A number of countries in East Asia and elsewhere have begun attracting foreign portfolio investors into their own fixed-income markets ,purchasing, instruments in local currency. In this case the foreign bondholder takes the exchange risk, for which he expects added compensation. It is encouraging that these economies are becoming attractive enough, and their exchange management is considered stable enough, to attract investment in local currency securities. For obvious reasons, interest tends to be in bank deposits, in shorter maturities, and in guaranteed instruments of government or their agencies.
To the extent that short-term capital flows exceed working balances, trade financing, or bridge activities to long-term investment, they are most likely the result of relatively high interest rates not offset by an expected devolution. For the most part, these flows are seeking high short-term rates of return and reflect cash management or speculative decisions rather than long-term investment decisions rather than long-term investment decisions. But like long-term flows, they tend to lower domestic interest rates and appreciate the exchange rate. They are likely to expand bank reserves and lead to more credit expansion, although on a potentially more volatile base. To the extend that a government is trying to restrain domestic demand with high interest rates, the inflow would undermine its policy. These flows may not directly influence long-term savings and investment, but they may do so.
The World Bank and investment bankers regularly provide advice to developing countries on asset and liability management. But that advice often is non optimal or simply wrong. Although many tactical tools for active risk management in developing countries have been developed in the past decade, a framework for developing a strategy that incorporates country-specific factors has lagged far behind.
For example, in case when the Federal Reserve Bank (the “Fed”) last September arranged a $3.6 billion bailout of Long Term Capital Management (LTCM)- a Connecticut- based hedge fund- critics of the US financial establishment cries foul. The bailout contrasted strikingly with IMF treatment of indebted firms in Asia. When indebted businesses in Asia were unable to replay foreign loads, US and IMF officials insisted that they be forced to close and their assets sold off to creditors. Bailing out ailing businesses with endless lines of bank credit was, US officials claimed, the essence of “crony capitalism” and the cause of all Asia’s problems “Reducing expectations of bailouts, ” declared the IMF, must be step number one in restructuring Asia’s financial markets.
To Japanese officials, the LTCM bailout was a clear case of the US “ignoring its own principles”. Representative Bruce Vento (Democrat, Minnesota), in a Congressional investigation of the LTCM bailout, said that “there seem to be two rules, a double standard.” But this view is incorrect. Where bailouts are concerned, there is only one standard. Whether in Korea, Thailand, Connecticut or Brazil, US- and IMF- organized bailouts conform, to the same quiding principle: whatever happens, whoever is at fault, the wealth of Western credits must be protected and enhanced.
Until 1997, Western creditors were bullish on Asia and “emerging markets” generally. They poured billions into stocks, banks and businesses in Thailand, Indonesia, Korea, expecting mega-returns and a piece of the action as the former “Third World” embraced freemarket capitalism. Beginning in 1997, though, Western investors began to worry that they might have over-lent. They pulled out of Thailand first, selling baht for dollars; as the baht’s value collapsed, worry turned to panic. Soon, international financial operators were selling won, ringgit, rupiah and rubles in an effort to cut potential losses and get their funds safety back to Europe and the US. In the ensuing capital flight, Asian stock prices plunged and the value of Asian currencies collapsed. Local businesses that had taken out dollar payments to Western creditors.
For a time, local governments tries to stave off default by lending their reserves of foreign currency to indebted firms. South Korea used up some $30 billion in this way. But this money soon ran out. Western banks refused to make new loans or roll over old debts. Asian businesses defaulted, cutting output and laying off workers. As the economies worsened, panic intensified. Asian currencies lost 35 to 85 per cent of their foreign- exchange value, driving up prices on imported goods and pushing down the standard of living. Businesses large and small were driven to bankruptcy by the sudden drying up of credit; within a year, millions of workers had lost jobs while prices of basic foodstuffs soared.
As the crisis unfolded, IMF officials flew to Asia to arrange a bailout, agreeing ultimately to loan $120 billion to Thailand, Indonesia and South Korea. When announcing these loans, the press used terms like “emergency assistance” and “international rescue package,” leading the casual reader to presume that the money will be spent on food for the hungry, or aid to the jobless. In float, the money is used to “help” countries pay bank their debts to international banks and brokerage houses. Which international banks and brokerage house? The same ones who made speculative loans in the first place, then panicked and brought about the collapse of the Asian economies. The IMF rescue packages are intended only to rescue the Western creditors.
The Western financial industry, moreover, has been lobbying heavily for even more secure protection from future losses. One plan, put forward last year by the US and US Treasuries, envisions a $90 billion fund of public money, supposedly to avert currency crises. The idea is that G7 governments will, henceforth, underwrite the finance industry’s speculative ventures into emerging, markets before, rather than after, they turn sour. In this way, when bankers and fund mangers grow bored with a particular market, withdraw their funds and send the currency into a tailspin, they can collect on their losses immediately, without the tedious and time- consuming delays generated by IMF negotiations.
The industry has also been working overtime to squelch defensive government action against their speculative attacks. At a recent conference in New York City, economist Jagdish Bhagwati noted that the IMF and the US Government, despite repeated crises and heavy criticism have intensities pressures on countries to lift exchange controls. The IMF recently proposed changing its Articles of Agreement so as to require countries to permit even more freedom for financial speculations. Echoing this sentiment, US Treasury official Lawrence Summers decried efforts by Malaysia, Hong Kong and other to curb foreign lending, calling capital controls “a catastrophe” and urging countries to “open up to foreign financial service” providers, and all the competition, capital and expertise they bring with them.
Critics of IMF and US policy have, of course, noted that the combination of free flowing capital and bailout funds are a boon to banks other creditors. Such IMF critics as financier George Soros and Harvard’s Jeffrey Sachs complain that the game of international speculation and bailout played by the Western financial establishment- in which hot money rushes into a country, then pulls out, leaving behind a wrecked economy to be cleaned up by local governments and G7 taxpayers- is a menace to world economic stability. For the Western financial establishment, however, the bailouts are not the real prize. Nor are the devastated economies of Asia an unfortunate side-effect of a financial scamp. They are the while point of the game. Asia’s bankrupt businesses, insolvent banks and jobless millions are the spoils of what economist Michel Chossudovsky aptly calls “financial warfare”. The gains to be won from these financial hit-and-runs are immense. There are, first of all, the foreign- exchange reserves of the target countries. Countries accumulate currency reserves by running trade surpluses, often after year upon year of selling more abroad than they purchase. These surpluses are accumulated at great cost to the working populations, who labor hard to produce goods, destined to be consumed by foreigners. In 1997-1998, Asian countries spent nearly $100 billion in accumulated reserves trying- vainly as it turned out- to prevent devaluation. Brazil, the latest country to fall, spent $36 billion defending the real against speculators. Thus, in little over a year, did the Western financial elite confiscate $136 billion of hard-won wealth from the emerging markets.
Next, there are the bargains to be had once the target country’s currency has collapsed and its firms are strapped for cash. Year of effort, for example, by the Korean elite to keep businesses firmly under control of state-supported conglomerates called chaebols were undone in a matter of months. By early 1998, as the IMF negotiated the terms of surrender, Citigroup, Goldman Sachs and other firms were snatching up ownership of Asian banks and industries. With currencies down 15-60 per cent and stock prices down 40-60 per cent, Asia is today a bargain- hunter’s paradise. Nor are assets the only bargains to be had. As a direct result of the destruction wrought by global financial interests, the prices of basic commodities have plummeted over the past year. Oil. Copper, steel, lumber, paper pulp, pork, coffee, rice can now be bought up by Western firms dirt cheap, an important key to the continued profitability of US industry.
Then there is the higher tribune that countries, once in debt peonage to Western creditors, must pay on both old and new loans. South Korea, for example, under the terms of the IMF bailout, will pay interest on foreign loans that is 25-30 per cent higher that rates on comparable international loans- this despite the fact that the loans have been guaranteed by the Korean Government. Since the crisis began, international lenders have doubled or tripled the interest rates they charge on emerging- market debt. What is such usurious interest cripples the economy and drives the country into default? Well ,then they will become wards of the IMF, lender of last resort.
Next, there are the people themselves, engulfed in debt, impoverished and committed by their governments to can endless course of domestic austerity and debt crisis of the 1980s, the Asian crisis has resulted in millions of newly unemployed, whose desperation will pull wages down world-wide. Like the debt crisis of the 1980s, the Asian crisis will turn entire countries into export platforms, where human labor is transformed into the foreign exchange needed to repay Asia’s $600 billion debt. In just this past year, Thai rice exports rose by 75 per cent, while Korea has managed to boost its exports and accumulate $41 billion in reserves for debt service. These figures, notes the World Bank, indicate that people in Asia “are working harder and eating less”.
Finally there are the governments themselves, the ultimate prizes to be won. It is no accident that conditions imposed by the IMF, with their emphasis on altering state employment, welfare and pension systems, their insistence on reforming the legal and political systems of the target countries, entail a major loss of national sovereignty. Through IMF negotiations, national governments are transformed into local enforcement agents of transnational corporations and banks. IMF officials are quick to point out that the usurped governments often were not paragons of democracy and virtue. This of course is true. But the motives of the IMF are themselves profoundly undemocratic, intended to seize sovereignty and fix the rules of the game and to protect and expand, at all cost the wealth of the international financial elite.
| Deposit Banks’ Foreign Assets | |||||
| All countries | |||||
| 1990 | 1991 | 1992 | 1993 | 1994 | 1995(I) |
| 6,793.4 | 6,753.5 | 6,780.4 | 7,239.0 | 7,907.9 | 8,568.9 |
| Developing countries | |||||
| 1,672.47 | 1,710.26 | 1,721.40 | 1,821.60 | 2,030.93 | 2,098.60 |
| Asia | |||||
| 868.69 | 884.06 | 891.33 | 928.57 | 1,068.13 | 1,135.63 |
| Deposit Banks’ Foreign Liabilities | |||||
| All countries | |||||
| 1990 | 1991 | 1992 | 1993 | 1994 | 1995(I) |
| 7,137.0 | 6,994.7 | 6,945.9 | 7,099.6 | 8,047.7 | 8,689.8 |
| Developing countries | |||||
| 1,681.28 | 1,703.69 | 1,735.69 | 1,859.19 | 2,105.00 | 2,200.18 |
| Asia | |||||
| 838.28 | 861.37 | 869.10 | 929.69 | 1,093.74 | 1,181.70 |
How a market develops, including the orderly introduction of new instruments, is an important element of managing capital flows. In a broader since, the kinds of instruments available and favored (by the tax structure or by other regulations) in a market and the extent of foreign ownership allowed may also have an effect on the allocation of investment in the real sector. For example, in markets in which bonds are readily available or pension funds are impotent buyers, more capital is likely to be available for long- gestating projects.
Two conclusions emerge from this analysis. First, capital flows are inherently neither good nor bad. They have a great potential to be either, depending on how productively they are used or on whether they are allowed to distort economic incentives and decisions. The contrast between growth in East Asia and stagnation in Latin America is instructive in this regard (There are significant exceptions to this generalization in both regions- the Philippines and other countries come to mind). Second, realizing positive benefits from capital inflows depends on sound macroeconomic and sectoral policies in the recipient country. Capital flows are a complement to good policy, not a substitute for it.
The List of Literature.
1. Managing Capital Flows in East Asia. A world Bank Publication. Wash 1996y.
2. Private Market Financing for Developing Countries. IMF wash 1995 y.
3. The World Economy Global trade policy Edited by Sven Arndt and Chris Milner. Oxford , 1996 y.
4. International Studies Review Edited by ISA and Thomas S. Watcon Oxford Milner Sping 2000 y.
6. The Would Bank Research Program. The Would Bank Research.
7. Alan Greespon. Financial markets //New Internation-list. may 1999 y. c15-16