Tough question– as came clear at last week’s U.S. House of Representatives Banking Committee hearings on money laundering and capital flight in Russia. “We cannot want successful market reform in Russia more than Russia’s government and its people do,” warned Treasury Secretary Lawrence Summers in his testimony. But the reality is that many in Washington (and Frankfurt and Tokyo, for that matter) still do outstrip Russia in reformist zeal. Damn it, why can’t they be more like us? And the program of the world’s financial leaders–who gather this week in Washington for the annual meetings of the International Monetary Fund and World Bank–doesn’t stop there. They still hope to sort out Indonesia–even though an IMF-backed project to rebuild that nation’s financial system has been dealt a heavy blow by corruption as appalling as Russia’s. They want to see South Korea’s restructuring continue, even though the country’s economic recovery may be decreasing its sense of urgency. Most of all, the moneymen want to achieve some equilibrium among the United States, Japan and Europe, the world’s three main economic powers.
With America’s trade deficit yawning ever wider, that last task could be the toughest of all. Throughout the decade, the United States has imported more than it sold abroad, and in recent years its willingness to do so has been a crucial strength in a fragile global economy. Other countries have financed the deficit by investing in America. Now, however, with growth (and financial markets) turning up in Europe and Japan, they may be withdrawing their money. The dollar is falling, and with it the U.S. stock market–whose lofty level encouraged American consumers to go on a spending spree in the first place. A virtuous circle could turn vicious.
Still, the global economics crowd marches on–debating, distilling and codifying the lessons of the recent crisis. From Paris, the Organization for Economic Cooperation and Development offers a slim volume entitled “Principles of Corporate Governance,” a first draft of global best-practices in transparency and good behavior. In Washington earlier this month, an all-star task force of deep thinkers, big-time bankers and policymakers released a report called “Safeguarding Prosperity in a Global Financial System,” sponsored by the Council on Foreign Relations. “It’s the rules of the road for the financial superhighway,” says project manager Morris Goldstein. Among the group’s recommendations: emerging economies should control capital inflows by taxing them, and should say no to pegged exchange rates; the IMF’s lending packages should shrink, and private money should play a greater role in resolving problems in developing countries.
Right now most emerging economies are still so short of capital that they can only dream about having to fend off the stuff. But the call for more burden-sharing by the private sector–which echoes sentiments expressed by the G7 leaders last spring–could be answered as soon as this week. Tiny Ecuador may become the first country to default on its Brady bonds (the securities devised to mop up the mess after the 1980s bank-debt crisis). And former Treasury secretary Nicholas Brady himself, now a private investor, charges that the IMF is encouraging the Ecuadorans to stiff their creditors. IMF managing director Michel Camdessus adamantly denied this at a press conference last Friday. Still, says Desmond Lachman, head of emerging-markets research at Salomon Smith Barney, the private sector frets about officialdom’s “changing the rules of the game.”
An Ecuadoran default would produce a row, no doubt. But nothing to compare with what happened in the streets of Jakarta last week. For most Indonesians, East Timor is a sideshow. What infuriates them are charges that virtually the entire economic team in President B. J. Habibie’s discredited government were involved in a scam to steal $68 million intended to recapitalize Bank Bali, one of the few banks to survive Indonesia’s financial crash. The IMF demanded a full inquiry, suspending all aid payments. Students took to the streets as the legislature considered the matter, and the situation escalated when the military pushed through a harsh new security law. The military backed down–but not before five protesters and one policeman had been killed.
Yet even amid Indonesia’s agony, there may be reasons for optimism. Corruption doesn’t get cured without first being brought to light. Then follows scandal, and then–perhaps, touch wood again–reform. It took a decade, but the pattern actually seems to apply in Japan. Three years ago Japanese protesters were marching (without bloodshed, to be sure) against the Ministry of Finance, enraged by the crippling burden of bad debts it had allowed the country’s banks to pile up. Today the ministry’s power is much diminished. The Bank of Japan is independent, just like the Fed and the ECB–so independent, in fact, that last week it made a point of saying it wasn’t going to intervene to slow the yen’s rise, no matter what the MoF or anyone else wanted. The country has a tough, internationally respected regulator, the Financial Services Authority. And it has an energetic group of entrepreneurs now gearing up to bring the Internet and electronic trading into Japanese finance when the next phase of financial reforms take effect next month.
Details count: that’s the lesson a lot of experts are drawing from the Asian contagion. “People used to think if you got the macro stuff right, everything else would be OK,” says Goldstein, a senior fellow at the Institute for International Economics in Washington. But it takes more than a balanced budget and a robust private sector to create sustainable growth. It takes a banking system that can effectively allocate capital, which is why the Bank for International Settlements is working toward global banking standards. It takes a tax system that actually collects taxes, which is why the OECD continues its work with Russia in that realm. And it takes an international awareness of which countries are getting these details right, and which aren’t. That’s why the architecture group wants the IMF to keep track, and publish its assessments. That way, developed-world regulators can rein in those banks lending to riskier countries by imposing tougher capital requirements on them.
Ah, the new, improved world order. It’s going to be lovely, all right–once we get there. Alas, there may be some in recession-racked Brazil and Argentina who despair of that ever happening. OK, maybe it was ridiculous that borrowers like them were getting funds at a modest 3 percent interest-rate premium over U.S. Treasuries at the height of the emerging-market craze. But should they really have to pay the 11 percent premium on offer today? No, argues Salomon Smith Barney’s Lachman. And, he adds, the cost of funds is going to rise further if Ecuador really does default.
And there are some on Wall Street who also wonder where we’re going. The $25 billion U.S. trade deficit for the month of July announced last week dealt yet another blow to the dollar–which fell to 104.1 yen–and with it, to the all-important U.S. stock market. In fact, the instability of the greenback against the other two major currencies–the yen and the euro–is a constant disruptive force at the very center of world finance. Consider: the buck rose from 79 yen per dollar in April 1995 to 145 yen per dollar in late 1998. That’s 80 percent in three years. Against the Deutsche mark (a good stand-in for the newly created euro), the rise was 50 percent. These movements have almost nothing to do with economic fundamentals, and they were a major factor in creating the Asian crisis in the first place, as small countries with pegged currencies got whipsawed by the giants.
No wonder a large minority of the Council on Foreign Relations task force wants Frankfurt, Tokyo and Washington to try to manage their currencies by means of a “target-zone system.” But even with almost the whole task force agreeing that stability is desirable, and even with such luminaries as former Fed chairman Paul Volcker behind the idea, the target zones aren’t likely to happen any time soon. “It’s just the practicality of the thing,” says task force co-chair Peter Peterson, who is also chairman of Wall Street’s Blackstone Group. “Can anyone believe a Treasury secretary could go to a president, with the economy in the midst of a recession, and say, ‘We must raise interest rates to stabilize the value of the dollar’?”
The problem, of course, is that for all their growing similarities, the economies of the United States, Japan and Europe remain quite different. And the most conspicuous difference is the one that most urgently needs to be addressed: only the United States has been willing to let its trade accounts remain in deficit year after year. Maybe raising another few glasses at their Washington receptions this week will pull the capitalist cadres closer together.
