The World Economic Crisis
Levinson, Mark
WHEN THAILAND devalued its currency in July 1997 it started a world financial crisis that continues to spin out of control. After a year of turbulence, what can we say about the crisis? Beware...
...The financial systems in Thailand, Indonesia, Korea, and, to some extent, Malaysia have been shattered and the economies of these countries continue to deteriorate...
...Speaking of the crisis in Asia, a New York currency trader quoted in the Rude paper said, "The market is a beast...
...wages have been slashed by as much as 40 percent...
...Unemployment is on the rise everywhere...
...The crisis was more severe than many initially claimed or hoped...
...Even countries that follow "market friendly" policies, like Mexico, have been affected...
...Regulating capital flows between nations and linking environmental standards and labor rights to trade and investment are the first steps to ensuring that global economic growth is equitably shared...
...Allowing unregulated flows of financial capital has created a situation in which livelihoods and prosperity are put needlessly at risk...
...Even defenders of free markets are dismayed by the power of currency markets to punish nations beyond the extent of their transgressions...
...Beware of experts...
...Mark Levinson is chief economist of UNITE...
...Perhaps the market "worked...
...The contagion is still spreading...
...Whatever we call it— rules, standards, financial architecture—we need some way to tame the beast...
...United Nations: Department of Economic and Social Affairs, 1998...
...But when does a market failure become so extenDISSENT / Fall 1998• 5 COMMENTS & OPINIONS sive that what has failed are the markets themselves...
...The cheerleaders of the global economy, having suffered an embarrassing defeat, are now picking themselves up, brushing off the dust, and marching merrily on with their heads in the air...
...However, a recession in the United states—it can't be ruled out—would surely push the global economy into a slump...
...Indonesia's economy (which is in the worst shape) will contract an astounding 20 percent this year...
...We need rules for the global economy...
...If the crisis means anything it is that markets are not always efficient or rational...
...The amount of capital withdrawn from Thailand, Malaysia, the Philippines, Indonesia, and Korea was remarkable...
...See a fascinatng paper by Christopher Rude: "The 1997-98 East Asian Financial Crisis: A New York Market-informed View...
...Treasury Secretary Robert Rubin speaks grandly of the need for a new financial architecture for the global economy...
...Few have confronted the implications of organizing a global economy through the market...
...and the number of Indonesians living on less than $360 per year will increase by more than twenty million over the next two years...
...Following a net private inflow of $93 billion in 1996, the net private outflow from these five countries was $12.1 billion in 1997, a swing of $105 billion...
...When you open your economy to the international financial markets, you should know that you are inviting a beast into your house...
...Perhaps I am wrong...
...Brazil, Hong Kong, Russia, Japan, Venezuela, and other countries are suffering attacks on their currencies...
...That swing was equal to 11 percent of the combined Gross Domestic Products of the countries involved...
...Will the contagion spread to the United States...
...Quite as if the crisis never occurred, the World Trade Organization is urging more liberalization in Asia, the International Monetary Fund is pushing for liberalization worldwide, and the Organization for Economic Cooperation and Development has just released a study titled "Open Markets Matter: The Benefits of Trade and Investment Liberalization...
...No government or international institution can control the nervous markets, which, according to the Wall Street Journal, are driven by a "psychology that at times borders on panic...
...After the crisis they saw only weak and poorly regulated financial systems, corruption, current account deficits and external debts, excess capacity and looming bankruptcies, bursting real estate and other asset bubbles—in short, a system of crony capitalism...
...Before the crisis, money managers with supposed expertise in Asia saw free-market liberalization, fiscal balances, strong savings and investment rates, solid growth, low inflation, and, most important to them, very positive rates of return...
...Few seem to grasp the meaning of the crisis...
...As James Grant remarked, "Like a burglar, recessions arrive unannounced...
...economists read about them in the newspapers, along with everyone else...
...Once he is in, he will do what he pleases...
...It's hard to say...
Vol. 45 • September 1998 • No. 4
