FINANCE-US: Crisis Prompts Calls for Debate on Global Economy

By Farhan Haq Reprint | | Print |

NEW YORK, Sep 17 1998 (IPS) - Growing pessimism about the state of the world economy has prompted a variety of U.S. leaders, from business elites to trade unionists, to call for a conversation on ways to deal with increasing financial crises.

U.S. President Bill Clinton helped prod that conversation when he told the Council on Foreign Relations here Monday that the recent currency woes from Asia to Latin America constituted “the biggest financial challenge facing the world in half a century”. In the days that have followed, the clamour for what Clinton called the United States’ “inescapable obligation to lead” has grown dramatically.

“The global capitalist system that has been responsible for our remarkable prosperity is coming apart at the seams,” financier George Soros warned the U.S. Congress on Tuesday. “The pain at the periphery has become so intense that individual countries have begun to opt out of the capitalist system or simply fall by the wayside.”

Soros, whose investment funds are estimated to have lost some two billion dollars after Russia devalued its ruble last month, was urging Congress to find ways to slow down the rate of speculative capital flows worldwide. Ironically, these are the flows that account for his own wealth.

Nor is he alone: Thea Lee, associate director of public policy for the American Federation of Labour-Congress of Industrial Organisations (AFL-CIO), the main U.S. labour coalition, also argued that Washington needed to find ways to “dampen short-term speculative capital flows”.

What both bankers and unions fear is that investors are moving too quickly in and out of nations’ markets, disrupting stock markets and currencies in bursts of financial panic. Last year, Asian economies – notably those of Thailand, Malaysia, South Korea, Hong Kong and the Philippines – crumbled amid investor worries; since then, Russia and now Brazil have been hit. Brazil’s recent problems, Soros cautioned, have “put the rest of Latin America at risk”.

Yet the global economic worries have also prompted second thoughts about the sort of monetarist economic measures and regional free-trade pacts that have prevailed in recent years, Lee told IPS. “We see the crisis in a lot of ways as validating many of the concerns we voiced,” she said.

For example, Lee argued, prior to the recent economic woes, “the Washington consensus had been that democracy, civil society and labour unions aren’t so important as long as you have good growth”. Now, she contended, policymakers are coming to accept that democratisation and economic growth must be developed together.

Similarly, she said, the momentum toward regional free-trade accords “has slowed down, and it is a good thing to slow it down”. In general, Lee argued, the crisis “certainly can open a new uncertainty on the part of the Washington elite … (which) could add up to an opportunity to have a conversation. But I think we’re a long way from winning it.”

The problem, critics of economic globalisation argue, is that, although policymakers in the West are finally willing to discuss alternatives to the faltering world economic system, they have not yet considered any concerted plan to repair or replace it.

“There’s not going to be any unified action among the Group of Seven (G-7),” said Doug Henwood, editor of the New York-based ‘Left Business Observer’, referring to the seven wealthiest nations. “They can’t really agree on anything, and the United States is not in a position to lead on this.”

Indicative of the disarray has been the inability among G-7 countries this week to follow up on Clinton’s idea that they must spur pro-growth policies at a time when their inflation fears are low.

“For most of the past 30 years, the United States and the rest of the world has been preoccupied by inflation,” Clinton told the Council Monday. “But clearly the balance of risks has now shifted, with a full quarter of the world’s population living in countries with declining economic growth or negative economic growth. Therefore, I believe the industrial world’s chief priority today plainly is to spur growth.”

Although Clinton aides have denied it, Clinton’s words were clearly taken by Wall Street as a signal for G-7 countries to coordinate interest-rate cuts, but nothing of the sort has happened this week. In fact, Hans Tietmayer, president of Germany’s central bank, ruled out a rate cut in his country.

“I think I can safely say that at the moment there is no endeavour to coordinate interest-rate cuts,” Alan Greenspan, chairman of the U.S. Federal Reserve, told the U.S. House of Representatives Banking Committee Wednesday. Amid the clamour for slowing down financial speculation, Greenspan also warned that any economy “inhospitable to risk capital will be mired at a sub- optimal standard of living and slow growth rate”.

One investment firm, Santander Investment, predicted that the Federal Reserve remained unlikely to cut U.S. interest rates at its next meeting on Sep. 29, but that it might do so by a “conservative” amount in November. “A sharp move is unlikely until the external turmoil firmly washes on U.S. shores,” Santander argued this week.

Greenspan’s pessimism is one sign that the United States has no agreement on how to handle the global crisis, Henwood said. But a larger problem, he argued, is that Clinton – mired in an impeachment crisis stemming from allegations of perjury and obstruction of justice in his affair with a White House intern, Monica Lewinsky – lacks the authority to deliver on any economic programme.

“He’s sort of a joke. Nobody’s willing to take this guy seriously,” Henwood said of the president. “He’s got no sway on Capitol Hill.”

Clinton is facing challenges in his bid to get Congress to approval a U.S. payment of some 18 billion dollars to the International Monetary Fund, and in his politically weakened state he also faces pressure from Republicans – two months before legislative elections – for a massive tax cut.

Neither the Brazilian government nor Germany’s, each of which is in the midst of election campaigns, is eager to take any unpopular economic measures either.

Still, Clinton is hopeful that finance ministers and central bank heads among the G-7 members will meet within the next month to hold a real conversation about how to deal with the changing global economy.

Tony Avirgan, communications coordinator for the Development Gap, a Washington think tank, argued that planners at that proposed meeting “should turn their ears in a different direction” to hear from the people hurt by the economic crisis. But whether they will be listening to each other at all remains an open question.