by Nicola Bullard*
Thanks to the Asian crisis, the IMF is now a household word. In Thailand, bars offer exotic IMF cocktails, shaped like bombs with a time fuse while peasants in the Northeast have added the IMF Era Man to the panoply of demons to be exorcised during the annual rocket festival. In Korea newspapers report IMF suicides and in Malaysia, they thank god that they don’t have the IMF, because Mahatir and the IMF would be just too much! IMF funding has, for the first time, become a topic of heated debate in the US Congress and it has even penetrated the busy suburban life of my sister who lives in Brisbane with her four kids and a menagerie of animals and visitors.
And it’s about time. For too long, the IMF has gone about its business, dictating economic policy to any country unfortunate enough to need its money, without any inclination to engage in open debate about what it does, how it makes decisions, and whose interests it is serving. But all this is changed, thanks to the Asian economic crisis.
This is nothing less than a sea-change. The warm winds of change ruffled the grey suits at the recent IMF and World Bank annual meetings in Washington, where, if you listened closely to the carefully chosen words of the IMF and World Bank, the US and Europe, you could hear the tectonic growl of the Washington Consensus shifting, heaving and cracking.
This is an important political moment but to make the most of it we need to understand what ground has been gained and what still needs to be done.
First, what is the Washington consensus and why does it matter? The Washington consensus has dominated economic thinking for almost two decades. Often referred to as neo-liberal economics, the doctrine preaches that the solution to under-development lies in three stages of economic transformation: stabilisation, structural adjustment and export-led growth.
Stabilisation comprises two elements: controlling inflation and reducing the supply of money by cutting government expenditure and raising interest rates. The second phase of structural adjustment – which follows hot on the heels of stabilisation – aims to establish a market economy. The main objective is to ‘get the price right’ by reducing distortions such as tariffs and price controls, limiting the role of the state which is seen as interfering with prices and the free market, privatising state owned enterprises and promoting the private sector, ‘reforming’ the labour market to allow for flexibility such as short term contracts and subcontracting, and reducing government deficits by cutting expenditure and increasing revenue through various taxes such as a VAT.
The third element of the Washington consensus is the promotion of export led growth, whereby governments boost exports by reducing all trade barriers and encouraging foreign investment by liberalising investment regimes.
If this all sounds remarkably familiar, it is because this programme was perfected in the era of Thatcher and Reagan, and has infiltrated economic thinking in almost every corner of the world. It is the perfect preparation, or softening up, for fully fledged global economic liberalisation. However, as we have seen in Asia, the crossing from state-led capitalism via the Washington consensus and onto the globalised free market is fraught with dangers. Simply, when bad development meets globalisation, the result can be devastating.
East meets West
The Asian economies most effected by the 1997 economic crisis – Thailand, Indonesia, the Philippines, Malaysia and South Korea – each adopted the neo-liberal model with various degrees of enthusiasm, adherence and coercion. The resulting combination of Washington consensus and Asian state-led capitalism created an interesting kind of real economik, in which the interests of domestic and foreign elites were protected and promoted, and then repackaged by the World Bank as the model of successful development.
Export-led growth was tremendously successful in terms of ensuring year-on-year economic growth, but this was not matched by the expansion of political participation and economic democracy, resulting in weak institutions, limited accountability and poorly developed domestic markets.
In the early 1990s, as the momentum of export-led growth began to slow, these countries rapidly liberalised financial markets to attract foreign capital and to spur growth through equity markets. G7 banks and investors swarmed into Asia in search of higher returns because their own economies were in recession. Capital flows to emerging markets doubled in just two years, from $154 billion in 1994 to $304 billion in 1996. Private capital flows to the Asian Five – Thailand, the Philippines, Indonesia, South Korea and Malaysia – almost tripled in three years, from $37.9 billion in 1994 to $97.1 billion in 1996. However, by 1997, the net flow was -$11.9 billion, a staggering turnaround of $109 billion in just one year. Much of this ‘hot money’ was seeking a quick return and high profits and was used to finance property development and consumer credit. In many cases there was poor match between short term loans and long terms investment.
Bad development meets globalisation
Comparison between the five countries embroiled in the Asian economic crisis is a useful way of identifying the key causes of the Asian crisis. South Korea, Thailand, Indonesia, the Philippines and Malaysia have a number of common features: all adopted an export-oriented growth model, each had experienced relatively high and consistent economic growth for two decades (with the Philippines being a notable exception, possibly due to that country’s extraordinarily high debt burden accumulated during the Marcos era) and each became increasingly dependent on foreign capital at the expense of domestic capital. To finance growth, these countries embarked on a rapid but rather unsystematic process of financial liberalisation from the early 1990s and provided a de facto guarantee for investors by pegging currencies to the US dollar.
But here the comparisons break-down. Each country has different political, social and economic institutions, distribution of wealth, population size, education levels, rural to urban ratios, and the relative importance of industry and agriculture vary enormously. Therefore, it is likely that the shared characteristics of rapid liberalisation and weak institutions, dependency on exports, and the surge in foreign speculative investment are important explanatory factors.
At this point it is useful to focus on Thailand, the epicentre of the economic crisis. By early 1997, it was evident that Thailand’s boom was about to go bust, with a slow-down in export earnings, a glut in the property sector and a growing number of shaky financial institutions. Once the market got wind of the collapse of one of the country’s largest finance companies, Finance One, speculators started to attack the baht and investors took their money out with alarming speed. The Thai government threw billions of dollars of foreign reserves at the speculators, trying to avoid the grim prospect of devaluation. But the market proved too strong and on 4 July 1997 Thailand was forced to withdraw from the battle, allowing the baht to float, leaving the government with depleted foreign reserves, mounting debts and a financial sector in ruins. The Thai government, which had pursued enthusiastically the policies of financial liberalisation, and backed it by guaranteeing a pegged exchange rate, suddenly found that liberalisation merry-go-round which goes both ways.
Just one month later, on 11 August, amidst growing public pressure for decisive action and with 42 finance companies effectively in government receivership, the IMF came to the rescue, with a $17.2 billion line of credit and a long list of conditions. In addition to strong measures to reform the finance sector, the package included a standard stabilisation and structural adjustment programme of reduced government expenditure, raised taxes, privatisation, high interest rates and further trade and financial liberalisation. But the IMF bailout did not restore the market’s faith in the Asian miracle and the so-called contagion spread like wildfire throughout the region. South Korea and Indonesia were the worst hit and found themselves victims of speculative currency attacks and massive capital flight. By 31 October Indonesia had signed on to a $43 billion IMF-brokered loan, and on 3 December South Korea – which had joined the rich-man’s club of the OECD less than two years earlier -- accepted a record-breaking $57 billion line of credit.
The role of the IMF
Following its intervention in Thailand, Indonesia and South Korea, the IMF found itself under attack from all sides. Suddenly non-government organisations and the progressive left, whose criticism of the IMF dates back to the Fund’s stabilisation programmes of the early 1980s, found themselves in unlikely company.
The criticisms came from some surprising sources, including former IMF employee and director of the Harvard Institute for International Development Jeffrey Sachs, World Bank chief economist Joseph Stiglitz, solid, conservative journals such as The Economist and The Financial Times, Republicans and Democrats in the US Congress, and even bone-dry neo-liberals such as former US president Ronald Reagan’s chief economic adviser Martin Feldstein and Milton Friedman of the Chicago School.
The debates are wide ranging and call into question fundamentals such as the efficacy and appropriateness of the Fund’s economic advice, the way the Fund operates, and its relationship with its key shareholder, the US.
The Fund sometimes gives poor advice
The public sector austerity measures imposed by the IMF, such as budget cuts, pushing up interest rates and raising taxes, were inappropriate for the circumstances of a private sector debt crisis and in fact deepened and accelerated contraction of the economies they were meant to be helping. As Jeffrey Sachs said "the currency crisis is not the result of Asian government profligacy. This is a crisis made mainly in the private, albeit under-regulated, financial markets."
Yet the IMF applied policy measures designed to rein in government overspending without addressing the real issue of private sector failure.
The Fund’s macro-economic requirements were meant to stabilise currencies and restore market confidence. In Thailand, South Korea and Indonesia, the currencies continued to devalue with gathering momentum even after the IMF’s intervention, indicating that their economic policies were neither addressing the real problems nor having the magic effect of restoring market and investor confidence.
In the year that followed the IMF’s intervention, the five Asian economies have spiralled into a self-perpetuating recession, and in the case of Indonesia, a depression.
The Fund’s tight monetary policies, designed to control inflation, stabilise the currency and allow banks to achieve Bank of International Settlement capital adequacy rations, is strangling the real economy. Growing unemployment, reduced exports, falling consumer demand and mounting portfolios of non-performing loans have driven the economies into deep recession.
In the past year, growth predictions have moved from a cautious region-wide growth of 2-3 per cent (predicted in November last year) to a region wide negative growth of -5-7 per cent, with estimates for Indonesia as high as -15 per cent. In short, the IMF policy prescriptions have accelerated and deepened the crisis, and allowed it to spread from the financial sector to the real economy. And, as World Bank chief economist Joseph Stiglitz remarked recently in a speech to the North South Institute in Canada, it’s much easier to get into a recession than to get out of one.
Moral Hazard
The IMF also stands accused of creating the problem of "moral hazard", whereby both creditors and debtors who make unwise investment choices are saved from the consequences of their bad decisions, thus making it more likely that they will reoffend in the future.
The Fund has also come under fire for its continued enthusiasm for freeing up capital flows. The crisis in Asia is a crisis of the private sector which engaged in excessive borrowing of easy-to-obtain foreign finance, following liberalisation of capital account regimes from the 1980s onwards. Therefore the IMF’s policy response of demanding further liberalisation of the finance sector and financial flows is wrong and actually "adds to financial vulnerability and renders these economies even more prone to future crisis."
Speaking in Helsinki on 7 January 1998, the World Bank’s chief economist Joseph Stiglitz went even further, saying that
"financial markets do not do a good job of selecting the most productive recipients of funds or of monitoring the use of funds and must be controlled."
The pain of adjustment is not fairly distributed
There is a double standard at work in the treatment of "domestic" and "foreign" interests. Domestic firms are left to the mercy of the market (for example, the IMF insisted that numerous financial institutions in Indonesia and Thailand could not be bailed out).
Foreign investors, on the other hand, are given enhanced rights to ownership, the possibility to convert debt to equity in struggling Asian enterprises and the chance of picking up others at bargain basement prices, thanks to changes in foreign ownership rules included in the IMF packages.
IMF bailouts of the private sector have also been criticised for socialising the debt, leaving the government and the taxpaying public, both in Asia and in the IMF’s main contributor nations, to bear the burden of the private sector’s failure.
The Fund has gone beyond its remit, and should be overhauled
Critics argue that the IMF has exceeded its mandate as defined in its Articles of Agreement and has assumed the role of global economic policeman, "forcing it into a convergence toward the reigning consensus" (in this case, the so-called ‘Washington consensus’).
Martin Feldstein, Professor of Economics at Harvard University and President of the National Bureau of Economic Research, and former adviser to US President Ronald Reagan, is sharply critical of the IMF:
"Imposing detailed economic prescriptions on legitimate governments would remain questionable even if economists were unanimous about the best way to reform the countries' economic policies. In practice, however, there are substantial disagreements about what should be done."
He goes on to say that the Fund should not use the opportunity of countries being ‘down and out’ to override national political processes or impose economic changes that "however helpful they may be, are not necessary to deal with the balance-of-payments problem and are the proper responsibility of the country's own political system." He continues
"a nation's desperate need for short-term financial help does not give the IMF the moral right to substitute its technical judgements for the outcomes of the nation's political process."
While it demands greater transparency from government and financial systems, the IMF has itself been criticised for its lack of transparency and accountability. Again, Jeffrey Sachs goes straight to the point
"Of course, one can’t be sure what the IMF is advising, since the IMF programmes and supporting documents are hidden from public view. This secrecy itself gravely undermines confidence."
The Fund has also been attacked for its intellectual arrogance in applying the same solution, regardless of the problem. According to Joseph Stiglitz the main problem is the belief that "political recommendations could be administered by economists using little more than simple accounting frameworks," leading to the situation where "economists would fly into a country, look at and attempt to verify these data, and make macroeconomic recommendations for policy reforms, all in the space of a couple of weeks."
The IMF works in the interests of powerful nations, especially the US
Finally, there is well-founded concern about the policy and power nexus between the IMF and its major shareholder, the US.
In the face of increasing resistance at home to its free-wheeling liberalisation agenda the US Government is having to rely even more on bodies such as the IMF and APEC to push its trade objectives. This became abundantly clear in the course of the recent US Congressional debate over IMF funding, where the pro-funding side argued in terms of leverage and protecting US interests. Treasury Secretary Robert Rubin put it bluntly, saying that "failure to provide funding could reduce our leverage in the IMF."
Interestingly, both the Congressional and Senate versions of the contested funding bill included strong trade and investment liberalisation obligations as a pre-condition for receiving IMF funding.
Charlene Barshefsky, in her testimony to the House Ways & Means Subcommittee, described how US interests could be furthered by the IMF
"Many of the structural reform components of the IMF packages will contribute directly to improvements in the trade regimes in those countries. If effectively implemented, these programs will complement and reinforce our trade policy goals."
To make it clear that the US would brook no competition, Barshefsky continued "Support for the IMF… sends the important message that America will continue to lead in the world economy."
The IMF’s First Deputy Managing Director, Stanley Fischer, reinforced this view in a speech earlier this year when he outlined the primary purpose of the IMF, quoting from its articles of agreement: "To facilitate… the balanced growth of international trade and to contribute thereby to… high levels of growth and real income" and then added his own words, "we have consistently promoted trade liberalisation." There is a seamless congruence between the IMF’s world view and that of its biggest shareholder, the US.
The US was also responsible for derailing Japan’s proposal, early on in the crisis, to establish an Asian Monetary Fund capitalised at $100 billion and designed to respond quickly to currency and market instability in the region.
Japan had good reasons for putting its money on the table: Japanese banks are heavily exposed to Thailand, South Korea and Indonesia and it is in their interests to stabilise volatile currency markets and the Japanese economy is deeply integrated with its neighbours so any slow down or collapse would have an immediate domestic impact.
For some time Japan has promoted an Asia-specific development model in its dealings with international institutions such as the IMF and World Bank. Essentially, Japan has argued that the "Washington Consensus" of rapid deregulation, reducing the role of the state and liberalisation of capital flows may not be the best path for countries such as those in Asia which have followed a state-led development model, and that severing the links between the state and industry of the one hand, and the banks on the other would be politically unpalatable and may not achieve the expected results.
In short, the Asian Monetary Fund was conceived as being more flexible, less doctrinaire and "more Asian" than the IMF deal. It seemed like a good idea if for no other reason than to break the IMF monopoly on economic thought and open the market to new ideas and economic paradigms.
In the event, Japan was forced to back down in the face of
"heated opposition from officials at the Department of the Treasury, most notably the Deputy Secretary Lawrence Summers, and the International Monetary Fund… They instead reaffirmed the central role of the IMF in the Asian financial bailout."
The course of the economic crisis might have been quite different had the Asian Monetary Fund seen the light of day. The AMF might have been more flexible in its terms whereas the IMF’s inflexibility deepened the economic crisis. One should not underestimate the extent to which the IMF is seen in Asia as the instrument of western neo-liberalism and, for example, an ‘Asian’ approach might have proved more effective in dealing with President Suharto.
Marginal voices now in the mainstream
If we look now through the list of criticisms directed at the Fund a year ago, most if not all, are now accepted as valid by everyone save some die-hards in the Fund itself. And in fact many proposed reforms seek to address them directly.
Looking at the broad clusters of criticisms in turn, we can see how each has been addressed by specific reform proposals and marked policy change.
The Fund sometimes gives poor advice: World Bank Chief Economist Joseph Stiglitz, who is leading the charge against the Washington consensus within the international financial institutions said "I do not want to enter into the debate about whether the policies which were put into place in the aftermath of the East Asia crisis exacerbated the downturn. The counterfactuals are always difficult: what would have happened if… While not all the jury may have turned in their ballots, there is a growing consensus on the matter." Mr Stiglitz may not have entered the debate, but it’s very clear which side he is on.
The IMF, however, does not admit that some of its policy advice was wrong and generally seems unwilling to debate the issues publicly. However, in the past months there have been gradual shifts on some key policy positions. Recent letters of intent with Thailand, South Korea and Indonesia show a decided easing of tight fiscal and monetary policy by allowing interest rates to slowly drop and allowing government deficits to expand (although given dwindling government revenues due to declining taxes and loss of export earnings, deficits must be allowed to grow even larger to ensure that new money is pumped into the economy). According to IMF Asian Regional Director Hubert Neiss "the IMF is not preaching austerity at the moment, it’s preaching fiscal expansion. We’re in a different phase now."
In addition, recent support for the $30 billion Miyazawa Plan put forward by Japan and the US proposal to establish a quick response credit facility within the Fund which would not attract the usual IMF policy conditions, recognises the need for new, alternative and flexible responses to economic crises beyond the traditional IMF formula.
Since the early 1990s, the IMF and the World Bank have been pushing countries to open their capital accounts. Almost every analysis of the causes of the Asian financial crisis identifies rapid capital account liberalisation and the subsequent uncontrolled movement of finance capital as a major contributing factor. At the 1997 annual meetings, the IMF was pushing enthusiastically for an expansion of its remit to include mandatory capital account covertibility for all borrowing countries. However, in the past year, policy advice has poured in from all directions – including the finance industry-backed Institute of International Finance – against rapid liberalisation. The IMF has softened its position considerably on this count, noting in its1998 capital markets report that "the combination of a weak banking system and an open capital account was an accident waiting to happen."
However, the almost universal criticism of Malaysia’s decision to impose currency controls shows that there is deep hostility to nations taking these matters into their own hands, and that the principle of open capital accounts is still a central plank in the Washington consensus.
The pain of adjustment is not fairly distributed: Criticisms about the burden of private sector failure being shifted to the public sector have also been noted. Again Joseph Stiglitz placed the question squarely on the World Bank agenda when he says
"The situation is intolerable. We have an international economic architecture which has led to more frequent crises, and yet our means of responding have proved inadequate. While there is much talk about pain, the poor have absorbed more than their share of the pain without sharing commensurately in the promised gain."
For Stiglitz, the solution lies in creating more democratic institutions "so that these silent voices are heard." This must be a cornerstone of the new global financial architecture, but some more immediate measures have also been proposed. For example, the US and Japan have unveiled a plan to establish a G7-funded agency to buy up debts issued by overseas creditors to private companies in Asia at a discount of 20 to 30 per cent.
UNCTAD’s 1998 Trade and Development Report advocates at a global level some rules akin to the chapter 11 of the US bankruptcy code, and in particular an automatic standstill principle, to enable countries in specified circumstances to impose unilateral standstill, similar to the safeguard action allowed under the GATT. They should then be able to approach an independent international panel to justify their case and get further relief. However, the UNCTAD report warns that the IMF as presently constituted is not able to perform this task because its governance structure gives weight to the views of creditors over debtors.
Other proposals include bringing the private sector into financing bailout loans, encouraging greater private sector risk assessment, and establishing stronger insolvency and debtor-creditor regimes. However, all of these proposals are somewhat limited in that they depend to a large extent on good-will, effective domestic legislation and willingness of the private sector to assume risk. So long as the IMF provides the ultimate guarantee against private sector risk, the incentives are not strong. Perhaps a more compelling and simpler solution would be an international bankruptcy law to ensure the orderly work-out of private sector debt in a transparent and equitable manner.
The Fund has gone beyond its remit and should be overhauled: The arguments on IMF mandate have, in fact, gone in the opposite direction with many calls for expansion of the IMF’s role to include environmental, labour, good governance and democracy conditions.
On this issue there are widely diverging opinions: on the one hand critics say that the Fund needs to take into account the social and environmental impact of its programs and therefore needs a broader mandate and better coordination with the World Bank. On the other hand, some, including my organisation, argue that the Fund’s role should be limited to preventing a breakdown in trade due to short-term balance of payments difficulties, and that the strictly stabilising role of the Fund should be de-linked from the long-term development mission of the Bank and other multilateral development agencies. The main drive behind this argument is that the Fund is not a democratic, accountable or transparent institution, and therefore should not be given the authority to make judgements about issues such as good governance or democracy.
The Fund – keen to extend its purview and staunch criticism -- has attempted to broaden its dialogue and discuss the social impacts of their programmes. For example, in each country the IMF has ‘consulted’ with labour. Not that it would pass any reasonable test of ‘consultation’ but at least they think that they should be doing something. Or should they? This raises an interesting question about the IMF and its mandate: does labour have a right to consult with the IMF? Does this undermine domestic democratic processes whereby governments should be accountable to workers? In South Korea, this is a sensitive issue: the IMF has agreed to meet the KCTU informally, but wouldn’t it be better if the labour organisation were able to extract a commitment from their government for workers’ representation in negotiations with the Fund, or better still, be confident that the elected government would properly represent and protect workers’ interests?
Although it is tempting to see the IMF as the deus ex machina which can solve the problems of Soeharto, corruption and the chaebol, this is dangerous ground. The IMF is not a democratic organisation, and can in fact take away political power and undermine domestic political development.
The IMF works in the interests of powerful nations and should be overhauled: There is no headlong move to comprehensively overhaul the IMF and so far most suggestions for institutional reform have focussed on transparency and accountability. The Fund itself is completely unused to outside scrutiny, and responds to most criticisms with defensive arrogance. Transparency is seen as simply making information available and accountability means making more information available. Democracy does not seem to be in their lexicon. Again, Joseph Stiglitz made a pertinent comment on transparency when he remarked to a group of non-government organisations in Washington that transparency is only meaningful if people are willing to debate different views.
However, there are some attempts to loosen the power nexus between the IMF and US Treasury.
Obviously shaken by the cataclysmic collapse of Russia (which, by the way, no-one ever talks about) Europe has suddenly realised that there is a crisis, and they are part of it and the people they thought were fixing the problems are not. The French Finance Minister’s proposal at the recent IMF World Bank Meeting to strengthen the role of the IMF Interim Committee – a 24 member group which is equivalent to a board of governors and reflects the composition of the executive board – aims to make the Fund more directly accountable to its main shareholder governments and to break the policy stranglehold of the Board of Directors and the Washington power elite. Interestingly the proposal was supported by IMF Managing Director Michel Camdessus, himself an elite French bureaucrat, who may be looking for a way to break free of the US Treasury and save his institution. UK Prime Minister Tony Blair has also called for ‘sweeping reforms’ but if his Chancellor Gordon Brown’s proposals for setting fiscal and financial codes of conduct are any indication, sweeping can mean different things to different people.
Indeed, the Bretton Woods institutions have earned such a bad name in the current crisis that even the London Financial Times now refers to them as "the gruesome twosome".
Noticeably absent, however, are calls for a complete overhaul of the IMF structure to make it more democratic and representative, or even for its abolition.
Tamed but not tied down…
On balance, though, it is fair to say that the International Monetary Fund has been chastened, if not yet tamed. Just two days ago there was a newspaper report that the IMF is now looking for a public relations firm to "figure out why the secretive agency is most unloved just when its activities are most visible." Frankly, that’s what the Americans call a ‘no-brainer’ – it’s not a problem being misunderstood, it’s a problem of policies
But this paper also has a sub-title: how the Asian crisis cracked the Washington consensus. Much of the above discussion supports the claim that the Washington consensus is starting to unravel, but there have been economic crises before, and no doubt there will be again. Why is Asia – which, excluding Japan counts for only 6 per cent of global trade -- so important. Why did the collapse in Thailand, Indonesia and South Korea trigger all this soul searching? There may be complicated answers, but there may also be a simple one.
For several decades, Southeast Asia’s tiger economies were held up the World Bank, the International Monetary fund and the US – the keepers of the Washington consensus – as emblematic of good development, the very model of how to do things. Then everything started to spin out of control. And even when the IMF applied the orthodox treatment, the standard IMF prescriptions, they came unstuck even more. It is the shattering of a dream – the dream of export-lead growth, free trade and financial liberalisation – in short the dream of ‘globalisation,’ that has finally cracked the Washington consensus.
Where to now?
The Washington consensus is starting to unravel, but what will replace it? The set of reforms presently on offer is limited and seek to put the train of economic globalisation back on track. They include measures such as increased surveillance, uniform reporting and accounting procedures, better risk assessment, strengthening domestic financial institutions, more transparency in market transactions.
Many of them are absolutely necessary in the short term, such as opening the IMF to greater scrutiny, acknowledging that reckless capital account liberalisation may not be wise and that speculative money creates instability and volatility, seeking ways of ensuring that the private sector shares an appropriate proportion of risks and loss, more coherent and better coordinated policy responses by governments and international institutions and greater efforts to predict and prevent crisis
.
But none of this actually addresses the underlying weakness of the present system. Without effective and binding mechanisms to ensure redistribution of resources and environmental sustainability, four fifths of the world’s population will continue to be excluded from the promised benefits of free trade and financial liberalisation.
Reform of the global financial architecture is now on the agenda, but instead of thinking about architecture, we should be thinking about the people that we are building it for. Any architect worth their salt starts by consulting the client, trying to understand what they want and how they live. It is a collaborative process. Designing the global financial architecture should be no different. But a word of caution about using the language of the elite. The word ‘architecture’ connotes institutions rather than relationships and limits our imagination. We should, instead, be thinking about the values that we want to express and promote. Only then should we think about what sort of institutions – either local, national, regional or global – we need to do the job. When the Bretton Woods Institutions were founded more than fifty years ago, there was a vision – albeit a reflection of the dominant powers – but nonetheless a vision based on shared values of a better world. There are no values in the Washington consensus just self-interest.
The basis for our design should be increasing political participation, economic democracy and social justice, replenishing and sustaining the environment. This means pushing decisions down the ‘food chain’. Minimally, it means stripping the IMF of its assumed power to impose policy conditions on governments. Minimally, it means allowing governments to establish whatever kinds of barriers they think are necessary to protect their domestic economies from the unpredictable global economy. Minimally, it means recognising that there is no single solution – even though the advocates of economic globalisation would wish that it were so.
The results will be not be shiny marble-clad monuments, but eclectic and useful, sometimes idiosyncratic, constantly changing, a nightmare for transnational corporations and anathema to the zealots of economic globalisation. But, the global economy needs to be de-constructed and build again on a sound moral basis of equity and sustainability. No amount of tinkering and reform of the existing global financial architecture will get this result. No amount of surveillance and disclosure will put economic power back into the hands of the mass of people.
Getting rid of hot money
Joseph Stiglitz has called for a ‘post-Washington consensus’ which "cannot be based on Washington.’ "One principle of the emerging consensus," he says, "is a greater degree of humility, the frank acknowledgment that we do not have all the answers."
Humility notwithstanding, there are two items that must be given priority: getting rid of hot money and ensuring the ‘post-Washington consensus’ does simply reflect the views of the elite, but ensures that the silent voices – the women, farmers and day labourers, the workers and small businessmen, are heard.
There is a lot of talk about ‘cooling down hot money’ , but we have to do a lot more than that. We have to get rid of it and discredit the whole notion that there is anything useful in speculation. The financial market, as it presently operates, serves very little useful purpose and is, for the most part, non productive. It does not create anything that you can eat or hold or sell or use. It does not add to the public good, and it distorts our collective understanding of what is valuable and productive. And, as we have seen with the recent near-collapse of Long Term Capital Management, it can threaten the whole financial system.
One of the ways of cooling down hot money is to redirect it into productive channels. And here is one of the great contradictions of the present economic system: the massive accumulation of finance and speculative capital is due to overproduction – which is a bewildering concept considering that we live in a world where four-fifths of the population struggles daily with poverty. Yet, this is true. The massive profits of transnational corporations and banks have no where ‘useful’ to go, so they go into speculation.
In addition corporations make such stupendous profits that they have little need for traditional banking services, so banks have found new ways of making profits by diversifying into securities and non-FDI activities. This explains the appearance of incomprehensible financial instruments which manipulate and capitalise on the cracks in the market to make quick profits. In addition, the massive growth of pension and mutual funds – due in large part to the privatisation of social security and the individualism inherent in neo-liberal economics – has created an enormous pool of highly mobile capital in search of maximum return.
But the other side of overproduction is demand. A simple solution to the problem of overproduction is to expand markets – that is, to put more money in the hands of more people, so that they can buy the simple, basic life enhancing consumer goods that countries like Vietnam, China, Thailand and Brazil are so good at producing. The good news for the US and Europe is that you do not need to shoulder the burden of consuming the world’s output on your own! Redistribution of wealth and purchasing power to the four-fifths of the world who are not being given a chance to pull us out of this recession would give the economy a kick start, would ease the problem of overproduction, and provide all sorts of useful ways to recycle profits. It would also cool down global capital markets.
However, creating this demand requires significant social reform in terms of asset and income distribution – it means land reform and wage and labour reform. Industrialisation via cheap labour and natural resource exploitation is no longer viable. We have reached the point where further economic growth can only be achieved by expanding domestic markets and most importantly by changing our definition of what is productive to include public goods, culture, the environment and human security. We are at a moment in history where economic necessity coincides with social justice.
Crisis of globalisation
In the past months, the contagion has spread far beyond Asia to Russia and to Latin America. Obviously, this is not an ‘Asian crisis’. It is not even a global crisis, it is a crisis of ‘globalisation’. There is agreement that there need to be some changes, but we cannot leave this matter to the G7 or even the G22.
The logic of globalisation is that as we become more interdependent and integrated, inequalities between nations will begin to disappear, which is all the more reason to bring all members of the globalised economy – not just the G7 – to the table. In addition, there must be a role for civil society groups in discussion of alternatives.
The so-called G22 – a group of systematically significant economies (whatever that means) which does not include Denmark – has produced three weighty working group reports on transparency and accountability, strengthening financial institutions and financial crises. The documents were released on 5 October, are available on the World Bank website, total 220 pages, and the deadline for comments is the end of this month – in two days time. This is nonsense. We cannot accept that these critical decisions about our future are left in the hands on central bankers from 22 countries and an elite gathering of bureaucrats who have a vested interest in maintaining the status quo. (The deadline was subsequently extended to end December 1998 in response to faxes of protest for several organisations, including the 125 participants at the Roskilde University Conference where this paper was presented.)
The European Union now has a majority of members with left or quasi-left governments. These governments were elected because people are concerned about unemployment, social exclusion, security and the environment. We are tired of the economics stripped of its social and political dimensions. We will no longer accept a world where progress is measured by meeting the macroeconomic targets for Euro harmonisation. These concerns – for human and environmental security and sustainability – must be translated into the international debate about the way we construct global economic relations. The logic of economic globalisation is exclusion because it is based on competition – in capitalism there are winners and losers. In Europe, we have seen that exclusion creates fear, xenophobia and hatred. At a global scale, exclusion causes war, famine, poverty and exploitation. We cannot accept this and we have now tremendous political opportunity to create a new vision of human society and to create the institutions and mechanisms to realise our vision. This cannot be left to the global elites -- G7, the G22 and the outdated and undemocratic Bretton Woods institutions. That would be like giving matches to the arsonist.
* Nicola Bullard is a senior associate with Focus on the Global South, a Bangkok-based policy research and advocacy non-government organisation associated with the Chulalongkorn University, Thailand. This paper was presented at the conference ‘The economic crisis in East Asia and the impact on local populations’ at Roskilde University, Denmark, 29-20 October 1998.
(1) Green, Duncan, Silent Revolution: the Rise of Market Economics in Latin America (Cassell, London: 1996)
(2) Institute for International Finance, Inc. ‘Capital Flows to Emerging Market Economies,’ 30 April, 1998
(3) "The Wrong Medicine for Asia," Jeffrey D. Sachs, New York Times, 3 November 1997
(4) C.P. Chandrasekhar and Jayati Ghosh, "Hubris, Hysteria and Hope: the Political Economy of Crisis and Response in East Asia," (forthcoming)
(5) "Bank Admits HIPC Conditions Wrong," Joseph Hanlon, Debt Update, March 1998
(6) Robert Mangabiera Ungers, "The Really New Bretton Woods," in The Financial System under Stress: An Architecture for the New World Economy, edited by Marc Urzan (New York& London: Routeledge, 1996). This article is an extremely interesting and constructive analysis of how the Bretton Woods institutions should be reformed, animated by the impulse that the world economy "needs more, not less, of all the benefits Bretton Woods was designed to provide through international coordination and supranational institutions." (page 23)
(6) Martin Feldstein, "Refocusing the IMF" Foreign Affairs, March/April 1998
(7) Ibid.
(8) IMF Articles of Agreement, Article 1, Purposes (IMF website)
"The Wrong Medicine for Asia…"
(9) Late in 1997 Congress failed to renew the President’s "fast-track" trade negotiating authority responding to an all-out public campaign opposing further liberalisation.
(10) "Dollars and Sense," Far Eastern Economic Review, 12 February 1998, p. 14
(11) Testimony of Ambassador Charlene Barshefsky United States Trade Representative before the House Ways & Means Trade Subcommittee, 24 February 1998 (USTR website)
(12) Ibid.
(13)Stanley Fischer, "The Asian Crisis: A View form the IMF." Address to the Midwinter Conference of the Bankers’ Association of Foreign Trade, Washington DC, 22 January 1998
(14) "The Asian Monetary Fund: a Case Study of Japanese Regional Leadership," Eric Altbach, Japan Economic Institute Report, Number 47A, 19 December 1997.
(15) Joseph Stiglitz, ‘Responding to Economic Crisis: Policy Alternatives for Equitable Recovery and Development’ This paper was presented at the North-South Institute Seminar, Ottawa, Canada, 29 September, 1998 (available from the World Bank website, www.worldbank.org)
(16) Bangkok Post, IMF expects short-term capital controls in Asia, 15 September 1998
(17) ibid.
(18) Australian Financial Review, Corporate Debt Rescue for Asia, 26 October 1998
(19) Report of the Working Group on Transparency and Accountability, October 1998 (available on the World Bank website, www.worldbank.org)
(20) "Bank Admits HIPC Conditions Wrong," Joseph Hanlon, Debt Update, March 1998