Nineteen-ninety-one was an exhilarating year. The simultaneous col-lapse of the Soviet regime and the apartheid system in South Africa appeared an unexpected international bonanza for moral activists, both liberal and conservative. Outstanding accounts were miraculously settled. The gloomy predictions of trade and race wars were swept aside. Old verities were dusted off and promoted as brand-new discoveries. The globe was headed for a pacific era under the twin orders of the free market and democratic governance. It was the “end of ideology.” A panacea was conceived in 1991, and globalization was born soon after.
Globalization’s proponents oppose racism and sexism, uphold human and reproductive rights, espouse social justice, and urge diversity in the public and private sectors. Their ultimate goal is to form a borderless, dynamic, and prosperous Pax Americana by integrating economies and multicultural societies through international agencies and corporations, over all of which they will preside.
The international institutions instructed their trained elites across the globe to forget the failures of their command-and-control economies and embrace the market. It was time to implement the Washington Consensus. Governments were instructed to reduce deficits, deregulate, privatize, and open up their economies to foreign trade and capital—for, it was preached, these measures would instill confidence in foreign investors, unleash the hitherto suppressed economic energies of the people, and initiate a reinforcing cycle of prosperity and stability.
The U.S. economy raced past its two-headed nemesis, a slumping Japan and a Germany straining at unification. Quickly finding its stride, the United States brought the nascent North American customs union into being. High consumer spending resulted in rising imports and higher trade deficits balanced by surplus-earning exporters investing in private and U.S.-government assets. The booming U.S. economy sucked in investment funds. The dollar appreciated, and the liquidity of the financial markets facilitated innovative and productive investments.
The corporate elite maximized shareholder value through aggressive cost-cutting. Companies downsized and transferred production to emerging markets. They gorged on the seemingly ever-rising value of their stock options. The Asian tigers roared, powered by their exports to North America and Europe. Globalization was working.
And then, suddenly, it wasn’t.
In 1995, the IMF and the U.S. Treasury bailed out the banks and financial institutions that had made loans to Mexican institutions. Mexican taxpayers were left with a bill of $71 billion.
Two years later, the seven Asian-tiger economies were caught in a financial vise as their direct-investment flows dried up, their debts and interest payments soared, and their exchange rates wilted.
A year later, Russia had defaulted on her loans and devalued the ruble.
Four years later, the Argentinian government defaulted, unpegged the peso from the dollar, and watched it plunge.
In March 2000, the U.S. stock-market bubble burst, caused, in part, by over-investment in new technology and the telecommunications sector.
Following the terrorist attacks on September 11, 2001, consumer spending fell sharply. Earning forecasts dropped, as did stock prices. All Group of Seven economies entered a recession.
Then Enron, the seventh-largest corporation in the United States, crashed into bankruptcy at the end of 2001.
Today, across the globe, from Johannesburg to Istanbul, from Buenos Aires to Jakarta, the once-promising emerging markets of a decade ago are sinking under the weight of despondency. Instead of enjoying reinforcing growth and development, capital and skilled labor are fleeing, and unemployment is soaring along with crime, corruption, and violence.
Why is this so?
Globalization’s apologists answer that the problems stem not from a failure of the market, nor from the weakness of the international financial architecture, but from the failure of these particular countries to establish the conditions necessary for a successful market.
The monetary framework recommend-ed by the IMF and the U.S. Treasury has two pillars: fixed exchange rates and currency convertibility for capital transactions. These pillars, goes the argument, contain inflation and engender confidence among investors. There are two snags, however. A country’s central bank must relinquish independent monetary policies and impose deflation, recession, and unemployment on its economy in order to maintain fixed exchange rates.
Not unexpectedly, these unpopular policies have been eschewed by politicians. The Asian tigers pursued domestic monetary policies that favored growth over the maintenance of a fixed exchange rate. They drew on their dollar reserves or on loans from abroad to finance their deficits. Without economic discipline, their fundamentals grew more incongruent with their pegged exchange rates. The drastic devaluations revealed the extent of the distortions.
In 1991, President Carlos Menem of Argentina stated his determination to control hyperinflation. The Central Bank was instructed only to print pesos when it had dollars to back them on a one-to-one basis. Hyperinflation was slain, and this dollar-peso peg anchored a run of impressive growth that only started to slow at the end of the decade. But then the fatal weakness in the Argentine economy emerged. The provincial governments had been unable to contain their spending, and now the Central Bank was not permitted to print money to cover the growing deficits. By the middle of 2001, Argentina ran out of credit and was at the mercy of the IMF. In return for IMF loans, the government had to cut the deficits. Incomes and tax revenues contracted while deficits expanded. Argentina’s federal government quit sending tax monies to the provinces. Unemployment and bankruptcies rose steeply. In December 2001, bloody riots were followed by the resignation of the president and default on foreign debt.
Other factors worsened the incongruities and led to the damaging volatilities that appeared around the world. The Asian economies, for example, operated under a form of crony capitalism. Opaque operations and weakened financial institutions contributed to the misallocation of resources and the flight of capital. Argentina failed to introduce strict banking, anti-corruption measures, and market regulation. As a result, there were no checks and balances on the market.
Russia’s “market shock-therapy strategy” proved to be fatally flawed. There was no legal structure to facilitate the exchange of property and assets through market transactions. Bankruptcy laws were ineffective. Direct foreign investment faltered. Debts could not be serviced as the government failed to introduce an effective fiscal regime. All the while, ruthless oligarchs grabbed and traded the country’s valuable extractable resources. The export of these riches was facilitated by the convertible-exchange-rate system. The IMF and the U.S. Treasury had not transformed Russia’s economy but had helped transfer most of Russia’s mobile wealth out of the country.
This same doleful scenario is being played out in South Africa, as skilled people and capital flee the country, leaving in their wake rising unemployment, social breakdown, and a steeply depreciating currency. These disturbing outcomes, however, cannot be blamed on the failure to establish the necessary conditions for the market to work a transformation. South Africa’s liberation leaders were wired to the Soviet, not to the American, elite. In 1991, they warned South Africans that, although socialism had failed elsewhere, it would be built correctly for the first time in South Africa. The socialist ideologues, amply assisted by left-liberal Western collaborators, created an impossibly utopian constitution whose objective was the wholesale redistribution of wealth and opportunity—affirmative action taken to the limits of folly. The results are that wealth and its possessors, as elsewhere in Africa, have fled. Rather than launching a free, equitable democracy, the new South Africa has slid violently into one-party rule, increasing minority exclusiveness, and economic regression. South Africa today resembles the failed utopian experiments of European idealists in North America in the 18th and 19th centuries: economically unworkable, regressive, and steeped in corruption.
South Africa was unlike the Asian tigers, Russia, or Argentina in that she did not attempt to maintain a fixed exchange rate. She did, however, share one policy with the other emerging markets. The Reserve Bank of South Africa permitted, with only limited restrictions, currency convertibility for capital transactions. The IMF and the U.S. Treasury promoted this measure, arguing that widespread currency convertibility would bring forth a convergence of real interest rates, an efficient allocation of investment funds, and an increase in productivity and output across the globe.
This felicitous outcome may well be attained, but only in the long run. The evidence suggests that short-term lending has actually magnified booms and busts. Moreover, even such advanced economies as that of the United Kingdom have been unable to maintain fixed exchange rates while permitting currency convertibility for capital transactions.
Yet the IMF and the U.S. Treasury have made no move to constrain currency convertibility for capital transactions but have spent billions in a futile quest to sustain the exchange rates of the Asian currencies, the peso, the ruble, and the Turkish lira. Malaysia’s response (and she is not alone) has been to accuse the two institutions of favoring the interests of American and international financiers over those of the emerging markets. And Malaysia has joined India and China in introducing controls on capital flows.
The emerging markets have also come to realize the adjustment costs of their “dollar standard” exchange system. As under the gold standard, financial oscillations have resulted in wrenching dislocations. Workers and domestic markets are expected to respond to lower prices by producing more at lower wages. The resistance of unions to the downward pressure on wages results in a ruinous rise in unemployment, which, in turn, places immense pressure on the political system.
Unions are not the only source of inflexibility. In South Africa, rigidly imposed racial quotas have been enforced at the expense of merit. Hence, as the currency relentlessly depreciates, corporations are unable to respond by raising their workers’ productivity. Instead, they resort to laying off more workers in an attempt to lower costs.
In other cases, the IMF and the World Bank have tried to enforce economic flexibility. The lending institutions have insisted that the borrower adopt policy reforms that are backed by some form of consensus. In effect, this has meant bargaining with, and later supporting, governments and elites whose interests do not necessarily coincide with the national interest. Structural reforms have rarely been implemented.
As a consequence, economies have not been transformed. The impacts of greater trade and inward flows of investment have frequently been blunted by widespread graft, corruption, and misallocation of resources. There is a salutary lesson here. The market builders are left with the same excuse as the state-building socialists: “The market has not failed,” they claim. “It has not been tried.”
Tried or not, the economic demise of Argentina imperils its democracy and retards the advance of market and democratic reform elsewhere on the continent. As the failures in Africa and Asia also attest, globalization has not been the promised land but a wonderfully malleable concept from which the elite have selected a set of values that served to unite disparate interests across the political spectrum. At the same time, this soft pack-aging of politically correct values and objectives has camouflaged the elite’s primary objective: to unleash multinational corporations into the liberated international field of trade, finance, transportation, communications, and telecommunications with the aim of making the elite rich. Elites of the emerging-market countries were promised that they, too, would become rich.
Now that the camouflage has been removed, however, early supporters of globalization have turned into opponents. In some emerging markets, there is a discernible shift toward autarky. International organizations are being urged to consider alternative strategies to the vaunted Washington Consensus. While change may result from these sources, the most significant shift would come from a rollback in the liberated global regulatory regimes through which the multinational corporations operate. A return to restrictions on international capital flows, on trade and investment in strategically important sectors, would have considerable effect.