Lessons from the Global Economic Crisis
Hill, Patrice, The World and I
With the global economic crisis waning and even hard-hit countries like Russia on the mend, questions remain about what caused the "contagion" that spread from Thailand to a third of the world's economy in a matter of months, and what should be done to prevent a relapse.
Nearly everyone wants to avoid another chain reaction of collapsed economies from Asia to Latin America like the one that last year threatened to bring down even the U.S. economy when it caused a sudden 20 percent drop in the stock market. But not everyone agrees on why that happened and how to immunize the global economy from similar threats in the future.
Many Third World countries, with sympathy from some left-leaning groups and governments in the West, blame the problem on "speculators"--the managers of investment funds that make money by exploiting the swings in countries' currency and financial markets. No question, such speculators greedily poured money into the Asian and Latin markets when they were healthy and zooming upward early in the 1990s.
Third World countries complain that the speculators--typified by billionaire hedge fund mogul George Soros, who was highly visible at each stage of the crisis--abandoned their investments and pulled out in a stampede when problems developed in 1997 and '98, leaving millions of poor people even poorer in their wake.
Brazilian President Fernando Henrique Cardoso, whose country plunged into recession when the crisis hit Latin America early this year, was forced to accept harsh medicine doled out by the United States and the International Monetary Fund (IMF) to win $42 billion in assistance.
But he later led an effort at an international summit in Rio de Janiero to impose controls on the speculators who wreaked havoc on the Latin giant's economy.
"What is at stake is fundamental," Cardoso said. "It's the development of a shared prosperity. ... [Globalization] has to apply to all. It cannot be a gift for the rich and a hardship for the poor."
GOVERNMENT MISMANAGEMENT AT FAULT?
Cardoso won the backing of Europe's left-leaning governments at the Rio summit in June. Gerhard Schroeder, chancellor of Germany and president of the European Union, endorsed efforts to establish new rules for speculative money flows.
"Speculators can destroy economies" and even "destroy democracy," he said.
But the United States and the IMF, which provided nearly $160 billion in loans to rescue the foundering economies of Asia, Russia, and Brazil, insisted the problem largely was due to poor management of the crisis-struck economies, which invited the collapse.
The crisis was caused by the failure of emerging countries to adopt critical elements of the dual system of democracy and capitalism that have nurtured stability as well as wealth and abundance in the West, they said.
Few would disagree that the countries in crisis suffered from poorly regulated and unsound banking systems. Several countries, notably Indonesia and Russia, were replete with corruption and lacked systems of bankruptcy and other legal measures to fairly deal with economic problems.
"In the case of the Asian emerging economies, there was evidence of speculative excesses in financial and real estate markets" as well as "extraordinary risk-taking in the form of enormous leverage" by the country's borrowers, said Laurence Meyer, a Federal Reserve governor.
"Advanced capitalist economies have found ways to mitigate the risks of financial and banking crises" by establishing independent central banks, sound financial institutions, and effective laws governing business, he said.
The United States and the IMF challenged one common government practice that stands out in bold relief, since it was the immediate cause of the crisis in each country: The governments linked the value of their currencies to the U.S. dollar but later were forced to abandon those currency pegs. …