FINANCE: Crisis Threatens other Vulnerable Countries

By Gustavo Capdevila Reprint | | Print |

Gustavo Capdevila

GENEVA, Sep 4 1998 (IPS) - Economists at the United Nations (UN) refuse to predict who will be next to reel from the crisis expanding out of Asia and Russia, stating only there is a long list of possibles amongst the vulnerable nations.

Yilmaz Ayuz, head economist for the UN Trade and Development conference (UNCTAD), said China and India were not threatened, but that upsets could occur in Latin America.

Foreign financiers have not penetrated the Chinese and Indian economies and the banks in these countries are less involved in international arbitrage, he explained.

India is one of the best administered countries in terms of the flow of foreign finance, said Ayuz.

These two countries are not as vulnerable to the contagion of financial crisis as others, like the Latin Americans and other emerging markets facing excessive currency risks, he said.

In any case, Ayuz predicted the crisis in Russia will accelerate world economic decline which could well enforce the implementation of currency adjustments, especially in China and India.

The two main Geneva-based UN agencies specialising in economic research, UNCTAD and the European Economic Commission (EEC), examined the repercussions of the world financial crisis in a press conference Friday.

Returning from a trip to Brazil this week, where he witnessed “enormous concern” over financial events, Ayuz said one of the causes of the contagiousness of the crisis is the general valorisation made on investments in the developing nations.

Another motive is that many international investors operate in both Russia and the emerging markets at the same time. In these cases there has been a tendency to sell in the emerging markets to cover losses in Russia.

Some of the Latin American countries fit into this emerging market bracket, explained Ayuz.

In these conditions, he said, the outlook has worsened for countries already vulnerable on the eve of the Russian crisis or even before the collapse in eastern Asia.

The vulnerable countries are characterised by their high levels of foreign exchange liabilities, the marked presence of foreign investors on their stock exchanges, inflated interest rates, imbalances in bulky and increasing current accounts and overvalued currencies.

Andrew Cornford, another UNCTAD economist, confirmed the forecasts announced a declining tendency for the leading countries of Latin America as these are linked to the lack of perspectives for capital flow toward the region.

Previous optimistic predictions for Latin America were based on the enormous continuing current account deficits being financed by the flow of foreign capital, said Cornford.

The crises in Eastern Asia and Russia, and the others to come, show the world must confront the problem of development management, said Ives Berthelet, EEC executive secretary.

Given these precedents, “the time has come to seriously question the ideas guiding the development and transition processes,” said Berthelet.

The EEC official criticised the Washington Consensus – the term used to describe the neoliberal paradigm, for its recommendations for developing and transition nations.

This Consensus recommends the fullest, broadest and fastest liberalisation possible “neglecting the time needed for the consolidation of institutions,” said Berthelet.

It was John Williamson of the International Economics Institute in Washington who first coined the term “Washington Consensus” to describe “a new conception” of the economic policy arising in developing countries.

Berthelet said this Consensus, which includes the Bretton Woods institutions and US Congress, is sinning on the side of excessive liberalisation “because the economy and the institutions are not ready to operate or to benefit from this.”

This concept, which is the intellectual precedent of most of the recommendations made for the transition process in Russia completely overlooks the importance of the institutions, he added.

Berthelet’s advice was for a solution to the Russian crisis through a programme developed by the Russians themselves considering the restructuring and establishment of the institutions, the procuring of macroeconomic balance and mobilisation of the nation’s human resources.

The international community, he said, must support this through a programme similar to the Marshall Plan – the measures adopted by the United States for the reconstruction of Europe following the Second World War.