KONGMexico. Thailand. Indonesia. Korea. Russia. Turkey. Argentina.
South Africa barely escaped. Now Brazil may be about to join the list of major
middle-income countries that have suffered wrenching economic crises in the past
seven years. These crises have been brought about by unstable international
capital markets, yet instead of looking at the flaws of a system that has
brought undemocratic power and huge profits to its promoters, analysts'
attention is primarily paid to the supposed domestic flaws of the crisis
In the case of Brazil it is widely
admitted that there is nothing seriously wrong with its economic policies, nor
its foreign debt levels. Nor has the opposition presidential candidate Luiz
Inacio "Lula" da Silva made any wild or radical promises. But the mere thought
of a leftist president in Brazil has been enough to send Wall Street
commentators and analysts into potentially self-fulfilling prophecies of doom,
causing an exodus of capital and a sharp rise in interest rates and so further
doubts about national solvency.
The three crises of the past year make it
plain that the international financial community has learned nothing from the
Asian crisis. Despite the domestic disgrace into which Wall Street has fallen,
thanks to years of excessive greed leading to recent multiple major scandals,
the nexus between Wall Street, Washington and the International Monetary Fund
may have even been strengthened.
Looking at the potential wreckage of what
had been a decade of economic progress in South America, it is worth remembering
how Prime Minister Mahathir bin Mohamad of Malaysia was vilified for not
following the dictates of Wall Street and the IMF. Yet he was right in two
assumptions about the IMF: First, that it lacked sufficient resources to rescue
even those countries it viewed favorably from panic or speculative attacks by
traders in London or New York. Second, that it would use loan conditions to push
microeconomic and political objectives that went far beyond its remit.
The latest Latin crisis has implications
that go well beyond individual countries, or even global financial institutions.
It strikes again at the ability of middle-income countries, particularly those
with relatively youthful populations, to act as an engine of global growth -
something the United States can no longer do, thanks to its own debt levels, and
which is also beyond the ability of the aging societies of Europe and Japan.
Indeed, it is now clear that the best
hope for reigniting medium-term growth rests with the poor but very large
countries, China and India. Their persistent refusal to follow Wall Street
mantras and IMF ideology and fully open their capital markets has kept them
relatively untouched by crises elsewhere. In fact, China's banks are in worse
shape than Argentina's, and India's domestic public debt is worse than Brazil's.
But capital controls and state ownership of banks provide a measure of stability
for countries with immature financial or legal institutions - and without the
money-printing ability of reserve currency nations.
Revived East Asian countries headed by
South Korea may be able to provide continued global stimulus. But each national
crisis increases the pressure on others to increase their reserves at the
expense of growth-oriented policies, and follow beggar-thy-neighbor trade
Direct and portfolio investment flows
remain important for most developing countries. But just as Wall Street in the
1990s came to be dominated by get-rich-quick schemes, so international
short-term capital flows have continued on a massive scale, to the benefit of no
one except the intermediaries.
As in Asia, those who promoted excessive
inflows also benefited from capital flight - and then from IMF bailout packages
which, like Alan Greenspan's rescue of Long Term Credit Management, add to moral
hazard and protect the financial sector at the expense of the real sectors of
the economy. As Maynard Keynes wrote: "When the capital development of a country
becomes the by-product of the activities of a casino, the job is likely to be
At home, the United States is, in its
typically self-renewing way, starting on a radical reform of Wall Street. But
how many more Argentina-style crises will it take before the world learns the
wisdom of taking power away from the casino operators, the investment banks, and
handing it back to elected governments?