bank heads will meet Oct. 4.