A YEAR OF GLOBAL ECONOMIC SHOCKS

It was a year when the East Asian economies (Malaysia's included) looked as if they would fall under. Then the crisis went global, spreading to Russia and Brazil and at one stage threatened to overwhelm the US stock market. The spread of the crisis and its devastating effects on the economic, social and political life of the affected countries, seriously undermined the free-market ideology. Will 1998 prove to be the turning point when the wonders of globalisation gave way to the crisis of global capitalism? MARTIN KHOR reviews the year.

What a year it was. A year of shocks to the global economic system. 1998 shattered the complacency that had descended on the post-Cold War world where the "free market" had seemingly won the ideological battle of how economies should be organised.

Carrying the banner of that ideology, the International Monetary Fund, on behalf of the Group of 7 rich nations, persisted with imposing laissez-faire policies of free capital flows and minimal state intervention in countries under its influence.

The mission failed. The financial crisis spread to the real economy, and to other parts of the world. 1998 was not kind to the free market system nor to the countries that clung to it or to the IMF that championed it.

The financial crisis that erupted in East Asia in 1997 led to a disastrous economic and social fallout in the region in 1998. Deep recession hit Indonesia, Thailand, Malaysia, South Korea and Hongkong.

Japan, tottering like a giant under the weight of financial debt overhang, also fell to recession, causing extra shockwaves through the region and world.

The financial crisis then hit Russia with a vengeance, where foreign investors got badly burnt when the government not only devalued the rouble but imposed a moratorium on payment of foreign and domestic debt.

Brazil then came under severe stress as many billions of dollars flew out in weeks. This scared the G7 because Brazil is the lynchpin of Latin America. If it fell to devaluation and default, the crisis would engulf the region and then the United States.

Quickly they acted to put together a US$40 billion plan to shore Brazil up, but it had to agree first to an austerity budget under the IMF. This together with high interest rates will plunge Brazil into deep recession in 1999.

Whether the currency and the foreign reserves will hold up is one of 1999's key questions, for if they do not, then the crisis will take a new turn for the worse.

In the second half of 1998, it had seemed at several points that the United States and Europe would also join the downtrend. The New York stock market dipped significantly as sentiments dived in response to the events in Russia and Brazil.

But the Federal Reserve rode to the rescue through several cuts to the interest rate and the Dow Jones index soared again, bringing the European capital markets with it, and some relief to Asia as well.

Many serious analysts believe however that the US and Western stock markets remain too high and that the bubble will burst, as it has done in Asia. How the puncture takes place, and whether there will be a hard or soft landing, will be one of 1999's keenly watched events.

The East Asian recession of 1998 and the financial crash of 1997 was most unpredictable, and the turnaround in Gross Domestic Product in one year from seven to eight percent trend growth to eight percent plunge for many countries (in Indonesia it was probably nearer to 20 percent) was almost unprecedented in modern history.

That it happened to the countries that had been touted as the shining models of the free market could not but lead to a disillusionment of the system itself.

Even entrenched pro-market institutions and opinion makers began to lose faith. Established international magazines spoke in bold headlines about "global capitalism in crisis." The World Bank's chied economist Joseph Stiglitz attacked the "Washington Consensus" (the set of free-market policies adhered to as an article of faith by the US Treasury, the IMF and the World Bank itself) and exposed a policy split between the Bank and the Fund.

Prominent gurus of the free market, Paul Krugman and Jagdish Bhagwati, criticised the policy of allowing freedom of capital flows and Krugman went further to advocate capital controls, an option considered taboo in economics and policy circles.

At the end of the year, the king of financial speculation George Soros, who is accused by many for sparking off the Asian crisis, joined the bandwagon with a book "The Crisis of Global Capitalism."

Thus the term "capitalism", denoting a particular socio-economic system, a term which had all but disappeared when the free market reigned supreme after the fall of the Soviet Union, made a dramatic comeback in 1998. It marked an important turn in thinking, away from the initial reaction of blaming individual countries for policy errors for the crisis that befell them, towards examining the very free-market system itself as the cause of the crisis that was spreading like a disease across the world.

Indeed the term "global capitalist crisis" that emerged in 1998 looks set to compete with the terms "globalisation" and "liberalisation" as an intellectual tool in understanding the current world disorder.

A year or two ago there was no serious challenge to the notion that free-market globalisation and liberalisation were the routes that developing countries had to take if they were to succeed.

"Look at the East Asian Tigers, who opened up their economies to global finance, trade and investment: if they can do it, you too can!" This was the slogan quoted to the poorer countries.

The crisis demolished the total-globalisation model by showing that financial liberalisation can open up a country to huge speculative forces that spirit away its assets, cause a financial hurricane, and leave economic and social devastation in its wake.

The lesson was that total or too much control by the state (as in the Soviet countries) may be wrong, but total or too much power to the private sector can also be wrong. The 1997 and 1998 crises were signs of a massive "market failure", another term that is now frequently used.

Malaysia made its mark in 1998 in following up logically on this lesson by instituting protective measures to insulate the financial system from speculation and to restore currency stability.

The currency exchange and capital control measures kicked up a big international storm with brickbats being thrown by financial investors, the IMF and the G7 countries, and guarded support being given by some institutions and economists and many developing countries.

With currency stability ensured, at least for the time being, the government was able to reduce interest rates significantly, which earned the support of local businesses and consumers whose loan servicing burdens have been much reduced.

The policy makers hope the measures will pave the way to an eventual recovery starting in 1999. Malaysians and the rest of the world will be watching closely to see what happens.

It wasn't only Malaysia that introduced state intervention in the market. The Hong Kong authorities also fought off speculators by heavily intervening in the stock market, Taiwan protected its curency and also barred Soros' funds, and of course Russia declared a moratorium on its debts. These actions demonstrated that some governments, under pressure of external circumstances beyond their control, are willing to break with the straitjacket of free-market ideology, rightly or wrongly, to protect what they consider their legitimate national interests.

The crisis in some of the affected countries spilled over to the polictical arena. President Suharto exited in Indonesia as the public placed primary blame for the economic disaster on his practice of channelling projects and benefits to a favoured few, mainly his family members.

In Malaysia, the political crisis following the sacking of Datuk Seri Anwar Ibrahim dramatically replaced the economic crisis at the centre stage of national affairs.

Ordinary Malaysians have been exposed by the rapidly unfolding events to a mixture of intense emotions, including shock, bewilderment, confusion, indignation and bitterness. These feelings are felt by the various sides of the political divide.

Passionate views and intense debates continue to dominate Malaysian life on the rights and wrongs of the personalities, the system and on each new twist and turn of the court case.

Coming on top of the economic problems, the political events have been painful and tragic. At least on that, everyone seems to agree.

And if 1998 has been a pain for the world, economically and politically, we can only hope that things will improve next year. - (December 1998)

(Martin Khor is the Director of Third World Network.)

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