SUNS4501 Wednesday 2 September 1999

Finance: Power, Timidity, and Irresponsibility


Walden Bello*

Bangkok Sep (Focus-on-Trade) -- Asia's stock markets are soaring again. To some, that portends real economic recovery. To others, it is an ominous sign that the "Electronic Herd," as New York Times columnist Thomas Friedman calls it, is back in its Asian grazing grounds, happily snapping up promising stocks and high-interest bonds now, but ready to move out tomorrow, perhaps in another furious stampede triggered by God knows what.

The herd, in fact, began moving in Manila the day after President Joseph Estrada's State of the Nation address
on July 26, as the foreign funds that had been pouring into the country over the last few months reversed
course, forcing the Philippine stock market index to drop 113 points to its three month low.

Was the Philippine chief executive looking more besotted than usual, some asked?

One would have expected that two years after the outbreak of the Asian financial crisis, there would be institutions in place that would prevent a repeat of the massive and rapid exit of $100 billion that triggered the
collapse of the region's economies. After all, even the new US Treasury chief, Larry Summers, who holds the
view that "crony capitalism" is the main reason for Asia's troubles, now admits that "a strong case can be made that excessive capital inflows may have contributed importantly to the recent problems in emerging markets."

A quick look around shows, however, that Chile has lifted its controls on foreign capital inflows, while
Malaysia has withdrawn the controversial restrictions on foreign capital outflows that it imposed last year. These moves certainly do not stem from the fact that national-level mechanisms have been rendered superfluous by the erection of serious capital controls at the international level.

For all its brave talk about creating a "new global financial architecture," the G-7 at its summit in Cologne in
mid-June gave birth to a mouse -- to a program that put the emphasis on voluntary disclosure of financial
information by hedge funds and other financial mechanisms and voluntary risk management by the private
sector. Cologne also produced another ironic result - a stronger International Monetary Fund to exact economic reforms from emerging economies, but without the organizational reforms in terms of greater transparency, greater accountability, greater consultation, and a more self critical approach to its programs that the Fund's many critics have long demanded.

The Cologne program bears the stamp of Larry Summers and his predecessor Robert Rubin. Alternative
proposals within the G-7, such as "target zones" to reduce fluctuations among the euro, dollar, and yen,
practically vanished when the controversial Keynesian Oskar Lafontaine resigned as Germany's Finance Minister in March.

The remaining potential counter-weight to US domination of the financial agenda is Japan, but it has refused
to play that role. Indeed, Japan has proven to be a very big disappointment to many people and governments
in Asia.

The first big let-down occurred a few months into the crisis. In what was then seen by practically all Asian
countries as an innovative response to the currency crisis, Tokyo proposed the establishment of the Asian
Monetary Fund (AMF), which would have been capitalized to the tune of $100 billion from the reserves of Japan, China, Taiwan, and Hongkong.

The AMF was conceived as a multipurpose, low- conditionality, quick-disbursing facility from which
governments whose currencies were under attack could have drawn cold cash to counter the speculators. But
the US Treasury and the Fund opposed the idea on grounds that it would weaken the ability of the IMF to
"extract reforms."

Moreover, as analyst Eric Altbach has noted, Summers and the Treasury "saw the AMF as more than just a
bad idea; they interpreted it as a threat to America's influence in Asia." Japan backed down, the opportunity
to stabilize the situation early on with an inter-governmental united front backed by hard reserves passed, and
key Asian economies plunged into spiral accelerated by Washington-backed contractionary IMF programs.

Since then, Japan has largely danced to the American tune. No concrete proposals have come from Tokyo on
global capital controls, though Finance Minister Kiichi Miyazawa and other Finance Ministry officials have
rhetorically targeted hedge funds on occasion. Tokyo has also made critical noises about the IMF but it has not followed these up with actual proposals for institutional reform.

The vaunted Miyazawa Plan has, in fact, elicited US approval, largely because it provides aid that is conditioned on advancing Washington's agenda for Asia-that is, rapid liberalization, deregulation, and privatization.

In the Philippines, for instance, Miyazawa money has been made contingent on Manila's implementing two
things: the privatization of the National Power Corporation, which has been a long-standing demand of the
World Bank and the IMF; and the opening up of retail trade to foreign participation, of which the American
Chamber of Commerce has been a prime advocate.

It is not that Japan lacks the clout to stand up for an alternative paradigm of global financial stabilization. For
when it comes to issues that bear on its domestic economy, Japan has not hesitated to take decisions that
Washington protested but could do nothing about, like Tokyo's refusal to open up its forestry and fisheries
sector and its move to restrict the short-selling of stocks. What Japan has studiously avoided is filling a
leadership role for Asian interests.

Unchallenged by Europe and Japan, the US has dominated the global financial agenda. This agenda has been
fairly consistent. The reason that Washington has felt uncomfortable about attaching urgency to controlling
global flows of speculative capital is that, as a New York Times series earlier this year revealed, Treasury's
push for rapid, indiscriminate liberalization of the capital accounts of the Asian economies was a central cause
of the crisis. And as the crisis developed, Washington's agenda, as former Federal Reserve GovernorLawrence Lindsey has pointed out, has been to take advantage of the situation to push its long-standing bilateral agenda of opening up trade and financial markets.

Now, Larry Summers talks about "properly paced liberalization," but it remains the case that capital account
and trade liberalization in the emerging markets continues to be the central thrust of the US program for global financial reform. Washington's main antidote against global financial instability is not international measures to throw sand in the wheels of speculative capital but more liberalization at the national level.

Summers revealed the logic behind this approach in his comments on Argentina in a recent speech:

"Today, fully 50% of the banking sector, 70% of private banks, in Argentina are foreign-controlled, up from
30% in 1994. The result is a deeper, more efficient market, and external investors with a greater stake in
staying put."

In the curious algebra of the US Treasury:
financial liberalization = financial stability = global interest

In sum, five years after the Mexican financial crisis and two years after outbreak of the Asian financial crisis,
Washington's single-minded pursuit of its financial agenda and European and Japanese timidity have ensured
that the world remains without a serious system of defense against periodic stampedes of the Electronic Herd.

This is irresponsibility of the highest order.

[* Walden Bello is director of Focus on the Global South and professor of sociology and publicdministration
at the University of the Philippines.]