YORKDelegates to the World Economic Forum's annual meeting here this
week should concentrate their attention on one question: Why has there been such
a monumental global misallocation of capital? This has created not just huge
black holes of debt defaults but has landed the world with massive overcapacity
in almost every major manufacturing sector.
The globalizers need to find ways of
avoiding or alleviating what seems to have become a rolling debt and excess
investment crisis. It once engulfed East Asia and may now, in a more gradualist
way, be undermining the United States, not to mention Turkey and Argentina.
If they do not, it will be easy for the
anti-globalizers to demonstrate that globalization unleashes dangerous forces
beyond the control of international bodies or even concerted action by the major
Hitherto the opponents of globalization
have concentrated their attention primarily on trade, labor and environmental
issues. This may not have been wise. The benefits of international trade are
easy to prove even if they are not well distributed. The environment is seen in
much of the developing world as something rich nations worry about and labor
concerns are often viewed as a new form of protectionism.
But the problems of excessive and
unstable capital flows are all too obvious. Little has been done since the Asian
crisis to address these.
The capital market forces that brought
recent U.S. corporate debt disasters such as Global Crossing and Enron are the
same ones that earlier provided absurdly easy money both to Asian corporations
and to the government of Argentina. In turn, similar forces provided a flow of
debt capital into the United States, whether into corporations or to finance a
consumer and housing price boom.
For the United States, borrowing dollars
was all the easier because it carried no exchange risk and others were willing
to hold the preeminent reserve currency. But the easier it is to borrow, the
more dangerous the eventual outcome.
The national debt and currency crises
that have flowed from open capital markets cannot simply be blamed on
inappropriate economic policies or lack of political leadership. Lending that
does not take proper account of institutional problems in countries such as
Argentina is as dumb as lending to Enron's off-balance-sheet partnerships in the
full knowledge of their purpose.
In all these cases lending was driven
more by the greed of the intermediaries than by the real need of the borrower.
The middle men earn quick and big rewards and transfer the risk elsewhere. If
lenders were using their own money, few of these disasters would happen. The
problem is not free capital flow itself but the structure of intermediation.
Overinvestment is a consequence both of
easy access to borrowing and of a warped view of globalization.
Think of how many international companies
feel they "have" to be in China, even if they cannot devise a business plan for
ever making money. China may be an extreme case, but lesser forms of the
attitude exist in regard to Brazil, to Southeast Asia, etc.
These are the same instincts that drove
South Korea's industrial conglomerates, or chaebol, to massive expansion,
overcapacity and unserviceable debt.
The current worldwide collapse in return
on capital is a consequence of faulty responses to the opportunities of
globalization. Worship of "foreign investment" has masked the fact that bad
investment can be worse than no investment.
The world now presents an unhappy picture
- half is suffering from capital overindulgence. The other half is starved of
capital and also hurting because globalization has made corporate tax avoidance
easier through transfer pricing and use of offshore tax shelters.
The shrill ideological debates over
globalization are irrelevant. What is needed is to understand that the failings
of the institutions driving capital flows could be fatal to the more open world
most of us want.