Laurence Harris is Professor of Economics and Pro-Director (Research) at the School of Oriental and African Studies, University of London, England. Paz Estrella Tolentino is in the Department of Management, Birkbeck College, University of London, England.
Introduction
In the first of these four chapters, Ajit Singh examines alternative theories of these crises, paying particular attention to the idea that the Asian economic system itself was the main cause of the financial turmoil. Grabel goes on to argue that the policies advocated by the IMF and pursued by various of the governments have made these economies more – rather than less – vulnerable to the recurrence of such crises in the future.
The 1997–1998 Asian crises
Asian capitalism’ and the financial crisis
Fundamentals
In 1996, Thailand's current account deficit was almost 8 percent of GDP, while Malaysia's had fallen to 4.9 percent. The Korean current account deficit in 1996 was 4.9 percent of GDP, an unusually high figure for Korea.
3 Structural factors
4 The IMF's misdiagnosis of the crisis (that it is due to the dirigiste model of Asian capitalism rather than being caused by internal and external financial liberalization) has had serious negative short-term as well as long-term consequences for the countries concerned. Professor Feldstein suggests the following three-point test for the structural aspects of IMF conditions:.
2 Policy implications
The East Asian Financial Crisis: 'The End of the Asian Model?', Issues in Development, Discussion Paper 24. The Asian Financial Crisis: The High Debt Model and the Unrecognized Risk of the IMF's Strategy', Working Paper No.
Rejecting exceptionalism
This chapter is motivated by the parallels in the conventional wisdom about the causes and consequences of the 1997-8 crisis and the Mexican crisis of 1994-. After the decline in the value of the ringgit, investors abandoned ringgit-denominated investments (triggering a fall in share prices), and the banking system began to experience severe difficulties as foreign credit became both expensive and scarce, and as deteriorating property market conditions undermined the value of collateral (NYT , 22.9.97).
Stabilizing capital flows to developing countries
Therefore, improved information on derivatives would be particularly useful, and the role of the IMF in improving this information is very valuable. Third, efforts must be made to improve transparency on the part of the IMF itself. The establishment of the Special Data Dissemination Standard (SDDS) in 1996 and the Dissemination Standard Bulletin Board (DSBB) on the IMF website testify to the Fund's commitment to improving data dissemination in the wake of the Mexican peso crisis.
Problems in the domestic financial systems of the most affected countries are central to the IMF's analysis of the Asian crisis (IMF, 1997 and Fischer, 1998). Therefore, strengthening domestic financial systems is a central element of the IMF's crisis prevention strategy. Recently, the role of the IMF in the supervision of domestic financial systems has also come under scrutiny.
Stiglitz, 1998, p. 8) Therefore, domestic financial sector reform in Asian countries and elsewhere will be long and complex. Likewise, it is argued that moral hazard would be limited due to the possibility that the IMF would not sanction a moratorium. The IMF has played a central role in these discussions, presenting its proposals for strengthening the "architecture of the international monetary system".
International finance and global deflation
The crisis in East Asia has shown that the IMF's existing model of financial liberalization, based on free capital flows, foreign portfolio investments and short-term foreign currency loans, is unstable and vulnerable to exchange rate fluctuations. The danger posed by the IMF's current stance is illustrated by its initial response to the East Asian crisis (Palley, 1998b). These countries comprise half of the developing countries. the eleventh largest economy in the world, has now been added to this list.
The East Asian bailout involves more than $100 billion, and its massive scale contributes to further growth in the size and import of the IMF. An institution like the IMF will always be needed to provide liquidity to the international financial system in times of financial crisis. Rather, it is the IMF's economic austerity policies and inappropriately designed financial liberalization that are wrong.
Finally, as one of the largest creditors in the developing world, the IMF must consider debt relief. Chile is also vulnerable, as 40 percent of its exports go to East Asia, and copper, its main export, has fallen in price. 1993), “The Unstable EMS,” unpublished paper presented to the Brookings Panel on Economic Activity. 1998a), “The Beneficial Effects of Core Labor Standards on Economic Growth”, AFL-CIO Public Policy Division, Washington, DC.
Global instability
Creating international credit rules and the Multilateral Agreement on Investment
In Section III, we present the MAI and a framework for understanding the nature of the MAI. The key difference between MAI and BIT is the MAI's investor-state settlement provisions. This provision of the MAI provides a gigantic increase in the international enforcement power of multinational companies.
It is an important empirical question about how much new real investment will be generated within the OECD as a result of the MAI. We suspect that, at least within the OECD, this will be the major impact of the MAI. Moreover, this region has attracted EDI despite the presence of some of the most restrictive investment regimes in the world.
In this section we develop a simple model (and indeed, a simple model) to illustrate the impact of MAI. These pressures will tend to expand the size of the state and the extent of social protection (Rodrik, 1997). 8 The following description of MAI draws heavily on the work of the Preamble Center for Public Policy in Washington.
World trade liberalisation
2 With the establishment of the World Trade Organization (WTO), the obligations of national governments with regard to the multilateral trading system (MTS) are enforced more effectively. It is the consideration of this question that we discuss in the following sections of the chapter. It would be illustrative to examine the response of the multilateral trading system to the assumption of such conflicts before looking at the concept of global regulation and governance that appears to be emerging in the WTO.
Nevertheless, in the WTO, much is made of the fact that to date there has not been a single case of conflict between the multilateral environmental agreements and the WTO/. It is of course being negotiated with the explicit aim of bringing it under the auspices of the WTO. On the contrary, the NGO approach is based on making use of MTS to promote their environmental and social goals.
These efforts are most evident in the case of the social clauses that will be used for the implementation of core labor standards. In the next section we try to criticize the idea that the WTO itself should be endowed with power to regulate social and environmental areas. In the environmental area, reference was made above to the role of trade measures in the success of the Montreal Protocol.
What role for the Tobin tax in world economic governance?
These figures indicate significant volatility over the course of a year, and also suggest significant differences in the real value of exchange rates. In the context of exchange rate volatility, there may be asymmetric responses to upward and downward exchange rate movements. In both cases (and also in between) the effect of the sales tax would depend on the frequency of false declarations.
With these illustrative figures, a 0.1 percent transaction tax would likely eliminate for active consideration a higher percentage of short-term than long-term exchanges. Based on the above estimates of transaction volume, a figure of 0.05 percent for transaction costs would suggest a total cost of $150 billion per year (in 1995). They assumed, wrongly, that only a portion of transactions made through foreign exchange agents would be subject to tax - about one-third of the total.
D'Orville and Najman estimate that volume will decrease by 20 percent due to the introduction of the transaction tax. Clearly, a tax of 0.1 percent would have little effect on the degree of divergence of domestic interest rates from (risk-adjusted) international interest rates. For example, a penalty rate could be imposed on the difference between the exchange rate in the transaction and a specified outer limit of the spread.
A new structure for international payments
Transnational rules for transnational corporations
Their priorities lay in controlling their own resources, despite the dominant role of multinationals and developed countries in their economies and in strategic areas such as technology, investment and trade. These principles were reaffirmed or reformulated in the standards of the UN Draft Code of Conduct for TNCs. However, these issues began to emerge as a multilateral concern within the Organization for Economic Co-operation and Development (OECD) in its efforts to progressively liberalize capital movements.15 To this end, in 1961 the OECD adopted two major instruments of a binding nature – the Code for the Liberalization of Capital Movements and the Code for the Liberalization of Current Invisible Operations – to facilitate foreign direct investment and other forms of transnational economic activities.
In the control of TNCs, there was the elaboration of new principles of international law to meet the aspirations of the newly independent countries. Controlling the behavior of TNCs was the goal of the 1970s (Sauvant and Aranda, 1994). The inclusion of the principles of national treatment and international incentives and disincentives in the section dealing with governments' treatment of TNCs was clearly a necessary condition for the US government to agree to the entire instrument (Hamilton, 1984).
The first element of the Declaration - the Guidelines for Multinational Enterprises - represents the second attempt after the Andean Pact's Investment Code to elaborate general standards of TNC conduct, but the first attempt by a group of large countries. Action to establish a new international economic order was included in United Nations General Assembly Resolution 3201 (S-VI) adopted in 1974. With similar nationalist rhetoric to the Andean Pact Code, Section V of the resolution made calls for the regulation and control of the activities of TNCs in the interest of the national economies where these TNCs operate and to formulate, adopt and implement an international code of conduct for TNCs.
