by Walden Bello*
Asia's stock markets are soaring again. To some, that portends real economic recovery. To others, it is an ominous sign that the "Electronic Herd, " as New York Times columnist Thomas Friedman calls it, is back in its Asian grazing grounds, happily snapping up promising stocks and high-interest bonds now, but ready to move out tomorrow, perhaps in another furious stampede triggered by God knows what.
The herd, in fact, began moving in Manila the day after President Joseph Estrada's State of the Nation address on July 26, as the foreign funds that had been pouring into the country over the last few months reversed course, forcing the Philippine stock market index to drop 113 points to its three month low. Was the Philippine chief executive looking more besotted than usual, some asked?
One would have expected that two years after the outbreak of the Asian financial crisis, there would be institutions in place that would prevent a repeat of the massive and rapid exit of $100 billion that triggered the collapse of the region's economies. After all, even the new US Treasury chief, Larry Summers, who holds the view that "crony capitalism" is the Main reason for Asia's troubles, now admits that "a strong case can be made that excessive capital inflows may have contributed importantly to the recent problems in emerging markets."
A quick look around shows, however, that Chile has lifted its controls on foreign capital inflows, while Malaysia has withdrawn the controversial restrictions on foreign capital outflows that it imposed last year. These moves certainly do not stem from the fact that national-level mechanisms have been rendered superfluous by the erection of serious capital controls at the international level. For all its brave talk about creating a "new global financial architecture," the G-7 at its summit in Cologne in mid-June gave birth to a mouse--to a program that put the emphasis on voluntary disclosure of financial information by hedge funds and other financial mechanisms and voluntary risk management by the private sector.
Cologne also produced another ironic result- a stronger International Monetary Fund to exact economic reforms from emerging economies, but without the organizational reforms in terms of greater transparency, greater accountability, greater consultation, and a more self critical approach to its programs that the Fund's many critics have long demanded.
The Cologne program bears the stamp of the Summers and his predecessor Robert Rubin. Alternative proposals within the G-7, such as "target zones" to reduce fluctuations among the euro, dollar, and yen, practically vanished when the controversial Keynesian Oskar Lafontaine resigned as Germany's Finance Minister in March. The remaining potential Counterweight to US domination of the financial agenda is Japan, but it has refused to play the role of Washington's fiscalizer.
Indeed, Japan has proven to be a very big disappointment to many people and governments in Asia.
The first big letdown occurred a few months into the crisis. In what was then seen by practically all Asian countries as an innovative response to the currency crisis, Tokyo proposed the establishment of the Asian Monetary Fund (AMF), which would have been capitalized to the tune of $100 billion from the reserves of Japan, China, Taiwan, and Hongkong. The AMF was conceived as a multipurpose, low-conditionality, quick-disbursing facility from which governments whose currencies were under attack could have drawn cold cash to counter the speculators. But the US Treasury and the Fund opposed the idea on grounds that it would weaken the ability of the IMF to "extract reforms." Moreover, as analyst Eric Altbach has noted, Summers and the Treasury "saw the AMF as more than just a bad idea; they interepreted it as a threat to America's influence in Asia."
Japan backed down, the opportunity to stabilize the situation early on with an inter-governmental united front backed by hard reserves passed, and key Asian economies plunged into spiral accelerated by Washington-backed contractionary IMF programs.
Since then, Japan has largely danced to the American tune. No concrete proposals have come from Tokyo on global capital controls, though Finance Minister Kiichi Miyazawa and other Finance Ministry officials have rhetorically targeted hedge funds on occasion. Tokyo has also made critical noises about the IMF but it has not followed these up with Actual proposals for institutional reform.
The vaunted Miyazawa Plan has, in fact, elicited US approval, largely because it provides aid that is conditioned on advancing Washington's agenda for Asia-that is, rapid liberalization, deregulation, and privatization. In the Philippines, for instance, Miyazawa money has been made contingent on Manila's implementing two things: the privatization of the National Power Corporation, which has been a longstanding demand of the World Bank and the IMF; and the opening up of retail trade to foreign participation, of which the American Chamber of Commerce has been a prime advocate.
It is not that Japan lacks the clout to stand up for an alternative paradigm of global financial stabilization. For when it comes to issues that bear on its domestic economy, Japan has not hesitated to take decisions that Washington protested but could do nothing about, like Tokyo's refusal to open up its forestry and fisheries sector and its move to restrict the short-selling of stocks. What Japan has studiously avoided is filling a leadership role for Asian interests.
Unchallenged by Europe and Japan, the US has dominated the global financial agenda. This agenda has been fairly consistent. The reason that Washington has felt uncomfortable about attaching urgency to controlling global flows of speculative capital is that, as a New York Times series earlier this year revealed, Treasury's push for rapid, indiscriminate liberalization of the capital accounts of the Asian economies was a central cause of the crisis. And as the crisis developed, Washington's agenda, as former Federal Reserve Governor Lawrence Lindsey has pointed out, has been to take advantage of the situation to push its longstanding bilateral agenda of opening up trade and financial markets.
Now it is true that today, Larry Summers talks about "properly paced liberalization," but it remains the case that capital account and trade liberalization in the emerging markets continues to be the central thrust of its program for global financial reform. Washington's main antidote against global financial instability is not international measures to throw sand in the wheels of speculative capital but more liberalization at the national level. Summers revealed the logic behind this approach in his comments on Argentina in a recent speech: "Today, fully 50 per cent of the banking sector, 70 per cent of private banks, in Argentina are foreign-controlled, up from 30 per cent in 1994. The result is a deeper, more efficient market, and external investors with a greater stake in staying put." To put it in the curious algebra of the US Treasury, financial liberalization equals financial stability equals the global interest.
In sum, five years after the Mexican financial crisis and two years after outbreak of the Asian financial crisis, Washington's single-minded pursuit of its financial agenda and European and Japanese timidity have ensured that the world remains without a serious system of defense against the periodic stampedes of the Electronic Herd. This is irresponsibility of the highest order.
*Walden Bello is director of Focus on the Global South and professor of sociology and public administration at the University of the Philippines.
Thai groups questions World Bank legitimacy Supara Janchitfah*
Nine years ago, landless Soy Onthai of Nakhon Sawan had to move from the province to find jobs in the big city. She thought she was fortunate to get a job at Par Garment in Rangsit for 45 baht a day.
Last March, she was receiving 162 baht a day for the work that she has been doing for nine years now: sewing 400 pieces of parts of various brand name shirts for the world market.
`Export competitiveness is an important potential tool to reduce poverty in developing countries, as it can lead to higher economic growth and can increase the likelihood of lower prices and better products for consumers,'' says J. Shivakumar, the World Bank's Country Director in Thailand.
``World-wide experience has shown that countries'inward-looking strategies eventually fail, for such policies almost always result in low- quality, high-cost products, in greater poverty, in disadvantaged consumers, and with only a well-connected and privileged minority benefiting. Export performance is thus a key ingredient of Thailand's recovery and growth strategy,'' said Mr Shivakumar. If Mr Shivakumar is right, Ms Soy and millions like her powering Thailand's teeming export companies should have better lives after they joining the export workforce.
But Ms Soy's hard life is an illustration of factual truths: it's been nine years but she still has to eat the cheapest meal as she could: five baht of sticky rice and some grilled chicken bone. ``We cannot eat much. I have to keep some part of the money for housing, for electricity, for water and to save some to send home,'' said Soy. According to the Department of Export Promotion, Thailand's exports last year amounted to 2,248.08 billion baht. The past four years totalled 6,938.46 billion in exports. If the labourers that bring this much money in do not seem to benefit, who does?
Soy and many other Thai workers nationwide are living a little above poverty line, more often than not deeply in debt. Most are farmers who are being pushed to produce more for export under the World Bank's Countries Assistance Strategies (CAS).
Promised the rose but sent the clay
Item 84 of the CAS states the objectives of rural development are to improve the competitiveness of agricultural exports and import substitutes, continue commercial agricultural productions and rural restructuring to improve farm incomes, improve irrigation for high-quality export rice and diversified high-valued exportable crops.
Soy used to grow in her 30-rai ricefield. Her family had to invest in fertiliser, chemicals, and eventually sank deep into debt. They were forced to produce more than her family needed in order to feed the market and the world. Her family lost their land and Soy became a waged earner.
Worse still, when the economic crisis hit Thailand in mid-1997, Soy and hundreds of thousands of Thais who went to work for export companies lost their jobs. One of them was Mrs Pramorm Chombud, who worked for the Thai Melon factory for 26 years. While the government has been attempting to solve the problems of financial market instability and loss of investor confidence by implementing economic policy remedies prescribed by the International Monetary Fund (IMF) and the World Bank, Pramorn continues to buy the cheapest bones and vegetables for her children to eat. Will they benefit from the government's actions? How? When?
At fleeting times, Pramorm, 51, thinks about those questions, but she has to go out and find a job. Her husband is paralysed. Her mind has more than enough worries to examine, and she doesn't have the time to dwell on the state of the nation's finances. She does odd jobs and earns less than 100 baht a day. She wants to go back to Lop Buri province. That's where she was born. But even in her hometown, there is no place for her. Her old friends are just as hard up as she is.
In June 1998, the World Bank published its Country Assistance Strategy (CAS) for Thailand and announced a US$300 million Social Investment Project (SIP) loan. In May 1999, the Bank announced a strategy for rural development in Thailand. The NGO Coordinating Committee on Development (NGO-COD) invited the World Bank's Thailand Country representative to brief NGOs, academics and community leaders on CAS-Thailand last month. Enthusiastically responding to NGO- COD's invitation, the Bank sent a group of eleven people to the meeting, led by the country director, Mr J. Shivakumar. Despite the long association between the World Bank and Thailand, this was the first time that Bank officials and Thai NGOs have formally met with each other. In the past, Thai NGOs and local communities has resorted to campaigns against the Bank's funding of socially and ecologically destructive projects and policies including large dams such as the Pak Moon, against the export-led agriculture policy, against chemical-intensive agriculture, and against proposed resettlement of forest- dwelling communities.
The World Bank officials spent half of the meeting to explain its stand, and the intent of the CAS. Academics and NGOs criticised the CAS as not designed to benefit the majority. In response, Bank officials insisted on explaining once more ``who we are and what we are doing here.'' This information is available on the website and in books. The critics recognised it as an evasion tactic.
The straightforward questions raised by the Thai NGOs were not adequately responded at the meeting: 1. What legitimacy does the World Bank have in influencing Thailand's national policies?
2. How will the World Bank, and its executive board, respond to the public's growing criticisms of its aid strategies?
3. How does the World Bank plan to deal with its past mistakes? And if its proposed social restructuring programme incurs adverse consequences, will the Bank be willing /ready to take responsibility?
4. How can the public regulate the Bank's activities?
5. What are conditions for the World Bank's loans? What will happen if the government fails to fulfil the requirements?
Rhethorical strategies sound beautiful but hard to attain. For instance, the strategic theme for the World Bank's social and environmental programs in Thailand is ``sharing growth and ensuring quality of life with the focus on people.'' The World Bank aims to ``protect the vulnerable, target poverty, redress rural-urban imbalances, build a viable social security system and protect natural resources and the environment.''
Moreover Mr Shivakumar points out that `` the rapid growth has pulled millions of Thai people out of poverty every year.'' Civil society groups such as the NGO- COD point out that the Bank continues to use the free-market economic paradigm to support CAS-Thailand, and refuses to allow the people to take part in preparing the CAS.
``In preparing the CAS, the Bank chose to dialogue only with elite groups: technocrats in the government sector, establishment economists supportive of economic liberalisation, and a number of NGOs uncritical about the World Bank's past performance in Thailand and in other developing countries,'' said Mr Srisuwan Kuankachon of NGO-COD. To these NGOs and academics, the Bank continues to refuse to discuss alternative solutions to the crisis of economy in Thailand. Many insist that the export orientation is at odds with the self-reliance policy recently advocated by His Majesty the King himself.
The Bank continues to insist that the public benefits from this export policy. They also insist that its public legitimacy rests with the fact that it comes into the country at the request of the government, which is one of the Bank's stakeholders, and an elected governments represent the people's interest.
What the World Bank seems to ignore is that many groups feel that the government is made up of political parties formed to protect the interests of the political elite and big business. The Bank has also ignored the widespread public perception that the government therefore lacks the political will to translate into action its avowed principles of more equal distribution of income among different social classes.
Dr Worawit Charoenlert, political economist of Chulalongkorn University, says that ``the aims of better distribution of wealth and improving the quality of life of the people conflicts with the Bank's `business as usual' nature. ``That is because it requires the highest return from the loans it extends."
``It ensures high returns by attempting to pave investment opportunities in all the world's regions to benefit the economies of industrialised countries and the multinational corporations.'' For instance, the World Bank and the IMF have collaboratively pushed the government to sell key state enterprises, including the liquidity-scarce Electricity Generating Authority of Thailand (Egat). Egat's employees are currently opposing the government's privatisation attempts.
Political economists and activists are concerned that key utilities will soon be transformed into the entities that profit multinational groups that will, at best, make token gestures to the plight of the poor.
``This privatisation policy would also be implemented in the country's educational system. This will make education unaffordable to the poor,'' said Dr Worawit. ``Education should be subsidised by the government as an investment for human resources of the country,'' he said.
Do more harm than good
Over the past four decades, the World Bank has imposed free-market ideologies on developing countries. This helped to make economic disparity a global problem. For instance, many countries in Latin America, Africa and Asia that borrowed World Bank funds and complied with its policy dictates have become and remain heavily indebted.
Most of the World Bank's financial resources have been geared towards developing infrastructures such as highways, dams and power plants which mainly benefit the business sector rather than the poor, said Mr Srisuwan. In his opinion, these infrastructure projects destroyed and degraded natural ecosystems, as well as economic and cultural ways of life of local communities.
Mrs Sompong Vienchan, a community leader in the Pak Moon dam area remains distressed over the loss of her livelihood after the dam, one of the many dams in Thailand financed by the World Bank, was built. Mrs Sompong demands the World Bank take responsibility for the suffering of hundreds of small-scale fishing communities in the Moon River Basin who continue to protest at the dam site in Ubon Ratchathani province.
The World Bank washes its hands of her sufferings, saying: ``The Pak Moon dam project was closed by the Operations Valuations Department."The World Bank's completion report is satisfactory.'' The fishermen of the Pak Moon River basin say: ``We have been protesting against this project even before it was supported by the World Bank.'' ``We submitted several petitions. We went to the World Bank office in Bangkok in 1991, but they chose to ignore us,'' said Mrs Sompong.
Make a pair of shoes for the whole world
In response, a World Bank official said that ``the World Bank is a bank, not a charity organisation.'' Many academics and NGOs see the World Bank as instrumental in the four-decade development process which expanded the bureaucracy and corruption, while decreasing genuine people's participation. Now, in order to impose a ``good governance'' agenda, the World Bank blames inefficient, non-transparent and corrupt public institutions as responsible for the economic collapse.
Dr Worapol Promigabutr, Thammasat University sociologist, said that the World Bank's past dictates ``created many problems, but now it returns to suggest ways to solve the problems it created.'' Although its CAS states two ways to improve good governance; to increase private sector role and greater participation of civil society organisation. NGOs wish the World Bank could distinguish the differences between the civil society development (CSD) and the CSOs. As their working's philosophies are different.
In the effort to restructure the financial sector as part of improving Thailand's competitiveness, the World Bank's role resulted in the Financial Restructuring Agency taking over bad loans of now-defunct 56 finance companies. The World Bank and the IMF pushed governments of crisis-hit countries to guarantee private debts incurred from private international banks. This has been severely criticised as a method to transform a private debt into public or tax-payer's debt. `` The ultimate beneficiaries from this process are the foreign financial institutions in industrialised countries such as Japan and the USA,'' said Dr Worapol.
The IMF and World Bank forced Thailand to maintain high interest-rates to cope with the capital flight and achieve short-term stabilisation. This resulted in rising manufacturing costs, increasing non-performing loans, and liquidity crunch. This caused thousands of firms to close down and almost all manufacturers to downsize. This in turn resulted in mass industrial lay-offs, shrinking incomes, collapse of domestic demand and further downward spiral of the economy. Labourers who wanted to return to farming could not do so due to low market price for agricultural products.
Most farmers are now deep in debt.
The World Bank rejects the subsidies policy for farm products saying that it will create dependencies. However, the World Bank pushes the government to subsidise the bad debts of financial institutions. If farmers can't profit, the Bank is not affected.
* Supara Janchitfah is a journalist with the Bangkok Post.
Deconstructing Larry: what the new man at treasury has in store for Asia Walden Bello*
This article came out in the July 26, 1999 issue of Business World (Manila) and the July 28, 1999 issue of the Nation (Bangkok.)
Larry Summers, the new US Secretary of the Treasury, first crashed into my consciousness in 1991, when, as chief economist of the World Bank, he penned the notorious internal World Bank memo justifying toxic waste exports to the Third World on the grounds that they were "underpolluted." "Just between you and me," he asked close colleagues, "shouldn't the World Bank be encouraging more migrations of the dirty industries to the LDCs [less developed countries]?"
The reason for this, he argued, was that toxic substances such as carcinogens will have a greater impact "in a country where people will survive to get prostrate cancer than in a country where under-five mortality is 200 per thousand." So long as there exist wage disparities between rich and poor countries, continued the memo, "the economic logic behind dumping A load of toxic waste in the lowest wage country is impeccable and we should face up to that." "Grating" is how even the Economist, a Summers fan, described the leaked document.
Summers made an even bigger splash in 1995, when, as Robert Rubin's undersecretary, he emerged as the brains behind and manager of the Clinton administration's massive $20 billion rescue package for Mexico in early 1995. The commitment of IMF and US money bailed out hundreds of US investment funds and banks, and the lesson that many of the world's high rollers drew from the episode was that countries in which massive amounts of speculative capital were committed would not be allowed to fail. Reassured, many of the same players moved from Mexico to play the overheating Asian casino, and the term "moral hazard" entered the popular vocabulary.
Which brings us to Summers and Asia. What really is Summers' record on Asia?
One might begin by pointing out that Summers was the World Bank's chief economist when the most important Bank research he oversaw was written and produced: the now famous East Asian Economic Miracle. In accounting for the "miracle," the Bank identified as a key factor the fact that "in each HPAE [high performing Asian economy], a technocratic elite insulated to a degree from excessive political pressure supervised macroeconomic management." It went on to say that "the insulation mechanisms ranged from legislation, such as balanced budget laws in Indonesia, Singapore, and Thailand, to custom and practice in Japan and Korea. All protected essentially conservative macroeconomic policies by limiting the scope for politicians and interest groups to derail those policies."
With the outbreak of the Asian financial crisis, Summers, scarcely batting an eyelash, made a 180 degree turn and attributed the developing disaster to "crony capitalism," or a typical Asian brew of government intervention, monopoly control, and financial shenanigans.
But even as Summers and his boss embraced the crony capitalist explanation, many close observers of the Asian scene were unconvinced and some, in fact, pointed to their policies as central to the crisis. As a remarkable New York Times expose that appeared earlier this year revealed, the Rubin-Summers team's "too dogmatic" insistence on free capital flows Was identified by their own colleagues as a major factor that touched off the financial implosion. In the case of Korea, for instance, a key Treasury memo on June 20, 1996 sought to use accession to the OECD as a "way of prying open Korean markets in part to win business for American banks and brokerages." Nowhere in the strategy memo's three pages "is there a hint that South Korea should improve its bank regulation or legal institutions."
Once the crisis got going in earnest in mid-1997, Summers again played a decisive non-constructive role, this time by preventing what could have turned out to be a quick stabilization mechanism: the Asian Monetary Fund (AMF). Capitalized to the tune of $100 billion, the AMF was conceived as a multipurpose, low-conditionality, quick-disbursing fund that would have provided Asian economies with reserves to defend their currencies against speculative attack. Backed by Japan and practically all East Asian governments, the Fund was nevertheless vetoed by Summers on the grounds that the AMF would weaken the ability of the IMF to extract "reforms" from the troubled Asian economies. Moreover, as analyst Eric Altbach has noted, Summers and Treasury "saw the AMF as more than just a bad idea; they interpreted it as a threat to America's influence in Asia" coming from Tokyo.
As the continuing speculative attacks forced Asia's currencies down, Summers and Treasury pushed Thailand, Korea, and Indonesia into the straitjackets of orthodox IMF stabilization programs, with their stress on high interest rates and fiscal cutbacks. Not surprisingly, this had the effect of turning a downturn into a deflationary spiral from which the Asian economies still have to recover.
Conservative monetary and fiscal policies of the emerging economies combined with radical free-market reform have constituted the principal thrust of Treasury's Asia policy since then. Yet so evident has been the central role of speculative capital in activating the virus of financial instability that spread to Russia and Brazil that even Summers and Rubin have had to speak about the need for a "new global financial architecture." That was all rhetoric, however, and Treasury's strategy in the G-7 has been to dilute or kill efforts to control hedge funds and other speculative institutions and install the equivalent of speed bumps on the flows of speculative capital.
The recent G-7 program for global financial stability issued at Cologne in June was quintessentially Summerian in its stress on the usual litany of more transparency, better monitoring, and reliance on voluntary risk management by the private sector. The lack of teeth in a proposal for global reform is both disappointing and alarming, especially in light of Summers' admission in a Time interview that "Global capital markets pose the same kinds of problems that jet planes do. They are faster, more comfortable, and they get you where you are going better. But the crashes are much more spectacular."
This exercise in deconstructing Larry inevitably leads to the question: With such a record of environmental insensitivity, analytical errors, and macroeconomic missteps, how did Summers qualify to be Secretary of the Treasury?
Part of the answer lies in the Rubin-Summers team's unsurpassed skills in manipulating the media. The selling of Summers as whiz kid, top economist of his generation, and natural heir to Robert Rubin has been going on for several years now. It reached its climax in 1998, at the height of the Asian crisis, when, on the TV evening news, Summers would play Sundance Kid to Rubin's Butch Cassidy. The spreading global financial crisis often appeared to be simply a backdrop for the performance of a mutual admiration club, with tough questions serving as the cue for the boss to compliment the young Summers as the real strategist behind the US economic team and yield the stage to him.
But, aside from superior media management, there is one area where Summers has indeed been successful, and this is in promoting US economic interests. The grand buyout of depreciated Asian assets by US financial and industrial corporations now in progress from Bangkok to Seoul owes itself to Summers and Rubin's taking advantage of the crisis to pursue the strategic goal of opening up Asia to US corporate interests. Summers' vision for the post-crisis Asian economic order may be gleaned from his comments in a speech he gave to the Council of the Americas on May 3, 1999. In the Same smooth way that his predecessor equated the common good with the US interest, Summers said: "Today, fully 50 per cent of the banking sector, 70 per cent of private banks, in Argentina are foreign controlled, up from 30 per cent in 1994. The result is a deeper, more efficient financial market, and external investors with a greater stake in staying put." Asia was, Of course, as much on Larry's mind as Argentina.
Yes, Larry Summers may be a Neanderthal when it comes to the environment and he may have an unenviable record as global economic manager. But you have to grant that he does a pretty good job at pushing the interests of American banks and corporations on the benighted and the recalcitrant. And that, after all, is what makes somebody a good Secretary of the Treasury.
* Walden Bello is the director of Focus on the Global South and a professor of public administration at the University of the Philippines.