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Global Financial Crises

By Robin Hahnel Guest Columnist

Article Dated 5/3/2001

International Financial Crisis: After watching closely during the past four years there are finally a few things I think I can predict about international financial crises with a great deal of confidence:

1. Some country will suffer a severe financial crisis in the near future - not because crises are unavoidable, but because international capital liberalization was done so irresponsibly and recklessly that the US Treasury and IMF have literally created a financial disaster waiting to happen. Massive amounts of highly leveraged, liquid global wealth can now enter and leave vulnerable economies on a whim without regulation or an reliable lender of last resort to respond to liquidity crises. The people who orchestrated capital liberalization, like Stanley Fischer at the IMF, are still in charge, more stubbornly convinced than ever that history will absolve them, and pressing forward for further capital liberalization at every opportunity.

2. No matter how "effective" the IMF bailout loan, and how quickly currency and financial markets recover, ordinary people in the next country stricken by capital flight will suffer terribly, large foreign companies will acquire a big chunk of the nation's assets at bargain basement prices, and the country will be more locked into neoliberal debt servitude after the crisis than before. This is true because countries ' real economies have been lashed tighter to the torture rack of precarious credit systems than ever before, and because IMF conditionality agreements prioritize debt repayment over domestic economic recovery and insist on removing any remaining restrictions on foreign ownership.

3. It is perfectly possible that a crisis in one country will spread to other countries as "financial contagion" and possibly precipitate a global downturn. Robert Samuelson worried about Argentina in a column titled "Will Argentina Trigger the Next Financial Crisis?" in the Washington Post on April 18: "Since late 1998 Argentina has endured a stubborn recession. Unemployment is up from 13% to 15%. The government of President Fernando de la Rua is wildly unpopular.

Economist Charles Calomiris of Columbia University predicts the government will inevitably default on its $140,000 billion debt, much of it owed to foreigners in dollars." But Samuelson goes on to warn "the potential for a chain reaction is why Argentina matters. An Argentine default could damage trade and investment throughout Latin America. In a forgiving economic climate, a default might remain only a problem between Argentina and its many creditors. But that luxury no longer exists. The US economy is flirting with recession; Japan is mired in stagnation.

The upshot is that an Argentine default could worsen the global slump, and economic instability might also feed political instability." Samuelson is right to warn that because the international financial system has been made so precarious, one country's default can lead to financial contagion elsewhere. And he is right to note that we are poised closer to the edge of global deflation than when East Asian dominoes toppled one another in 1997-98.

4. I am now sure the IMF and World Bank have no more idea than I do what country will go into crisis next. One amazing thing about the financial crises of the last five years is how loudly the IMF and World Bank sang the praises of economies right up to the moment before they fell off a cliff. Just a month before the baht took a nose dive in 1997 the World Bank praised Thailand's high savings rate, rapid economic growth, and strong property market and banking sector.

Experts pointed out that Malaysians were far better educated and less corrupt than the Thais -- right up to the moment the ringgit followed the baht. Macroeconomic fundamentals were pronounced sound in Indonesia, up to the moment the rupiah crashed, and everyone thought South Korean was the mightiest tiger of them all, until the won dived revealing South Korea to be nothing more than a paper tiger. Nor have predictions improved since 1997.

The IMF singled Turkey out for special praise in reports in 1999 and 2000. Yet financial crisis struck Turkey in February 2001 and the Associated Press reported in March that we had already moved on to the anti-IMF riot phase of the neoliberal cycle as "police with nightsticks and water cannons battled more than 130,000 stone throwing protesters in several Turkish cities."

The Tide that Fails to Lift All Ships: There is no better time to lay a pernicious lie to rest about the effects of so-called free trade agreements than when 34 heads of state are meeting in Quebec City trying to extend a disastrous free trade agreement between three countries, NAFTA, into an even bigger and more disastrous free trade agreement among all countries (except Cuba) in the Western Hemisphere, FTAA.

In 1994 supporters claimed NAFTA would raise Mexican wages. Some Mexican unions and some progressives in the US took this prediction seriously, and either supported or muted their opposition to NAFTA as a result. Now advocates claim FTAA will raise wages in the lowest wage countries all over South and Central America and the Caribbean. This time we do not have to resort to competing economic theories to predict the outcome. We have the results of the NAFTA experiment in hand.

According to the U.S. Department of Labor, since 1994 the gap between U.S. and Mexican manufacturing wages has grown by some 30 percent -- and not because US wages have soared. Instead, American manufacturing workers have seen sluggish growth in their real wages, at best, and Mexican real wages in the manufacturing sector have declined by over 25%. Unlike NAFTA where Mexican unions were divided six years ago, unions throughout Latin America today have seen the unmistakable evidence and are almost unanimous in opposition to FTAA. Latin American unions and have increasingly become active supporters of the movement to stop corporate sponsored globalization.

Nor do progressives in the US and Canada have to worry any longer that by opposing FTAA they might be guilty of "national chauvinism" supporting their own "labor aristocracy" at the expense of even more exploited workers in Latin America. The fact is that the kind of so-called free trade agreements being negotiated are so pro-business and anti-labor that they can be counted on to lower real wages in both higher wage and lower wage trading partners. In this case at least, any fear that the call for all to unite against the common enemy is a subterfuge at the expense of the worst off is clearly unwarranted.

Reverse Robin Hood: You know we have crossed the line between infuriating and ridiculous when a Washington Post editorial (April 17) declares "President Bush's budget raises the prospect not merely of mainly benefiting those already at the top of the income heap with a tax cut, but also of doing so directly at the poor's expense."

The editorial goes on to register a mild objection to Bush's plan to pay for his tax cut for the wealthy by reducing spending on domestic programs that benefit the poor. Two examples they note are: (1) "Public housing makes up much of the subsidized housing inventory. A capital fund meant to keep the public housing stock from deteriorating would be cut by $700 million, or nearly a fourth, next year." And (2) "the budget fails to renew a program of supplemental welfare grants to some 17 low-benefit states, including the president's home state of Texas.

The grants were enacted as part of welfare reform in 1996 on the theory that, without them, many welfare families in those states would be unfairly stranded - lack the support to make a successful transition from welfare to work." The editorial might also have noted that the budget Bush claimed "funds our needs without the fat" and "represents compassionate conservatism:" (3) Eliminates a $162 million Wetlands Reserve program, (4) Halves funding for research on renewable energy sources such as solar and wind power. (5) Awards more than half of all increases in discretionary spending to the Department of Defense leaving non-defense discretionary spending $6.2 billion below the level needed to have as much purchasing power as this year.

(6) Allocates $30 million to expand energy-related activities on public lands - i.e. money for future oil exploration in the Arctic National Wildlife Refuge and for petroleum lease sales in the National Petroleum Reserve Alaska - while cutting the overall Interior Department budget by 3%. (7) Cut spending on community and regional development programs by 5% while increasing spending on international affairs - i.e. initiatives to accelerate corporate sponsored globalization - by 5%. You know the federal budget must have gone from bad to a bad joke if even the Washington Post feels compelled to point out that the Shrub seems to be auditioning for the role of evil Prince John in a Hollywood remake of the Robin Hood saga.

http://www.tbwt.com/content/article.asp?articleid=584

-- Martin Thompson (mthom1927@aol.com), May 03, 2001