Jun 5, 1998

FINANCE: CRONY CAPITALISM VS RUBIN-FISCHER-SUMMERS AXIS?

 

Geneva, 3 June (Chakravarthi Raghavan) -- The structural weaknesses in the Asian economies, on which much attention has been focused in discussions about the crisis, have played a major role in amplifying the crisis, but "cannot explain,, by themselves, the sudden collapse that the crisis countries have experienced," according to the Paris-based secretariat of the OECD.  

In presenting this view in its June 1998 Outlook, the OECD has distanced itself from the current standard theological explanations of the IMF top officials head and the staff, and the ideologues following their line who have been blaming "crony capitalism" of the Asian model.  

The OECD does not use the term 'crony capitalism', but calls a number of elements highlighted in discussions blaming these countries as "structural deficiencies"  

It says that a number of factors have operated to generate the crisis. But an important one on which much attention has been focused is the large number of structural weaknesses that exist in the affected countries, including: weaknesses in corporate governance arrangements; lack of transparency about business' financial situation and their relationship to government authorities; poor regulatory and supervisory arrangements in the financial sector; and tendencies to high indebtedness and over-leveraging in business sectors and to allowing financial institutions to continue operating with high levels of non-performing loans.  

"While these structural deficiencies have played a major role in amplifying the crisis, and addressing them must be an important part of the solution, they have existed for many years without preventing the rapid growth and rise in living standards that most of the region has enjoyed during the past 30 years or more. They cannot explain, by themselves, the sudden collapse that the crisis countries have experienced."  

Two major developments stand out which set the stage for the immediate crisis, says the OECD: the sustained growth in region giving rising both to excessive optimism throughout the region itself and in financial institutions in Europe, North America and Japan; and to insufficient weighing of downside risks.  

Current account deficits in the region were financed in good part by short-term capital inflows, which in the period immediately before the crisis were at record levels.  

[The IMF takes such flows into account, in judging the adequacy of reserves of countries for balance-of-payments purposes]. 

And even where deficits have generally been low (as in Korea and Hong Kong) or in surplus (as in Singapore), integration of banking systems with international financial markets were high, and in the case of Korea rising rapidly. Consequently, the region was vulnerable to international liquidity problems in the event of any diminishing of optimism about its prospects while, at the same time, investment performance was increasingly inviting a more cautious assessment of the prospects.  

The OECD notes that the recent financial crises, of which the Asian one is the latest but most severe one, have raised some questions. In most of the episodes, international capital flows have played a prominent role, often in the context of reforms which have pushed the process of financial liberalization forward. These have raised questions both about the extent to which the financial liberalization in emerging market countries has contributed to these episodes and the wider management of the international financial system.  

Overall, the OECD says, a common theme in Asia and earlier episodes is that financial reform, rather than going too far, has been interpreted too narrowly, and has not gone far enough, nor adequately supported by macro-economic policies and structural reforms in other areas. 

After discussing some details of the various reforms needed, the OECD notes that the Asian crises has raised wider issues concerning management of the international financial system. It refers to the $21 billion in IMF funds disbursed to the Asian countries in crisis so far (of the total of about $115 billion package) and notes these amounts are considerably less than the potential capital movements which the crises could ultimately entail.  

This has placed responsibility on private creditors to set up refinancing facilities to overcome short-term funding problems -- reminiscent of the process of Latin American debt rescheduling during the 1980s. And where negotiations have proved successful as in the case of Korea, favourable effects can become visible in financial markets fairly quickly the OECD says.  

[But other IMF critics, among them Martin Feldstein in his latest article in Wall Street Journal, has blamed the IMF ordained high interest rates as responsible for prolonging the crisis and bankrupting small and medium enterprises. Feldstein's article in effect has called for some amount of 'financial repression' in Korea - through the government requiring banks to maintain old credits to business at old interest rates (in return for increasing the Korean special fund to rescue the banks, which he expects may ultimately require more than 10% of GDP.]  

The "scandals" coming out of the Asian region about deals involving those close to the ruling establishment, and the protests and outcry inside the countries with many non-government groups even welcoming the IMF conditionalities and "reforms" that have brought down governments, is now being used by the IMF to further its jurisdiction to use conditionality packages to bring about "good governance" -- a term that seems to mean many things to many people.

In trying to counter the opposition, particularly in the US against funding for the IMF and the perception that the IMF funding helps to "rescue" foreign bankers and their loans, the IMF top officials have been using the 'governance' issue and their determination to end "corruption" in these countries.  

In the June issue of its publication, "Finance and Development", the IMF deputy Managing Director, Stanley Fischer, in outlining steps IMF is taking to meet new challenges posed by the Asia crisis, has said that with its 182 member countries, the IMF is the premier forum where issues relating to the organization and functioning of the international system are generally discussed and, when decisions are needed, are decided on in the IMF.  

Says Fischer: "Almost every major international economic issue or problem of recent years has been discussed in the IMF and usually acted upon (often together with other institutions, especially our Bretton Woods nonidentical twin the World bank): the Mexican and Asian crises; technical and financial assistance to the economies in transition, including Russia; the debt problems of the poorest countries (in cooperation with the World Bank); the attempt to improve international banking standards; economic assistance to countries emerging from chaos in the aftermath of wars and natural disasters; the ongoing effort initiated following the Mexican crisis, to improve the quality and public provision of data; the unfortunately long-running problems of the Japanese economy this decade; the activities of hedge funds and their role in the Asian crisis. The list goes on and will go on.."  

The same issue of the IMF publication has an article by the "IMF staff" which notes that the East Asian countries for several years had been admired as some of the most successful emerging economies, but have suddenly become embroiled in one of the worst financial crises of the post-war period.  

"Several factors, both domestic and external, probably contributed to the dramatic deterioration in sentiment of foreign and domestic investors," the IMF 'staff' say and list these:  

• build-up of overheating pressures, evident in large external deficits and inflated property and stock market values;  
• prolonged maintenance of pegged exchange rates, in some cases at unsustainable levels;  
• lack of enforcement of prudential rules and inadequate supervision of financial systems, coupled with government directed lending;  
• problems resulting from the limited availability of data and a lack of transparency; and  
• problems of governance and political uncertainties, which worsened the crisis of confidence.  

The IMF staff concede that external factors also played a role, but claim that many foreign investors suffered substantial losses. They however also add that international investors -- mainly commercial and investment banks -- may, in some cases, have contributed, along with domestic investors and residents seeking to hedge their foreign currency exposures, to the downward pressure on currencies.  

Says the OECD Outlook, legitimate questions exist as to whether the Asia crisis could have become so severe if lenders had been behaving with a prudent respect for the risks inherent in lending to borrowers in emerging market economies. If the size of the international financial crises is not to continue to rise in the future, it will be necessary to ensure that participants in international capital markets are not sheltered from the consequences of their own actions.

But the IMF's own writings and views of its staff, and of the US treasury that actually runs the IMF through what has come to be called by critics as the operation of the Rubin-Fisher-Summers axis (the orchestration of IMF policies by former Wall Street banker and now US Treasury Secretary Rubin, his deputy Lawrence Summers and Stanley Fischer, Summers former professor and the top US official in the IMF) is seen by critics as in fact sheltering banks and increasing the "moral hazards".

At a recent seminar at UNCTAD, independent experts have said that what was being called "crony capitalism" in Asia is known as "pork barrel" politics in the United States -- as evidenced by the campaign funding stories about the Clinton administration and of Senator D'Amato disclosed in the US media in recent days.  

And while non-governmental organizations have been patting themselves on the back with having derailed the OECD negotiations for a multilateral agreement on investment, the IMF (which has been fighting a turf battle on this with the OECD and the WTO) is pushing ahead with getting jurisdiction over the capital account of all member countries.  

Developing countries, and particularly those within the G-24 are saying that they have managed to turn aside the earlier IMF moves for requiring countries, over a period of time, to move to capital account convertibility.  

But the IMF would still have achieved its goals, even by getting jurisdiction.  

Developing countries could stand up and say no to the OECD-MAI or the WTO's moves in this regard, but virtually impossible for them to stand up to the IMF, once the jurisdiction is granted through amendment of articles, one expert said. 

The IMF can then routinely use the 'conditionality' packages, whether of structural adjustment programmes or the 'rescue packages' as in Mexico or now in Asia to force countries to open up their capital accounts and bring about financial services liberalisation, acting in tandem with the WTO, to enforce them.