Superior US Capitalism?

Asia ponders lessons of 'superior' US capitalism

KUALA LUMPUR, Sept 25 - A decade ago, Alan Greenspan, then the Federal Reserve chairman, declared that Asia would realise that ''market capitalism, as practised in the West, especially in the United States, is the superior model.''Asian governments never quite saw it that way. Now, policy makers in the region may feel that the collapse of Wall Street investment banks and Washington's planned US$700 billion bailout have vindicated their suspicion of freewheeling capitalism.The implications for investors in the region are enormous. Governments may slow deregulation, rush to the rescue of troubled companies or clamp down more quickly on market ructions.Greenspan made his comments about the ''superior model'' to US lawmakers to justify a bailout for the collapsing Asian economies during the crisis of 1997 and 1998. He is now accused by some economists of pursuing a lax monetary policy that helped create the bubble that led to Wall Street's implosion.Asian policy makers have not forgotten the hectoring they got from the United States and the International Monetary Fund, which dispensed cash in exchange for raising interest rates, closing banks, curtailing spending and opening markets.''At that time,'' the IMF and US officials ''behaved as if they were treating an owner of a small business just about to go bankrupt,'' said Chung Duck Koo, who was the chief South Korean negotiator with the IMF in 1997, when he was a deputy finance minister.Officials in Malaysia, which spurned both the cash and the IMF's advice by fixing the value of its currency, the ringgit, and imposing capital controls back in 1998, see Washington's rescue efforts as proof that US policy makers are adjusting their thinking.''We are now seeing the West, particularly the US, ignoring the standard IMF prescriptions and implementing the same measures that Malaysia had done during the 1997 crisis,'' said Nor Mohamed Yackop, the Malaysian Finance Minister II, who in 1998 helped impose capital controls.Ten years ago, Asia was on its knees with a financial meltdown in the region after a series of crises in Latin America that later bankrupted Russia. Despite high growth and low inflation, Asia's so-called tiger economies succumbed because of overvalued exchange rates, persistent current account deficits, speculation in financial markets and dependence on short-term sources of capital.Most countries applied the IMF's bitter medicine, and subsequently South Korea's economy shrank 7 per cent in 1998, Indonesia's contracted 13 per cent and Thailand's slumped 10.5 per cent, according to IMF data.But the region recovered quickly, amassing in the process trillions of dollars in foreign currency reserves, first as a defense against future crises and later because of windfall profits from the global commodity boom.Much of those reserves are invested in US Treasury bonds, so they are bankrolling Washington's efforts to contain the current crisis. The latest plan is to buy toxic debt estimated at US$700 billion, with the total cost of its rescue efforts estimated at as much as US$1.8 trillion.The irony is not lost on nations that took draconian steps in return for the US$35 billion the IMF initially offered in 1997 to rescue Indonesia, South Korea and Thailand, later topped up with an extra US$77 billion.Critics say the ''Washington consensus,'' a term referring to the market liberalisation pursued by the IMF and the United States, has led to the current crisis.''It was so patronising. First it was the lazy Latinos, then it was the corrupt Asians and their crony capitalists,'' said Stephany Griffith-Jones, executive director of the Initiative for Policy Dialogue at Columbia University, and a leading authority on capital flows and developing economies.''The lesson is: You need to regulate everything. Any deregulated market in developed and developing countries leads to these results,'' Griffith-Jones said.Others say, however, that the IMF-bashing goes too far and that the crises in Latin America and Asia were largely of their own making. They also argue that it is impossible to stanch the capital flows that financegrowth in many developing economies.
''No doubt capital markets have plenty of problems; often they generate these bubbles,'' said Domingo Cavallo, who was Argentina's finance minister from 1991 to 1996. ''The bubble explodes and then there is a financial crisis.''''So far, there has been no recipe for avoiding these problems,'' said Cavallo, who was the architect of the Argentine plan that fixed the dollar-peso rate at parity, a decision that crushed inflation and contributed to an increase in growth and investment.Chung, of South Korea, said that wealthy nations might tighten regulation and intervene more in markets, but that developing countries could ill afford to revert to pre-1997 policies.''In developing or underdeveloped countries, in which each government has the mission to improve overall welfare and overall income level, there is no choice for them but to continue to accept and pursue globalisation,'' he said. - International Herald Tribune

Source: http://www.themalaysianinsider.com/index.php/business/9536-asia-ponders-lessons-of-superior-us-capitalism