GLOBAL CAPITALISM, R.I.P.?
Much of the world simply does not have the values needed for free markets. We pretended otherwise. Now comes the reckoning. Tumbling world stock markets contained a large, though muffled, message: global capitalism - whose triumph once seemed inevitable - is now in full retreat, perhaps for many years. Who would have guessed this? After the cold war, global capitalism offered a powerful vision of world prosperity and, ultimately, democracy. Multinational companies and investors would pour technology and capital into poorer regions, creating a transnational mass market of middle-class consumers who would drive Toyotas, watch CNN, eat Big Macs - and, incidentally, demand more freedom. World trade and investment did indeed surge, but not with the expected consequences. Global capitalism is now destabilizing the economies of poor countries and inflicting large losses on investors in rich countries. Worse are the collapses of economies around the world. The only good news is that most American economists think-perhaps naively - that the United States will avoid a recession. The Blue Chip Economic Indictors survey of 49 economists finds only one predicting aslump. “Demand is strong, inflation is low and employment is high,” says Joel Prakken of Macroeconomic Advisers. But dangers are rising. Exports could disappoint, because economies in Latin America and Canada are weakening. With Asia, these areas buy nearly three quarters of U.S. exports. And economists may underestimate how much the dropping stock market demoralizes consumers and cuts their spending. David Wyss of Standard & Poor’s DRI says that the total value of U.S. stocks (the market’s “capitalization”) has dropped about $2 trillion since the market’s peak. Wyss figures that consumers reduce current spending by 2.5 cents for each dollar of stock losses. The math: 2.5 percent of $2 trillion is $50 billion. That’s less than I percent of GDP. What might undo such estimates? Perhaps this: because more Americans own stocks than ever, the adverse effect could be larger than ever. But however the U.S. economy fares, global capitalism is under siege. The idea was to open up markets to trade and foreign investment. But some markets were being shut. What went wrong? On one level, the answer is simple. Countries became overdependent on foreign capital, which, having entered in huge amounts, is trying to leave the same way. What initially triggered the reversal was the recognition that much foreign money had been squandered through «crony capitalism» or misguided industrial policies. Asia was dotted with empty office buildings and surplus factories. Overseas banks refused to renew their loans; mutual-fund investors sold shares and converted their funds back into dollars. But now the fear of capital flight is feeding on itself - and spreading to Latin America. If people fear the Mexican peso will be devalued, they may convert pesos into dollars. The frightened include locals, not just foreign investors. But countries need hard currencies to pay for imports; and they can’t afford a depositor run on their banks. High interest rates are one way to halt the process by rewarding people for keeping funds in local currencies. The trouble, of course, is that punitive interest rates also crush local economies. If a few economies face this squeeze, it’s their problem; if many economies do, it’s everyone’s problem. This is happening. The threat of capital flight has shoved so many countries toward austerity that it’s inducing a worldwide slump. And, again, the process feeds on itself. Feeble economic growth has depressed prices of raw-material exports. Earning less abroad, the raw-material exporters must slow their economies to cut imports. This depresses U.S. exports and the profits of multinational companies operating in these countries. Thus does the Third World’s distress threaten the First World’s stock markets and prosperity. But global capitalism’s failure demands a deeper explanation. After all, capitalism is supposed to excel at allocating investment funds efficiently. In this case, it didn’t. The deeper explanation is that market capitalism is not just an economic system. It is also a set of cultural values that emphasizes the virtue of competition, the legitimacy of profit and the value of freedom. These values are not universally shared. Other countries have organized economic systems around different values and politics. As a result, spreading capitalism is not simply an exercise in economic engineering. It is an assault on other nations’ culture and politics that almost guarantees a collision. Even when countries adopt some trappings of capitalism, they may not embrace the basic values that make the system work. This is what happened. Led by the U.S., global agencies (the World Trade Organization, the International Monetary Fund) sought to persuade poorer countries to become more open to trade and global capital. These countries tried to maximize the benefits of the process while minimizing changes to their politics and commerce. Mutual deception flourished. Countries like Korea and Russia pretended that they were changing more than they had. American, European and Japanese bankers, executives and government officials pretended the claims were true—or might become true. Loans were made on the basis of incomplete or faulty financial statements. Or they were made on the faith that, if a loan went sour, someone (the government, the IMF) would cover the losses. Global capitalism became a dangerous hybrid. On the one hand, investors committed huge sums and expected high returns. On the other, the money often went - through bank loans, bond issues and stock offerings - to borrowers who were not operating by strict rules of efficiency or profit and loss. “Crony” capitalism often meant corruption: contracts won with bribes; favoritism for the well-connected. But capital flowed freely while optimism and self-deception prevailed. Banks collected interest on loans. “Emerging market” mutual funds rose, because local stocks were buoyed by new investment money. While everyone enjoyed profits, there was a suspension of disbelief. Now comes the reckoning. Capital flight has forced most developing countries to scramble to conserve scarce foreign exchange. All their choices are bad. Still, some U.S. economists see currency controls as a temporary way of avoiding high-interest rate austerity. A gentler way to achieve the same result would be debt relief: global bankers would write down loans, easing the repayment burden. But so far, banks have shown little interest. A third approach is to attract new long-term capital to replace old short-term capital. But developing countries are reluctant to sell too much of their economic bases to foreigners at fire-sale prices. Countries cannot expand their economies unless they replenish their foreign-exchange reserves of hard currencies. The IMF- which provides temporary hard-currency loans - has focused only on “reforms” that would enable countries to attract new capital. It might also usefully emphasize debt relief so that the burden of bad lending would be shared between creditors and debtors. But preventing an American or European slump is no less important; either one would deepen the world economy’s downturn. The danger might ease if the Federal Reserve and Germany’s Bundesbank lowered interest rates. As yet, they show no signs of doing so. Even if the worst doesn’t occur, the world will never be the same. Global capitalism won’t soon regain its aura of infallibility. There was nothing wrong with the theory. Free trade and the free movement of capital would, in a world where everyone worshiped efficiency and profits, enrich all nations. The trouble is that we do not live in such a world.
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