If nothing else, Asia’s economic crisis shows that the usual debate over “globalization” is cockeyed. It has asked whether poor countries drain well-paid jobs from rich countries. The answer is “no.” The world’s surplus of cheap labor hasn’t depressed everyone’s wages. The reason is that, as poor countries prosper, they buy more of rich countries’ advanced exports (from computers to commercial jets) that support high-paying jobs. The real question is whether globalization has proceeded so rapidly that it’s become dangerously unstable.
Countries with huge differences in culture, history and political systems have been thrust together in ways that stretch the limits of normal commerce and common understanding. It is not merely that the so-called “emerging market” nations have often tried to retain parochial domestic economies and protected banking systems, even as they expanded trade and accepted vast amounts of foreign investment. There has been a mutual web of illusion and deception among richer and poorer nations–or, more precisely, the companies, banks and investors in each.
Recall John Maynard Keynes’ memorable phrase: “animal spirits,” which he defined as the “spontaneous urge to action rather than inaction.” Well, the “animal spirits” of global capitalists got mixed with a big dose of ignorance about emerging markets. In the 1990s, foreign investors (from the United States, Japan, Europe and Asia) poured about $1 trillion into poor countries. China, Brazil, Thailand, Indonesia, South Korea and Malaysia were all big recipients. Some money arrived as direct investment (foreigners building factories); some came as bank loans or through bonds. Other funds went into local stock markets.
A lot of investors–multinational companies, banks, wealthy tycoons, mutual fund managers–simply didn’t know what they were doing. Risks were misjudged. Confirmation of this comes from a study done by the Institute of International Finance in Washington. It found that by mid-1997 interest rates on bonds issued by 14 emerging market economies were only about 1 percentage point higher than rates on U.S. Treasury bonds. Higher risks ought to command higher rates.
This teaches a lesson that constantly needs to be relearned: Markets–though generally productive–regularly blunder. Swept up in enthusiasms, they succumb to herd behavior and go to excess. In this case, the combination of too much foreign capital and weak local banking systems produced enormous waste.
We now see the aftermath: capital flight. The whole process is unraveling with destructive economic consequences. Foreign banks won’t renew dollar loans to banks in Korea and elsewhere. Overseas investors withdraw from local stock markets. Loans made during the boom go sour. Exchange rates plunge. Dollars are bought; South Korean won or Indonesian rupiah are sold.
And the crisis has (so far) fed on itself. Confidence has not recovered. Believing that currencies will drop, investors sell; so currencies drop. Emergency loans arranged by the International Monetary Fund are supposed to inspire confidence and restore stability. In practice, this hasn’t yet happened, because the loans are fully disbursed only after countries meet tough conditions: closing weak banks; raising interest rates. These conditions offend powerful interests and limit national sovereignty. There are howls of protest; investors then doubt that the conditions will be met–or the money disbursed.
Globalization, though, flows from irreversible forces. It cannot be undone. Lower communication and transportation costs abet foreign commerce. Multinational companies seek wider markets; poor countries seek higher living standards through trade, investment and technology. Over the decades, the process has worked astonishingly well. Living standards have risen for poor and rich countries alike. The record refutes the standard objections that poor countries–and workers–gain only at the expense of the rich.
But there is no guarantee that the process will work as smoothly in the future as it has in the past. A country that exhausts its foreign exchange (the dollars, yen or marks needed to buy imports) must retrench. It can revive economic growth only by exporting more. This is the plight of many Asian economies, and at best the IMF only cushions the shock. High interest rates and low exchange rates (which make exports more competitive) merely reflect the basic problem. If too many countries fall into this trap simultaneously, all will have a harder time escaping. All countries cannot have export surpluses; some must import.
Potential instabilities abound. Commerce–whether local, national or global–does not exist in a political or cultural vacuum. It requires common understandings, procedures and rules to govern ordinary transactions and inevitable crises. For the world economy, this foundation is weak. There is much mutual ignorance and suspicion. The present crisis may be a passing phase–a collective learning experience that strengthens a global commercial culture. Or it may foretell more turmoil. All major countries now depend on large flows of international trade and investment. If these were to shrink, all would suffer.