Joseph Stiglitz, who was chief economist of the World Bank during the emerging markets crisis a decade ago, discusses in a Project Syndicate article (hat tip Mark Thoma) how the US is now unwilling to take the harsh medicine it prescribed back then. While this may be a revelation to some US readers, this inconsistency is well known overseas and cause for quiet consternation.
But Stiglitz takes the case of the nations subject to the tough US/World Bank requirements one step further. He argues that href=”http://www.stabroeknews.com/index.pl/article_daily_features?id=56533502″> the standard recommendation of financial market liberalization is wrong; it increases instability without increasing growth. It merely serves Wall Street Stiglitz quite bluntly points out what people in polite society here seem unable to admit, that the Treasury is the financial industry’s advocate. It has merely become glaringly obvious with Paulson.
This second line of thinking – that US Treasury/IMF policies are not in the best interests of the nations subject to them – is also a widely held view abroad, but too often is dismissed in policy circles as conspiracy theory. Having someone like Stiglitz, a Nobel prize winning economist who also had a seat at the table. support that view puts an entirely different coloration on it.
From Project Syndicate:
This year marks the tenth anniversary of the East Asia crisis….There were many other innocent victims, including countries that had not even engaged in the international capital flows that were at the root of the crisis. Indeed, Laos was among the worst-affected countries….It was the worst global crisis since the Great Depression….
Looking back at the crisis a decade later, we can see more clearly how wrong the diagnosis, prescription, and prognosis of the IMF and United States Treasury were. The fundamental problem was premature capital market liberalization. It is therefore ironic to see the US Treasury Secretary once again pushing for capital market liberalization in India – one of the two major developing countries (along with China) to emerge unscathed from the 1997 crisis.
It is no accident that these countries that had not fully liberalized their capital markets have done so well. Subsequent research by the IMF has confirmed what every serious study had shown: capital market liberalization brings instability, but not necessarily growth. (India and China have, by the same token, been the fastest-growing economies.)
Of course, Wall Street (whose interests the US Treasury represents) profits from capital market liberalization: they make money as capital flows in, as it flows out, and in the restructuring that occurs in the resulting havoc. In South Korea, the IMF urged the sale of the country’s banks to American investors, even though Koreans had managed their own economy impressively for four decades, with higher growth, more stability, and without the systemic scandals that have marked US financial markets with such frequency.
In some cases, US firms bought the banks, held on to them until Korea recovered, and then resold them, reaping billions in capital gains. In its rush to have westerners buy the banks, the IMF forgot one detail: to ensure that South Korea could recapture at least a fraction of those gains through taxation. Whether US investors had greater expertise in banking in emerging markets may be debatable; that they had greater expertise in tax avoidance is not.
The contrast between the IMF/US Treasury advice to East Asia and what has happened in the current sub-prime debacle is glaring. East Asian countries were told to raise their interest rates, in some cases to 25%, 40%, or higher, causing a rash of defaults. In the current crisis, the US Federal Reserve and the European Central Bank cut interest rates.
Similarly, the countries caught up in the East Asia crisis were lectured on the need for greater transparency and better regulation.
But lack of transparency played a central role in this past summer’s credit crunch; toxic mortgages were sliced and diced, spread around the world, packaged with better products, and hidden away as collateral, so no one could be sure who was holding what.
And there is now a chorus of caution about new regulations, which supposedly might hamper financial markets (including their exploitation of uninformed borrowers, which lay at the root of the problem.) Finally, despite all the warnings about moral hazard, Western banks have been partly bailed out of their bad investments.
Following the 1997 crisis, there was a consensus that fundamental reform of the global financial architecture was needed.
But, while the current system may lead to unnecessary instability, and impose huge costs on developing countries, it serves some interests well. It is not surprising, then, that ten years later, there has been no fundamental reform. Nor, therefore, is it surprising that the world is once again facing a period of global financial instability, with uncertain outcomes for the world’s economies.