The Financial Crisis in East Asia: A Background Note by
UNCTAD Secretariat
The following is a Background Note prepared by the UNCTAD
Secretariat providing an analysis of critical issues and
questions on the Financial Crisis in East Asia. The Note was
publicly released at the end of January 1998.
--------------------------------------------------------------------------------
1. To what extent does the financial crisis in East Asia
differ from earlier crises?
This is perhaps the most serious financial crisis since the
breakdown of the Bretton Woods system in the early 1970s, in
terms of both its scope and its effects. Its impact is much
more global than that of the financial crises we have seen in
the past two or three decades, including those in Latin
America. Today, global financial integration is much more
pervasive, and the East Asian countries have a much higher
share of world trade and production. For the first time, a
financial crisis in the South has had a profound impact on
capital markets in the North. It is also expected to cause a
significant drop in global growth.
2. What are the roots of the crisis?
Although different influences have been at play in different
countries in the region, a common feature is that the crisis
has its origin in the private sector and has taken the form of
a major market failure. One can describe it either as
excessive borrowing abroad by the private sector, or as
excessive lending by international financial markets. In any
case, as pointed out by Alan Greenspan, Chairman of the US
Federal Reserve Board, it is clear that more investment monies
flowed into these economies than could be profitably employed
at modest risk. Hence, there is a failure of free financial
markets to produce an optimal global allocation of capital.
There was a similar episode in the Southern Cone of Latin
America in the late 1970s and early 1980s. The private sector
was allowed unrestricted access to external finance in the
belief that, for private firms, the difference between domestic
and external debt was not significant, since they were expected
to assess carefully the costs and benefits on which their
survival depended. The result was private over-borrowing and
a debt crisis, necessitating subsidized debt servicing via
preferential exchange rates and eventually the nationalization
of private external debt and a de facto socialization of the
banking system.
3. What is the role of governments in the crisis?
Perhaps one could fault governments for failing to prevent
market failure. But what they might have done is a complex
question. According to one view, the problem is not
liberalization as such but the absence of effective prudential
regulation and supervision of the banking system. There can be
little doubt that prudential limits on bank lending, capital
adequacy requirements and currency matching conditions for
assets and liabilities that are properly enforced can help
prevent excessive risk-taking by banks, thus containing the
adverse effects of widespread defaults. However, it is not
easy to prevent domestic credit expansion when capital inflows
lead to a rapid liquidity expansion. As long as capital
inflows and liquidity expansion remain unchecked, lending will
eventually spill over from the financing of safe and productive
investments to risky and speculative assets. This in turn
raises the collateral values of the assets financed by such
lending, thereby encouraging belief in the appropriateness of
these values. Such a process was experienced not only in Asia
but also in Mexico in the early 1990s and in the US in the
1980s.
In this process, as the investment boom continues, growth
remains strong and the external balance deteriorates. But
eventually loans become non-performing and banks are weakened.
Thus, deterioration of the external balance and weakening of
the financial sector are two sides of the same process of
excessive capital inflows. The basic problem is the absence of
instruments to restrict capital inflows and contain their
impact on macroeconomic and monetary conditions. It is
difficult to check this process solely through prudential
banking regulations. In any case, such regulations cannot
prevent excessive non-bank private borrowing abroad. This is
not always appreciated, even though in East Asia an important
part of private borrowing from international banks is by non-
bank firms: one-third in the Republic of Korea, around 60 per
cent in Malaysia and Thailand, and even more in Indonesia. Nor
do international financial markets impose the right kind of
discipline over private borrowers in developing countries. All
too often they manifest in herd-like, pro-cyclical behaviour in
both giving and cutting back loans. The global reverberations
of this boom-bust character of finance are further enhanced by
greater integration of markets and increased mobility of
capital. This is why governments need to be prepared to use a
broad range of policy instruments, including but not restricted
to prudential regulations.
4. What is the role of external factors?
Quite apart from the overreaction of financial markets in
lending and calling back loans, two external factors seem to
have played a major role. First, the appreciation of the
dollar led to the appreciation of the currencies in the region,
as they were pegged to the dollar. The regional division of
labour in East Asia (in the context of the so-called flying
geese process) presupposes a stable pattern of exchange rates,
and this may be an important reason why individual countries
were not willing to devalue vis-a-vis the dollar and hence vis-a
-vis each other. Second, a glut has emerged in markets for a
number of manufactures produced in the region, such as
electronics, leading to sharp declines in their prices.
Attention has focused on over-investment in some areas, but
such over-investment also reflects sluggish global demand - a
phenomenon that UNCTAD has been constantly warning about in
recent years in opposition to the widespread complacency
regarding growth in the world economy. In any case, less than
10 years ago there was much talk about a shortage of savings in
the global economy. Now, however, the refrain has changed, and
the new culprit is excessive global investment at a time when
unemployment in the North is on the rise and poverty in the
South remains unabated.
5. Could the crisis have been anticipated?
Financial instability has become a systemic feature of the
global economy and has been occurring with considerable
frequency since the beginning of the past decade. Accordingly,
such instability is a recurring theme of our annual Trade and
Development Report (TDR). In 1990 we argued that the hands-off
approach to finance was putting serious strains on
international debtor-creditor relations and on the
international payments and exchange rate arrangements. We
warned that although disruptions in financial markets had until
then been contained, "as long as the international monetary and
financial system remained structurally vulnerable, the
potential for an extremely costly crisis would remain". Since
then the world economy has witnessed further bouts of financial
instability, including debt deflation in some major industrial
countries, a currency crisis in Europe, a financial crisis in
Latin America, and now the East Asian crisis. In the early
1990s, the UNCTAD secretariat was among the minority of
forecasters that persistently expressed doubts as to the
sustainability of Mexico's external financial position. On
South East Asia, the TDR 1996 sounded a clear warning, noting
that growth in the region relied excessively on foreign
resources, and that these economies could suffer from loss of
competitiveness and were highly vulnerable to interruptions of
capital inflows. We shall return to this theme in our TDR
1998, to be released in September, with a detailed analysis of
the causes and effects of the crisis, the policy response and
its global implications, and actions needed at the national and
global levels to avert such crises.
6. How should the international policy response be assessed?
Handling a crisis of this kind poses a complex policy
challenge. Indeed, a major disagreement has emerged among
mainstream economists over the appropriateness of the standard
policy package comprising, inter alia, fiscal austerity and
tight money. A main concern is that these could drive the
economies into deep recession. Confidence and stability in
currency markets have so far proved difficult to restore. A
way still has to be found to prevent the undermining of a
positive response to recent shifts in exchange rates by the
effects of high interest rates on the banking sectors and
companies' capacity to meet their financial obligations. The
credit crunch seems to be so deep that, despite favourable
exchange rates, firms are unable to export, as their access to
trade credit has been curtailed. Thus, an important part of
the improvement in the current account balances of the Republic
of Korea and Thailand so far seems to have been due to import
cuts rather than export expansion. Over a longer horizon,
however, increased exports should account for a major share of
the required external adjustment.
7. What is to be done?
A positive adjustment to the crisis should include a number
of components. First, loans should be rolled over and
rescheduled to allow the countries concerned to service them
from future export earnings and not through increased external
borrowing at penalizing rates. This should be combined with
the provision of external liquidity to support the exchange
rate and enable a more accommodating monetary policy to be
pursued while restructuring of the financial sector is under
way. In this respect, there are important lessons to be
learned from the policy response of the US Federal Reserve
Board to the debt deflation of the early 1990s - a response
which played a major role in bringing about one of the
country's longest recoveries following one of its deepest post-
war recessions. Finally, it is necessary to raise global
growth to provide markets in which Asian countries can earn
the foreign exchange needed to pay off their foreign currency
debt. Thus, an important component of the solution is to
remove the deflationary bias in the macroeconomic policies in
those areas of the developed world running large trade
surpluses. Until the surplus countries initiate domestic
demand-led growth and reduce their external surpluses, the
global economy will continue to be vulnerable to the risk of
financial instability and recession, and the crisis in South
East Asia will continue to contribute to the decline in global
growth and to trade frictions.
8. Will the Asian financial crisis dampen world economic
growth?
On the eve of the crisis, there was already a major
imbalance in the world economy: virtually all major industrial
countries except the US were expecting faster growth on the
basis of increased exports. The surplus countries (Europe and
Japan) were employing restrictive fiscal policies and
attempting to increase their export surpluses to preserve
growth. With the notable exceptions of China and Taiwan
Province of China, the fast-growing economies of East Asia were
major contributors to global demand, running large deficits
financed by private capital inflows. Perhaps the single
positive contribution of the East Asian crisis is that it has
halted the tendency towards monetary restriction and higher
interest rates in the US and Europe, and hence prevented the
global deflationary gap from deepening further. It has eased
the concern of central bankers over the risk of inflation,
leading Alan Greenspan, Chairman of the US Federal Reserve
Board, to talk of deflation. Japan has also been spurred to
take steps to reflate its economy, while alleviating the drag
on activity resulting from the weakness of its banking sector.
However, the crisis in East Asia will still mean slower growth
of global demand and output. This is recognized by the IMF and
by the OECD, which have revised (downward) their growth
estimates.
9. Will the Asian crisis affect the launching of the European
Monetary Union (EMU)?
The East Asian crisis may pose an additional challenge for
the EMU. It has been pointed out by several observers that
desynchronization of cycles among the participating countries,
together with restrictions on individual countries' budgetary
policies and the absence of a strong fiscal centre a la US, can
cause frictions regarding common interest rate and exchange
rate policies, particularly since initial conditions with
respect to external payments and labour markets differ widely.
Such frictions are also possible when the EMU community
receives asymmetric external shocks which require different
monetary policy response for the different participants. In
that respect, the coincidence of the Asian crisis with the
launching of the EMU could be a major cause for concern.
10. How will the crisis affect other developing regions?
There are three channels of influence. First, contagion and
capital flight: we have not seen much of it so far, but it
cannot be ruled out. Second, the crisis is expected to
influence policies in other developing countries with large
external deficits. They may be inclined to cut their imports
and external deficits to reduce their vulnerability to an
interruption of capital flows. This happened after the Mexican
crisis when, for instance, Brazil tried to reduce its external
deficits despite continuing capital inflows. This would
certainly be deflationary for the countries concerned and for
the global economy. Finally, other developing regions will be
adversely affected by changes in exchange rates. Given their
sensitivity to inflationary pressures, Latin American and
Central and Eastern European countries may not be able to
adjust their exchange rates to restore their competitiveness in
world markets.
11. Is there a danger of competitive devaluations?
This was a major concern for the architects of the Bretton
Woods system, and that concern increased after the collapse of
the system in the early 1970s. However, it receded when
inflation became a major problem. Because of the implications
for price stability, countries were unwilling to use their
exchange rates to export unemployment. The threat of
competitive devaluations is much more serious now than at any
time since then, because the danger now is deflation, not
inflation, as we already pointed out in TDR 1995. There were
some signs of it during the currency crisis in Europe a few
years ago when some countries pulled out of the EMS and
devalued to import some demand. If the crisis deepens global
deflation, there may be more action of this kind. This is why
it is important to have expansionary policies in the countries
with external surpluses.
12. Is this a situation which might tempt industrialized
countries to protect their markets?
UNCTAD has always maintained that international monetary and
financial instability is the principal enemy of free trade.
Certainly, increased trade imbalances and reduced growth will
provide humus to protectionist sentiments and such pressures
may intensify, as much in countries with slow growth and high
unemployment as in those with large trade deficits. Moreover,
these pressures could succeed in attaining their goals if
surplus countries do not pursue expansionary macroeconomic
policies as developing countries start cutting their trade
deficits.
13. Is the crisis a setback for the process of globalization?
There are some positive sides to it. It has long been
maintained by many observers that it is not possible to speak
of a "system" of international money and finance in the way we
refer to the trading system. There is indeed a vacuum
regarding global governance of finance. The East Asian
financial crisis has increased awareness of the need for
greater management of international money and finance so as to
prevent the recurrence of similar crises. Indeed, the
international community will undoubtedly be forced to think
about whether or not existing arrangements regarding
international payments and finance are compatible with
stability and growth.
14. What are the issues?
The main problem is that, even though financial markets are
much more integrated than product markets and capital is much
more mobile than other factors of production, there is no
global governance of international financial transactions
analogous to that found in the area of trade. Moreover, the
present international arrangements are not only inadequate but
also asymmetrical; they are designed to discipline borrowers
rather than regulate lenders. This stands in sharp contrast
with the way national financial systems are designed.
Moreover, international arrangements are designed to manage
rather than to prevent crises. And the measures to stave off
international banking crises tend to be at the expense of
living standards, stability and development in debtor
developing countries.
Second, with greater financial integration, the global
impact of interest- and exchange-rate policies has become much
more important. This is true not only for the major industrial
countries but also for many developing countries where policies
are seen to have had serious regional or global repercussions.
There is no effective surveillance in these areas and there
is no way of preventing "beggar thy neighbour" policies
affecting key monetary and financial variables. Moreover,
there is no mechanism for dispute settlement regarding
macroeconomic and financial policies, such as exists for trade
policies. If a country puts up its tariffs on imports of cars
from its neighbour, the latter can go to the WTO and complain,
but no forum exists where a country can make analogous
representations about a rise in a major country's interest
rates and a consequent increase in its debt burden, or about a
devaluation which has the same effect on its exports as higher
tariffs.
Third, there are no effective, rule-based and adequately
funded arrangements for the provision of liquidity by an
international lender of last resort.
Finally, there is a need for a system of orderly work-outs
based on rules and bankruptcy procedures governing
international debtor-creditor relations. Several proposals to
fill these gaps are worth considering. The international
community needs to turn its attention to these issues as part
of efforts to improve the governance of international finance.
(This note can also be found on the Internet at the following
address: http://www.unicc.org/unctad in the press and reference
section).
Monday, February 2, 2009
AN EAST ASIAN FINANCIAL CRISIS MADE IN THE US
AN EAST ASIAN FINANCIAL CRISIS MADE IN THE US
According to recent reports in the New York Times, 'Washington's policies ... fostered vulnerabilities that were an underlying cause of the economic crisis that began in Thailand in July 1997, rippled through Asia and Russia and is now shaking Brazil and Latin America'. The policies included pushing hard for financial liberalisation and freer capital flows.
By Hardev Kaur
--------------------------------------------------------------------------------
February 1999
Is the United States' obsession with market liberalisation the cause for the on-going currency and financial crisis? It would appear to be so, going by the statements of various US officials as reported in the New York Times in mid-February.
The articles - the work of 10 correspondents reporting from eight countries over five months - according to a columnist based in Tokyo revealed 'the ruthless way in which the US Administration has pursued its agenda of prising open financial markets in Asia and elsewhere'.
While there may have been weaknesses in developing countries, they did not deserve to be 'hammered' by the 'financial pendulum or wrecking ball' sparked off by US policies.
For more than 17 months, Asian countries were told that it was 'Asia's own fault'. They were lectured about the fact that it was 'cronyism, corruption and the lack of transparency' which had prompted the economic problems. But now, according to the New York Times, it would seem as if these factors '... were not necessary to touch off a crisis'.
It reports that 'Washington's policies ... fostered vulnerabilities that were an underlying cause of the economic crisis that began in Thailand in July 1997, rippled through Asia and Russia and is now shaking Brazil and Latin America'.
'Financial liberalisation was undertaken in countries that didn't have the infrastructure to support it,' Ricki R Helfer, an international bank regulator and former chairwoman of the Federal Deposit Insurance Corporation, said. She went on to add 'that this was one of the principal causes of the Asian crisis'.
In the words of former US Trade Representative, Mickey Kantor, who is now the Commerce Secretary: 'It would be a legitimate criticism to say that we should have been more nuanced, more frightened that this could have happened.' But alas, that was not the case. The US pursued and continues to pursue liberalisation with a relentless vengeance.
Kantor is also quoted as saying that the risks of financial liberalisation in the absence of modern banking and financial systems are akin to 'building a skyscraper with no foundation'.
'It's easy to see in retrospect that we probably pushed too far, too fast,' Jeffrey E Garten, a former US Commerce Department official, is reported as having said. He added that 'in retrospect, we overshot and in retrospect, there was a certain degree of arrogance'.
The push for greater liberalisation was directed at Asia in particular, largely because it was seen as a potential gold mine for American banks and brokerages. 'Our financial services industry wanted to get into these markets,' Laura D'Andrea Tyson, the former chairwoman of President Bill Clinton's Council of Economic Advisers and later the National Economic Council, is quoted as having said.
According to the reports: 'The idea was to press Asia into easing its barriers to American goods and financial services by helping Fidelity sell mutual funds, Citibank sell checking accounts and American International Group sell insurance.'
The stream of officials that passed through the region and who went around the world continued to push for banking and financial liberalisation despite explanations from countries, including Malaysia, that the developing world was not ready for liberalisation nor was it able to face an onslaught from the mighty US banks and institutions.
These explanations were ignored and countered by statements that the countries were pursuing 'protectionist' policies. Clinton's Cabinet, according to the reports, approved a 'big emerging markets' plan. The aim was to identify 10 'rising economic powers' and push 'relentlessly for business for US companies in these countries'.
Under Ron Brown, the late Commerce Secretary, a 'war room' was set up in the Department 'where computers tracked big contracts and everyone from the CIA to the ambassadors to the President himself was called upon to help land deals'.
Garten, who is now Dean of the Yale School of Management, says, 'I never went on a trip where my brief didn't include either advice or congratulations on liberalisation.'
The warning bell for a slower pace in liberalisation was reportedly sounded by some officials. But it fell on deaf ears. Tyson said that she disagreed to some extent with the push (for liberalisation) and was concerned about 'a tendency to do this as a blanket approach, regardless of the size of a country or the development of a country'.
Another former Treasury official who had issued a caution about the push was then in the White House as Chairman of the Council of Economic Advisers, Joseph Stiglitz. He had said that there was a need for the slower pacing of financial liberalisation abroad, 'but nobody listened'.
The New York Times concluded that according to some economists, some countries which are now in trouble and have weak foundations, reached this desperate stage 'partly because Washington helped supply the blueprints'. These blueprints pushed too hard for financial liberalisation and freer capital flows.
Now that much of the wealth in developing countries has been destroyed and millions have been put out of jobs, their basic human rights denied by the chaos that has been created and with some countries calling in the International Monetary Fund (IMF) for help, perhaps the US Administration has achieved its goal of 'liberalisation' at a much more rapid pace than would otherwise have been possible. The IMF's conditions, in return for funds, stipulate greater foreign ownership in many financial institutions. Many of the new foreign 'owners' just happened to be from the US.
While Kantor may now defend the US policies and argue '... that the US was insufficiently aware of the kind of chaos that financial liberalisation could provide', it is no consolation for the millions that are now suffering.
It is also no consolation to the millions that are dying due to lack of medicine or food and for those who are unable to go to school and have to resort to begging for their daily bread. It is no consolation to the decades of hard work that has been undone and the wealth that has been destroyed in a matter of days, if not hours, in the name of liberalisation and globalisation. - Third World Network Features
About the writer: Hardev Kaur is Editor-at-Large of the Malaysian New Straits Times group. The above article first appeared in the Business Times (22 February 1999).
1864/99
According to recent reports in the New York Times, 'Washington's policies ... fostered vulnerabilities that were an underlying cause of the economic crisis that began in Thailand in July 1997, rippled through Asia and Russia and is now shaking Brazil and Latin America'. The policies included pushing hard for financial liberalisation and freer capital flows.
By Hardev Kaur
--------------------------------------------------------------------------------
February 1999
Is the United States' obsession with market liberalisation the cause for the on-going currency and financial crisis? It would appear to be so, going by the statements of various US officials as reported in the New York Times in mid-February.
The articles - the work of 10 correspondents reporting from eight countries over five months - according to a columnist based in Tokyo revealed 'the ruthless way in which the US Administration has pursued its agenda of prising open financial markets in Asia and elsewhere'.
While there may have been weaknesses in developing countries, they did not deserve to be 'hammered' by the 'financial pendulum or wrecking ball' sparked off by US policies.
For more than 17 months, Asian countries were told that it was 'Asia's own fault'. They were lectured about the fact that it was 'cronyism, corruption and the lack of transparency' which had prompted the economic problems. But now, according to the New York Times, it would seem as if these factors '... were not necessary to touch off a crisis'.
It reports that 'Washington's policies ... fostered vulnerabilities that were an underlying cause of the economic crisis that began in Thailand in July 1997, rippled through Asia and Russia and is now shaking Brazil and Latin America'.
'Financial liberalisation was undertaken in countries that didn't have the infrastructure to support it,' Ricki R Helfer, an international bank regulator and former chairwoman of the Federal Deposit Insurance Corporation, said. She went on to add 'that this was one of the principal causes of the Asian crisis'.
In the words of former US Trade Representative, Mickey Kantor, who is now the Commerce Secretary: 'It would be a legitimate criticism to say that we should have been more nuanced, more frightened that this could have happened.' But alas, that was not the case. The US pursued and continues to pursue liberalisation with a relentless vengeance.
Kantor is also quoted as saying that the risks of financial liberalisation in the absence of modern banking and financial systems are akin to 'building a skyscraper with no foundation'.
'It's easy to see in retrospect that we probably pushed too far, too fast,' Jeffrey E Garten, a former US Commerce Department official, is reported as having said. He added that 'in retrospect, we overshot and in retrospect, there was a certain degree of arrogance'.
The push for greater liberalisation was directed at Asia in particular, largely because it was seen as a potential gold mine for American banks and brokerages. 'Our financial services industry wanted to get into these markets,' Laura D'Andrea Tyson, the former chairwoman of President Bill Clinton's Council of Economic Advisers and later the National Economic Council, is quoted as having said.
According to the reports: 'The idea was to press Asia into easing its barriers to American goods and financial services by helping Fidelity sell mutual funds, Citibank sell checking accounts and American International Group sell insurance.'
The stream of officials that passed through the region and who went around the world continued to push for banking and financial liberalisation despite explanations from countries, including Malaysia, that the developing world was not ready for liberalisation nor was it able to face an onslaught from the mighty US banks and institutions.
These explanations were ignored and countered by statements that the countries were pursuing 'protectionist' policies. Clinton's Cabinet, according to the reports, approved a 'big emerging markets' plan. The aim was to identify 10 'rising economic powers' and push 'relentlessly for business for US companies in these countries'.
Under Ron Brown, the late Commerce Secretary, a 'war room' was set up in the Department 'where computers tracked big contracts and everyone from the CIA to the ambassadors to the President himself was called upon to help land deals'.
Garten, who is now Dean of the Yale School of Management, says, 'I never went on a trip where my brief didn't include either advice or congratulations on liberalisation.'
The warning bell for a slower pace in liberalisation was reportedly sounded by some officials. But it fell on deaf ears. Tyson said that she disagreed to some extent with the push (for liberalisation) and was concerned about 'a tendency to do this as a blanket approach, regardless of the size of a country or the development of a country'.
Another former Treasury official who had issued a caution about the push was then in the White House as Chairman of the Council of Economic Advisers, Joseph Stiglitz. He had said that there was a need for the slower pacing of financial liberalisation abroad, 'but nobody listened'.
The New York Times concluded that according to some economists, some countries which are now in trouble and have weak foundations, reached this desperate stage 'partly because Washington helped supply the blueprints'. These blueprints pushed too hard for financial liberalisation and freer capital flows.
Now that much of the wealth in developing countries has been destroyed and millions have been put out of jobs, their basic human rights denied by the chaos that has been created and with some countries calling in the International Monetary Fund (IMF) for help, perhaps the US Administration has achieved its goal of 'liberalisation' at a much more rapid pace than would otherwise have been possible. The IMF's conditions, in return for funds, stipulate greater foreign ownership in many financial institutions. Many of the new foreign 'owners' just happened to be from the US.
While Kantor may now defend the US policies and argue '... that the US was insufficiently aware of the kind of chaos that financial liberalisation could provide', it is no consolation for the millions that are now suffering.
It is also no consolation to the millions that are dying due to lack of medicine or food and for those who are unable to go to school and have to resort to begging for their daily bread. It is no consolation to the decades of hard work that has been undone and the wealth that has been destroyed in a matter of days, if not hours, in the name of liberalisation and globalisation. - Third World Network Features
About the writer: Hardev Kaur is Editor-at-Large of the Malaysian New Straits Times group. The above article first appeared in the Business Times (22 February 1999).
1864/99
Asia: The causes of the crises
Asia: The causes of the crises
The Trade and Development Report 1998 argues that the East
Asian crisis is only the latest one in a string of financial
crises rocking the global economy in the post-Bretton Woods
era. The root of these crises can be traced to imprudent
financial liberalization and the subsequent failure to
adequately manage and control the resultant capital surges.
Moreover, conditions in the East Asian economies were
exacerbated by the international community's orthodox policy
responses to the crisis.
by Chakravarthi Raghavan
--------------------------------------------------------------------------------
GENEVA: The crisis in East Asia, and the dramatic turnaround in
the economic fortunes of these economies do not stem from the
"East Asia model" or the resistance of these countries to a
globalizing world and the discipline of market forces. Rather,
says UNCTAD's Trade and Development Report (TDR), the crisis
occurred because governments failed to manage integration into
global capital markets with the same prudence and skill they
had earlier shown in managing trade liberalization. Throwing
caution to the wind, the voices of orthodoxy ordained even
larger doses of financial liberalization, and wrong assessments
of the roots of the crisis and the remedies put forward on this
basis have been responsible for worsening the crisis, the
report brings out.
From the beginning, says Yilmaz Akyuz, the author of the
report, "our assessment of the crisis and causes [was]
different from those of orthodox assessments which concentrated
on certain institutional and socio-economic characteristics of
the regions, including the weaknesses of the Asian model."
This ignores the fact that the crisis in Asia does not
differ in essential features from other crises that have
occurred in industrial and developing countries, which have
different social characteristics.
In what it calls a common-sense view, the report says that
a few lessons are evident. First, the worst time to "reform"
a financial system is in the middle of a crisis. Second, when
currency turmoil is associated with financial difficulties,
raising interest rates may simply worsen the situation by
bringing about widespread corporate and bank insolvencies.
Finally, currencies should not be left to sink while funds are
used to bail out the international creditors.
Looking back on the crisis and its handling, says Akyuz, it
is clear it was not well-handled. The orthodox policy measures
advocated by the international community aggravated the
financial difficulties. Market confidence was further
undermined by the initial allegations of corruption and
cronyism. And closing down the banks to reform the financial
system in the midst of the crisis undermined confidence.
Instead of supporting the currencies of the affected countries,
the international community was seeking free capital flows and
bailing out the lenders. These are the main factors that
aggravated the situation.
Potential backlash
The events of the past year, says the TDR, should serve to
underline the warning in last year's TDR of a potential
backlash against the contradictions of a globalizing world.
Asks the TDR: "When a colossal global market failure and
measures taken to bail out creditors are paid for at the
expense of the living standards of ordinary people, and of
stability and development in the debtor developing countries
concerned, who is to say that justice has been served?"
In East Asia, the trend of decades of rising incomes has
been reversed, and unemployment, underemployment and poverty
are reaching alarming levels. Many of the lost jobs have been
in sectors that had helped to reduce poverty by absorbing low-
skilled workers from the countryside. Rising food prices and
falling social expenditures have further aggravated social
conditions and contributed to growing poverty. Even on
conservative estimates, the proportion of the Indonesian
population living on incomes below the poverty line in 1998 is
expected to be at least 50% greater than in 1996. Similarly,
poverty in Thailand can be expected to increase by at least
one-third.
"As the crisis drags on, it will be increasingly difficult
for the new poor to recover from deprivation and return to
their previous occupations and living standards. Moreover, the
social harm could persist long after economic recovery is
achieved. Judging from the mounting evidence of growing child
malnutrition and declining primary school enrolments, the
impact of the crisis on human resources will spill over into
future generations."
"Safety net measures can act as palliatives to cushion the
impact of the crisis on poor and vulnerable groups, but they
are in no way a lasting solution. Only the resumption of rapid
and sustained growth can bring unemployment and poverty levels
back down to pre-crisis levels. Policy should turn from
deflation to reflation, supporting the unemployed by lowering
interest rates, expanding liquidity and raising public
expenditure, thus breaking out of a vicious circle that could
do incalculable harm."
Challenging orthodox views on the origins of the crisis, the
TDR points out that the East Asian crisis is only the latest in
a string of financial crises which have disrupted the global
economy since the breakdown of the Bretton Woods system.
Such crises have been occurring with increasing frequency in
both industrial and developing countries. In industrial
countries, the episodes of financial instability have involved
either banking or currency crises; but in developing countries,
they have typically been a combination of the two, and have
been accompanied by difficulties over external debt service.
These differences reflect divergences in net external
indebtedness as well as the increasing dollarization of the
economies of developing countries.
Common characteristics of crises
A greater understanding of the causes and nature of financial
crises is essential for their better management as well as for
designing policies to reduce their likelihood. While each
episode of financial instability has had its own special
characteristics, a number of common features stand out, says
the TDR:
* They have typically been preceded by financial
deregulation and - where there was currency instability - by
liberalization of capital transactions;
* Banking crises have been associated with excessive lending
on certain categories of assets such as property and stocks,
and with speculative bubbles, frequently following a large
movement by banks into certain types of financing for the first
time. Such lending has often, but not always, taken place in
the context of weak financial regulation and supervision;
* Currency crises have typically been preceded by periods
of sharply increased capital inflows attracted by a combination
of an interest rate differential and relatively stable exchange
rates. These act as an incentive to borrow abroad, but at the
same time they increase exposure to currency risk;
* There is no known case in any country, developed or
developing, of a large increase in liquidity in the banking
sector resulting from capital inflows that did not lead to an
over-extension of lending, a decline in the quality of assets
and increased laxity in risk assessment;
* The inflows generate tendencies to currency appreciation
and deterioration of the balance on the current account. When
there are excessive capital inflows, the worsening of external
balances and the weakening of the financial sector are often
two sides of the same coin;
* of the impetus for the increased capital flows is
related to the crisis of commercial banking in the major
industrial countries. The pressure on banks to find alternative
sources of business to increase returns, and the greater
competition in the financial sector brought about by
deregulation, have been an important cause of increased
international financial instability;
* Reversals of capital flows are often associated with a
deterioration of macroeconomic conditions resulting from the
effects of the inflows, rather than with shifts in policies.
But almost all major episodes of capital outflows and debt
crisis in developing countries have been associated with rising
international interest rates. The consequent currency
depreciation leads to capital losses among those with unhedged
exposures, and may become a force transforming the depreciation
into a free fall owing to the rush for foreign exchange.
Other features of currency crises have varied. They have
occurred under rather diverse conditions with respect to types
of financial flows, borrowers and lenders. For example, they
have been preceded by borrowing by the private and public
sectors in different proportions. Likewise, the most important
form of capital flows in many recent crises (including that in
East Asia) was international bank lending, but in the Mexican
crisis, a large share consisted of portfolio investment in
equities and in the paper of the Mexican Government.
Liberalization, interest rate differentials and nominal
exchange rate stability have been the main factors attracting
capital inflows; and rapid liberalization often gives rise to
expectations of improvements in economic fundamentals and large
capital gains as well as perceptions of reduced risks. The
existence of massive arbitrage flows taking advantage of large
international interest rate differentials appears to be an
important element in each currency crisis in the post-Bretton
Woods period. And while in traditional concept, arbitrage
opportunities are not permanent and eventually get eliminated,
international interest rate arbitrage flows tend to be self-
reinforcing rather than self-eliminating, thus making it more
difficult to sustain domestic policies. And in the absence of
controls, capital inflows generally result in an unfavourable
combination of appreciating real exchange rate, rising foreign
deficit and rising fiscal deficit.
Constant factor of volatility
Analyzing the various types of flows - FDI, portfolio
investments, bank lending - and the maturity of the flows and
so on, the report challenges the view that one particular form
is better than the other or prevents crises. The likes of Asia,
Latin America and elsewhere have in their experiences gone
through a full circle of bank loans, bonds, FDI and portfolio
flows. But "there is one constant factor, namely extreme
volatility of flows in periods of crisis."
"The divergences in the form of the flows received by a
country do not seem to have made a substantial difference to
the impact of these flows on domestic conditions and their
subsequent reversal."
Nor is the distinction between private and public borrowing
borne out. The experience of the post-Bretton Woods system
shows that the nature of the borrower does not significantly
alter the probability of a crisis. And financial sector
competition, caused by deregulation, is as much a cause of
increased financial instability as anything else. Large capital
flows lead to an overextension in bank lending that is exposed
when flows are reversed, resulting in instability or collapse
of the banking system, says the TDR.
The TDR notes there is now a tendency to relate these to
inappropriate domestic regulation or lax supervision, and to
emphasize the importance of sequencing liberalization with an
effective system of prudential regulations. This is a welcome
but delayed response, says the TDR, which points out that among
the ten lessons drawn by the World Bank on the tenth
anniversary of the Latin American debt crisis, there was no
mention of sequencing or prudential regulations, and that
"there is also a limit to what prudential regulations can
achieve."
Outlining what it calls a "typical post-Bretton Woods
crisis", the TDR says that such a crisis involves increased
interest rate differentials, often associated with tight
monetary policy aimed at attaining or maintaining price
stability. Financial market deregulation and capital account
liberalization are introduced alongside currency regimes
maintaining nominal exchange rate stability. These combine to
produce arbitrage margins large enough to attract liquid and
short-term capital and reinforce the stability of the exchange
rate peg. Liberalized and deregulated banks are free to expand
into new areas of business internally, and domestic firms are
free to borrow abroad, avoiding higher domestic interest rates
and building up foreign currency exposures. The combination of
success in controlling inflation and exchange rate stability
tends to cause a real appreciation of the currency, and weakens
the foreign balance. Attempts to sterilize the impact of these
capital flows on domestic credit expansion lead to greater
pressures on interest rates. And since domestic bonds are
issued to finance sterilization of inflows held as reserves in
foreign currency at lower interest rates, the fiscal position
deteriorates.
Eventually, either the foreign balance or fiscal balance
gets out of control, domestic financial conditions deteriorate
and there is extreme vulnerability to changes in perception,
rise in foreign rates and rapid outflows, breaking the exchange
rate peg, leading to capital losses for banks and firms
carrying unhedged foreign currency exposure.
Such a process can occur under varying conditions, and
starts not with unsustainable policies but with those designed
to maintain macroeconomic stability and integrate the economy
into the global system to take advantage of global market
opportunities. And in the absence of effective controls, the
impact of capital flows distorts the effect of policies, making
it very difficult to attain the objectives. (Third World
Economics No. 193, 16-30 September 1998)
Chakravarthi Raghavan is the Chief Editor of the South-North
Development Monitor (SUNS)from which the above article first appeared.
The Trade and Development Report 1998 argues that the East
Asian crisis is only the latest one in a string of financial
crises rocking the global economy in the post-Bretton Woods
era. The root of these crises can be traced to imprudent
financial liberalization and the subsequent failure to
adequately manage and control the resultant capital surges.
Moreover, conditions in the East Asian economies were
exacerbated by the international community's orthodox policy
responses to the crisis.
by Chakravarthi Raghavan
--------------------------------------------------------------------------------
GENEVA: The crisis in East Asia, and the dramatic turnaround in
the economic fortunes of these economies do not stem from the
"East Asia model" or the resistance of these countries to a
globalizing world and the discipline of market forces. Rather,
says UNCTAD's Trade and Development Report (TDR), the crisis
occurred because governments failed to manage integration into
global capital markets with the same prudence and skill they
had earlier shown in managing trade liberalization. Throwing
caution to the wind, the voices of orthodoxy ordained even
larger doses of financial liberalization, and wrong assessments
of the roots of the crisis and the remedies put forward on this
basis have been responsible for worsening the crisis, the
report brings out.
From the beginning, says Yilmaz Akyuz, the author of the
report, "our assessment of the crisis and causes [was]
different from those of orthodox assessments which concentrated
on certain institutional and socio-economic characteristics of
the regions, including the weaknesses of the Asian model."
This ignores the fact that the crisis in Asia does not
differ in essential features from other crises that have
occurred in industrial and developing countries, which have
different social characteristics.
In what it calls a common-sense view, the report says that
a few lessons are evident. First, the worst time to "reform"
a financial system is in the middle of a crisis. Second, when
currency turmoil is associated with financial difficulties,
raising interest rates may simply worsen the situation by
bringing about widespread corporate and bank insolvencies.
Finally, currencies should not be left to sink while funds are
used to bail out the international creditors.
Looking back on the crisis and its handling, says Akyuz, it
is clear it was not well-handled. The orthodox policy measures
advocated by the international community aggravated the
financial difficulties. Market confidence was further
undermined by the initial allegations of corruption and
cronyism. And closing down the banks to reform the financial
system in the midst of the crisis undermined confidence.
Instead of supporting the currencies of the affected countries,
the international community was seeking free capital flows and
bailing out the lenders. These are the main factors that
aggravated the situation.
Potential backlash
The events of the past year, says the TDR, should serve to
underline the warning in last year's TDR of a potential
backlash against the contradictions of a globalizing world.
Asks the TDR: "When a colossal global market failure and
measures taken to bail out creditors are paid for at the
expense of the living standards of ordinary people, and of
stability and development in the debtor developing countries
concerned, who is to say that justice has been served?"
In East Asia, the trend of decades of rising incomes has
been reversed, and unemployment, underemployment and poverty
are reaching alarming levels. Many of the lost jobs have been
in sectors that had helped to reduce poverty by absorbing low-
skilled workers from the countryside. Rising food prices and
falling social expenditures have further aggravated social
conditions and contributed to growing poverty. Even on
conservative estimates, the proportion of the Indonesian
population living on incomes below the poverty line in 1998 is
expected to be at least 50% greater than in 1996. Similarly,
poverty in Thailand can be expected to increase by at least
one-third.
"As the crisis drags on, it will be increasingly difficult
for the new poor to recover from deprivation and return to
their previous occupations and living standards. Moreover, the
social harm could persist long after economic recovery is
achieved. Judging from the mounting evidence of growing child
malnutrition and declining primary school enrolments, the
impact of the crisis on human resources will spill over into
future generations."
"Safety net measures can act as palliatives to cushion the
impact of the crisis on poor and vulnerable groups, but they
are in no way a lasting solution. Only the resumption of rapid
and sustained growth can bring unemployment and poverty levels
back down to pre-crisis levels. Policy should turn from
deflation to reflation, supporting the unemployed by lowering
interest rates, expanding liquidity and raising public
expenditure, thus breaking out of a vicious circle that could
do incalculable harm."
Challenging orthodox views on the origins of the crisis, the
TDR points out that the East Asian crisis is only the latest in
a string of financial crises which have disrupted the global
economy since the breakdown of the Bretton Woods system.
Such crises have been occurring with increasing frequency in
both industrial and developing countries. In industrial
countries, the episodes of financial instability have involved
either banking or currency crises; but in developing countries,
they have typically been a combination of the two, and have
been accompanied by difficulties over external debt service.
These differences reflect divergences in net external
indebtedness as well as the increasing dollarization of the
economies of developing countries.
Common characteristics of crises
A greater understanding of the causes and nature of financial
crises is essential for their better management as well as for
designing policies to reduce their likelihood. While each
episode of financial instability has had its own special
characteristics, a number of common features stand out, says
the TDR:
* They have typically been preceded by financial
deregulation and - where there was currency instability - by
liberalization of capital transactions;
* Banking crises have been associated with excessive lending
on certain categories of assets such as property and stocks,
and with speculative bubbles, frequently following a large
movement by banks into certain types of financing for the first
time. Such lending has often, but not always, taken place in
the context of weak financial regulation and supervision;
* Currency crises have typically been preceded by periods
of sharply increased capital inflows attracted by a combination
of an interest rate differential and relatively stable exchange
rates. These act as an incentive to borrow abroad, but at the
same time they increase exposure to currency risk;
* There is no known case in any country, developed or
developing, of a large increase in liquidity in the banking
sector resulting from capital inflows that did not lead to an
over-extension of lending, a decline in the quality of assets
and increased laxity in risk assessment;
* The inflows generate tendencies to currency appreciation
and deterioration of the balance on the current account. When
there are excessive capital inflows, the worsening of external
balances and the weakening of the financial sector are often
two sides of the same coin;
* of the impetus for the increased capital flows is
related to the crisis of commercial banking in the major
industrial countries. The pressure on banks to find alternative
sources of business to increase returns, and the greater
competition in the financial sector brought about by
deregulation, have been an important cause of increased
international financial instability;
* Reversals of capital flows are often associated with a
deterioration of macroeconomic conditions resulting from the
effects of the inflows, rather than with shifts in policies.
But almost all major episodes of capital outflows and debt
crisis in developing countries have been associated with rising
international interest rates. The consequent currency
depreciation leads to capital losses among those with unhedged
exposures, and may become a force transforming the depreciation
into a free fall owing to the rush for foreign exchange.
Other features of currency crises have varied. They have
occurred under rather diverse conditions with respect to types
of financial flows, borrowers and lenders. For example, they
have been preceded by borrowing by the private and public
sectors in different proportions. Likewise, the most important
form of capital flows in many recent crises (including that in
East Asia) was international bank lending, but in the Mexican
crisis, a large share consisted of portfolio investment in
equities and in the paper of the Mexican Government.
Liberalization, interest rate differentials and nominal
exchange rate stability have been the main factors attracting
capital inflows; and rapid liberalization often gives rise to
expectations of improvements in economic fundamentals and large
capital gains as well as perceptions of reduced risks. The
existence of massive arbitrage flows taking advantage of large
international interest rate differentials appears to be an
important element in each currency crisis in the post-Bretton
Woods period. And while in traditional concept, arbitrage
opportunities are not permanent and eventually get eliminated,
international interest rate arbitrage flows tend to be self-
reinforcing rather than self-eliminating, thus making it more
difficult to sustain domestic policies. And in the absence of
controls, capital inflows generally result in an unfavourable
combination of appreciating real exchange rate, rising foreign
deficit and rising fiscal deficit.
Constant factor of volatility
Analyzing the various types of flows - FDI, portfolio
investments, bank lending - and the maturity of the flows and
so on, the report challenges the view that one particular form
is better than the other or prevents crises. The likes of Asia,
Latin America and elsewhere have in their experiences gone
through a full circle of bank loans, bonds, FDI and portfolio
flows. But "there is one constant factor, namely extreme
volatility of flows in periods of crisis."
"The divergences in the form of the flows received by a
country do not seem to have made a substantial difference to
the impact of these flows on domestic conditions and their
subsequent reversal."
Nor is the distinction between private and public borrowing
borne out. The experience of the post-Bretton Woods system
shows that the nature of the borrower does not significantly
alter the probability of a crisis. And financial sector
competition, caused by deregulation, is as much a cause of
increased financial instability as anything else. Large capital
flows lead to an overextension in bank lending that is exposed
when flows are reversed, resulting in instability or collapse
of the banking system, says the TDR.
The TDR notes there is now a tendency to relate these to
inappropriate domestic regulation or lax supervision, and to
emphasize the importance of sequencing liberalization with an
effective system of prudential regulations. This is a welcome
but delayed response, says the TDR, which points out that among
the ten lessons drawn by the World Bank on the tenth
anniversary of the Latin American debt crisis, there was no
mention of sequencing or prudential regulations, and that
"there is also a limit to what prudential regulations can
achieve."
Outlining what it calls a "typical post-Bretton Woods
crisis", the TDR says that such a crisis involves increased
interest rate differentials, often associated with tight
monetary policy aimed at attaining or maintaining price
stability. Financial market deregulation and capital account
liberalization are introduced alongside currency regimes
maintaining nominal exchange rate stability. These combine to
produce arbitrage margins large enough to attract liquid and
short-term capital and reinforce the stability of the exchange
rate peg. Liberalized and deregulated banks are free to expand
into new areas of business internally, and domestic firms are
free to borrow abroad, avoiding higher domestic interest rates
and building up foreign currency exposures. The combination of
success in controlling inflation and exchange rate stability
tends to cause a real appreciation of the currency, and weakens
the foreign balance. Attempts to sterilize the impact of these
capital flows on domestic credit expansion lead to greater
pressures on interest rates. And since domestic bonds are
issued to finance sterilization of inflows held as reserves in
foreign currency at lower interest rates, the fiscal position
deteriorates.
Eventually, either the foreign balance or fiscal balance
gets out of control, domestic financial conditions deteriorate
and there is extreme vulnerability to changes in perception,
rise in foreign rates and rapid outflows, breaking the exchange
rate peg, leading to capital losses for banks and firms
carrying unhedged foreign currency exposure.
Such a process can occur under varying conditions, and
starts not with unsustainable policies but with those designed
to maintain macroeconomic stability and integrate the economy
into the global system to take advantage of global market
opportunities. And in the absence of effective controls, the
impact of capital flows distorts the effect of policies, making
it very difficult to attain the objectives. (Third World
Economics No. 193, 16-30 September 1998)
Chakravarthi Raghavan is the Chief Editor of the South-North
Development Monitor (SUNS)from which the above article first appeared.
'Financial warfare' triggers global economic crisis
'Financial warfare' triggers global economic crisis
As financial markets continue to tumble and as national economies sink deeper into recession, it is clear that the East Asian crisis has developed into a global economic crisis. The international money managers whose speculative activities have heavily contributed to this development, have been abetted by the IMF with its push for the deregulation of international capital flows. After having whittled away the capacity of national governments to effectively respond to such 'financial warfare', these powerful forces are working to secure even greater control of the Bretton Woods institutions and a more direct role in the shaping of the international financial and economic environment.
by Michel Chossudovsky
--------------------------------------------------------------------------------
'PRACTICES of the unscrupulous money changers stand indicted in the court of public opinion, rejected by the hearts and minds of men.' (Franklin D Roosevelt's First Inaugural Address, 1933)
Humanity is undergoing in the post-Cold War era an economic crisis of unprecedented scale leading to the rapid impoverishment of large sectors of the world population. The plunge of national currencies in virtually all major regions of the world has contributed to destabilising national economies while precipitating entire countries into abysmal poverty.
The crisis is not limited to South-East Asia or the former Soviet Union. The collapse in the standard of living is taking place abruptly and simultaneously in a large number of countries. This worldwide crisis of the late 20th century is more devastating than the Great Depression of the 1930s. It has far-reaching geo-political implications; economic dislocation has also been accompanied by the outbreak of regional conflicts, the fracturing of national societies and in some cases the destruction of entire countries. This is by far the most serious economic crisis in modern history.
The existence of a 'global financial crisis' is casually denied by the Western media, its social impacts are downplayed or distorted; international institutions, including the United Nations, deny the mounting tide of world poverty: 'The progress in reducing poverty over the [late] 20th century is remarkable and unprecedented....'1 The 'consensus' is that the Western economy is 'healthy' and that 'market corrections' on Wall Street are largely attributable to the 'Asian flu' and to Russia's troubled 'transition to a free- market economy'.
Evolution of the global financial crisis
The plunge of Asia's currency markets (initiated in mid- 1997) was followed in October 1997 by the dramatic meltdown of major bourses around the world.
In the uncertain wake of Wall Street's temporary recovery in early 1998 - largely spurred by panic flight out of Japanese stocks - financial markets back-slided a few months later to reach a new dramatic turning point in August with the spectacular nose-dive of the Russian ruble. The Dow Jones plunged by 554 points on 31 August (its second largest decline in the history of the New York Stock Exchange) leading in the course of September to the dramatic meltdown of stock markets around the world. In a matter of a few weeks (from the Dow's 9,337 peak in mid-July), $2,300 billion of 'paper profits' had evaporated from the US stock market.2
The ruble's free-fall had spurred Moscow's largest commercial banks into bankruptcy, leading to the potential takeover of Russia's financial system by a handful of Western banks and brokerage houses. In turn, the crisis has created the danger of massive debt default to Moscow's Western creditors, including the Deutsche and Dresdner banks. Since the outset of Russia's macroeconomic reforms, following the first injection of IMF 'shock therapy' in 1992, some $500 billion worth of Russian assets - including plants of the military industrial complex, infrastructure and natural resources - have been confiscated (through the privatisation programmes and forced bankruptcies) and transferred into the hands of Western capitalists.3 In the brutal aftermath of the Cold War, an entire economic and social system is being dismantled.
'Financial warfare'
The worldwide scramble to appropriate wealth through 'financial manipulation' is the driving force behind this crisis. It is also the source of economic turmoil and social devastation. In the words of renowned currency speculator and billionaire George Soros (who made $1.6 billion of speculative gains in the dramatic crash of the British pound in 1992), 'extending the market mechanism to all domains has the potential of destroying society'.4
This manipulation of market forces by powerful actors constitutes a form of financial and economic warfare. No need to recolonise lost territory or send in invading armies. In the late 20th century, the outright 'conquest of nations', meaning the control over productive assets, labour, natural resources and institutions, can be carried out in an impersonal fashion from the corporate boardroom: commands are dispatched from a computer terminal, or a cellphone. The relevant data are instantly relayed to major financial markets - often resulting in immediate disruptions in the functioning of national economies. 'Financial warfare' also applies to complex speculative instruments, including the gamut of derivative trade, forward foreign exchange transactions, currency options, hedge funds, index funds, etc. Speculative instruments have been used with the ultimate purpose of capturing financial wealth and acquiring control over productive assets. In the words of Malaysia's Prime Minister Mahathir Mohamad: 'This deliberate devaluation of the currency of a country by currency traders purely for profit is a serious denial of the rights of independent nations.'5
The appropriation of global wealth through this manipulation of market forces is routinely supported by the IMF's lethal macro-economic interventions which act almost concurrently in ruthlessly disrupting national economies all over the world. 'Financial warfare' knows no territorial boundaries; it does not limit its actions to besieging former enemies of the Cold War era. In Korea, Indonesia and Thailand, the vaults of the central banks were pillaged by institutional speculators while the monetary authorities sought in vain to prop up their ailing currencies. In 1997, more than $100 billion of Asia's hard currency reserves had been confiscated and transferred (in a matter of months) into private financial hands. In the wake of the currency devaluations, real earnings and employment plummeted virtually overnight, leading to mass poverty in countries which had in the post-war period registered significant economic and social progress.
The financial scam in the foreign exchange market had destabilised national economies, thereby creating the preconditions for the subsequent plunder of the Asian countries' productive assets by so-called 'vulture foreign investors'.6 In Thailand, 56 domestic banks and financial institutions were closed down on the orders of the IMF, and unemployment virtually doubled overnight.7 Similarly in Korea, the IMF 'rescue operation' has unleashed a lethal chain of bankruptcies, leading to the outright liquidation of so-called 'troubled merchant banks'. In the wake of the IMF's 'mediation' (put in place in December 1997 after high-level consultations with the World's largest commercial and merchant banks), 'an average of more than 200 companies [were] shut down per day (...) 4,000 workers every day were driven out onto [the] streets as unemployed'.8 Resulting from the credit freeze and 'the instantaneous bank shut-down', some 15,000 bankruptcies are expected in 1998, including 90% of Korea's construction companies (with combined debts of $20 billion to domestic financial institutions).9 South Korea's Parliament has been transformed into a 'rubber stamp'. Enabling legislation is enforced through 'financial blackmail': if the legislation is not speedily enacted according to the IMF's deadlines, the disbursements under the bailout will be suspended, with the danger of renewed currency speculation looming.
In turn, the IMF-sponsored 'exit programme' (i.e., forced bankruptcy) has deliberately contributed to fracturing the chaebols, which are now invited to establish 'strategic alliances with foreign firms' (meaning their eventual control by Western capital). With the devaluation, the cost of Korean labour had also tumbled: 'It's now cheaper to buy one of these [high- tech] companies than [to] buy a factory - and you get all the distribution, brand-name recognition and trained labour force free in the bargain....'10
The demise of central banking
In many regards, this worldwide crisis marks the demise of central banking, meaning the derogation of national economic sovereignty and the inability of the national State to control money creation on behalf of society. In other words, privately held money reserves in the hands of 'institutional speculators' far exceed the limited capabilities of the world's central banks. The latter acting individually or collectively are no longer able to fight the tide of speculative activity. Monetary policy is in the hands of private creditors who have the ability to freeze State budgets, paralyse the payments process, thwart the regular disbursement of wages to millions of workers (as in the former Soviet Union) and precipitate the collapse of production and social programmes. As the crisis deepens, speculative raids on central banks are extending into China, Latin America and the Middle East with devastating economic and social consequences.
This ongoing pillage of central bank reserves, however, is by no means limited to developing countries. It has also hit several Western countries including Canada and Australia where the monetary authorities have been incapable of stemming the slide of their national currencies. In Canada, billions of dollars were borrowed from private financiers to prop up central bank reserves in the wake of speculative assaults. In Japan - where the yen has tumbled to new lows - 'the Korean scenario' is viewed (according to economist Michael Hudson) as a 'dress rehearsal' for the takeover of Japan's financial sector by a handful of Western investment banks. The big players are Goldman Sachs, Morgan Stanley, Deutsche Morgan Grenfell, among others, who are buying up Japan's bad bank loans at less than 10% of their face value. In recent months, both US Secretary of the Treasury Robert Rubin and Secretary of State Madeleine K Albright have exerted political pressure on Tokyo, insisting 'on nothing less than an immediate disposal of Japan's bad bank loans - preferably to US and other foreign "vulture investors" at distress prices. To achieve their objectives, they are even pressuring Japan to rewrite its constitution, restructure its political system and cabinet and redesign its financial system.... Once foreign investors gain control of Japanese banks, these banks will move to take over Japanese industry...'11
Creditors and speculators
The world's largest banks and brokerage houses are both creditors and institutional speculators. In the present context, they contribute (through their speculative assaults) to destabilising national currencies, thereby boosting the volume of dollar denominated debts. They then reappear as creditors with a view to collecting these debts. Finally, they are called in as 'policy advisers' or consultants in the IMF- World Bank-sponsored 'bankruptcy programmes' of which they are the ultimate beneficiaries. In Indonesia, for instance, amidst street rioting and in the wake of Suharto's resignation, the privatisation of key sectors of the Indonesian economy ordered by the IMF was entrusted to eight of the world's largest merchant banks, including Lehman Brothers, Credit Suisse-First Boston, Goldman Sachs and UBS/SBC Warburg Dillon Read.12 The world's largest money managers set countries on fire and are then called in as firemen (under the IMF 'rescue plan') to extinguish the blaze. They ultimately decide which enterprises are to be closed down and which are to be auctioned off to foreign investors at bargain prices.
Who funds the IMF bailouts?
Under repeated speculative assaults, Asian central banks had entered into multi-billion-dollar contracts (in the forward foreign exchange market) in a vain attempt to protect their currency. With the total depletion of their hard currency reserves, the monetary authorities were forced to borrow large amounts of money under the IMF bailout agreement. Following a scheme devised during the Mexican crisis of 1994- 95, the bailout money, however, is not intended 'to rescue the country '; in fact the money never entered Korea, Thailand or Indonesia; it was earmarked to reimburse the 'institutional speculators', to ensure that they would be able to collect their multi-billion-dollar loot. In turn, the Asian tigers have been tamed by their financial masters. Transformed into lame ducks, they have been 'locked up' into servicing these massive dollar-denominated debts well into the third millennium.
But 'where did the money come from' to finance these multi- billion-dollar operations? Only a small portion of the money comes from IMF resources: starting with the 1995 Mexican bailout, G7 countries, including the US Treasury, were called upon to make large lump-sum contributions to these IMF- sponsored rescue operations, leading to significant hikes in the levels of public debt.13 Yet in an ironic twist, the issuing of US public debt to finance the bailouts is underwritten and guaranteed by the same group of Wall Street merchant banks involved in the speculative assaults.
In other words, those who guarantee the issuing of public debt (to finance the bailout) are those who will ultimately appropriate the loot (e.g., as creditors of Korea or Thailand) - i.e., they are the ultimate recipients of the bailout money (which essentially constitutes a 'safety net' for the institutional speculator). The vast amounts of money granted under the rescue packages are intended to enable the Asian countries to meet their debt obligations with those same financial institutions which contributed to precipitating the breakdown of their national currencies in the first place. As a result of this vicious circle, a handful of commercial banks and brokerage houses have enriched themselves beyond bounds; they have also increased their stranglehold over governments and politicians around the world.
Strong economic medicine
Since the 1994-95 Mexican crisis, the IMF has played a crucial role in shaping the 'financial environment' in which the global banks and money managers wage their speculative raids. The global banks are craving for access to inside information. Successful speculative attacks require the concurrent implementation on their behalf of 'strong economic medicine' under the IMF bailout agreements. The 'big six' Wall Street commercial banks (including Chase, Bank America, Citicorp and J P Morgan) and the 'big five' merchant banks (including Goldman Sachs, Lehman Brothers, Morgan Stanley and Salomon Smith Barney) were consulted on the clauses to be included in the bailout agreements. In the case of Korea's short-term debt, Wall Street's largest financial institutions were called in on Christmas Eve (24 December 1997) for high-level talks at the Federal Reserve Bank of New York.14
The global banks have a direct stake in the decline of national currencies.
In April 1997, barely two months before the onslaught of the Asian currency crisis, the Institute of International Finance (IIF), a Washington-based think-tank representing the interests of some 290 global banks and brokerage houses, had 'urged authorities in emerging markets to counter upward exchange rate pressures where needed...'15 This request (communicated in a formal letter to the IMF) hints in no uncertain terms that the IMF should advocate an environment in which national currencies are allowed to slide.16
Indonesia was ordered by the IMF to unpeg its currency barely three months before the rupiah's dramatic plunge. In the words of American billionaire and presidential candidate Steve Forbes: 'Did the IMF help precipitate the crisis? This agency advocates openness and transparency for national economies, yet it rivals the CIA in cloaking its own operations. Did it, for instance, have secret conversations with Thailand, advocating the devaluation that instantly set off the catastrophic chain of events? Did IMF prescriptions exacerbate the illness? These countries' moneys were knocked down to absurdly low levels.'17
Deregulating capital movements
The international rules regulating the movements of money and capital (across international borders) contribute to shaping the 'financial battlefields' on which banks and speculators wage their deadly assaults. In their worldwide quest to appropriate economic and financial wealth, global banks and multinational corporations have actively pressured for the outright deregulation of international capital flows, including the movement of 'hot' and 'dirty' money.18 Caving in to these demands (after hasty consultations with G7 finance ministers), a formal verdict to deregulate capital movements was taken by the IMF Interim Committee in Washington in April 1998. The official communique stated that the IMF will proceed with the amendment of its Articles with a view to 'making the liberalisation of capital movements one of the purposes of the Fund and extending, as needed, the Fund's jurisdiction for this purpose'.19 The IMF managing director, Mr Michel Camdessus, nonetheless conceded in a dispassionate tone that 'a number of developing countries may come under speculative attacks after opening their capital account' while reiterating (ad nauseam) that this can be avoided by the adoption of 'sound macroeconomic policies and strong financial systems in member countries' (ie. the IMF's standard 'economic cure for disaster').20
The IMF's resolve to deregulate capital movements was taken behind closed doors (conveniently removed from the public eye and with very little press coverage) barely two weeks before citizens' groups from around the world gathered in late April 1998 in mass demonstrations in Paris opposing the controversial Multilateral Agreement on Investment (MAI) under Organisation for Economic Cooperation and Development (OECD) auspices. This agreement would have granted entrenched rights to banks and multinational corporations overriding national laws on foreign investment as well as derogating the fundamental rights of citizens. The MAI constitutes an act of capitulation by democratic government to banks and multinational corporations.
The timing was right on course: while the approval of the MAI had been temporarily stalled, the proposed deregulation of foreign investment through a more expedient avenue had been officially launched: the amendment of the Articles would for all practical purposes derogate the powers of national governments to regulate foreign investment. It would also nullify the efforts of the worldwide citizens' campaign against the MAI: the deregulation of foreign investment would be achieved ('with a stroke of a pen') without the need for a cumbersome multilateral agreement under OECD or World Trade Organisation (WTO) auspices and without the legal hassle of a global investment treaty entrenched in international law.
Creating a global financial watchdog
As the aggressive scramble for global wealth unfolds and the financial crisis reaches dangerous heights, international banks and speculators are anxious to play a more direct role in shaping financial structures to their advantage as well as 'policing' country-level economic reforms. Free-market conservatives in the United States (associated with the Republican Party) have blamed the IMF for its reckless behaviour. Disregarding the IMF's intergovernmental status, they are demanding greater US control over the IMF. They have also hinted that the IMF should henceforth perform a more placid role (similar to that of the bond-rating agencies such as Moody's or Standard and Poor's) while consigning the financing of the multi-billion-dollar bailouts to the private banking sector.21
Discussed behind closed doors in April 1998, a more perceptive initiative (couched in softer language) was put forth by the world's largest banks and investment houses through their Washington mouthpiece (the Institute of International Finance). The banks' proposal consists in the creation of a 'Financial Watchdog' - a so-called 'Private Sector Advisory Council'- with a view to routinely supervising the activities of the IMF. 'The Institute [of International Finance], with its nearly universal membership of leading private financial firms, stands ready to work with the official community to advance this process.'22 Responding to the global banks' initiative, the IMF has called for concrete 'steps to strengthen private sector involvement' in crisis management - what might be interpreted as a 'power-sharing arrangement' between the IMF and the global banks.23
The international banking community has also set up its own high-level 'Steering Committee on Emerging Markets Finance' integrated by some of the World's most powerful financiers, including William Rhodes, Vice Chairman of Citibank, and Sir David Walker, Chairman of Morgan Stanley. The hidden agenda behind these various initiatives is to gradually transform the IMF from its present status as an intergovernmental body into a full-fledged bureaucracy which more effectively serves the interests of the global banks. More importantly, the banks and speculators want access to the details of IMF negotiations with member governments, which will enable them to carefully position their assaults in financial markets both prior to and in the wake of an IMF bailout agreement.
The global banks (pointing to the need for 'transparency') have called upon 'the IMF to provide valuable insights [on its dealings with national governments] without revealing confidential information...' But what they really want is privileged inside information.24
The ongoing financial crisis is not only conducive to the demise of national State institutions all over the world, it also consists in the step-by-step dismantling (and possible privatisation) of the post-war institutions established by the founding fathers at the Bretton Woods Conference in 1944. In striking contrast with the IMF's present-day destructive role, these institutions were intended by their architects to safeguard the stability of national economies. In the words of Henry Morgenthau, US Secretary of the Treasury, in his closing statement to the Conference (22 July 1944): 'We came here to work out methods which would do away with economic evils - the competitive currency devaluation and destructive impediments to trade - which preceded the present war. We have succeeded in this effort.'25
Have we?
Notes
1. United Nations Development Programme, Human Development Report, 1997, New York, 1997, p. 2.
2. Robert O'Harrow Jr., 'Dow Dives 513 Points, or 6.4', Washington Post, 1 September 1998, p A.
3. Bob Djurdjevic, 'Return looted Russian Assets', Truth in Media's Global Watch, Phoenix, 30 August 1998.
4. See 'Society under Threat- Soros', The Guardian, London, 31 October 1997.
5. Statement at the Meeting of the Group of 15, Malacca, Malaysia, 3 November 1997, quoted in the South China Morning Post, Hong Kong, 3 November 1997.
6. See Michael Hudson and Bill Totten, 'Vulture speculators', Our World, No. 197, Kawasaki, 12 August 1998.
7. Nicola Bullard, Walden Bello and Kamal Malhotra, 'Taming the Tigers: the IMF and the Asian Crisis', Special Issue on the IMF, Focus on Trade, No. 23, Focus on the Global South, Bangkok, March 1998.
8. Korean Federation of Trade Unions, Unbridled Freedom to Sack Workers Is No Solution At All, Seoul, 13 January 1998.
9. Song Jung tae, 'Insolvency of Construction Firms Rises in 1998', Korea Herald, 24 December 1997. Legislation (following IMF directives) was approved which dismantles the extensive powers of the Ministry of Finance while also stripping the Ministry of its financial regulatory and supervisory functions. The financial sector had been opened up, a Financial Supervisory Council under the advice of Western merchant banks arbitrarily decides the fate of Korean banks. Selected banks (the lucky ones) are to be 'made more attractive' by earmarking a significant chunk of the bailout money to finance (subsidise) their acquisition at depressed prices by foreign buyers - i.e., the shopping spree by Western financiers is funded by the government on borrowed money from Western financiers.
10. Michael Hudson, Our World, Kawasaki, 23 December 1997.
11. Michael Hudson, 'Big Bang is Culprit behind Yen's Fall', Our World, No. 187, Kawasaki, 28 July 1998. See also Secretary of State Madeleine K Albright and Japanese Foreign Minister Keizo Obuchi, Joint Press Conference, Ikura House, Tokyo, 4 July 1998, contained in Official Press Release, US Department of State, Washington, 7 July l998.
12. See Nicola Bullard, Walden Bello and Kamal Malhotra, op. cit.
13. On 15 July 1998, the Republican- dominated House of Representatives slashed the Clinton Administration request of $18 billion in additional US funding to the IMF to $3.5 billion. Part of the US contribution to the bailouts would be financed under the Foreign Exchange Stabilisation Fund of the Treasury. The US Congress has estimated the increase in the US public debt and the burden on taxpayers of the US contributions to the Asian bailouts.
14. Financial Times, London, 27-28 December 1997, p. 3.
15. Institute of International Finance, Report of the Multilateral Agencies Group, IIF Annual Report, Washington, 1997.
16. Letter addressed by the Managing Director of the Institute of International Finance Mr Charles Dallara to Mr Philippe Maystadt, Chairman of the IMF Interim Committee, April 1997, quoted in Institute of International Finance, 1997 Annual Report, Washington, 1997.
17. Steven Forbes, 'Why Reward Bad Behaviour', editorial, Forbes Magazine, 4 May 1998.
18. 'Hot money' is speculative capital, 'dirty money' are the proceeds of organised crime which are routinely laundered in the international financial system.
19. International Monetary Fund, Communique of the Interim Committee of the Board of Governors of the International Monetary Fund, Press Release No. 98/14, Washington, 16 April 1998. The controversial proposal to amend its Articles on 'capital account liberalisation' had initially been put forth in April 1997.
20. See Communique of the IMF Interim Committee, Hong Kong, 21 September 1997.
21. See Steven Forbes, op. cit.
22. Institute of International Finance, 'East Asian Crisis Calls for New International Measures, Say Financial Leaders', Press Release, 18 April 1998.
23. IMF, Communique of the Interim Committee of the Board of Governors, 16 April 1998.
24. The IIF proposes that global banks and brokerage houses could for this purpose'be rotated and selected through a neutral process [to ensure confidentiality], and a regular exchange of views [which] is unlikely to reveal dramatic surprises that turn markets abruptly (...). In this era of globalisation, both market participants and multilateral institutions have crucial roles to play; the more they understand each other, the greater the prospects for better functioning of markets and financial stability...' See letter of Charles Dallara, Managing Director of the IIF, to Mr Philippe Maystadt, Chairman of IMF Interim Committee, IIF, Washington, 8 April 1998.
25. Closing Address, Bretton Woods Conference, Bretton Woods, New Hampshire, 22 July 1944. The IMF's present role is in violation of its Articles of Agreement.
Michel Chossudovsky is Professor of Economics, University of Ottawa, and author of The Globalisation of Poverty: Impacts of IMF and World Bank Reforms, Third World Network, Penang and Zed Books, London, 1997. (The Globalisation of Poverty can be ordered from TWN at twn@igc.apc.org)
© Michel Chossudovsky, Ottawa 1998. All rights reserved. To publish or reproduce this text, contact the author at chossudovsky@sprint.ca or fax: 1-514-4256224.
As financial markets continue to tumble and as national economies sink deeper into recession, it is clear that the East Asian crisis has developed into a global economic crisis. The international money managers whose speculative activities have heavily contributed to this development, have been abetted by the IMF with its push for the deregulation of international capital flows. After having whittled away the capacity of national governments to effectively respond to such 'financial warfare', these powerful forces are working to secure even greater control of the Bretton Woods institutions and a more direct role in the shaping of the international financial and economic environment.
by Michel Chossudovsky
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'PRACTICES of the unscrupulous money changers stand indicted in the court of public opinion, rejected by the hearts and minds of men.' (Franklin D Roosevelt's First Inaugural Address, 1933)
Humanity is undergoing in the post-Cold War era an economic crisis of unprecedented scale leading to the rapid impoverishment of large sectors of the world population. The plunge of national currencies in virtually all major regions of the world has contributed to destabilising national economies while precipitating entire countries into abysmal poverty.
The crisis is not limited to South-East Asia or the former Soviet Union. The collapse in the standard of living is taking place abruptly and simultaneously in a large number of countries. This worldwide crisis of the late 20th century is more devastating than the Great Depression of the 1930s. It has far-reaching geo-political implications; economic dislocation has also been accompanied by the outbreak of regional conflicts, the fracturing of national societies and in some cases the destruction of entire countries. This is by far the most serious economic crisis in modern history.
The existence of a 'global financial crisis' is casually denied by the Western media, its social impacts are downplayed or distorted; international institutions, including the United Nations, deny the mounting tide of world poverty: 'The progress in reducing poverty over the [late] 20th century is remarkable and unprecedented....'1 The 'consensus' is that the Western economy is 'healthy' and that 'market corrections' on Wall Street are largely attributable to the 'Asian flu' and to Russia's troubled 'transition to a free- market economy'.
Evolution of the global financial crisis
The plunge of Asia's currency markets (initiated in mid- 1997) was followed in October 1997 by the dramatic meltdown of major bourses around the world.
In the uncertain wake of Wall Street's temporary recovery in early 1998 - largely spurred by panic flight out of Japanese stocks - financial markets back-slided a few months later to reach a new dramatic turning point in August with the spectacular nose-dive of the Russian ruble. The Dow Jones plunged by 554 points on 31 August (its second largest decline in the history of the New York Stock Exchange) leading in the course of September to the dramatic meltdown of stock markets around the world. In a matter of a few weeks (from the Dow's 9,337 peak in mid-July), $2,300 billion of 'paper profits' had evaporated from the US stock market.2
The ruble's free-fall had spurred Moscow's largest commercial banks into bankruptcy, leading to the potential takeover of Russia's financial system by a handful of Western banks and brokerage houses. In turn, the crisis has created the danger of massive debt default to Moscow's Western creditors, including the Deutsche and Dresdner banks. Since the outset of Russia's macroeconomic reforms, following the first injection of IMF 'shock therapy' in 1992, some $500 billion worth of Russian assets - including plants of the military industrial complex, infrastructure and natural resources - have been confiscated (through the privatisation programmes and forced bankruptcies) and transferred into the hands of Western capitalists.3 In the brutal aftermath of the Cold War, an entire economic and social system is being dismantled.
'Financial warfare'
The worldwide scramble to appropriate wealth through 'financial manipulation' is the driving force behind this crisis. It is also the source of economic turmoil and social devastation. In the words of renowned currency speculator and billionaire George Soros (who made $1.6 billion of speculative gains in the dramatic crash of the British pound in 1992), 'extending the market mechanism to all domains has the potential of destroying society'.4
This manipulation of market forces by powerful actors constitutes a form of financial and economic warfare. No need to recolonise lost territory or send in invading armies. In the late 20th century, the outright 'conquest of nations', meaning the control over productive assets, labour, natural resources and institutions, can be carried out in an impersonal fashion from the corporate boardroom: commands are dispatched from a computer terminal, or a cellphone. The relevant data are instantly relayed to major financial markets - often resulting in immediate disruptions in the functioning of national economies. 'Financial warfare' also applies to complex speculative instruments, including the gamut of derivative trade, forward foreign exchange transactions, currency options, hedge funds, index funds, etc. Speculative instruments have been used with the ultimate purpose of capturing financial wealth and acquiring control over productive assets. In the words of Malaysia's Prime Minister Mahathir Mohamad: 'This deliberate devaluation of the currency of a country by currency traders purely for profit is a serious denial of the rights of independent nations.'5
The appropriation of global wealth through this manipulation of market forces is routinely supported by the IMF's lethal macro-economic interventions which act almost concurrently in ruthlessly disrupting national economies all over the world. 'Financial warfare' knows no territorial boundaries; it does not limit its actions to besieging former enemies of the Cold War era. In Korea, Indonesia and Thailand, the vaults of the central banks were pillaged by institutional speculators while the monetary authorities sought in vain to prop up their ailing currencies. In 1997, more than $100 billion of Asia's hard currency reserves had been confiscated and transferred (in a matter of months) into private financial hands. In the wake of the currency devaluations, real earnings and employment plummeted virtually overnight, leading to mass poverty in countries which had in the post-war period registered significant economic and social progress.
The financial scam in the foreign exchange market had destabilised national economies, thereby creating the preconditions for the subsequent plunder of the Asian countries' productive assets by so-called 'vulture foreign investors'.6 In Thailand, 56 domestic banks and financial institutions were closed down on the orders of the IMF, and unemployment virtually doubled overnight.7 Similarly in Korea, the IMF 'rescue operation' has unleashed a lethal chain of bankruptcies, leading to the outright liquidation of so-called 'troubled merchant banks'. In the wake of the IMF's 'mediation' (put in place in December 1997 after high-level consultations with the World's largest commercial and merchant banks), 'an average of more than 200 companies [were] shut down per day (...) 4,000 workers every day were driven out onto [the] streets as unemployed'.8 Resulting from the credit freeze and 'the instantaneous bank shut-down', some 15,000 bankruptcies are expected in 1998, including 90% of Korea's construction companies (with combined debts of $20 billion to domestic financial institutions).9 South Korea's Parliament has been transformed into a 'rubber stamp'. Enabling legislation is enforced through 'financial blackmail': if the legislation is not speedily enacted according to the IMF's deadlines, the disbursements under the bailout will be suspended, with the danger of renewed currency speculation looming.
In turn, the IMF-sponsored 'exit programme' (i.e., forced bankruptcy) has deliberately contributed to fracturing the chaebols, which are now invited to establish 'strategic alliances with foreign firms' (meaning their eventual control by Western capital). With the devaluation, the cost of Korean labour had also tumbled: 'It's now cheaper to buy one of these [high- tech] companies than [to] buy a factory - and you get all the distribution, brand-name recognition and trained labour force free in the bargain....'10
The demise of central banking
In many regards, this worldwide crisis marks the demise of central banking, meaning the derogation of national economic sovereignty and the inability of the national State to control money creation on behalf of society. In other words, privately held money reserves in the hands of 'institutional speculators' far exceed the limited capabilities of the world's central banks. The latter acting individually or collectively are no longer able to fight the tide of speculative activity. Monetary policy is in the hands of private creditors who have the ability to freeze State budgets, paralyse the payments process, thwart the regular disbursement of wages to millions of workers (as in the former Soviet Union) and precipitate the collapse of production and social programmes. As the crisis deepens, speculative raids on central banks are extending into China, Latin America and the Middle East with devastating economic and social consequences.
This ongoing pillage of central bank reserves, however, is by no means limited to developing countries. It has also hit several Western countries including Canada and Australia where the monetary authorities have been incapable of stemming the slide of their national currencies. In Canada, billions of dollars were borrowed from private financiers to prop up central bank reserves in the wake of speculative assaults. In Japan - where the yen has tumbled to new lows - 'the Korean scenario' is viewed (according to economist Michael Hudson) as a 'dress rehearsal' for the takeover of Japan's financial sector by a handful of Western investment banks. The big players are Goldman Sachs, Morgan Stanley, Deutsche Morgan Grenfell, among others, who are buying up Japan's bad bank loans at less than 10% of their face value. In recent months, both US Secretary of the Treasury Robert Rubin and Secretary of State Madeleine K Albright have exerted political pressure on Tokyo, insisting 'on nothing less than an immediate disposal of Japan's bad bank loans - preferably to US and other foreign "vulture investors" at distress prices. To achieve their objectives, they are even pressuring Japan to rewrite its constitution, restructure its political system and cabinet and redesign its financial system.... Once foreign investors gain control of Japanese banks, these banks will move to take over Japanese industry...'11
Creditors and speculators
The world's largest banks and brokerage houses are both creditors and institutional speculators. In the present context, they contribute (through their speculative assaults) to destabilising national currencies, thereby boosting the volume of dollar denominated debts. They then reappear as creditors with a view to collecting these debts. Finally, they are called in as 'policy advisers' or consultants in the IMF- World Bank-sponsored 'bankruptcy programmes' of which they are the ultimate beneficiaries. In Indonesia, for instance, amidst street rioting and in the wake of Suharto's resignation, the privatisation of key sectors of the Indonesian economy ordered by the IMF was entrusted to eight of the world's largest merchant banks, including Lehman Brothers, Credit Suisse-First Boston, Goldman Sachs and UBS/SBC Warburg Dillon Read.12 The world's largest money managers set countries on fire and are then called in as firemen (under the IMF 'rescue plan') to extinguish the blaze. They ultimately decide which enterprises are to be closed down and which are to be auctioned off to foreign investors at bargain prices.
Who funds the IMF bailouts?
Under repeated speculative assaults, Asian central banks had entered into multi-billion-dollar contracts (in the forward foreign exchange market) in a vain attempt to protect their currency. With the total depletion of their hard currency reserves, the monetary authorities were forced to borrow large amounts of money under the IMF bailout agreement. Following a scheme devised during the Mexican crisis of 1994- 95, the bailout money, however, is not intended 'to rescue the country '; in fact the money never entered Korea, Thailand or Indonesia; it was earmarked to reimburse the 'institutional speculators', to ensure that they would be able to collect their multi-billion-dollar loot. In turn, the Asian tigers have been tamed by their financial masters. Transformed into lame ducks, they have been 'locked up' into servicing these massive dollar-denominated debts well into the third millennium.
But 'where did the money come from' to finance these multi- billion-dollar operations? Only a small portion of the money comes from IMF resources: starting with the 1995 Mexican bailout, G7 countries, including the US Treasury, were called upon to make large lump-sum contributions to these IMF- sponsored rescue operations, leading to significant hikes in the levels of public debt.13 Yet in an ironic twist, the issuing of US public debt to finance the bailouts is underwritten and guaranteed by the same group of Wall Street merchant banks involved in the speculative assaults.
In other words, those who guarantee the issuing of public debt (to finance the bailout) are those who will ultimately appropriate the loot (e.g., as creditors of Korea or Thailand) - i.e., they are the ultimate recipients of the bailout money (which essentially constitutes a 'safety net' for the institutional speculator). The vast amounts of money granted under the rescue packages are intended to enable the Asian countries to meet their debt obligations with those same financial institutions which contributed to precipitating the breakdown of their national currencies in the first place. As a result of this vicious circle, a handful of commercial banks and brokerage houses have enriched themselves beyond bounds; they have also increased their stranglehold over governments and politicians around the world.
Strong economic medicine
Since the 1994-95 Mexican crisis, the IMF has played a crucial role in shaping the 'financial environment' in which the global banks and money managers wage their speculative raids. The global banks are craving for access to inside information. Successful speculative attacks require the concurrent implementation on their behalf of 'strong economic medicine' under the IMF bailout agreements. The 'big six' Wall Street commercial banks (including Chase, Bank America, Citicorp and J P Morgan) and the 'big five' merchant banks (including Goldman Sachs, Lehman Brothers, Morgan Stanley and Salomon Smith Barney) were consulted on the clauses to be included in the bailout agreements. In the case of Korea's short-term debt, Wall Street's largest financial institutions were called in on Christmas Eve (24 December 1997) for high-level talks at the Federal Reserve Bank of New York.14
The global banks have a direct stake in the decline of national currencies.
In April 1997, barely two months before the onslaught of the Asian currency crisis, the Institute of International Finance (IIF), a Washington-based think-tank representing the interests of some 290 global banks and brokerage houses, had 'urged authorities in emerging markets to counter upward exchange rate pressures where needed...'15 This request (communicated in a formal letter to the IMF) hints in no uncertain terms that the IMF should advocate an environment in which national currencies are allowed to slide.16
Indonesia was ordered by the IMF to unpeg its currency barely three months before the rupiah's dramatic plunge. In the words of American billionaire and presidential candidate Steve Forbes: 'Did the IMF help precipitate the crisis? This agency advocates openness and transparency for national economies, yet it rivals the CIA in cloaking its own operations. Did it, for instance, have secret conversations with Thailand, advocating the devaluation that instantly set off the catastrophic chain of events? Did IMF prescriptions exacerbate the illness? These countries' moneys were knocked down to absurdly low levels.'17
Deregulating capital movements
The international rules regulating the movements of money and capital (across international borders) contribute to shaping the 'financial battlefields' on which banks and speculators wage their deadly assaults. In their worldwide quest to appropriate economic and financial wealth, global banks and multinational corporations have actively pressured for the outright deregulation of international capital flows, including the movement of 'hot' and 'dirty' money.18 Caving in to these demands (after hasty consultations with G7 finance ministers), a formal verdict to deregulate capital movements was taken by the IMF Interim Committee in Washington in April 1998. The official communique stated that the IMF will proceed with the amendment of its Articles with a view to 'making the liberalisation of capital movements one of the purposes of the Fund and extending, as needed, the Fund's jurisdiction for this purpose'.19 The IMF managing director, Mr Michel Camdessus, nonetheless conceded in a dispassionate tone that 'a number of developing countries may come under speculative attacks after opening their capital account' while reiterating (ad nauseam) that this can be avoided by the adoption of 'sound macroeconomic policies and strong financial systems in member countries' (ie. the IMF's standard 'economic cure for disaster').20
The IMF's resolve to deregulate capital movements was taken behind closed doors (conveniently removed from the public eye and with very little press coverage) barely two weeks before citizens' groups from around the world gathered in late April 1998 in mass demonstrations in Paris opposing the controversial Multilateral Agreement on Investment (MAI) under Organisation for Economic Cooperation and Development (OECD) auspices. This agreement would have granted entrenched rights to banks and multinational corporations overriding national laws on foreign investment as well as derogating the fundamental rights of citizens. The MAI constitutes an act of capitulation by democratic government to banks and multinational corporations.
The timing was right on course: while the approval of the MAI had been temporarily stalled, the proposed deregulation of foreign investment through a more expedient avenue had been officially launched: the amendment of the Articles would for all practical purposes derogate the powers of national governments to regulate foreign investment. It would also nullify the efforts of the worldwide citizens' campaign against the MAI: the deregulation of foreign investment would be achieved ('with a stroke of a pen') without the need for a cumbersome multilateral agreement under OECD or World Trade Organisation (WTO) auspices and without the legal hassle of a global investment treaty entrenched in international law.
Creating a global financial watchdog
As the aggressive scramble for global wealth unfolds and the financial crisis reaches dangerous heights, international banks and speculators are anxious to play a more direct role in shaping financial structures to their advantage as well as 'policing' country-level economic reforms. Free-market conservatives in the United States (associated with the Republican Party) have blamed the IMF for its reckless behaviour. Disregarding the IMF's intergovernmental status, they are demanding greater US control over the IMF. They have also hinted that the IMF should henceforth perform a more placid role (similar to that of the bond-rating agencies such as Moody's or Standard and Poor's) while consigning the financing of the multi-billion-dollar bailouts to the private banking sector.21
Discussed behind closed doors in April 1998, a more perceptive initiative (couched in softer language) was put forth by the world's largest banks and investment houses through their Washington mouthpiece (the Institute of International Finance). The banks' proposal consists in the creation of a 'Financial Watchdog' - a so-called 'Private Sector Advisory Council'- with a view to routinely supervising the activities of the IMF. 'The Institute [of International Finance], with its nearly universal membership of leading private financial firms, stands ready to work with the official community to advance this process.'22 Responding to the global banks' initiative, the IMF has called for concrete 'steps to strengthen private sector involvement' in crisis management - what might be interpreted as a 'power-sharing arrangement' between the IMF and the global banks.23
The international banking community has also set up its own high-level 'Steering Committee on Emerging Markets Finance' integrated by some of the World's most powerful financiers, including William Rhodes, Vice Chairman of Citibank, and Sir David Walker, Chairman of Morgan Stanley. The hidden agenda behind these various initiatives is to gradually transform the IMF from its present status as an intergovernmental body into a full-fledged bureaucracy which more effectively serves the interests of the global banks. More importantly, the banks and speculators want access to the details of IMF negotiations with member governments, which will enable them to carefully position their assaults in financial markets both prior to and in the wake of an IMF bailout agreement.
The global banks (pointing to the need for 'transparency') have called upon 'the IMF to provide valuable insights [on its dealings with national governments] without revealing confidential information...' But what they really want is privileged inside information.24
The ongoing financial crisis is not only conducive to the demise of national State institutions all over the world, it also consists in the step-by-step dismantling (and possible privatisation) of the post-war institutions established by the founding fathers at the Bretton Woods Conference in 1944. In striking contrast with the IMF's present-day destructive role, these institutions were intended by their architects to safeguard the stability of national economies. In the words of Henry Morgenthau, US Secretary of the Treasury, in his closing statement to the Conference (22 July 1944): 'We came here to work out methods which would do away with economic evils - the competitive currency devaluation and destructive impediments to trade - which preceded the present war. We have succeeded in this effort.'25
Have we?
Notes
1. United Nations Development Programme, Human Development Report, 1997, New York, 1997, p. 2.
2. Robert O'Harrow Jr., 'Dow Dives 513 Points, or 6.4', Washington Post, 1 September 1998, p A.
3. Bob Djurdjevic, 'Return looted Russian Assets', Truth in Media's Global Watch, Phoenix, 30 August 1998.
4. See 'Society under Threat- Soros', The Guardian, London, 31 October 1997.
5. Statement at the Meeting of the Group of 15, Malacca, Malaysia, 3 November 1997, quoted in the South China Morning Post, Hong Kong, 3 November 1997.
6. See Michael Hudson and Bill Totten, 'Vulture speculators', Our World, No. 197, Kawasaki, 12 August 1998.
7. Nicola Bullard, Walden Bello and Kamal Malhotra, 'Taming the Tigers: the IMF and the Asian Crisis', Special Issue on the IMF, Focus on Trade, No. 23, Focus on the Global South, Bangkok, March 1998.
8. Korean Federation of Trade Unions, Unbridled Freedom to Sack Workers Is No Solution At All, Seoul, 13 January 1998.
9. Song Jung tae, 'Insolvency of Construction Firms Rises in 1998', Korea Herald, 24 December 1997. Legislation (following IMF directives) was approved which dismantles the extensive powers of the Ministry of Finance while also stripping the Ministry of its financial regulatory and supervisory functions. The financial sector had been opened up, a Financial Supervisory Council under the advice of Western merchant banks arbitrarily decides the fate of Korean banks. Selected banks (the lucky ones) are to be 'made more attractive' by earmarking a significant chunk of the bailout money to finance (subsidise) their acquisition at depressed prices by foreign buyers - i.e., the shopping spree by Western financiers is funded by the government on borrowed money from Western financiers.
10. Michael Hudson, Our World, Kawasaki, 23 December 1997.
11. Michael Hudson, 'Big Bang is Culprit behind Yen's Fall', Our World, No. 187, Kawasaki, 28 July 1998. See also Secretary of State Madeleine K Albright and Japanese Foreign Minister Keizo Obuchi, Joint Press Conference, Ikura House, Tokyo, 4 July 1998, contained in Official Press Release, US Department of State, Washington, 7 July l998.
12. See Nicola Bullard, Walden Bello and Kamal Malhotra, op. cit.
13. On 15 July 1998, the Republican- dominated House of Representatives slashed the Clinton Administration request of $18 billion in additional US funding to the IMF to $3.5 billion. Part of the US contribution to the bailouts would be financed under the Foreign Exchange Stabilisation Fund of the Treasury. The US Congress has estimated the increase in the US public debt and the burden on taxpayers of the US contributions to the Asian bailouts.
14. Financial Times, London, 27-28 December 1997, p. 3.
15. Institute of International Finance, Report of the Multilateral Agencies Group, IIF Annual Report, Washington, 1997.
16. Letter addressed by the Managing Director of the Institute of International Finance Mr Charles Dallara to Mr Philippe Maystadt, Chairman of the IMF Interim Committee, April 1997, quoted in Institute of International Finance, 1997 Annual Report, Washington, 1997.
17. Steven Forbes, 'Why Reward Bad Behaviour', editorial, Forbes Magazine, 4 May 1998.
18. 'Hot money' is speculative capital, 'dirty money' are the proceeds of organised crime which are routinely laundered in the international financial system.
19. International Monetary Fund, Communique of the Interim Committee of the Board of Governors of the International Monetary Fund, Press Release No. 98/14, Washington, 16 April 1998. The controversial proposal to amend its Articles on 'capital account liberalisation' had initially been put forth in April 1997.
20. See Communique of the IMF Interim Committee, Hong Kong, 21 September 1997.
21. See Steven Forbes, op. cit.
22. Institute of International Finance, 'East Asian Crisis Calls for New International Measures, Say Financial Leaders', Press Release, 18 April 1998.
23. IMF, Communique of the Interim Committee of the Board of Governors, 16 April 1998.
24. The IIF proposes that global banks and brokerage houses could for this purpose'be rotated and selected through a neutral process [to ensure confidentiality], and a regular exchange of views [which] is unlikely to reveal dramatic surprises that turn markets abruptly (...). In this era of globalisation, both market participants and multilateral institutions have crucial roles to play; the more they understand each other, the greater the prospects for better functioning of markets and financial stability...' See letter of Charles Dallara, Managing Director of the IIF, to Mr Philippe Maystadt, Chairman of IMF Interim Committee, IIF, Washington, 8 April 1998.
25. Closing Address, Bretton Woods Conference, Bretton Woods, New Hampshire, 22 July 1944. The IMF's present role is in violation of its Articles of Agreement.
Michel Chossudovsky is Professor of Economics, University of Ottawa, and author of The Globalisation of Poverty: Impacts of IMF and World Bank Reforms, Third World Network, Penang and Zed Books, London, 1997. (The Globalisation of Poverty can be ordered from TWN at twn@igc.apc.org)
© Michel Chossudovsky, Ottawa 1998. All rights reserved. To publish or reproduce this text, contact the author at chossudovsky@sprint.ca or fax: 1-514-4256224.
A crisis made abroad
Argentina: A crisis made abroad
Countering claims that the Argentine economic crisis was caused by extravagant government spending, a US think-tank has traced the roots of the Latin American country’s troubles to external shocks and wrong-headed policies backed by the international financial institutions.
by Chakravarthi Raghavan
--------------------------------------------------------------------------------
GENEVA: The crisis in Argentina is not the result of profligate government spending but was caused by external shocks and failures of policies that were set or encouraged and promoted by the international financial institutions, including the International Monetary Fund, according to a briefing paper of the Centre for Economic and Policy Research (CEPR).
The briefing paper is by Mark Weisbrot and Dean Baker, co-directors of CEPR, a Washington-based think-tank, who warn that the IMF is playing with fire in trying to squeeze debt service out of Argentina’s collapsed economy.
In the briefing paper, Weisbrot and Baker have challenged reports in the US and international press of a profligate government that could not contain its spending and could not make the necessary hard choices to build confidence among investors and lenders.
It was higher interest payments on its debt, not increased government spending, that led to the higher deficits which in turn created doubts about the overvalued exchange rate, pushed interest rates higher and created larger deficits - in a hopeless spiral that ended in default and devaluation.
While policy failures played a role in the economic collapse in Argentina - and the most important was the fixed exchange rate tying the Argentine peso to the US dollar - the immediate cause of the crisis was a series of external shocks beyond the control of Argentina, CEPR says.
These shocks began with the US Federal Reserve’s decision to raise interest rates in February 1994 and were made much worse because of the fixed exchange rate.
The Argentine data do not support the idea that the government could not accept a sufficient dose of the austerity medicine or that it spent its way into a hole.
The total budget balance of Argentina over the period 1993-2000 suggests a significant loosening of fiscal policy, with the budget moving from a surplus of $2.7 billion or 1.2% of the GDP in 1993 to a deficit of $6.8 billion or 2.4% of GDP in 2000. But, for a country in deep recession, this deficit was modest.
However, even this deficit, and the shift from surplus at the beginning of the period, does not accurately represent government fiscal policy, the CEPR briefing paper points out.
The primary balance of the government - government spending other than interest payments, subtracted from revenues - moved from a surplus of $5.6 billion or 2.4% of GDP in 1993 to $2.9 billion or about 1% of GDP in 2000 - “a very modest deterioration”.
Even this movement did not occur on the expenditure side. Government spending, minus interest payments, was essentially flat over the period - 19.1% of GDP in 1993 and 18.9% in 2000 - despite the serious recession. All the deterioration was on the revenue side, as tax collections fell off during the recession.
It was thus difficult to argue, says CEPR, that the Argentine government contributed to the economic crisis through overspending, nor could the government have averted, even if it were politically possible, the default and devaluation through further fiscal tightening throughout the recession.
The government budget moved from surplus to deficit because of interest payments, which rose from $2.5 billion in 1991 to $9.5 billion in 2000 or from 1.2% to 3.4% of GDP.
With almost all of these payments in foreign currency, this itself was a significant drain on the economy. But the effect of rising interest rates, in the context of the fixed exchange rate, was much more damaging. The budget deficit increased uncertainty in the financial markets about the viability of the exchange-rate regime, and the uncertainty drove interest rates even higher.
Efforts to meet the deficit by cutting primary government spending even further during a period of recession made things worse: it directly cut demand and, by causing political instability and uncertainty, fed the fears of devaluation and/or default. The collapse of the economy occurred without any new borrowing by the government to finance its primary spending.
Interest rate hike
Argentina’s problems began when the US Federal Reserve hiked up interest rates in February 1994 and over the next year doubled the short-term rates from 3 to 6 percent. Argentina was hit immediately because of the uncertainty created over emerging markets: Argentina’s borrowing rate increased by the US Fed’s 3 percentage point increases, and the increasing spread.
The devaluation of the Mexican peso in December 1994 - partly triggered by the hike in US interest rates that attracted tens of billions of dollars away from Mexican bonds to the US - exacerbated the situation in Argentina, with the banking system losing 18% of its deposits within weeks.
The economy, which had been growing at an average annual 8% rate from the second half of 1990 to the second half of 1994, went into a steep recession. GDP contracted by 7.6% from the last quarter of 1994 to the first quarter of 1996, and there was a massive outflow of capital and shrinkage of reserves.
While recovery began in the second half of 1996, the Asian crisis of 1997 sent the Argentine risk premium and cost of borrowing up again. And the peso, tied to its fixed exchange rate with the dollar, became overvalued, with the dollar too becoming overvalued at that time.
The subsequent spread of the Asian financial crisis to Russia and then Brazil made things worse, and the Argentine economy went into recession in the second half of 1998 and has not recovered since. Efforts to restore confidence in the overvalued peso through spending cuts and IMF loans (including a $40 billion package in December 2000) could not reverse the downward spiral.
The IMF supported the fixed-rate policy of Argentina all the way into the abyss, though subsequently the Fund officials have claimed they did so at the request of the Argentine government.
Argentina’s debt to the international financial institutions increased from $15 billion to $33 billion, and throughout the IMF insisted that more fiscal tightening was the key to recovery, even though it was quite clear that no amount of budget-cutting or tax increase could have saved Argentina from default and devaluation.
Argentina is currently trying to negotiate new agreements with the IMF and the international financial institutions, and there are renewed calls for budget austerity. Though the fixed-exchange-rate system has gone, austerity cannot help Argentine recovery, says CEPR.
At the moment, with the government of President Eduardo Duhalde lacking any public backing to be able to stand up to the IMF, the Fund officials seem to have the upper hand.
However, says Weisbrot, the IMF would be playing with fire if it tries to squeeze debt service out of the collapsed economy and push more people into poverty. (SUNS5077)
From TWE No 276 (1-15 March 2002)
Countering claims that the Argentine economic crisis was caused by extravagant government spending, a US think-tank has traced the roots of the Latin American country’s troubles to external shocks and wrong-headed policies backed by the international financial institutions.
by Chakravarthi Raghavan
--------------------------------------------------------------------------------
GENEVA: The crisis in Argentina is not the result of profligate government spending but was caused by external shocks and failures of policies that were set or encouraged and promoted by the international financial institutions, including the International Monetary Fund, according to a briefing paper of the Centre for Economic and Policy Research (CEPR).
The briefing paper is by Mark Weisbrot and Dean Baker, co-directors of CEPR, a Washington-based think-tank, who warn that the IMF is playing with fire in trying to squeeze debt service out of Argentina’s collapsed economy.
In the briefing paper, Weisbrot and Baker have challenged reports in the US and international press of a profligate government that could not contain its spending and could not make the necessary hard choices to build confidence among investors and lenders.
It was higher interest payments on its debt, not increased government spending, that led to the higher deficits which in turn created doubts about the overvalued exchange rate, pushed interest rates higher and created larger deficits - in a hopeless spiral that ended in default and devaluation.
While policy failures played a role in the economic collapse in Argentina - and the most important was the fixed exchange rate tying the Argentine peso to the US dollar - the immediate cause of the crisis was a series of external shocks beyond the control of Argentina, CEPR says.
These shocks began with the US Federal Reserve’s decision to raise interest rates in February 1994 and were made much worse because of the fixed exchange rate.
The Argentine data do not support the idea that the government could not accept a sufficient dose of the austerity medicine or that it spent its way into a hole.
The total budget balance of Argentina over the period 1993-2000 suggests a significant loosening of fiscal policy, with the budget moving from a surplus of $2.7 billion or 1.2% of the GDP in 1993 to a deficit of $6.8 billion or 2.4% of GDP in 2000. But, for a country in deep recession, this deficit was modest.
However, even this deficit, and the shift from surplus at the beginning of the period, does not accurately represent government fiscal policy, the CEPR briefing paper points out.
The primary balance of the government - government spending other than interest payments, subtracted from revenues - moved from a surplus of $5.6 billion or 2.4% of GDP in 1993 to $2.9 billion or about 1% of GDP in 2000 - “a very modest deterioration”.
Even this movement did not occur on the expenditure side. Government spending, minus interest payments, was essentially flat over the period - 19.1% of GDP in 1993 and 18.9% in 2000 - despite the serious recession. All the deterioration was on the revenue side, as tax collections fell off during the recession.
It was thus difficult to argue, says CEPR, that the Argentine government contributed to the economic crisis through overspending, nor could the government have averted, even if it were politically possible, the default and devaluation through further fiscal tightening throughout the recession.
The government budget moved from surplus to deficit because of interest payments, which rose from $2.5 billion in 1991 to $9.5 billion in 2000 or from 1.2% to 3.4% of GDP.
With almost all of these payments in foreign currency, this itself was a significant drain on the economy. But the effect of rising interest rates, in the context of the fixed exchange rate, was much more damaging. The budget deficit increased uncertainty in the financial markets about the viability of the exchange-rate regime, and the uncertainty drove interest rates even higher.
Efforts to meet the deficit by cutting primary government spending even further during a period of recession made things worse: it directly cut demand and, by causing political instability and uncertainty, fed the fears of devaluation and/or default. The collapse of the economy occurred without any new borrowing by the government to finance its primary spending.
Interest rate hike
Argentina’s problems began when the US Federal Reserve hiked up interest rates in February 1994 and over the next year doubled the short-term rates from 3 to 6 percent. Argentina was hit immediately because of the uncertainty created over emerging markets: Argentina’s borrowing rate increased by the US Fed’s 3 percentage point increases, and the increasing spread.
The devaluation of the Mexican peso in December 1994 - partly triggered by the hike in US interest rates that attracted tens of billions of dollars away from Mexican bonds to the US - exacerbated the situation in Argentina, with the banking system losing 18% of its deposits within weeks.
The economy, which had been growing at an average annual 8% rate from the second half of 1990 to the second half of 1994, went into a steep recession. GDP contracted by 7.6% from the last quarter of 1994 to the first quarter of 1996, and there was a massive outflow of capital and shrinkage of reserves.
While recovery began in the second half of 1996, the Asian crisis of 1997 sent the Argentine risk premium and cost of borrowing up again. And the peso, tied to its fixed exchange rate with the dollar, became overvalued, with the dollar too becoming overvalued at that time.
The subsequent spread of the Asian financial crisis to Russia and then Brazil made things worse, and the Argentine economy went into recession in the second half of 1998 and has not recovered since. Efforts to restore confidence in the overvalued peso through spending cuts and IMF loans (including a $40 billion package in December 2000) could not reverse the downward spiral.
The IMF supported the fixed-rate policy of Argentina all the way into the abyss, though subsequently the Fund officials have claimed they did so at the request of the Argentine government.
Argentina’s debt to the international financial institutions increased from $15 billion to $33 billion, and throughout the IMF insisted that more fiscal tightening was the key to recovery, even though it was quite clear that no amount of budget-cutting or tax increase could have saved Argentina from default and devaluation.
Argentina is currently trying to negotiate new agreements with the IMF and the international financial institutions, and there are renewed calls for budget austerity. Though the fixed-exchange-rate system has gone, austerity cannot help Argentine recovery, says CEPR.
At the moment, with the government of President Eduardo Duhalde lacking any public backing to be able to stand up to the IMF, the Fund officials seem to have the upper hand.
However, says Weisbrot, the IMF would be playing with fire if it tries to squeeze debt service out of the collapsed economy and push more people into poverty. (SUNS5077)
From TWE No 276 (1-15 March 2002)
crisis at it highest
All Parts of the world in one or another way are either directly or indirectly involved and affected by the current political,social and econimical uproar caused by many factors moreso human factors inform of spur heading enviromental dipiladation,inhumanity and loss of sanity among myriad empirical factors.mundiah
Thursday, December 18, 2008
The Rwanda Crisis
The enormous crowd of at least 300,000 was a mixture of all sorts and conditions: dispirited Interahamwe, who no longer even bothered to kill the few Tutsi walking along with them, civil servants and their families, riding in a motley of commandeered vehicles that had belonged to their ministries, ordinary peasants fleeing in blind terror, exhausted FAR troops trying to keep a minimum of discipline, abandoned children with swollen feet, middle class Kigali businessmen in their overloaded cars, whole orphanages, priests, nuns and madmen.”
Gerard Prunier describing the exodus from Ruhengeri. The Rwanda Crisis: History of a Genocide 1959-1994 at page 298, published by Hurst and Company Ltd, 1995.
Flight from Rwanda
The genocide in Rwanda claimed the lives of nearly a million people in 100 days in 1994, as extremist members of the Hutu majority turned on the Tutsi minority and moderate Hutus, vowing to exterminate the Tutsi and their influence on Rwandan society. The horror was only halted when the Tutsi-dominated Rwandan Patriotic Front (RPF) finally defeated the genocidal government.
In the wake of this violence, over two million refugees streamed into Burundi, Tanzania, Uganda and Zaire (now the Democratic Republic of Congo). 850,000 people walked across the border to Goma in eastern Zaire over just five days from July 14 to 18, 1994. Most were innocent Hutu fleeing the advancing RPF forces. Some had heard of human rights abuses committed by the RPF. Others fled out of fear inspired by Hutu Power propaganda describing the Tutsi as a “subhuman” race bent on enslaving and massacring the Hutu masses.
However, concealed among those clamoring for support were individuals who had been involved in massacre and killing—even in planning and carrying out the genocide. Groups intent on prolonging the violence saw the camps and the humanitarian aid that came with them as vital for the restocking of and recruitment for their war effort. The genocidaires quickly took control of the camps. Instead of finding safety in flight, the refugees continued to struggle against violence and intimidation while the genocidaires, operating with impunity, used the camps to rearm and launch forays back into Rwanda. Humanitarian organizations were forced to either deliver aid to the hands of the genocidaires or abandon hundreds of thousands of refugees to potential starvation. (For more on the Refugee Program’s efforts to address the dilemmas faced by humanitarian workers, see Refugees, Humanitarianism and Human Rights.
Insecurity in the Camps
The Rwanda crisis forced the international community to acknowledge the extent to which insufficient response to refugee crises could pose a threat to international peace and security. The magnitude of the crisis, combined with the saturation coverage it received on European and North American television, exposed the inadequacy of the international community’s responses in ways that other crises had not. Furthermore, its timing coincided with a renewed commitment by the international community to bring the most serious criminals to justice, starkly highlighting their failure to do so in the immediate aftermath of Rwanda.
It was clear that the international community was unprepared to respond to the crisis—both in dealing with singling out and bringing to justice the genocidaires and in assisting host countries in providing effective security. Many organizations, including Human Rights First, called on international actors to identify and separate those responsible for the genocide and the destruction of the civilian and humanitarian nature of the camps. Unfortunately, there was little political will to undertake such an exercise.
In the face of the international community’s inaction the genocidaires continued to use the camps as bases for incursions into Rwanda and attacks on elements of the local population. Eventually the new Rwandan government and its Zairian allies attacked and destroyed the camps claiming that they could no longer tolerate the threat the camps posed to Rwandan security. Thousands of refugees were killed. 640,000 Rwandans trekked home, while others, including some of the genocidaires, fled deeper into the jungles of Zaire.
The destruction of the camps in Zaire dramatically demonstrated the dire consequences of the failure to maintain security in refugee camps. One of the mechanisms could have been applied it an effort to prevent this disaster was the international refugee law concept of exclusion.
Zimbabwe's Mugabe says cholera crisis over
Zimbabwe's Mugabe says cholera crisis over
By ANGUS SHAW – 6 days ago
HARARE, Zimbabwe (AP) — President Robert Mugabe declared Thursday that there was "no cholera" in Zimbabwe and the country's health crisis was over, even as the United Nations raised the death toll from the epidemic to 783.
Cholera has spread rapidly in the southern African nation because of the country's crumbling health care system and the lack of clean water. The U.N. said 16,403 cases have been reported.
Last week, Zimbabwe declared a health emergency because of cholera and the collapse of its health services. South African authorities have declared the cholera-hit border region with Zimbabwe a disaster area as the disease spreads to other countries.
At a state funeral Thursday for a ruling party official, Mugabe insisted the outbreak of the waterborne disease had been "arrested" with the help of the World Health Organization and other aid agencies.
Mugabe lashed out at critics who have been calling for his ouster — and even military intervention — as concerns about Zimbabwe's deepening humanitarian crisis mounted.
"So now that there is no cholera, there is no cause for war anymore. We need doctors, not soldiers," he said during an hour-long address broadcast live on state television.
Mugabe has ruled his country since its 1980 independence from Britain and has refused to leave office following disputed elections in March. A power-sharing deal worked out in September with the opposition has been deadlocked over how to divide up Cabinet posts.
President George W. Bush, British Prime Minister Gordon Brown and French President Nicolas Sarkozy all have called recently for the 84-year-old leader to step down.
In Washington, the U.S. ambassador to Harare, James McGee, told reporters at the State Department that the cholera problem is getting worse and that Mugabe's assertion that the health crisis was over showed "how out of touch he is with the reality" in Zimbabwe.
"The situation is truly grim," McGee said, "One man and his cronies — Robert Mugabe — are holding this country hostage."
Britain's Africa minister Mark Malloch-Brown also rejected Mugabe's claim that there was no longer a crisis in Zimbabwe.
"I don't know what world he is living in," Malloch-Brown said during a one-day trip to South Africa, where he visited a Johannesburg church housing 1,600 Zimbabweans who have fled the country.
Malloch-Brown called on South Africa to put more pressure on Mugabe to end the political and humanitarian crisis. South Africa has withheld 300 million rand ($30 million) in aid for Zimbabwe but otherwise has been reluctant to use its huge economic and political muscle against its neighbor.
"South Africa could do a lot more and it needs to do it now," said Malloch-Brown, who also met South African Health Minister Barbara Hogan, who is trying to contain the spread of cholera from across the border. He was also due to meet President Kgalema Motlanthe.
About 664 people have been treated for the waterborne disease and at least eight people have died in South Africa. Hundreds of Zimbabweans cross the border at Beitbridge every day to search for jobs in South Africa, buy supplies and, increasingly, seek medical treatment.
Phandu Skelemani, foreign minister of neighboring Botswana, which has been critical of Mugabe, said his country's border with Zimbabwe should remain open but he supported other measures to isolate Mugabe and his ZANU-PF party.
"If you switch off petrol (gasoline), I think that ZANU-PF will have to go. If that step is agreed and you then simultaneously airlift critical supplies like food and essential supplies to prevent Zimbabweans from starving to death, I think it will have desired effect," Skelemani told The Associated Press on Thursday.
Associated Press writers Sello Motseta in Gaborone, Botswana and Celean Jacobson in Johannesburg, South Africa contributed to this report.
Tuesday, December 16, 2008
Zuma puts Zimbabwe on 2009 priority list
Zuma puts Zimbabwe on 2009 priority list
Tuesday, 16 December 2008
Jacob ZumaI hope it is not too late for this
Johannesburg – Jacob Zuma, the President of South Africa’s ruling African National Congress (ANC), who is also largely tipped to become the country’s leader after next year’s general elections, has placed resolving the ongoing Zimbabwean crisis among the top priority list for his party in 2009.
Zuma said this Monday last week, while addressing Namibian leaders during his tour of that country, meant to strengthen bi-lateral relations between South Africa and its former colony. The ANC leader said that his country was “concerned about the deteriorating humanitarian and political situation”, adding that very swift action was needed to end the political and economic crisis, which has created a serious humanitarian crisis in South Africa’s erstwhile prosperous northern neighbour. Zuma added that South Africa was determined to solve the crisis in Zimbabwe , alongside the conflicts that continue in other African countries like the Democratic Republic of Congo, Sudan , Somalia and Burundi .”Some swift action is clearly needed to deal with the situation in Zimbabwe. We are concerned about the deteriorating humanitarian and political situation there,” said Zuma.He said that although his party was fully supportive of former South African President, Thabo Mbeki’s mediation efforts in trying to solve the ongoing crisis, the ANC leadership still felt that a lot more needed to be done. “We however more feel that more pressure needs to be brought to bear on the negotiating parties to ensure a speedy conclusion of an agreement. We cannot keep Zimbabweans on tenterhooks while the situation in the country deteriorates,” added Zuma. Unlike Mbeki, whose preferred approach of “quiet diplomacy” was usually viewed as sterile in solving the Zimbabwean crisis, Zuma is viewed as a no-nonsense leader and has also been a very strong critic of Zimbabwean dictator, Robert Mugabe. Since he took over the leadership of the ANC, Zuma has often accused Mugabe’s government of having lost all liberation qualities and respect for the constitution. After Zimbabwe’s ill-fated elections, when Mugabe deployed state security agents on a violence spree in which they tortured both known and suspected opposition officials, murdering more than 100 of them, Zuma was very vocal in criticizing Mugabe, while the ANC also announced that it had cut ties with Mugabe’s ZANU (PF). Mugabe has ruled Zimbabwe since its independence from Britain in 1980, and has, with his authoritarian rule and skewed governance policies, reduced the country from being the bread basket of Southern Africa into being a basket case of the region, failing to even feed its 11 million people. South Africa, which boasts of Africa's strongest economy, is currently under pressure from the international community to lead calls for Mugabe to, at least, share power equally with the opposition Movement for Democratic Change and create a government of national unity, after a power-sharing agreement was signed on September 15. However, Mugabe has refused to hand over some key cabinet posts to the MDC, especially those responsible for the country's security, resulting in a deadlock that has spanned close to three months. The national unity government is viewed by many as the only way that the Zimbabwean crisis can be solved, but doubts have now arisen on whether it will work even if the parties involved fainally bury their hatchet and agree on the cabinet posts. - By Our Correspondent
Tuesday, 16 December 2008
Jacob ZumaI hope it is not too late for this
Johannesburg – Jacob Zuma, the President of South Africa’s ruling African National Congress (ANC), who is also largely tipped to become the country’s leader after next year’s general elections, has placed resolving the ongoing Zimbabwean crisis among the top priority list for his party in 2009.
Zuma said this Monday last week, while addressing Namibian leaders during his tour of that country, meant to strengthen bi-lateral relations between South Africa and its former colony. The ANC leader said that his country was “concerned about the deteriorating humanitarian and political situation”, adding that very swift action was needed to end the political and economic crisis, which has created a serious humanitarian crisis in South Africa’s erstwhile prosperous northern neighbour. Zuma added that South Africa was determined to solve the crisis in Zimbabwe , alongside the conflicts that continue in other African countries like the Democratic Republic of Congo, Sudan , Somalia and Burundi .”Some swift action is clearly needed to deal with the situation in Zimbabwe. We are concerned about the deteriorating humanitarian and political situation there,” said Zuma.He said that although his party was fully supportive of former South African President, Thabo Mbeki’s mediation efforts in trying to solve the ongoing crisis, the ANC leadership still felt that a lot more needed to be done. “We however more feel that more pressure needs to be brought to bear on the negotiating parties to ensure a speedy conclusion of an agreement. We cannot keep Zimbabweans on tenterhooks while the situation in the country deteriorates,” added Zuma. Unlike Mbeki, whose preferred approach of “quiet diplomacy” was usually viewed as sterile in solving the Zimbabwean crisis, Zuma is viewed as a no-nonsense leader and has also been a very strong critic of Zimbabwean dictator, Robert Mugabe. Since he took over the leadership of the ANC, Zuma has often accused Mugabe’s government of having lost all liberation qualities and respect for the constitution. After Zimbabwe’s ill-fated elections, when Mugabe deployed state security agents on a violence spree in which they tortured both known and suspected opposition officials, murdering more than 100 of them, Zuma was very vocal in criticizing Mugabe, while the ANC also announced that it had cut ties with Mugabe’s ZANU (PF). Mugabe has ruled Zimbabwe since its independence from Britain in 1980, and has, with his authoritarian rule and skewed governance policies, reduced the country from being the bread basket of Southern Africa into being a basket case of the region, failing to even feed its 11 million people. South Africa, which boasts of Africa's strongest economy, is currently under pressure from the international community to lead calls for Mugabe to, at least, share power equally with the opposition Movement for Democratic Change and create a government of national unity, after a power-sharing agreement was signed on September 15. However, Mugabe has refused to hand over some key cabinet posts to the MDC, especially those responsible for the country's security, resulting in a deadlock that has spanned close to three months. The national unity government is viewed by many as the only way that the Zimbabwean crisis can be solved, but doubts have now arisen on whether it will work even if the parties involved fainally bury their hatchet and agree on the cabinet posts. - By Our Correspondent
food crisis
Posted on August 19, 2008 by Ching Li Chan
Topics: Food, Economic Development, AgricultureCountries: Ethiopia
If you think that the global food crisis is taking a toll on countries like Indonesia, Bangladesh, and Mexico, imagine what its like for those living in Ethiopia. Alex Perry’s report from Kersa, Ethiopia for Time Magazine paints a grim picture:
The day photographer Thomas Dworzak and I arrived at Kuyera, four children died. There were four more the next day…. On that first day, I glimpsed Ayano in the intensive care room, wrapped in a red and blue blanker, struggling to breathe, his eyes tipped back into his skull. When I next saw him, he was trussed up the blanket that had become his death shroud, lying on a slab next to two other small bundles in the morgue…. For five days, we turned our hired SUV into an ambulance, ferrying bodies of dead children back to their villages, picking up the starving and taking them to Kuyera.
Ethiopia faces a major crisis — chronic drought coupled with food prices that have risen 330 percent in the past year and a population that has doubled in size since the mid-1980s.
Yet nature alone is not to blame for Ethiopia's food crisis. Some argue that the government's tight control of the agricultural sector that puts all land under state ownership exacerbates Ethiopia's food insecurity. The distribution of fertilizer and seeds are government-controlled, and while farmers can choose what they want to grow, the Los Angeles Times reports that some 20,000 agricultural advisors, also functioning as tax collectors, keep close tabs of what is being grown.
This week, the UN's Office for the Coordination of Humanitarian Affairs said that "despite the best efforts of the government and humanitarian community to respond to the crisis the needs of people continue to far outstrip the resources available to hand."
Yet surrounding the famine are lush fields of green — feeding goats and cattle — while children continue to die of hunger. It is the harsh reality of what is being called "green hunger" or "green drought" — starvation amidst plenty. A recent BBC article describes it as "the time when the land is full of new shoots but there is no food. It happens because the last rains failed and few crops were planted."
Images posted by Reuters photographer Radu Sigheti puts a face to the crisis in an intimate visit with the Mohamed family during the loss of their young daughter, Michu, who died of malnutrition.
Other children will likely suffer the same fate. Recent government figures estimate some 75,000 children under the age of five in the country are severely malnourished. Among all Ethiopians, more than 4.5 million are in need of emergency food aid.
Now is the time for us to help fill Ethiopia's need. As Mark Lang from the Christian relief agency Tearfund writes in the Times Online, "This is no time to give Ethiopians a compassion fatigued brush-off."
Topics: Food, Economic Development, AgricultureCountries: Ethiopia
If you think that the global food crisis is taking a toll on countries like Indonesia, Bangladesh, and Mexico, imagine what its like for those living in Ethiopia. Alex Perry’s report from Kersa, Ethiopia for Time Magazine paints a grim picture:
The day photographer Thomas Dworzak and I arrived at Kuyera, four children died. There were four more the next day…. On that first day, I glimpsed Ayano in the intensive care room, wrapped in a red and blue blanker, struggling to breathe, his eyes tipped back into his skull. When I next saw him, he was trussed up the blanket that had become his death shroud, lying on a slab next to two other small bundles in the morgue…. For five days, we turned our hired SUV into an ambulance, ferrying bodies of dead children back to their villages, picking up the starving and taking them to Kuyera.
Ethiopia faces a major crisis — chronic drought coupled with food prices that have risen 330 percent in the past year and a population that has doubled in size since the mid-1980s.
Yet nature alone is not to blame for Ethiopia's food crisis. Some argue that the government's tight control of the agricultural sector that puts all land under state ownership exacerbates Ethiopia's food insecurity. The distribution of fertilizer and seeds are government-controlled, and while farmers can choose what they want to grow, the Los Angeles Times reports that some 20,000 agricultural advisors, also functioning as tax collectors, keep close tabs of what is being grown.
This week, the UN's Office for the Coordination of Humanitarian Affairs said that "despite the best efforts of the government and humanitarian community to respond to the crisis the needs of people continue to far outstrip the resources available to hand."
Yet surrounding the famine are lush fields of green — feeding goats and cattle — while children continue to die of hunger. It is the harsh reality of what is being called "green hunger" or "green drought" — starvation amidst plenty. A recent BBC article describes it as "the time when the land is full of new shoots but there is no food. It happens because the last rains failed and few crops were planted."
Images posted by Reuters photographer Radu Sigheti puts a face to the crisis in an intimate visit with the Mohamed family during the loss of their young daughter, Michu, who died of malnutrition.
Other children will likely suffer the same fate. Recent government figures estimate some 75,000 children under the age of five in the country are severely malnourished. Among all Ethiopians, more than 4.5 million are in need of emergency food aid.
Now is the time for us to help fill Ethiopia's need. As Mark Lang from the Christian relief agency Tearfund writes in the Times Online, "This is no time to give Ethiopians a compassion fatigued brush-off."
Food crisis 'worsens' in Kenya
Food crisis 'worsens' in Kenya
The situation on the ground is deteriorating rapidlyAid agencies have stepped up appeals for food in northern Kenya where some 2.5m people face severe shortages.
Eight under-nourished children have died in the last 10 days in the hospital in Garissa.
The situation is deteriorating rapidly with families losing cattle, goats and even hardier camels, aid workers say.
Thousands of herdsmen seeking new pastures are moving to Uganda, where Lake Victoria's waters have dropped significantly due to the drought.
Exodus
World Vision, Action Against Hunger and the International Federation of Red Cross Societies have added their voice to the appeal of the Kenyan government, which has declared the food crisis a "national disaster".
President Mwai Kibaki has pledged government aid for famine victims
Over the last few months the pastoral people of northern Kenya, Somalia and southern Ethiopia have begun to lose their livestock to the drought.
"Communities may soon be wiped out since they depend entirely on livestock," said the Red Cross.
Children, weakened by months of hunger, are starting to die of diarrhoea, malaria and other diseases, and the existing centres for feeding malnourished children are overflowing, aid workers say.
BBC Africa analyst Elizabeth Blunt says people in these parts of Africa have traditional ways of coping with drought, eating famine foods such as wild berries and migrating en masse to areas where there may still be water and grazing.
The water levels at Mtera and Kidatu dams are too low to generate power
Patrick RutabanzibwaTanzania's energy and minerals ministry
A senior Kenyan churchman said more than 3,000 people from Western Pokot district were on the move, heading towards the Ugandan border with around 20,000 head of cattle.
"The exodus is still going on, but we hope that Ugandan authorities will understand the situation and continue allowing the Pokot to graze their animals in the country," Rev Joseph Murupus told Kenya's East African Standard newspaper.
Power cuts
This drought follows previous seasons of poor rains across the region.
Uganda's Water, Land and Environment Minister Kahinda Otafire warned on Wednesday that the water levels in Lake Victoria - which borders Kenya, Uganda and Tanzania - had dropped due to the drought and some hydroelectric plants may be closed.
He said more than 20 Uganda districts were facing food shortages, but said the problem was not as serious as in Kenya.
Tanzania is also expected to start power rationing as water levels in dams have dropped.
"The water levels at Mtera and Kidatu dams are too low to enable Tanesco [Tanzania Electric Supply Company] to generate power as required," Energy and Minerals Permanent Secretary Patrick Rutabanzibwa told Tanzania's Guardian newspaper this week.
"The plan is to start with a two-hour rationing schedule," he said.
The situation on the ground is deteriorating rapidlyAid agencies have stepped up appeals for food in northern Kenya where some 2.5m people face severe shortages.
Eight under-nourished children have died in the last 10 days in the hospital in Garissa.
The situation is deteriorating rapidly with families losing cattle, goats and even hardier camels, aid workers say.
Thousands of herdsmen seeking new pastures are moving to Uganda, where Lake Victoria's waters have dropped significantly due to the drought.
Exodus
World Vision, Action Against Hunger and the International Federation of Red Cross Societies have added their voice to the appeal of the Kenyan government, which has declared the food crisis a "national disaster".
President Mwai Kibaki has pledged government aid for famine victims
Over the last few months the pastoral people of northern Kenya, Somalia and southern Ethiopia have begun to lose their livestock to the drought.
"Communities may soon be wiped out since they depend entirely on livestock," said the Red Cross.
Children, weakened by months of hunger, are starting to die of diarrhoea, malaria and other diseases, and the existing centres for feeding malnourished children are overflowing, aid workers say.
BBC Africa analyst Elizabeth Blunt says people in these parts of Africa have traditional ways of coping with drought, eating famine foods such as wild berries and migrating en masse to areas where there may still be water and grazing.
The water levels at Mtera and Kidatu dams are too low to generate power
Patrick RutabanzibwaTanzania's energy and minerals ministry
A senior Kenyan churchman said more than 3,000 people from Western Pokot district were on the move, heading towards the Ugandan border with around 20,000 head of cattle.
"The exodus is still going on, but we hope that Ugandan authorities will understand the situation and continue allowing the Pokot to graze their animals in the country," Rev Joseph Murupus told Kenya's East African Standard newspaper.
Power cuts
This drought follows previous seasons of poor rains across the region.
Uganda's Water, Land and Environment Minister Kahinda Otafire warned on Wednesday that the water levels in Lake Victoria - which borders Kenya, Uganda and Tanzania - had dropped due to the drought and some hydroelectric plants may be closed.
He said more than 20 Uganda districts were facing food shortages, but said the problem was not as serious as in Kenya.
Tanzania is also expected to start power rationing as water levels in dams have dropped.
"The water levels at Mtera and Kidatu dams are too low to enable Tanesco [Tanzania Electric Supply Company] to generate power as required," Energy and Minerals Permanent Secretary Patrick Rutabanzibwa told Tanzania's Guardian newspaper this week.
"The plan is to start with a two-hour rationing schedule," he said.
Zim food crisis deepens
Zim food crisis deepens30/09/2007 20:49 - (SA)
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Zimbabwe Special Report
Latest Zimbabwe Stories
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Harare - Zimbabwe harvested only one-third of the wheat it needs this year - a drastic shortfall the government blamed on constant power outages, official media reported on Sunday.
Stores throughout the impoverished country were telling customers that bread would not be available until further notice.
Most bakeries closed last week as flour deliveries ceased, worsening the situation for a nation already struggling with severe shortages of fuel and food supplies, including its staple diet item of corn.
The government said on Tuesday it would import 100 000 tons of wheat to supplement this year's yield of 145 000 tons - well short of the government's 375 000-ton target.
The first 35 000 tons of the imported wheat were delayed, however, at the Mozambique port of Beira as authorities sought hard currency to pay for it.
Land grabs 'to blame'
Many have blamed Zimbabwe's agricultural decline on the government's seizures of white-owned commercial farms, begun in 2000, for redistribution to black owners.
A report by the Ministry of Agriculture's research department said, however, that chronic power outages had cut off irrigation and forced wheat farmers to abandon crops during germination - leading to yields of about 2-3 tons per hectare (0.8-1.2 tons per acre), far lower than the target of 5 tons a hectare (about 2.25 tons an acre), the official Sunday Mail newspaper reported.
The low harvest compounds Zimbabwe's troubles, as it faces its worst economic crisis since independence in 1980, with acute shortages of hard currency, food, most basic goods and fuel.
The UN World Food Program estimates at least 3 million people - a quarter of the population - will need emergency food aid before the April corn harvests.
Zimbabwe is facing daily power outages caused by shortages of coal and equipment. Breakdowns have plagued the western Hwange coal mine, which sits atop one of southern Africa's biggest coal deposits, and the country is importing nearly 40% of its power.
Outages rise 50%
The state power utility said on Friday that daily outages had increased by 50% since Mozambique reduced supplies over an outstanding debt of US$35m.
The outages have also affected the tobacco industry, which began planting seedlings this month, according to the Zimbabwe Farmers Union, a black farmers group. Many farmers had said that, with irrigation shut off, their seedlings had wilted and died, the union said.
Zimbabwe was once the second-largest tobacco exporter in the world after Brazil. Cigarettes have disappeared from shops, and on the thriving black market fetch at least 10 times the government's fixed price.
Meanwhile, cotton farmers anxious about seed shortages were resisting government advice to destroy their crops to prevent the spread of cotton blight, a bacterial disease that affects the plant, the agriculture ministry's research department said.
Newspapers were also in short supply on Sunday. The state newspaper company and the sole independent Sunday paper have cut print operations because of shortages of paper and materials and falling advertising on consumer goods no longer available in stores.
The independent Standard sold out on the streets before 07:00 GMT, vendors said.
- AP
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Zimbabwe Special Report
Latest Zimbabwe Stories
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Harare - Zimbabwe harvested only one-third of the wheat it needs this year - a drastic shortfall the government blamed on constant power outages, official media reported on Sunday.
Stores throughout the impoverished country were telling customers that bread would not be available until further notice.
Most bakeries closed last week as flour deliveries ceased, worsening the situation for a nation already struggling with severe shortages of fuel and food supplies, including its staple diet item of corn.
The government said on Tuesday it would import 100 000 tons of wheat to supplement this year's yield of 145 000 tons - well short of the government's 375 000-ton target.
The first 35 000 tons of the imported wheat were delayed, however, at the Mozambique port of Beira as authorities sought hard currency to pay for it.
Land grabs 'to blame'
Many have blamed Zimbabwe's agricultural decline on the government's seizures of white-owned commercial farms, begun in 2000, for redistribution to black owners.
A report by the Ministry of Agriculture's research department said, however, that chronic power outages had cut off irrigation and forced wheat farmers to abandon crops during germination - leading to yields of about 2-3 tons per hectare (0.8-1.2 tons per acre), far lower than the target of 5 tons a hectare (about 2.25 tons an acre), the official Sunday Mail newspaper reported.
The low harvest compounds Zimbabwe's troubles, as it faces its worst economic crisis since independence in 1980, with acute shortages of hard currency, food, most basic goods and fuel.
The UN World Food Program estimates at least 3 million people - a quarter of the population - will need emergency food aid before the April corn harvests.
Zimbabwe is facing daily power outages caused by shortages of coal and equipment. Breakdowns have plagued the western Hwange coal mine, which sits atop one of southern Africa's biggest coal deposits, and the country is importing nearly 40% of its power.
Outages rise 50%
The state power utility said on Friday that daily outages had increased by 50% since Mozambique reduced supplies over an outstanding debt of US$35m.
The outages have also affected the tobacco industry, which began planting seedlings this month, according to the Zimbabwe Farmers Union, a black farmers group. Many farmers had said that, with irrigation shut off, their seedlings had wilted and died, the union said.
Zimbabwe was once the second-largest tobacco exporter in the world after Brazil. Cigarettes have disappeared from shops, and on the thriving black market fetch at least 10 times the government's fixed price.
Meanwhile, cotton farmers anxious about seed shortages were resisting government advice to destroy their crops to prevent the spread of cotton blight, a bacterial disease that affects the plant, the agriculture ministry's research department said.
Newspapers were also in short supply on Sunday. The state newspaper company and the sole independent Sunday paper have cut print operations because of shortages of paper and materials and falling advertising on consumer goods no longer available in stores.
The independent Standard sold out on the streets before 07:00 GMT, vendors said.
- AP
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