In Davos, Switzerland, the site of a ritzy ski resort and the World Economic Forum, the movers and shakers of the global economy are debating the causes of and solutions to the recent string of financial crises all over the world.
Even as the Clinton Administration and the International Monetary Fund continue to focus blame on the financial practices of the affected countries, some economists at the forum have not hesitated to implicate the system. The recent crises in Brazil, Asia and Russia suggest that flaws within the global economic system itself helped to induce the turmoil.
The causes promulgated by the developed nations have been crony capitalism, bad banking and overinvestment in faulty schemes. Recently in the New York Times, the IMF admitted that its mixture of austerity measures and bailout money has not proven successful in Asia. If anything, the IMF has prolonged the recessions in the region.
As the United States enjoys a 5.6 percent growth rate this quarter and the cheapest gas prices in decades, former business partners in Asia and Brazil experience shortages. These countries have begun to suspect that economic success in the West has come at their cost.
Kofi Annan, secretary general of the United Nations, warned yesterday in Davos of a possible backlash from the developing world in response to the increasing discrepancy between Western economies and the rest of the world. The previously unspoken theory that the current macroeconomic system favors the West is now being considered in business pages across the United States and by such prominent economists as Jeffrey Sachs, director of Harvard’s Institute for International Development.
The flight of investors from countries such as Indonesia, Thailand and now Brazil has intensified the crises in these countries. When it was announced that these countries would not be able to make good on their loans, investors rapidly withdrew their capital. These same investors must now be stroked in order for these countries to turn their situations around. One suggestion offered at the World Economic Forum is to re-regulate the free-flow capitalist system, insuring a mass exodus of capital need not always follow a speculative attack.
Limiting short-term loans to emerging markets — loans whose lenders are the first to turn tail at the sign of a crisis — while also preventing investors from fleeing, would be more effective in preventing and curtailing future financial crackups. Western lenders and speculators must assume as much responsibility for international financial crises as the banks and countries that now face bankruptcy.
If we continue to enjoy our prosperity while our economists ruthlessly impose an American-style economic system on the rest of the world, we might soon face Annan’s prediction of a Third World rebellion. This development might seem farfetched, but consider history: The last time capitalism ran this unfettered was in the 1920s, and this situation was immediately followed by the Great Depression of the 1930s.