http://www.themoscowtimes.com/stories/2007/11/23/006.html
Friday, November 23, 2007. Issue 3792. Page 8.
Financial Hypocrisy
By Joseph E. Stiglitz
This year marks the 10th anniversary of the East Asia crisis, which began in
Thailand on July 2, 1997, and spread to Indonesia in October and to South Korea
in December. Eventually, it became a global financial crisis, embroiling Russia
and Latin American countries, such as Brazil, and unleashing forces that played
out over the ensuing years.
Argentina in 2001 may be counted as among its victims. 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 countries that were affected the worst. Though every crisis
eventually ends, no one knew at the time how broad, deep and long the ensuing
recessions and depressions would be. It was the worst global crisis since the
Great Depression.
As the World Bank's chief economist and senior vice president, I was in the
middle of the conflagration and the debates about its causes and the
appropriate policy responses. This summer and fall I revisited many of the
affected countries, including Malaysia, Laos, Thailand, and Indonesia. It is
heartwarming to see their recoveries. These countries are now growing at annual
rates of 5 percent, 6 percent and in some cases even higher -- not quite as
fast as in the days of the East Asia miracle but far more rapidly than many
thought possible in the aftermath of the crisis.
Many countries changed their policies, but in directions markedly different
from the reforms that the International Monetary Fund had urged. The poor were
among those who bore the biggest burden of the crisis as wages plummeted and
unemployment soared. As countries emerged, many placed a new emphasis on
"harmony," in an effort to redress the growing divide between rich and poor,
urban and rural. They gave greater weight to investments in people, launching
innovative initiatives to bring health care and access to finance to more of
their citizens and creating social funds to help develop local communities.
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 U.S. 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 U.S. Treasury represents, profits
from capital-market liberalization: It makes 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 U.S. 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 U.S. financial markets.
In some cases U.S. firms bought the banks, held on to them until South Korea
recovered, and then they 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 U.S. 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 and U.S. Treasury advice to East Asia and what has
happened in the current subprime debacle is glaring. East Asian countries were
told to raise their interest rates, in some cases to 25 percent, 40 percent, or
higher, causing a rash of defaults. In the current crisis, the U.S. Federal
Reserve and the European Central Bank cut interest rates.
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 10 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.
Joseph E. Stiglitz, a Nobel laureate in economics and former chairman of the
Council of Economic Advisers to U.S. President Bill Clinton, is professor of
economics at Columbia University. This comment appears © Project Syndicate.
