When Thailand's baht collapsed last July, it seemed an event of no great significance, a pebble plopped into the sea of global finance. Today, the ripples are beginning to wash up on California shores, and nobody knows if they portend an economic tsunami or just some rough surf. But then, the high priests of the global economy at the International Monetary Fund (IMF) had no idea that some of Asia's most dynamic economies would collapse in a panic over the inability of their businesses to repay their debts, or that this would force government leaders to come groveling for more than $120 billion in IMF bailouts.
Though the conditions of the bailout plans aren't public – the terms of IMF loans are never public – the basic outlines are clear. Governments are typically expected to cut spending and subsidies for both consumers and business, raise interest rates, open up their economies to foreign capital (selling their patrimony at fire-sale prices), and export their way to repaying their debts. While many businesses will fold and millions of workers will lose their jobs, the major international banks that recklessly overextended credit to companies in these countries will at worst have to accept some delays in getting their money back.
The deal for the American public doesn't quite match the deal for American banks, however. U.S. consumers will be expected to buy the new wave of Asian goods, while fewer Asians will be buying American products. Last year's trade deficit of $200 billion could climb to $300 billion this year – wiping out roughly 1.1 million jobs, according to a new study by the Economic Policy Institute (EPI). California is likely to be one of the hardest-hit states, losing more than 126,000 jobs.
The Asian crisis is likely to make Americans even more wary of our involvement in a deregulated global economy. The defeat of President Clinton's proposal for fast-track trade authority last fall was already a signal of rising distrust of globalization, partly because of disillusionment with the effects of NAFTA and the related 1994 peso crash and bailout. The $52 billion Mexican financial rescue helped precipitate the larger Asian crisis by giving international bankers reason to believe they would be saved from their own greed. It also stirred, in distinct left and right varieties, populist resentment against public safety nets for bankers while ordinary workers here and abroad suffer.
The White House had planned to make another stab at fast-track early in this session of Congress, but now that has been pushed to the back burner. The Asian crisis will also put a damper on plans for an expanded Free Trade Agreement of the Americas and a new, quietly crafted Multilateral Agreement on Investments – essentially a wide-ranging bill of corporate rights for the global economy. In short, the elite preoccupation with globalization is getting to be a harder sell, even without scandals swirling about the First Salesman.
The initial battle over global economics in this congressional session is likely to come over additional funding for the IMF. The administration will ask for $15 billion for an increase in the U.S. membership fee, and an additional $3.5 billion as part of a new line of credit for the bank. It will argue that the U.S. must pony up both to demonstrate its leadership and to prevent the “Asian contagion” from spreading. Rather than debate the issue head-on, though, the administration seems likely to slip IMF funding into a grab-bag supplemental appropriation bill including money for troops in Bosnia and domestic disaster relief.
While Clinton's usual intraparty rival on global issues, House Democratic leader Dick Gephardt, will support IMF funding, a left-right coalition – ranging from the International Labor Rights Fund to the Heritage Foundation – will oppose it. IMF supporters may argue that the Asian crisis gives new urgency to the dues increase, but in fact the money is irrelevant to the bailouts already negotiated, and the IMF has $40 billion on hand and the ability to borrow much more if needed. The congressional vote is really about shoring up confidence not in the world economy, but in the IMF.
Such confidence is unwarranted. The IMF, one of the several international financial institutions established after World War II, lost its original reason for existence in the early 1970s when the postwar monetary-exchange-rate system was abandoned. The IMF has been inventing reasons to exist and expand ever since, starting with its assistance to countries during the oil crises of the '70s. The history of IMF “structural adjustment programs” for developing countries is dismal, according to a new study by the Development GAP and Friends of the Earth. The two groups argue that the IMF's public austerity reforms have in most cases increased poverty and ravaged the environment, while catering to foreign lenders and investors.
As well, the Asian crisis has highlighted the IMF's incompetence at detecting problems and prescribing cures: One internal IMF report has concluded that its actions worsened the Indonesian bank crisis, and even conservative defenders of past structural adjustment actions have denounced the IMF for imposing austerity programs on economies like Korea that already have high savings rates and low public debt.
IMF critics also argue that the kind of global deregulation that the fund advocates is hardly the answer for market excess and failure. Capitalism is a manic-depressive system: Just as it is prone to euphorias, seeing boundless profit in Asian sweatshops and high-rise buildings, it also overreacts to trouble with panics. This is not always “creative destruction,” as the great economist Joseph Schumpeter argued. Sometimes it is just needless destruction.
The idea of an IMF is a sound one: There is a need for a lender of last resort that can stabilize a shaky system. There is also a need, especially in the Asian economies, for better accounting, closer supervision of banks, and an end to the corrupt cronyism of big business and politicians. But the solution need not be a stiffer dose of free-market castor oil. There is an alternative solution of greater democracy, especially in countries like Indonesia; more public accountability; and a larger role for citizen groups and unions. Bailouts should aim to sustain, not depress, the incomes of most peasants and workers, and they should be used to protect and enhance human rights, including core labor rights (a requirement of U.S. law routinely ignored in the bailouts).
Rather than having to expose themselves to wild global financial markets, the Asian economies need more “speed bumps” that slow the movement of capital in and out of their economies. As economist David Hale of Zurich Research has noted, the Asian countries suffering the least in the current crisis “are the ones which have proceeded most slowly in opening their financial systems, especially China.” One helpful step would be to subject global financial transactions to a tax that could both dampen volatility and finance a fund to resolve future financial crises.
The world needs an international monetary fund – but not the actual existing International Monetary Fund, which makes matters worse more often than not. The coming vote on IMF funding should open an overdue debate on what kinds of controls on global finance and what new international economic institutions are needed to avoid an even bigger crisis that engulfs us all.