rob wade capital controls
The policy backlash is ‘the most serious challenge yet to the free-market orthodoxy that the globe has embraced since the end of the Cold War’ The Wall Street Journal, 4 September 1998.
‘There is an ideological battle going on over capital controls, and it is huge’ World Bank senior advisor on capital markets and Asian specialist, 1 September 1998.
‘The relative stability of China and India, countries whose restrictions on international financial flows have insulated them to some extent from the current maelstrom, has led some to conclude that the relatively free flow of capital is detrimental to economic growth and standards of living. Such conclusions, in my judgement, are decidedly mistaken’ Federal Reserve Chairman Alan Greenspan, to us House of Representatives, 16 September 1998.
‘It would be a catastrophe if countries were to develop the idea that somehow withdrawing from the global system was right and that building the foundation for a market economy was wrong.’ us Deputy Treasury Secretary Lawrence Summers, 9 September 1998.
Former Federal Reserve Chairman Paul Volker said the imf’s stance was over-influenced by the us Treasury, and left many small economies dangerously exposed to turbulent capital flows. ‘The visual image of a vast sea of liquid capital strikes me as apt. The big and inevitable storms through which a great liner like the u.s.s. United States of America can safely sail will surely swamp even the sturdiest South Pacific canoe.’
‘Financial markets are given to excesses and if a boom/bust sequence progresses beyond a certain point it will never revert to where it came from. Instead of acting like a pendulum, financial markets have recently acted more like a wrecking ball, knocking over one economy after another’ George Soros, international financier, to us House of Representatives, 16 September 1998.
‘Marx’s view of free enterprise is now being echoed by many business men who would rather be flogged than labelled Marxists’ John Cassidy, ‘The Next Great Thinker: the Return of Karl Marx’, The New Yorker, 20–27 October 1997.
We may well be on the verge of a world slump.footnote1 The Thai crisis of July 1997 soon became the Southeast Asian crisis, then became the Asian crisis in October, and now has become the Great Asian Depression, The sudden intensification of insecurity and poverty that confronts hundreds of millions of people in Asia makes this one of the worst economic calamities of the twentieth century. Spending on education, health, and social assistance is shrinking rapidly, creating gaping ‘social deficits’.footnote2 The abrupt shift to negative growth in what had been the world’s fastest growing region has sent a contractionary wave coursing through the world economy, setting off a cycle of events elsewhere.
The Gathering Slump
Commodity prices have fallen to their lowest levels in more than twenty years.footnote3 From Venezuela to Chile to Canada to New Zealand to Nigeria to South Africa to Russia—and places in between—commodity-based economies are finding it hard to sustain economic growth and public spending.
The Asian crisis has also triggered a ‘gestalt shift’ in the minds of the owners and managers of banks, hedge funds, pension funds, and other forms of mobile capital. They now see danger everywhere. Their pullout from one market causes pullout from others. The Morgan Stanley Capital International Index of emerging market stocks plummeted 33 per cent between mid-July and late August. In Europe the knockon effects of Asia have been strong enough to force the Italian central bank to intervene to support the lira. Figure 1 shows the path of an index of financial market performance covering the industrial and emerging markets from the start of 1997 to the start of September 1998. Since April it has been mostly in free-fall.
On the face of it, the dynamics are odd. In normal times, short-term capital has an incentive to move to countries with current account surpluses and flee from those with deficits. Asia is building up huge current account surpluses. Korea’s is running at an annualized rate of about 10 per cent of gdp, which is enormous. Thailand’s is nearly as big. Malaysia’s surplus is likely to be about 2 per cent of gdp. But foreign bankers and portfolio investors have been fleeing these economies. China has the second biggest foreign exchange reserves in the world after Japan and an enormous current account surplus, yet there are fears of a renmimbi devaluation. Hong Kong has a current account surplus and $96 billion of reserves—about the biggest reserves per person in the world—and the Chinese government has pledged it will use its $140 billion of reserves to support the Hong Kong dollar. Yet the Hong Kong dollar and stock market are under intense speculative attack. So is the Taiwan dollar, despite Taiwan’s towering exchange reserves and current account surpluses. The Japanese current account surplus is a large 3 per cent of gdp and Japan has the biggest net creditor position in the world by far. Yet foreign capital is not racing to take positions in the expectation of yen appreciation.
The answer to the puzzle lies partly in the fact that the current account surpluses result from import compression more than export expansion. The four most badly affected economies—Korea, Thailand, Malaysia, Indonesia—have undergone import falls of 30–40 per cent in the past year. The falls reflect deep recessions, which spell debt default, bankruptcies, still lower domestic interest rates and possible further ‘beggar thy neighbour’ currency devaluations.
The Crisis Spreads
The Asian surpluses, of course, must be matched by deficits elsewhere. The western hemisphere economies have been thrown into deficit, and Latin America has now entered a full-blown crisis. Since June money has been withdrawn from Latin American money funds at three times the rate of withdrawal from Asian and Pacific funds.footnote4 Venezuela’s current account has gone deeply into deficit and a bolivar devaluation is imminent. Colombia has already devalued in early September. The Mexican current account deficit has widened and the peso has fallen against the us dollar. Chile now has a current account deficit of around 5 per cent of gdp and its currency has been devaluing. Despite a current account deficit of 4 per cent of gdp and a fiscal deficit of 7 per cent of gdp, the Brazilian government is intent on holding the peg between the real and the us dollar. The Argentinean government is also intent on maintaining the dollar peg despite a 4 per cent current account deficit. Given the much higher risk premium now demanded by the owners and managers of financial capital in emerging markets, the exchange rate pegs of Brazil and Argentina seem to be unsustainable. Even the Canadian dollar has fallen to its lowest level ever against the us dollar, partly because of the commodity collapse and partly merely because of the prophecy that it would fall. The oecd predicted in early 1998 that Canada would have the fastest growth of any oecd economy in the coming year, a prediction now seen as wildly inaccurate.
The huge current account imbalances—deficits in some regions and surpluses in others—are causing instability and contraction. Governments of economies experiencing Asian-imposed deficits are responding with some combination of, (i) currency devaluation; (ii) cuts in imports—including the reintroduction of quantitative restrictions; (iii) increases in export subsidies, that increase the effective devaluation; and (iv) cuts in domestic demand by monetary and fiscal contraction. The Asian surplus countries are trying to turn on the monetary gas and stimulate their exports as a way to regenerate growth and wipe out the debt mountain—but from very depressed levels of demand. Deflation + debt + highly integrated international financial markets = dynamite.
The us and Europe, at the core of the world economy, have so far benefited from debt repayments by the rest of the world, as well as by the flight to quality that boosts the value of their currencies and cheapens their imports.footnote5 But they are not the oases of expansion that they appear. As the rest of the world tries to escape from difficulties by exporting more to them and importing less, they are hurtling towards a deficit precipice. The us dollar is currently being held aloft by its safe haven status, making imports cheap and exports expensive. The us is already running a current account deficit of almost 3 per cent of gdp. On the ground, the us west coast’s ports are at their busiest in 20 years. The number of containers arriving in August at the port of Long Beach, which together with the neighbouring port of Los Angeles handles a quarter of us seaborne trade, was 7 per cent higher than the previous all-time monthly record. But more than half of the returning containers were shipped out empty, a figure more than 100 per cent larger than in the same month last year.footnote6 These figures represent an echoing testament to the tumbling demand for us exports. The gathering Latin American and Canadian devaluations and contractions will cut us exports still further—some 30 per cent of us trade is with Canada and Latin America. As Asia cranks up its export machine and as Latin American and Canadian exports become more competitive at newly devalued exchange rates, us imports will surge again. The current account deficit will grow even bigger; profits will be squeezed even more.
At some point, footloose capital will flee from a country with so severe a balance of payments disequilibrium and profits squeeze. But the us has the lowest aggregate savings rate among the oecd countries—gross domestic savings equal to 15 per cent of gdp, equal with the uk at the bottom of the scale—and its household savings rate of 1 per cent of disposable income is the lowest of any major industrial economy since the Second World War. It needs foreign savings to sustain its consumption and investment. It also needs a high stock market for the same purpose. But the interest rates needed to pull in the foreign savings may be too high to sustain the stock market. Eroded profit margins and a fallen stock market will cause multiplying falls in both consumption and investment. So even the us may succumb to the gathering slump, as may Europe.
The Crisis of Crisis Management
The crisis is also one of global crisis management. In Asia, the imf not only led but in effect monopolized the international rescue effort, with conspicuously little regional coordination, and with the World Bank and the Asian Development Bank in distinctly subordinate roles. Japan’s August 1997 proposal for a $100 billion Asia Monetary Fund, with pledges mostly from Japan, China, Hong Kong, Taiwan, and Singapore, was shot down by the us Treasury, not wanting a competitor to the imf outside of its control.footnote7 The Asia Fund could probably have deterred the currency runs and stopped the crisis from becoming even a fraction of what it has become, because speculating against a currency backed by $100 billion is altogether less attractive than speculating against one backed by only $25 billion. The Treasury’s failure to support it was a major mistake as regards dealing with the crisis, if not in terms of us foreign policy objectives in Asia.footnote8
The Fund’s basic strategy was two-fold. First, to promote the idea that the crisis represented the well-warranted punishment of Asian economies by international financial markets for the governments’ gross mismanagement, As First Deputy Managing Director Stanley Fischer kept repeating, the crisis was due to ‘homegrown causes’—that became, in the words of other commentators, ‘Asian crony capitalism’. This was propounded by an organisation, that until September 1997, lavished praise on these countries’ economic performance and attributed it in good part to their financial liberalization. Second, the Fund mobilized large stand-by credits and loans in return for changes in government policies. The changes included: (i) government guarantees of private sector foreign debt; (ii) domestic demand contraction by sharp increases in real interest rates and government budget surpluses; and (iii) structural reforms in finance, corporate governance, labour markets, and so on, going far beyond what was necessary to stabilize the situation. These reforms targeted marketconstraining institutional arrangements of a kind common in majorEuropean industrial countries, which the Fund would not dare demand be reformed—in the unlikely event that crisis-affected European countries called on it for help. Moreover, the Fund then disbursed the committed funds very slowly in order to force the restructuring, in its own version of the game of chicken: conditionality in pursuit of restructuring dominated disbursement in pursuit of ending the runs on the currencies.
A Failed Strategy
The strategy has been criticized from across the political spectrum, especially since it has been seen to have failed. The requirement that the government guarantee foreign private debt, thereby largely protecting foreign creditor banks from default, encouraged them to slow down rescheduling their short-term Asian loans.footnote9 This exacerbated the hard currency squeeze on local debtors and sent them rushing to buy foreign exchange to cover their increased dollar needs, adding to the downward pressure on the exchange rate. Domestic demand contraction accelerated the momentum towards corporate insolvency and social disorder, so that capital fled, or did not return, despite high interest rates. The insistence on major structural reforms sent a signal that the economies were basically unsound, redoubling capital exit. The imf claims that the situation would have been even worse with any other strategy—such as one that emphasizes monetary and fiscal stimulus and limits policy reform to those things directly needed to bring about expansion.footnote10 But, by now, the Fund’s claims ring hollow. The organisation has lost credibility in the region.
The Policy Backlash
There are three broad ways to escape the depressionary effects of debt and deflation. One is monetary and fiscal expansion sufficient to devalue or vaporize financial claims through inflation. This is not favoured by the holders of financial assets or organisations that represent their interests. A second is bankruptcy and default that destroys the debt, but at the cost of crisis and collapse. A third is dogged repayment over a long period, accompanied by a painful squeeze of the real economy—the ‘water torture’ route.footnote11 This tends to be the preferred option of financial capitalists and of the imf.
Until recently, most Asian governments generally acquiesced in the imf’s strategy, in part because they needed its money and approval, and in part because they believed in it. Now that the cost of thisoption has become apparent, a policy backlash has begun. It constitutes what The Wall Street Journal calls ‘the most serious challenge yet to the free-market orthodoxy that the globe has embraced since the end of the Cold War’.footnote12
In the face of steep losses of output and the threat of social unrest, and with huge current account surpluses to cushion the need for western short-term capital, Asian governments are lowering interest rates and promoting a Keynesian fiscal expansion. Indeed, they are becoming more interventionist across the board in order to regain control of their economies. Some have described their actions as a rejection of Anglo-American capitalism, and look to China as a model for the way it has escaped relatively unscathed. Their turning away from the us and towards China may have important long-term implications. And the mood is spreading well beyond Asia. ‘The “free market” path of development—from developing to emerging to a developed nation—has failed to live up to the expectations of the people of the South’, said South African Deputy President Thabo Mbeki recently.footnote13
This backlash may be the harbinger of the second stage of Karl Polanyi’s ‘double movement’. Polanyi identified a recurrent pattern in the evolution of capitalism, in which a period of free-market policies gave rise to such instability and inequality as to trigger a social and political response, resulting in tighter social and political controls over markets—especially over finance.footnote14 From this perspective, we have been in the first stage for the past twenty years—the stage of market supremacy over governments and society. The Asia crisis and its spreading contagion may be leading to the second stage, the reordering of power away from markets and towards governments.
The Swing to Capital Controls
In particular, Asian governments and policy analysts are urgently discussing whether they should continue to allow financial capital to flow freely across their borders, as the imf and the us Treasury have insisted they should. They realize that whatever the balance between ‘real’ and ‘financial’ causes of the crisis, the capital account opening that they undertook mostly in the 1990s is centrally implicated. Capital account liberalization first allowed large and uncoordinated inflows and then torrential outflows in the second half of 1997 and on into 1998. The switch in flows between 1996 and 1997 amounted to some 11 per cent of the combined gdp of the five main crisis-affected countries—the asean four plus Korea. No nation can survive such a whipsaw without great disruption, especially when weakly institutionalized politicalstructures are unable to support a negotiated sharing of the burden. China has escaped the direct impacts of the crisis in large part because its currency was nonconvertible, preventing both inflows and outflows of hot money—but not preventing foreign direct investment, of which China has had lots. Much the same applies to India.
Malaysia
Malaysia, which had been amongst the most open economies on the capital account, has gone furthest in reintroducing capital controls—explicitly following China. The new special functions minister, Diam Zainuddin, announced that ‘Malaysia’s new currency controls are based on China’s model’.footnote15
The exchange controls slapped on at the end of August in effect withdraw the ringgit from the international currency trading system.footnote16 Exporters are now required to sell their foreign exchange to the central bank at a fixed rate; that currency is then sold for approved payments to foreigners, mainly for imports and debt service. This system makes the ringgit convertible on the current—or trade—account, as before, but not on the capital account—it prevents buying of foreign exchange for speculative purposes. Residents cannot transfer ringgits to foreign bank accounts, and can take only a limited amount of foreign exchange for purposes of foreign travel. Non-residents can convert ringgits into foreign currency only with the approval of the central bank. Sellers of Malaysian securities can only convert their ringgits into foreign exchange once they have held the security for 12 months. Holders of offshore ringgit accounts have until 1 October to repatriate their ringgits, after which repatriation is illegal. With this last move the government ensures that the imposition of exchange controls, far from generating the always threatened punishment, capital flight, yields a short-term debt-free capital inflow.
Malaysia has not turned away from all forms of foreign capital. The controls are aimed specifically at short-term flows. They do not extend to foreign direct investment or the repatriation of interest, dividends and profits.footnote17 Current account transactions remain convertible; Malaysia remains committed to free trade. The Malaysian stock market rose in the days following the exchange controls.
Prime Minister Mahathir accompanied this move with a stinging indictment of free markets. ‘The free market system has failed and failed disastrously’, he said. He added, ‘We have asked the InternationalMonetary Fund to have some regulation on currency trading but it looks like they are not interested.’ He proceeded to sack Anwar Ibrahim, the deputy prime minister and finance minister and his heir apparent. Anwar had reassured international investors with his orthodox free-market views and willingness to impose austerity measures. Although Malaysia had not taken imf money, and therefore had not come under a formal imf program, Anwar had followed the imf both in its broad strategy and in its specific advice to Malaysia. The previous week, Mahathir had prompted the resignation of the head of the central bank and his deputy over the forthcoming capital controls and monetary expansion.
Mixed Reactions
A Chinese official commented with evident satisfaction, ‘Malaysia is returning to the route which China has been taking’.footnote18 ‘Tokyo supports capital control by Asian economies’, said the headline about the Japanese response. The story reports that ‘Japanese officials and analysts are supporting the recent moves by Malaysia, Hong Kong and Taiwan to step up capital controls to defend themselves from global speculators or erratic flows of short-term capital.’ As an official at Japan’s Ministry of Finance put it, ‘Japan was once a developing country and we had restrictions of all kinds, including controls in the foreign exchange market.’footnote19 The former president of the Philippines, Fidel Ramos, said, ‘One must sympathize with Kuala Lumpur’s effort to defend itself from what it sees as a kind of global laissez-faire capitalism which is going out of control’.footnote20
The imf’s managing director, Michel Camdessus, claimed that Malaysia’s exchange controls were ‘dangerous and indeed harmful’.footnote21 First Deputy Managing Director Stanley Fischer said that foreign exchange controls introduced by Malaysia were a step backward and would bring no long-term benefit.footnote22
us Treasury Secretary Rubin said that dramatic economic policy shifts by Malaysia were of concern to the us and were not the best way to promote economic growth. ‘I think the actions Malaysia took yesterday are of concern and obviously it is not the path that we think best lends itself to economic growth and stability over time. I think we’ll be watching what happens in Malaysia and see what occurs there over time’.footnote23 The us undersecretary for international trade saidAsian nations must not follow Malaysia’s lead, but adhere to open market principles. ‘The supposed alternatives—exchange controls, import substitution and state management—do not work. The failed nostrums of the past are not the answer’.
Western financiers chorused disapproval. Salomon Brothers described Mahathir’s measures as ‘regressive’ and ‘ultimately destined to failure’. Crédit Lyonnais Securities (Asia) said that capital controls would turn Malaysia into ‘an equity black hole’ for foreigner investors. Indosuez W.I. Carr said the measures make ‘Malaysia virtually uninvestable’.
The underlying assumption is that Malaysia, notwithstanding one of the highest savings rates in the world—37 per cent of gdp in 1995—needs Western finance not only for immediate refinancing purposes but also in the longer term. ‘With capital controls slapped on many investors will not return to Malaysia for a decade or more, regardless of how attractive their asset values become. The capital account problems will be dragged out for many years. Any prospects of getting this crisis over with by “doing the right thing” have been shot.’footnote24
Mahathir has been voicing anti-market sentiments for some time, earning himself the reputation for being what might politely be called a lone voice. But even in economies that had been celebrated as exemplars of free-market capitalism, policies are being implemented that make free-market economists throw up their hands in horror.
Hong Kong
Hong Kong is the most dramatic case. The economy is likely to experience a contraction of gross domestic product by over 4 per cent in 1998, and throughout the summer of 1998 faced intense attacks by hedge funds against the Hong Kong dollar—pegged to the us dollar in a quasi-currency board arrangement. The hedge funds calculated that, when competitor countries had devalued by 30–40 per cent and more against the us dollar, the Hong Kong dollar would have to be devalued as well. In what came to be known as the ‘double play’, hedge funds sold the Hong Kong dollar short—borrowing hk dollars, selling those borrowed dollars back to the Hong Kong Monetary Authority at the fixed rate, expecting that, by the time they had to repay their borrowed dollars, the exchange rate would have fallen. At the same time they sold Hong Kong stocks short—borrowing stocks they did not own (from an investment bank with a stock lending operation, such as Morgan Stanley) and selling the borrowed stocks, in the expectation of later repaying the borrowed stocks at a lower cost. If the Hong Kong Monetary Authority raised domestic interest rates to defend the currency peg, the local stock market would fall, and the speculators would benefit by being able to repay their borrowed stock at a lower price. If the strain of higher interest rates became so great that the government devalued the currency, the speculators could repay their borrowed hk dollars at a cheaper price—and the currency fall would allow them to repay their borrowed equities at a cheaper price, even if the stock market did not fall. Either way, the hedge funds would win.
Hedge Funds Versus the National Interest
In response the government has been intervening to restrict various forms of trading on the stock market so as to ease the pressure on the Hong Kong dollar. And it has bought up about 6 per cent of the stock market, acquiring a national stake in the private sector at the cost of 15 per cent of its foreign exchange reserves in the last two weeks of August alone. The aim was to hit the speculators by intervening to keep the price of stocks high, to show them that selling stocks short was not a one-way bet. It worked: the hedge funds took big losses and retreated.
‘After Hong Kong markets shut [on 28 August] Hong Kong’s Financial Secretary Donald Tsang said the government would propose new laws to restrict short selling and stock borrowing, which enable people to bet against stocks. He said it was in the public’s interest to do so.’footnote25 In the public’s interest to restrict the right of the owners and managers of financial assets to buy and sell freely? This is not what one expects from Hong Kong. The government is also considering ways to restrict large movements of money into and out of Hong Kong’s markets.
The Hong Kong events constitute a telling illustration of the purely casinoesque nature of the hedge fund operations. It is ironic that the hedge funds, arch champions of free financial markets, have driven Hong Kong to adopt policies that resemble those of China more than those of British colonial Hong Kong—and have driven Hong Kong into dependence on China. The Chinese government was not only well informed about the Hong Kong government’s interventions, it was a player in the game, providing an amply-endowed fire-fighting fund specifically for use in protecting the Hong Kong dollar.
Western bankers and investors are furious with the Hong Kong Monetary Authority for daring to intervene to fend off unwanted speculation, notwithstanding the government’s meticulously explained defence. Without a level playing field, they say, Hong Kong will be passed over by investors, falling into well-deserved economic oblivion.footnote26 ‘Does any country where the regulator has a 10 per cent stake in its number one company have financial credibility? The answer is No’, said the head of research at a derivatives trading firm.footnote27 ‘Spiteful Capital Controls’ was the headline in a Morgan Stanley newsletter, which went on to say, ‘Policymakers [in Hong Kong and elsewhere] appear to believe that speculative attacks on their currency have nothing to do with economic fundamentals and everything to do with evil speculators’.footnote28
Taiwan
Even Taiwan, which has weathered the crisis better than most others, has seen a 7 per cent fall in its export earnings in the first half of 1998 compared with first half of 1997, and a 20 per cent stock market fall between March and August 1998. Notwithstanding its huge foreign exchange reserves, it too faces intense speculative pressure against its currency. Asked ‘Is your currency under pressure from the yen?’, the prime minister replied, ‘Yes, day after day, day after day’.footnote29
The policy response has been to insulate the New Taiwan dollar from the region’s currency decline, and bar foreign short-term investors while encouraging local investors. The government has been intensifying existing controls since May. The central bank virtually shut down trade in futures instruments which had been used to pressure the local currency. Inflows of funds destined for the stock market are subject to central bank approval, allowing the authorities to influence demand for the currency. The offshore market in New Taiwan dollars has been closed. At the end of August, the central bank issued a sharp warning that foreign currency speculators such as George Soros would find ‘no quarter’ to operate in domestic currency markets.footnote30
On 1 September President Lee Teng-hui met with a group of 20 investment professionals and announced a variety of further interventions. As a Taiwan currency analyst said, ‘The president coming out and meeting with brokerages is very rare. The government is getting serious. They are trying to block speculation as much as they can.’footnote31
Korea
Throughout this period, Korea has kept in place some capital account restrictions on the convertibility of the won. Also, as noted, Korea is now earning huge current account surpluses; its foreign exchange reserves as of August 1998 stand at $41 billion, an all-time record, exceeding the imf’s target of $40 billion by the end of 1998. This reflects, however, savage import cut-backs, including in raw materials and capital goods.
Though the Korean government has not moved to re-impose Malaysian-type exchange controls, it has become much more interventionist—and much more authoritarian. Many labour leaders are in jail, and riot police are deployed in force against strikers or demonstrators against the government. But capital, as well as labour, is being disciplined. The new labour law gives firms the right to fire more or less at will; but the government has pressured the big firms not to fire en masse. The government is pressing the big companies to merge and restructure in order to manage the problems of excess capacity—in semiconductors and petrochemicals, for example. The companies are demanding that the government take on all the bad debts of the merged entities. The government is offering less. The result is a standoff. The government is also committed in principle to bringing in more foreign ownership, and the big companies are resisting. The result is another stand-off—though, in practice, the situation is less than straightforward, because the government has prevented Microsoft from taking over Korea’s biggest software firm, and has resisted the sale of Kia Motors and two large banks to foreigners.
In the financial sector, the government is moving quickly, unlike Japan, to buy up bad loans from the banks and force small banks to merge with larger ones, putting the banking sector on the road to recovery—though many firms are still finding credit difficult to obtain, because banks continue to try to meet the Basle standards of capital adequacy, as demanded by oecd membership. The major question now is whether the government will take the banks off the Basle standards, which might greatly alarm international financial markets. The even more important question concerns the source of finance for the promised fourfold package: Keynesian expansion; social safety net—the absence of which could cost the government its survival; public bailout of the banks; and public purchase of the debt of some of the biggest companies.footnote32
Japan
Potentially, the most dramatic development of all may come from the current discussion within Japan on the subject of reintroducing capital controls. Finance Minister Miyazawa, giving a press conference in early September, was asked whether Japan was studying the option of erecting capital controls to protect against speculative attacks. In the words of the Reuters report, ‘He said it was too early to discuss that at the government level but added he had asked Toyo Gyohten, a special advisor
‘There is an ideological battle going on over capital controls, and it is huge’ World Bank senior advisor on capital markets and Asian specialist, 1 September 1998.
‘The relative stability of China and India, countries whose restrictions on international financial flows have insulated them to some extent from the current maelstrom, has led some to conclude that the relatively free flow of capital is detrimental to economic growth and standards of living. Such conclusions, in my judgement, are decidedly mistaken’ Federal Reserve Chairman Alan Greenspan, to us House of Representatives, 16 September 1998.
‘It would be a catastrophe if countries were to develop the idea that somehow withdrawing from the global system was right and that building the foundation for a market economy was wrong.’ us Deputy Treasury Secretary Lawrence Summers, 9 September 1998.
Former Federal Reserve Chairman Paul Volker said the imf’s stance was over-influenced by the us Treasury, and left many small economies dangerously exposed to turbulent capital flows. ‘The visual image of a vast sea of liquid capital strikes me as apt. The big and inevitable storms through which a great liner like the u.s.s. United States of America can safely sail will surely swamp even the sturdiest South Pacific canoe.’
‘Financial markets are given to excesses and if a boom/bust sequence progresses beyond a certain point it will never revert to where it came from. Instead of acting like a pendulum, financial markets have recently acted more like a wrecking ball, knocking over one economy after another’ George Soros, international financier, to us House of Representatives, 16 September 1998.
‘Marx’s view of free enterprise is now being echoed by many business men who would rather be flogged than labelled Marxists’ John Cassidy, ‘The Next Great Thinker: the Return of Karl Marx’, The New Yorker, 20–27 October 1997.
We may well be on the verge of a world slump.footnote1 The Thai crisis of July 1997 soon became the Southeast Asian crisis, then became the Asian crisis in October, and now has become the Great Asian Depression, The sudden intensification of insecurity and poverty that confronts hundreds of millions of people in Asia makes this one of the worst economic calamities of the twentieth century. Spending on education, health, and social assistance is shrinking rapidly, creating gaping ‘social deficits’.footnote2 The abrupt shift to negative growth in what had been the world’s fastest growing region has sent a contractionary wave coursing through the world economy, setting off a cycle of events elsewhere.
The Gathering Slump
Commodity prices have fallen to their lowest levels in more than twenty years.footnote3 From Venezuela to Chile to Canada to New Zealand to Nigeria to South Africa to Russia—and places in between—commodity-based economies are finding it hard to sustain economic growth and public spending.
The Asian crisis has also triggered a ‘gestalt shift’ in the minds of the owners and managers of banks, hedge funds, pension funds, and other forms of mobile capital. They now see danger everywhere. Their pullout from one market causes pullout from others. The Morgan Stanley Capital International Index of emerging market stocks plummeted 33 per cent between mid-July and late August. In Europe the knockon effects of Asia have been strong enough to force the Italian central bank to intervene to support the lira. Figure 1 shows the path of an index of financial market performance covering the industrial and emerging markets from the start of 1997 to the start of September 1998. Since April it has been mostly in free-fall.
On the face of it, the dynamics are odd. In normal times, short-term capital has an incentive to move to countries with current account surpluses and flee from those with deficits. Asia is building up huge current account surpluses. Korea’s is running at an annualized rate of about 10 per cent of gdp, which is enormous. Thailand’s is nearly as big. Malaysia’s surplus is likely to be about 2 per cent of gdp. But foreign bankers and portfolio investors have been fleeing these economies. China has the second biggest foreign exchange reserves in the world after Japan and an enormous current account surplus, yet there are fears of a renmimbi devaluation. Hong Kong has a current account surplus and $96 billion of reserves—about the biggest reserves per person in the world—and the Chinese government has pledged it will use its $140 billion of reserves to support the Hong Kong dollar. Yet the Hong Kong dollar and stock market are under intense speculative attack. So is the Taiwan dollar, despite Taiwan’s towering exchange reserves and current account surpluses. The Japanese current account surplus is a large 3 per cent of gdp and Japan has the biggest net creditor position in the world by far. Yet foreign capital is not racing to take positions in the expectation of yen appreciation.
The answer to the puzzle lies partly in the fact that the current account surpluses result from import compression more than export expansion. The four most badly affected economies—Korea, Thailand, Malaysia, Indonesia—have undergone import falls of 30–40 per cent in the past year. The falls reflect deep recessions, which spell debt default, bankruptcies, still lower domestic interest rates and possible further ‘beggar thy neighbour’ currency devaluations.
The Crisis Spreads
The Asian surpluses, of course, must be matched by deficits elsewhere. The western hemisphere economies have been thrown into deficit, and Latin America has now entered a full-blown crisis. Since June money has been withdrawn from Latin American money funds at three times the rate of withdrawal from Asian and Pacific funds.footnote4 Venezuela’s current account has gone deeply into deficit and a bolivar devaluation is imminent. Colombia has already devalued in early September. The Mexican current account deficit has widened and the peso has fallen against the us dollar. Chile now has a current account deficit of around 5 per cent of gdp and its currency has been devaluing. Despite a current account deficit of 4 per cent of gdp and a fiscal deficit of 7 per cent of gdp, the Brazilian government is intent on holding the peg between the real and the us dollar. The Argentinean government is also intent on maintaining the dollar peg despite a 4 per cent current account deficit. Given the much higher risk premium now demanded by the owners and managers of financial capital in emerging markets, the exchange rate pegs of Brazil and Argentina seem to be unsustainable. Even the Canadian dollar has fallen to its lowest level ever against the us dollar, partly because of the commodity collapse and partly merely because of the prophecy that it would fall. The oecd predicted in early 1998 that Canada would have the fastest growth of any oecd economy in the coming year, a prediction now seen as wildly inaccurate.
The huge current account imbalances—deficits in some regions and surpluses in others—are causing instability and contraction. Governments of economies experiencing Asian-imposed deficits are responding with some combination of, (i) currency devaluation; (ii) cuts in imports—including the reintroduction of quantitative restrictions; (iii) increases in export subsidies, that increase the effective devaluation; and (iv) cuts in domestic demand by monetary and fiscal contraction. The Asian surplus countries are trying to turn on the monetary gas and stimulate their exports as a way to regenerate growth and wipe out the debt mountain—but from very depressed levels of demand. Deflation + debt + highly integrated international financial markets = dynamite.
The us and Europe, at the core of the world economy, have so far benefited from debt repayments by the rest of the world, as well as by the flight to quality that boosts the value of their currencies and cheapens their imports.footnote5 But they are not the oases of expansion that they appear. As the rest of the world tries to escape from difficulties by exporting more to them and importing less, they are hurtling towards a deficit precipice. The us dollar is currently being held aloft by its safe haven status, making imports cheap and exports expensive. The us is already running a current account deficit of almost 3 per cent of gdp. On the ground, the us west coast’s ports are at their busiest in 20 years. The number of containers arriving in August at the port of Long Beach, which together with the neighbouring port of Los Angeles handles a quarter of us seaborne trade, was 7 per cent higher than the previous all-time monthly record. But more than half of the returning containers were shipped out empty, a figure more than 100 per cent larger than in the same month last year.footnote6 These figures represent an echoing testament to the tumbling demand for us exports. The gathering Latin American and Canadian devaluations and contractions will cut us exports still further—some 30 per cent of us trade is with Canada and Latin America. As Asia cranks up its export machine and as Latin American and Canadian exports become more competitive at newly devalued exchange rates, us imports will surge again. The current account deficit will grow even bigger; profits will be squeezed even more.
At some point, footloose capital will flee from a country with so severe a balance of payments disequilibrium and profits squeeze. But the us has the lowest aggregate savings rate among the oecd countries—gross domestic savings equal to 15 per cent of gdp, equal with the uk at the bottom of the scale—and its household savings rate of 1 per cent of disposable income is the lowest of any major industrial economy since the Second World War. It needs foreign savings to sustain its consumption and investment. It also needs a high stock market for the same purpose. But the interest rates needed to pull in the foreign savings may be too high to sustain the stock market. Eroded profit margins and a fallen stock market will cause multiplying falls in both consumption and investment. So even the us may succumb to the gathering slump, as may Europe.
The Crisis of Crisis Management
The crisis is also one of global crisis management. In Asia, the imf not only led but in effect monopolized the international rescue effort, with conspicuously little regional coordination, and with the World Bank and the Asian Development Bank in distinctly subordinate roles. Japan’s August 1997 proposal for a $100 billion Asia Monetary Fund, with pledges mostly from Japan, China, Hong Kong, Taiwan, and Singapore, was shot down by the us Treasury, not wanting a competitor to the imf outside of its control.footnote7 The Asia Fund could probably have deterred the currency runs and stopped the crisis from becoming even a fraction of what it has become, because speculating against a currency backed by $100 billion is altogether less attractive than speculating against one backed by only $25 billion. The Treasury’s failure to support it was a major mistake as regards dealing with the crisis, if not in terms of us foreign policy objectives in Asia.footnote8
The Fund’s basic strategy was two-fold. First, to promote the idea that the crisis represented the well-warranted punishment of Asian economies by international financial markets for the governments’ gross mismanagement, As First Deputy Managing Director Stanley Fischer kept repeating, the crisis was due to ‘homegrown causes’—that became, in the words of other commentators, ‘Asian crony capitalism’. This was propounded by an organisation, that until September 1997, lavished praise on these countries’ economic performance and attributed it in good part to their financial liberalization. Second, the Fund mobilized large stand-by credits and loans in return for changes in government policies. The changes included: (i) government guarantees of private sector foreign debt; (ii) domestic demand contraction by sharp increases in real interest rates and government budget surpluses; and (iii) structural reforms in finance, corporate governance, labour markets, and so on, going far beyond what was necessary to stabilize the situation. These reforms targeted marketconstraining institutional arrangements of a kind common in majorEuropean industrial countries, which the Fund would not dare demand be reformed—in the unlikely event that crisis-affected European countries called on it for help. Moreover, the Fund then disbursed the committed funds very slowly in order to force the restructuring, in its own version of the game of chicken: conditionality in pursuit of restructuring dominated disbursement in pursuit of ending the runs on the currencies.
A Failed Strategy
The strategy has been criticized from across the political spectrum, especially since it has been seen to have failed. The requirement that the government guarantee foreign private debt, thereby largely protecting foreign creditor banks from default, encouraged them to slow down rescheduling their short-term Asian loans.footnote9 This exacerbated the hard currency squeeze on local debtors and sent them rushing to buy foreign exchange to cover their increased dollar needs, adding to the downward pressure on the exchange rate. Domestic demand contraction accelerated the momentum towards corporate insolvency and social disorder, so that capital fled, or did not return, despite high interest rates. The insistence on major structural reforms sent a signal that the economies were basically unsound, redoubling capital exit. The imf claims that the situation would have been even worse with any other strategy—such as one that emphasizes monetary and fiscal stimulus and limits policy reform to those things directly needed to bring about expansion.footnote10 But, by now, the Fund’s claims ring hollow. The organisation has lost credibility in the region.
The Policy Backlash
There are three broad ways to escape the depressionary effects of debt and deflation. One is monetary and fiscal expansion sufficient to devalue or vaporize financial claims through inflation. This is not favoured by the holders of financial assets or organisations that represent their interests. A second is bankruptcy and default that destroys the debt, but at the cost of crisis and collapse. A third is dogged repayment over a long period, accompanied by a painful squeeze of the real economy—the ‘water torture’ route.footnote11 This tends to be the preferred option of financial capitalists and of the imf.
Until recently, most Asian governments generally acquiesced in the imf’s strategy, in part because they needed its money and approval, and in part because they believed in it. Now that the cost of thisoption has become apparent, a policy backlash has begun. It constitutes what The Wall Street Journal calls ‘the most serious challenge yet to the free-market orthodoxy that the globe has embraced since the end of the Cold War’.footnote12
In the face of steep losses of output and the threat of social unrest, and with huge current account surpluses to cushion the need for western short-term capital, Asian governments are lowering interest rates and promoting a Keynesian fiscal expansion. Indeed, they are becoming more interventionist across the board in order to regain control of their economies. Some have described their actions as a rejection of Anglo-American capitalism, and look to China as a model for the way it has escaped relatively unscathed. Their turning away from the us and towards China may have important long-term implications. And the mood is spreading well beyond Asia. ‘The “free market” path of development—from developing to emerging to a developed nation—has failed to live up to the expectations of the people of the South’, said South African Deputy President Thabo Mbeki recently.footnote13
This backlash may be the harbinger of the second stage of Karl Polanyi’s ‘double movement’. Polanyi identified a recurrent pattern in the evolution of capitalism, in which a period of free-market policies gave rise to such instability and inequality as to trigger a social and political response, resulting in tighter social and political controls over markets—especially over finance.footnote14 From this perspective, we have been in the first stage for the past twenty years—the stage of market supremacy over governments and society. The Asia crisis and its spreading contagion may be leading to the second stage, the reordering of power away from markets and towards governments.
The Swing to Capital Controls
In particular, Asian governments and policy analysts are urgently discussing whether they should continue to allow financial capital to flow freely across their borders, as the imf and the us Treasury have insisted they should. They realize that whatever the balance between ‘real’ and ‘financial’ causes of the crisis, the capital account opening that they undertook mostly in the 1990s is centrally implicated. Capital account liberalization first allowed large and uncoordinated inflows and then torrential outflows in the second half of 1997 and on into 1998. The switch in flows between 1996 and 1997 amounted to some 11 per cent of the combined gdp of the five main crisis-affected countries—the asean four plus Korea. No nation can survive such a whipsaw without great disruption, especially when weakly institutionalized politicalstructures are unable to support a negotiated sharing of the burden. China has escaped the direct impacts of the crisis in large part because its currency was nonconvertible, preventing both inflows and outflows of hot money—but not preventing foreign direct investment, of which China has had lots. Much the same applies to India.
Malaysia
Malaysia, which had been amongst the most open economies on the capital account, has gone furthest in reintroducing capital controls—explicitly following China. The new special functions minister, Diam Zainuddin, announced that ‘Malaysia’s new currency controls are based on China’s model’.footnote15
The exchange controls slapped on at the end of August in effect withdraw the ringgit from the international currency trading system.footnote16 Exporters are now required to sell their foreign exchange to the central bank at a fixed rate; that currency is then sold for approved payments to foreigners, mainly for imports and debt service. This system makes the ringgit convertible on the current—or trade—account, as before, but not on the capital account—it prevents buying of foreign exchange for speculative purposes. Residents cannot transfer ringgits to foreign bank accounts, and can take only a limited amount of foreign exchange for purposes of foreign travel. Non-residents can convert ringgits into foreign currency only with the approval of the central bank. Sellers of Malaysian securities can only convert their ringgits into foreign exchange once they have held the security for 12 months. Holders of offshore ringgit accounts have until 1 October to repatriate their ringgits, after which repatriation is illegal. With this last move the government ensures that the imposition of exchange controls, far from generating the always threatened punishment, capital flight, yields a short-term debt-free capital inflow.
Malaysia has not turned away from all forms of foreign capital. The controls are aimed specifically at short-term flows. They do not extend to foreign direct investment or the repatriation of interest, dividends and profits.footnote17 Current account transactions remain convertible; Malaysia remains committed to free trade. The Malaysian stock market rose in the days following the exchange controls.
Prime Minister Mahathir accompanied this move with a stinging indictment of free markets. ‘The free market system has failed and failed disastrously’, he said. He added, ‘We have asked the InternationalMonetary Fund to have some regulation on currency trading but it looks like they are not interested.’ He proceeded to sack Anwar Ibrahim, the deputy prime minister and finance minister and his heir apparent. Anwar had reassured international investors with his orthodox free-market views and willingness to impose austerity measures. Although Malaysia had not taken imf money, and therefore had not come under a formal imf program, Anwar had followed the imf both in its broad strategy and in its specific advice to Malaysia. The previous week, Mahathir had prompted the resignation of the head of the central bank and his deputy over the forthcoming capital controls and monetary expansion.
Mixed Reactions
A Chinese official commented with evident satisfaction, ‘Malaysia is returning to the route which China has been taking’.footnote18 ‘Tokyo supports capital control by Asian economies’, said the headline about the Japanese response. The story reports that ‘Japanese officials and analysts are supporting the recent moves by Malaysia, Hong Kong and Taiwan to step up capital controls to defend themselves from global speculators or erratic flows of short-term capital.’ As an official at Japan’s Ministry of Finance put it, ‘Japan was once a developing country and we had restrictions of all kinds, including controls in the foreign exchange market.’footnote19 The former president of the Philippines, Fidel Ramos, said, ‘One must sympathize with Kuala Lumpur’s effort to defend itself from what it sees as a kind of global laissez-faire capitalism which is going out of control’.footnote20
The imf’s managing director, Michel Camdessus, claimed that Malaysia’s exchange controls were ‘dangerous and indeed harmful’.footnote21 First Deputy Managing Director Stanley Fischer said that foreign exchange controls introduced by Malaysia were a step backward and would bring no long-term benefit.footnote22
us Treasury Secretary Rubin said that dramatic economic policy shifts by Malaysia were of concern to the us and were not the best way to promote economic growth. ‘I think the actions Malaysia took yesterday are of concern and obviously it is not the path that we think best lends itself to economic growth and stability over time. I think we’ll be watching what happens in Malaysia and see what occurs there over time’.footnote23 The us undersecretary for international trade saidAsian nations must not follow Malaysia’s lead, but adhere to open market principles. ‘The supposed alternatives—exchange controls, import substitution and state management—do not work. The failed nostrums of the past are not the answer’.
Western financiers chorused disapproval. Salomon Brothers described Mahathir’s measures as ‘regressive’ and ‘ultimately destined to failure’. Crédit Lyonnais Securities (Asia) said that capital controls would turn Malaysia into ‘an equity black hole’ for foreigner investors. Indosuez W.I. Carr said the measures make ‘Malaysia virtually uninvestable’.
The underlying assumption is that Malaysia, notwithstanding one of the highest savings rates in the world—37 per cent of gdp in 1995—needs Western finance not only for immediate refinancing purposes but also in the longer term. ‘With capital controls slapped on many investors will not return to Malaysia for a decade or more, regardless of how attractive their asset values become. The capital account problems will be dragged out for many years. Any prospects of getting this crisis over with by “doing the right thing” have been shot.’footnote24
Mahathir has been voicing anti-market sentiments for some time, earning himself the reputation for being what might politely be called a lone voice. But even in economies that had been celebrated as exemplars of free-market capitalism, policies are being implemented that make free-market economists throw up their hands in horror.
Hong Kong
Hong Kong is the most dramatic case. The economy is likely to experience a contraction of gross domestic product by over 4 per cent in 1998, and throughout the summer of 1998 faced intense attacks by hedge funds against the Hong Kong dollar—pegged to the us dollar in a quasi-currency board arrangement. The hedge funds calculated that, when competitor countries had devalued by 30–40 per cent and more against the us dollar, the Hong Kong dollar would have to be devalued as well. In what came to be known as the ‘double play’, hedge funds sold the Hong Kong dollar short—borrowing hk dollars, selling those borrowed dollars back to the Hong Kong Monetary Authority at the fixed rate, expecting that, by the time they had to repay their borrowed dollars, the exchange rate would have fallen. At the same time they sold Hong Kong stocks short—borrowing stocks they did not own (from an investment bank with a stock lending operation, such as Morgan Stanley) and selling the borrowed stocks, in the expectation of later repaying the borrowed stocks at a lower cost. If the Hong Kong Monetary Authority raised domestic interest rates to defend the currency peg, the local stock market would fall, and the speculators would benefit by being able to repay their borrowed stock at a lower price. If the strain of higher interest rates became so great that the government devalued the currency, the speculators could repay their borrowed hk dollars at a cheaper price—and the currency fall would allow them to repay their borrowed equities at a cheaper price, even if the stock market did not fall. Either way, the hedge funds would win.
Hedge Funds Versus the National Interest
In response the government has been intervening to restrict various forms of trading on the stock market so as to ease the pressure on the Hong Kong dollar. And it has bought up about 6 per cent of the stock market, acquiring a national stake in the private sector at the cost of 15 per cent of its foreign exchange reserves in the last two weeks of August alone. The aim was to hit the speculators by intervening to keep the price of stocks high, to show them that selling stocks short was not a one-way bet. It worked: the hedge funds took big losses and retreated.
‘After Hong Kong markets shut [on 28 August] Hong Kong’s Financial Secretary Donald Tsang said the government would propose new laws to restrict short selling and stock borrowing, which enable people to bet against stocks. He said it was in the public’s interest to do so.’footnote25 In the public’s interest to restrict the right of the owners and managers of financial assets to buy and sell freely? This is not what one expects from Hong Kong. The government is also considering ways to restrict large movements of money into and out of Hong Kong’s markets.
The Hong Kong events constitute a telling illustration of the purely casinoesque nature of the hedge fund operations. It is ironic that the hedge funds, arch champions of free financial markets, have driven Hong Kong to adopt policies that resemble those of China more than those of British colonial Hong Kong—and have driven Hong Kong into dependence on China. The Chinese government was not only well informed about the Hong Kong government’s interventions, it was a player in the game, providing an amply-endowed fire-fighting fund specifically for use in protecting the Hong Kong dollar.
Western bankers and investors are furious with the Hong Kong Monetary Authority for daring to intervene to fend off unwanted speculation, notwithstanding the government’s meticulously explained defence. Without a level playing field, they say, Hong Kong will be passed over by investors, falling into well-deserved economic oblivion.footnote26 ‘Does any country where the regulator has a 10 per cent stake in its number one company have financial credibility? The answer is No’, said the head of research at a derivatives trading firm.footnote27 ‘Spiteful Capital Controls’ was the headline in a Morgan Stanley newsletter, which went on to say, ‘Policymakers [in Hong Kong and elsewhere] appear to believe that speculative attacks on their currency have nothing to do with economic fundamentals and everything to do with evil speculators’.footnote28
Taiwan
Even Taiwan, which has weathered the crisis better than most others, has seen a 7 per cent fall in its export earnings in the first half of 1998 compared with first half of 1997, and a 20 per cent stock market fall between March and August 1998. Notwithstanding its huge foreign exchange reserves, it too faces intense speculative pressure against its currency. Asked ‘Is your currency under pressure from the yen?’, the prime minister replied, ‘Yes, day after day, day after day’.footnote29
The policy response has been to insulate the New Taiwan dollar from the region’s currency decline, and bar foreign short-term investors while encouraging local investors. The government has been intensifying existing controls since May. The central bank virtually shut down trade in futures instruments which had been used to pressure the local currency. Inflows of funds destined for the stock market are subject to central bank approval, allowing the authorities to influence demand for the currency. The offshore market in New Taiwan dollars has been closed. At the end of August, the central bank issued a sharp warning that foreign currency speculators such as George Soros would find ‘no quarter’ to operate in domestic currency markets.footnote30
On 1 September President Lee Teng-hui met with a group of 20 investment professionals and announced a variety of further interventions. As a Taiwan currency analyst said, ‘The president coming out and meeting with brokerages is very rare. The government is getting serious. They are trying to block speculation as much as they can.’footnote31
Korea
Throughout this period, Korea has kept in place some capital account restrictions on the convertibility of the won. Also, as noted, Korea is now earning huge current account surpluses; its foreign exchange reserves as of August 1998 stand at $41 billion, an all-time record, exceeding the imf’s target of $40 billion by the end of 1998. This reflects, however, savage import cut-backs, including in raw materials and capital goods.
Though the Korean government has not moved to re-impose Malaysian-type exchange controls, it has become much more interventionist—and much more authoritarian. Many labour leaders are in jail, and riot police are deployed in force against strikers or demonstrators against the government. But capital, as well as labour, is being disciplined. The new labour law gives firms the right to fire more or less at will; but the government has pressured the big firms not to fire en masse. The government is pressing the big companies to merge and restructure in order to manage the problems of excess capacity—in semiconductors and petrochemicals, for example. The companies are demanding that the government take on all the bad debts of the merged entities. The government is offering less. The result is a standoff. The government is also committed in principle to bringing in more foreign ownership, and the big companies are resisting. The result is another stand-off—though, in practice, the situation is less than straightforward, because the government has prevented Microsoft from taking over Korea’s biggest software firm, and has resisted the sale of Kia Motors and two large banks to foreigners.
In the financial sector, the government is moving quickly, unlike Japan, to buy up bad loans from the banks and force small banks to merge with larger ones, putting the banking sector on the road to recovery—though many firms are still finding credit difficult to obtain, because banks continue to try to meet the Basle standards of capital adequacy, as demanded by oecd membership. The major question now is whether the government will take the banks off the Basle standards, which might greatly alarm international financial markets. The even more important question concerns the source of finance for the promised fourfold package: Keynesian expansion; social safety net—the absence of which could cost the government its survival; public bailout of the banks; and public purchase of the debt of some of the biggest companies.footnote32
Japan
Potentially, the most dramatic development of all may come from the current discussion within Japan on the subject of reintroducing capital controls. Finance Minister Miyazawa, giving a press conference in early September, was asked whether Japan was studying the option of erecting capital controls to protect against speculative attacks. In the words of the Reuters report, ‘He said it was too early to discuss that at the government level but added he had asked Toyo Gyohten, a special advisor
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