By Richard C. Longworth
Reining in the Global Economy
Effects of Asian Financial Crisis
The crises left behind not only vast wreckage but also a growth industry in ideas on how to cope with a global market so powerful that it could rapidly turn once-prosperous nations into virtual paupers. Scholars, officials, corporate executives, and traders suggested some form of new global financial authority to regulate the markets. Analysts who once saw the free flow of currency as the key to global prosperity suddenly agreed that emerging nations might be justified in imposing capital controls, at least in the short run. Malaysia did so in September 1998 and suffered little of the international criticism that such a move would have invited just one year earlier.
Suggestions blossomed for slowing down the speculative trading on capital markets. One idea, first proposed by Nobel Prize-winning economist James Tobin, would impose a tiny tax—less than 0.5 percent on each currency transaction—on grounds that most speculative currency trades involve margins no bigger than that. Another suggestion, pioneered by Chile, would penalize short-term investments that do not stay in a country long enough to do some real good. The Group of Eight, an informal organization that includes the world’s seven leading industrialized nations and Russia, announced in October 1998 plans to “create a strengthened financial architecture for the global marketplace of the next millennium,” a phrase vague enough to permit almost any reform that the nations choose.
Some critics want to do away with the IMF and World Bank altogether; some others want to hold an international conference to create new institutions to fit the new global era. Still others argue that the IMF and World Bank, plus others such as the BIS, are established institutions with experienced staffs that need only new marching orders to be effective. Virtually everyone now agrees that emerging countries should not open themselves to global markets until they have a structure of laws and regulations ready to cope with the markets’ power.