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HVK Archives: IMF can't tackle the crises (Part I of II)

IMF can't tackle the crises (Part I of II) - Dawn, Karachi

Henry Kissinger ()
Oct 6, 1998.

Title: IMF can't tackle the crises
Author: Henry Kissinger
Publication: Dawn, Karachi
Date: Oct 6, 1998.

WHAT began 15 months ago as a currency crisis in Thailand and then
spread across Asia, now threatens the industrialized world.
No government and virtually no economist predicted the crisis,
understood its extent or anticipated its staying power. A series of IMF
rescue packages has not arrested its spread and threatens the political
institutions implementing them. In Indonesia a regime tainted by
cronyism has been overthrown. But in Brazil, the crisis threatens what
is arguably the most reform-minded government in decades.
What was treated at first as a temporary imbalance is becoming a crisis
of the world's financial system. In the past 20 years two Mexican
crises, in 1982 and 1994, spread to most of Latin America; the Asian
crisis of 1997 has already infected Eastern Europe, South Africa and
Latin America. Each crisis has been more extensive and has spread more
widely than its predecessor.
Free-market capitalism remains the most effective instrument for
economic growth and for raising the standard of living of most people.
But just as the reckless laissez faire capitalism of the 19th century
spawned Marxism, so the indiscriminate globalism of the 1990s may
generate a worldwide assault on the very concept of free financial
markets. Globalism views the entire world as one market in which the
most efficient and competitive prosper. It accepts - and even welcomes -

that the free market will relentlessly sift the efficient from the
inefficient, even at the cost of periodic economic and social
But the extreme version of globalism neglects the inevitable mismatch
between the world's political and economic organization. Unlike
economics, politics divides the world into national units. And while
political leaders may accept a certain degree of suffering for the sake
of stabilizing their economies, they cannot survive as advocates of
near-permanent austerity on the basis of directives imposed from abroad.

The temptation to seek to reverse - or at least to buffer - austerity by

political means becomes overwhelming. Protectionism may well prove
ineffective in the long term but, for better or worse, political leaders

respond to more short-term cycles.
Even well-established free-market democracies do not accept limitless
suffering in the name of the market, and have taken measures to provide
a social safety net and to curb market excesses by regulation. The
international financial system does not as yet have these firebreaks.
Nor is there much of a recognition that it needs them.
Ours is the first period experiencing a genuinely global economic
system. Markets in different parts of the world interact continuously.
Modern communications enable them to respond instantaneously.
Sophisticated credit instruments provide unprecedented liquidity. Hedge
funds, the trading departments of international banks and institutional
investors possess the reach, power and resources to profit from market
swings in either direction, and even to bring them about. It is market
stability that they find uncongenial.
Broadly speaking, direct foreign investment benefits from the well-being

of the societies in which it operates; it runs the risks and is entitled

to the benefits of the host country. By contrast, modern speculative
capital benefits from exploiting emerging trends before the general
public does. It drives upswings into bubbles and down cycles into
crises, and in a time-frame that cannot be significantly affected by the

kind of macroeconomic remedies being urged on the political leaders.
For example, when Asian credit-worthiness began to fall, financial
institutions and fund managers holding the debt were tempted to sell
Asian currencies short, thereby accelerating devaluation and compounding

the difficulty of repaying debt. Speculators were acting rationally, but

the result was a deeper, more vicious and more intractable crisis.
To maintain their overall performance, speculators, as losses mounted in

Asia, were driven to cash in their holdings in Latin America and thereby

spread the crisis. The capacity of smaller countries to deal with these
massive capital flows is not equal to the temptations offered by the
system. Regulators in the United States, Europe and Japan have not
succeeded in dampening the increased volatility of the market. And small

and medium-sized countries are defenceless in the face of it.
The speculators will argue that they are only exploiting weaknesses in
the market, not causing them. My concern is that they have a tendency to

turn a weakness into a disaster. If Brazil is driven into deep
recession, countries like Argentina and Mexico, heretofore committed to
free-market institutions, may be overwhelmed.
The crisis in Brazil is a case in point. Despite a reform-minded and on
the whole efficient government, Brazil faces a crisis partly because, as

one of the largest and most liquid emerging markets, it is one of the
easiest from which to withdraw. If these trends are not arrested, global

flows of capital will be impeded by a plethora of national or regional
regulations, a process that has already begun.
The International Monetary Fund, the principal international institution

for dealing with the crisis, too often compounds the political
instability. Forced by the current crisis into assuming functions for
which it was never designed, the IMF has utterly failed to grasp the
political impact of its actions. In the name of free-market orthodoxy,
it usually attempts - in an almost academic manner - to remove all at
once every weakness in the economic system of the afflicted country,
regardless of whether these caused the crisis or not. In the process, it

too often weakens the political structure and with it the precondition
of meaningful reform. Like a doctor who has only one pill for every
conceivable illness, its nearly invariable remedies mandate austerity,
high interest rates to prevent capital outflows and major devaluations
to discourage imports and encourage exports.
The inevitable result is a dramatic drop in the standard of living,
exploding unemployment and growing hardship weakening the political
institutions necessary to carry out the IMF programme.
The situation in Southeast Asia is a case in point. Crony capitalism,
corruption and inadequate supervision of banks were serious
shortcomings. But they did not cause the immediate crisis; they were a
cost of doing business, not a barrier to it. Until little more than a
year ago, Asia was the fastest growing region in the world, its progress

underpinned by high savings rates, disciplined work ethic and
responsible fiscal behaviour.

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