----- Original Message ----- From: John Hermann <[EMAIL PROTECTED]> To: John Hermann <[EMAIL PROTECTED]> Sent: Friday, 24 September 1999 6:17 PM Subject: World Bank Now Supports Capital Controls > Economic Reform Australia > ERA EMAIL NETWORK > > From: Janet M Eaton <[EMAIL PROTECTED]> > Date: Wed, 22 Sep 1999 > Subject: World Bank Now Supports Capital Controls > Global Intelligence Update Weekly Analysis September 20, 1999 > > > Significant global changes are indeed brewing !!!! > > The World Bank reversed its opposition to short-term capital controls > and announced that Malaysia's experiment with capital controls was, > in effect, a success. > > This will have consequences - for Japan which has toyed with the > idea of capital controls and reinforces Mahatmir's idea of a regional > Asian bloc excluding the United States, based on the yen and Japan, > with capital controls as a regional management tool...Just as Europe > has the EU and North America has NAFTA, Asia must seek, according to > Mahathir, an Asian entity. > > In short, needing to stabilize his polity, Mahathir created an > economic analysis in which the stabilization of his society was its > grand purpose. It was effective politics. It also spawned economic > policies that the World Bank has now endorsed. > > All the best, > janet > -------------------------------------------------- > > > World Bank Reverses Position on Financial Controls and on Malaysia > > Summary: > > The World Bank reversed its opposition to short-term > capital controls and announced that Malaysia's experiment with > capital controls was, in effect, a success. Since the World Bank > acts on the distilled essence of conventional wisdom, this means > that the international financial community no longer regards either > capital control or Malaysia's prime minister as taboo. > > The most important short-term consequence of this change will be on > Japan, which has toyed with the idea of capital controls. But more > importantly in the long run, the rehabilitation of Mahathir from > lunatic to visionary will bring his other ideas into play. Of > particular importance is his idea of a regional Asian bloc > excluding the United States, based on the yen and Japan, with > capital controls as a regional management tool. Neither of these > outcomes is intended by the World Bank or the IMF, but both are the > embodiment of the unintended consequence. > > > Analysis: > > The World Bank has executed an important and somewhat startling > reversal of position on Malaysia's use of capital controls to solve > its economic problems. Joseph Stiglitz, the World Bank's chief > economist, said Sept. 15, "There has been a fundamental change in > mindset on the issue of short-term capital flows and these kind of > interventions - a change in the mind set that began two years ago." > He went on to say that "in the context of Malaysia and the quick > recovery in Malaysia, the fact that the adverse effects that were > predicted - some might say that some people wished upon Malaysia - > did not occur is also and important lesson." > > These were not casual remarks. They were made during the > presentation of a key World Bank annual document, the "World > Development Review," and were meant to be taken seriously. Indeed, > Stiglitz's comments came a week after the International Monetary > Fund (IMF) praised Malaysia for its skillful handling of capital > controls. > > These comments represent a fundamental shift in the international > economic establishment's understanding of how that system works. > The economists at the World Bank and the IMF are not particularly > original or imaginative, and their track record in predicting and > managing the twists and turns of the international system is not, > to say the least, impressive. Thus, viewing their policy shifts as > contributions to economic theory is not particularly useful. > Stiglitz and his colleagues at the World Bank and the IMF are not > people who go out on the limb with dramatically novel idea. They > like to move with the herd. > > That is what makes Stiglitz's statement extraordinarily important. > It shows that the herd is making one of its periodic migrations. > The World Bank's chief economist doesn't lead the convention. He > is a superbly sensitive weather vane - he follows it. > > During the 1960s and 1970s, the World Bank was committed to > massive, government-run infrastructure projects, reflecting the > conventional economic wisdom at the time that the state is the > appropriate engine for economic growth, at least in the developing > world. During the 1980s, when the conventional system shifted to > the view that the free market was the most efficient means of > capital allocation and economic growth, the World Bank slowly and > painfully shifted again. They stuck with the free market position > throughout the Asian meltdown. > > Now, two years after the bloodbath, they are slowly shifting again, > not only endorsing capital controls, but praising their own arch- > nemesis, Malaysia's Mahathir. Stiglitz is following the new > conventional wisdom: capital controls are chic. > > Whether capital controls are good or bad doesn't really matter. > What matters is that they have been accepted by a highly > politicized, extremely powerful segment of the international > community that the World Bank/IMF complex is part of and serves. > This is the international financial community, understood as the > national bankers, the leading international banks and the political > elites to which they connect. > > Stiglitz's comments reveal that the 20-year love affair with a > purely free market approach to international financial flows is, if > not coming to an end, nevertheless being severely modified. There > are now cases in which market regulations are not only tolerable, > but also a good idea. > > This will lead to interesting debates among economists, most of > whom will argue that controls create inefficiencies that will > retard recoveries and damage economies. The problem is that these > economists tend to approach these issues from an isolated angle. > Stratfor's view has been that economic crises increase the pressure > on governments to take steps that stabilize the situation in the > short run, even if they affect the economy negatively in the long > run. > > For example, assume that political chaos is something to be > avoided. Assume further that the economically optimal policy would > quickly lead to political and social chaos. Finally assume that a > policy could be found that avoided political and social chaos at > the price of poor economic performance in the long run. Which is > the better policy? > > As much as any country, Indonesia followed the conventional wisdom > of the time, as transmitted by the IMF and World Bank. As capital > poured out of the country, trying to flee Indonesia's dangers, the > government did nothing to interfere with capital movements, > assuming that the market would create stability. > > Indeed, the markets did work, and the Indonesian economy was > beginning to improve earlier this year. But by optimizing its > economic response to the crisis, Indonesia's social and political > fabric was shredded. The pressures imposed by the market on social > cohesion created the extraordinary reality of an economy in > recovery and a society in collapse. In the end, of course, that > collapsing society will shatter the economic recovery as well, so > all will be for naught. > > Indonesia's neighbor, Malaysia, followed a very different policy, > which originated in a radically different analysis, heavily > ridiculed at the time and today. According to the Malaysian prime > minister, the origins of the crisis had little to do with > imbalances in the country's economy. Rather, they had to do with > the structure of the international financial system and > particularly the management of international currency flows. > > According to Mahathir, it was an illusion to think of short-term > capital flows as market driven. On a day-to-day basis, control of > short-term capital was in the hands of a relatively small number of > massive currency hedge funds. Mahathir claimed that George Soros > and other hedge fund managers were orchestrating the collapse of > Asia's currencies. Because they profited from relatively small > differentials, they were prepared to create sudden, massive and > uncontrollable outflows of capital that would wreck national > economies by causing both short- and long-term capital flight. > > Mahathir's analysis tended to be more colorful, charging Jewish > conspiracies against Muslim countries. The primary purpose of his > analysis was political. Mahathir used his analysis to explain why > his government had not failed. Rather, he argued Malaysia and the > rest of Asia had been victimized by the international system. He > personalized the system into the person of George Soros for further > political effect. > > In short, needing to stabilize his polity, Mahathir created an > economic analysis in which the stabilization of his society was its > grand purpose. He successfully diverted his attention from the > Pan-Asian economic practices that had triggered the crisis, such as > irrational capital allocation, absurdly low rates of return on > capital, an undercapitalized banking system and the failure to > create domestic demand while relying on exports. Instead, he > refocused domestic attention on the claimed defects of > international systems. > > It was effective politics. It also spawned economic policies that > the World Bank has now endorsed. If the central problem were the > nonexistence of a free market in short-term currency flows, and > that these flows were instead controlled by a few financial > institutions, then the rational answer to oligopoly was government > regulation. > > Accordingly, Mahathir slammed currency controls on the flow of > money into and out of Malaysia. Conventional economic theory said > this should have had a devastating effect. In fact, compared to > Indonesia, the actions (along with other acts of repression, such > as the trial of Anwar Ibrahim, Mahathir's former protege and > advocate of the international economic community in Malaysia) not > only helped stabilize the political system, but also did not seem > to have produced a great deal of economic harm. > > Malaysia's economy contracted by 7.5 percent before controls were > imposed. In the year following the imposition of controls, the > official growth projection has gone to 1 percent, while unofficial > projections go as high as 5 percent. It is no surprise that > Stiglitz stated that the bank had been "humbled" by Malaysia's > performance. > > Stratfor has long regarded Mahathir as one of the most interesting > figures in Asia. Long ridiculed by conventional economists as a > lunatic - an image reinforced by the rhetoric he chooses for > domestic consumption - Mahathir has nevertheless made some cogent > points. His argument that short-term capital flows were too > vulnerable to a small number of hedge funds has some empirical > validity. If those funds can create short-term oscillations that > become uncontrollable, they can and have created long-term > problems. Healthy economies are not vulnerable to these events, but > unhealthy ones are. Mahathir argued that the medicine imposed is > likely to kill the patients rather than rejuvenate them. > > Since 1990, Mahathir has made the broader argument that Asia's > economies are overly dependent on the United States as a market. He > has not only been an advocate of capital controls on the national > level, but also an advocate for the creation of a regional economic > bloc in Asia, built around the yen, and insulated from the United > States by policies and trade frameworks. > > Mahathir believes a Japanese-led, regional economic bloc is needed > for two reasons. First, he argues that dependence on the United > States for the absorption of Asian production cannot be sustained > in the long run. Second, the United States will use this > dependence to manipulate and divide Asians so that, inevitably, > what happened in 1997 would happen again. > > Everyone dismissed Mahathir. We have long argued that he has been > pointing the way. This does not mean that we agree with him. It > simply means that we have felt that a Mahathirian worldview would > eventually carry the day in Asia. > > Stiglitz's bow toward Malaysia is therefore critical in two ways. > First, the World Bank and the IMF have now endorsed the principle > of capital controls, at least in the short run. Since you cannot > be a little bit pregnant, even at the World Bank, that means > conventional wisdom now says capital controls are a legitimate tool > in economic policy. > > This is of extreme importance for nations in Asia that have not and > cannot solve their structural problems without destabilizing their > societies. We mean, of course, the Japanese. Japan has > contemplated capital controls and has, in highly informal ways, > actually employed them. But Japan, as a charter member of the > international financial community's conventional wisdom, has never > formally implemented nor even endorsed them. > > Now that the World Bank and IMF have both praised Mahathir, with > whom the Japanese have interestingly warm relations, the taboo has > been lifted. Japan, adverse to taboo smashing, can now use capital > controls as a conventional tool. So can other Asian countries. > > The tremendous pressure for an Asian solution has eased with the > current recovery among some the region's nations. Since we > regarded this as less a recovery than the end of the collapse and > the beginning of long-term malaise - for Malaysia included - the > short-term pressure is being replaced by a less urgent, but > nonetheless real search for structural alternatives. > > Which brings us to the second point. Japan's problems are the > region's problems. If Japan cannot find a purely domestic solution > to its problems and the global environment is too inhospitable, > then regional solutions might well be the answer. Just as Europe > has the EU and North America has NAFTA, Asia must seek, according > to Mahathir, an Asian entity. > > Joseph Stiglitz's comments legitimized capital controls, the tool > that any region-wide plan would require. They also turned Mahathir > from an official pariah into an official visionary. Dismissing his > ideas on other matters now becomes much more difficult. For many > in Japan who have quietly agreed with his ideas, the change in the > international economic community's perspective will open the > floodgates to ideas that have thus far been taboo: an East Asian > economic bloc. > > Thus, the World Bank and the IMF have effectively handed Asia > legitimization for a regional bloc designed not only to facilitate > intra-bloc trade, but also to create regional regulatory bodies to > manage the capital flow in and out of the bloc. True, this would > destroy the essence of Asia's free markets. But, as we have argued > for a long time, the idea that Asia had domestic free markets was > quite illusory to begin with. > > There is much mistrust of Japan in the rest of Asia. Memories run > long. But if the Poles and Czechs can work with the Germans, be > assured that southeast Asia can work with Japan - if the stakes are > high enough. > > ----ooOoo---- > > > > > > > ---------------------------------------------------------------- This is the Neither public email list, open for the public and general discussion. To unsubscribe click here Mailto:[EMAIL PROTECTED]?Subject=unsubscribe To subscribe click here Mailto:[EMAIL PROTECTED]?Subject=subscribe For information on [EMAIL PROTECTED] http://www.neither.org/lists/public-list.htm For archives http://www.mail-archive.com/[email protected]
