Atelier 17, article 11

© Robert J. Samuelson
(from Newsweek, October 1998)

                                                Global Capitalism, RIP?(*)

[Les raisons de la crise financière mondiale [de 1998]. Pour la première fois dans l'histoire economique internationale, une crise financière frappe le monde entier, comme un jeu pervers de domino. L'Asie fut la première touchée, puis la Russie et l’Amerique Latine. Les répercussions sur les places boursières ne se sont pas fait attendre. New York, Francfort, Londres ou Tokyo, toutes connaissent de trés fortes baisses. Cette crise, structurelle, est aussi cell d'un modèle qu'on croyait pouvoir appliquer au monde entier. Sonne-t-elle le glas du capitalisme global?]

 Tumbling world stock markets con-tain a large. though muffled. mes-sage global capitalism-whose tri-umph once seemed inevitable-is now in full retreat. perhaps for many years In Hong Kong the overlords have so wea-ned of global financial turmoil that they have re-sorted to government intervention (reportedly $14 billion) to make the market behave.

 Who would have guessed this? After the cold war global capitalism offered a powerful vision of world prosperity and ultimately. democracy. Multinational companies and investors would pour technology and capital into poorer regions, creating a transnational mass market of middle-class consumers. World trade and investment did indeed surge. but not with the expected conse-quences. Global capitalism is now destabilizing the economies of poor countries and inflicting large losses on investors in rich countries.

 Consider. The U.S. market is now more than 3% lower than at the start of 1998. Mean-while, Tokyo is down 8% for the year; and Hong Kong a bruising 30%. Worse are the col-lapses of economies around the world. In Hong Kong, the gross domestic product is dropping at a 5% annual rate; unemployment has dou-bled. In South Korea. unemployment is now 7.6%; last October. it was only 2.1%. Indone-sia's GDP may drop 20% in 1998; food shortages are already reported.

 Most American economists think-per-haps naively-that the United States will avoid a recession. But dangers are rising. Exports could disap-point. because economies in Latin America and Canada are weakening. With Asia, these areas buy nearly three quarters of U.S. exports.

 But however the U.S. economy fares, global capital-ism is under siege. The idea was to open up markets to trade and foreign in-vestment. Instead markets are being shut. Malaysia imposed exchange controls, prevent-ing foreign investors from reclaiming funds (ringgit could not be changed into dollars). Earlier, Russia had defaulted on some foreign debt and stopped converting rubles into hard currencies. And then there's Hong Kong's stock-market intervention. The abrupt change of rules could frighten away investors.

What went wrong?

On one level, the answer is simple. Coun-tries became overdependent on foreign capital. which. having entered in huge amounts. is try-ing to leave the same way. In 1996. South Korea received $42 billion of inflows: a year later. out-flows totaled $21 billion. What initially trig-gered the reversal was the recognition that much foreign money had been squandered through "crony capitalism" or misguided indus-trial policies. Overseas banks refused to renew their loans: mutual-fund investors sold shares and converted their funds back into dollars.

But now the fear of capital flight is feed-ing on itself-and spreading to Latin America. If people fear the Mexican peso will be deval-ued. they may convert pesos into dollars. But countries need hard currencies to pay for im-ports. High interest rates are one way to halt the process by rewarding people for keeping funds in local currencies. Hong Kong's short-term in-terest rates have risen to a bout 15%. Mexico's to 36%. The trouble. of course. is that punitive interest rates also crush local economies.

 If a few economies face this squeeze, it’s their problem: if many economies do, it's ev-eryone's problem. This is happening. The threat of capital flight has shoved so many countries toward austerity that it's inducing a worldwide slump. And, again. the process feeds on itself. Feeble economic growth has de-pressed prices of raw-material exports. Be-tween June 1997 and -August 1998. oil prices dropped about 30% (affecting Russia, Mexico and Venezuela among other's), and gold prices sank 17% (Russia, South -Africa). Earning less abroad, these countries must slow their economies to cut imports. This depresses U.S. exports and the profits of multinational com-panies operating in these countries.

 But global capitalism's failure demands a deeper explanation. Market capitalism is not just an economic system. It is also a set of cul-tural values that emphasizes the virtue of competition, the legitimacy of profit and the value of freedom. These values are not univer-sally shared.

 As a result, spreading capitalism is also an assault on other nations' culture and poli-tics that almost guarantees a collision. This is what happened. Led by the U.S. global agen-cies (the World Trade Organization. the Inter-national Monetary Fund) sought to persuade poorer countries to become more open to trade and global capital.

 Countries like Korea and Russia pre-tended that they were changing more than they had. American, European, and Japanese bankers, executives, and government officials pretended the claims were true -or might become true. Loans were made on the basis of incomplete or faulty financial statements. Or they were made on the faith that, it a loan went sour, someone (the government, the IMF) would cover the losses.

 Global capitalism became a dangerous hybrid. On the one hand, investors committed huge sums and expected high returns. On the other, the money often went to borrowers who
were not operating by strict rules of efficiency or profit and loss. "Crony "capitalism often meant  corruption.  In 1997, a group  called Transparency  Interna-tional ranked corruption in 52 countries. Not sur-prisingly, Russia ranked fourth. Indonesia seventh and Thailand 14th. 

 But capital flowed freely while opti-mism and self-deception prevailed. While every-one  enjoyed  profits. there was a suspension of disbelief Now comes the reckoning. Capital flight has forced most developing countries to scramble to conserve scarce for-eign exchange.

 All their choices are bad. Malaysia’s ex-change controls risk loss of any future foreign in-vestment. Still, some U.S. economists see currency controls as a temporary way of avoiding high-in-terest rate austerity. A gentler way to achieve the same result would be debt relief: global bankers would ease the repayment bur-den. But so far, they have shown little interest. A third approach is to attract new long-term capital to replace old short-term capital. Some of this is occurring as U.S. and European firms are al-lowed to buy Korean or Thai companies that were once off-limits. But developing countries are reluctant to sell too much of their economic bases to foreigners at fire-sale prices.

 Countries  cannot  expand  their economies unless they replenish their foreign- exchange reserves of hard currencies. The IMF has focused only on "reforms". It might also use-fully emphasize debt relief so that the burden of bad lending would be shared between creditors and debtors. But preventing an American or Eu-ropean slump is no less important: either one would deepen the world economy's downturn.

 Even if the worst doesn't occur, global capitalism won't soon regain its aura of infallibility. There '-vas nothing wrong with he theory, Free trade and the free movement of capital would, in a world where even-one worshipped ef-ficiency and profits, enrich all nations. Toe trou-ble is that we do not live in such a world.

(*)«Global capitalism, R.I.P.?»= La fin du capitalisme mondial?  (R.I.P.= rest in peace).