Shoring Up the House

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The Financial Tsunami that struck Asia in July 1997 was the most powerful economic blow since the Great Depression. In its wake, hundreds of billions of dollars were sucked out of emerging markets, from Thailand and Russia to Brazil, provoking widespread hardship and calls for a "new global financial architecture" to shelter the world from future disaster. Capitalism no longer seemed to be working; "globalism" as practiced before the meltdown seemed in sore need of repair.

So, what has happened since? Not much. As stock markets and growth rates around the world have begun to rebound smartly in the past few months, the urgency of reform has faded--in some views, to an alarming degree. "There is a danger that the crisis, having diminished, will cause a slowdown in preparations to prevent the next one," warns Canada's Finance Minister, Paul Martin. "So now it really becomes a question of leadership, of not allowing a welcome improvement in the world economy to lull us into a false sense of complacency."

The good news is that "architectural reform" will be Topic A at this week's annual meetings of the World Bank and the International Monetary Fund, when scores of finance ministers and central bankers converge on Washington. Debt relief for the world's neediest nations, the so-called heavily indebted poor countries, or HIPCs, will be one focus for the sessions and the subject of an important new initiative. And yes, there will also be much discussion, a great deal of it arcane, of ways to make the world economy safer--moderated capital flows, more transparent accounting standards, more effective regulation.

There will also be a lot of soul searching. What went wrong in the financial crisis? And what needs to be changed? Views on those important issues vary. As its contribution, the influential U.S. Council on Foreign Relations has just issued a report calling for the IMF to do less and commercial banks and wealthy investors to do more in bailing out troubled economies. The Institute of International Finance, a global association of 300 financial institutions, disagrees. It holds that the private sector should participate only on a case-by-case basis in bailouts, leaving the heavy lifting to national governments and the IMF. For some experts, the debate amounts to dithering.

Joseph Stiglitz, chief economist of the World Bank, is fond of pointing out that in the past quarter-century there have been 80 or more financial crises, everything from the cash squeeze caused by two Arab oil embargoes to the Latin debt debacle of the 1980s. "When there is a single accident on a highway, one suspects the driver's attention may have lapsed," he maintains. "But when there are dozens of accidents at the same bend in the same highway, one needs to re-examine the design of the road." Stiglitz blames the IMF and the U.S. Treasury for bad engineering in the way they foisted overheated capital flows and privatization on emerging markets, nearly all of which lack the financial institutions and regulatory apparatus to absorb an influx of private cash that in Asia alone reached nearly $500 billion between 1993 and 1997.

In short, agreement on the causes and remedies for global financial contagion is limited. As a result, the world is pursuing what the experts call "architectural reform" at a distinctly measured pace that is typical of the international financial system. The U.S., in particular, is eager to avoid what it deems to be hastily crafted solutions that might destabilize a growing but still fragile world economy. It's an approach to reform that looks more like a plumber fixing leaky pipes than an architect trying to devise a grandiose new world order. But until a broad international consensus does form, U.S. Treasury Secretary Lawrence H. Summers, like his predecessor, Robert Rubin, is likely to pursue a cautious, incremental strategy, which a U.S. Treasury official calls a financial version of the Hippocratic oath: "... at least, to do no harm."

The Summers-Rubin approach does seem to be working, at least for now. Little more than a year ago, as the world teetered on a financial precipice, the duo (Summers was then Rubin's deputy) worked closely with Federal Reserve Board Chairman Alan Greenspan to maintain the strength of the U.S. economy. Their efforts fueled a spending binge by American consumers, who snapped up exports not only from hard-hit emerging markets but also from recession-bound Japan as well as Europe, where growth had slowed. Wall Street stock markets surged, while the U.S. racked up record trade deficits. The trade imbalance is headed for more than $300 billion by year's end, far above last year's record $220 billion.

All that spending is at last helping to generate renewed growth in many parts of the world. The Asian Development Bank has announced that 14 developing countries in the region, after recording growth of just 1% in the final quarter of 1998, had a "substantial" 4.8% jump in gross domestic product in the first quarter of this year. An overall increase of 5.5% is anticipated for 1999. "In just a few short months, Asia has made great strides in recovering from the worst economic crisis in a generation," said Myoung-Ho Shin, an ADB official. "Industrial production and exports in most of the crisis-affected economies are on the rise, and in many cases capital outflows have reversed."

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