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An early draft of an oped that appeared in the Washington Post on February 12, 1998.
Stanley Fischer on the IMF and East Asia
J. Bradford DeLong
Professor of Economics
January 11, 1998
It is a time of economic boom. Far to the west of the established industrial centers of the world economy--across the broad ocean--an industrial revolution is in progress. Mammoth infrastructure projects lay the groundwork for cities and factories where before only rude farmers had dwelt. Natural resources are tapped, and rising exports of resource-based products raise living standards both in the new boom economies and in the older industrial core. Alongside the resource exports a flow of manufactured goods begins and grows, as the emerging industries find their competitive niches. All this is funded by a flood of capital out of the established financial centers seeking higher returns, and willing to bear some extra risks as well.
But all is not well. Corrupt government officials have been siphoning off unbelievable amounts of money from state-funded infrastructure projects. Revelations of the extent of production lead to legislative censure of the truth-tellers. Meanwhile, the greatest financial institutions have become overextended: poured their money into enterprises doomed to failure, and then tried their real bankruptcy. When a sudden shock lays bare the extent of official corruption and of unsound private business practices, investors in the industrial core realize that all is not well in the lands to the west across the ocean. Capital stampedes out, back to the industrial core, no matter what interest rates are paid or equity terms are offered. And with a shattering crash, the largest and most prominent financiers--those whose houses have been the vacation retreats of national presidents, and who have been the business partners of close relatives of national leaders--fail and go bankrupt.
East Asia in 1997-8? Yes, of course. But also the United States of America in 1873-4. Congressman Oakes Ames of Massachusetts and his "friends" at the Union Pacific, Leland Stanford and Colis Huntington of the Central Pacific, and the team of Jay Gould and Jim Fisk would have had little if anything to learn about crony capitalism and corruption from the friends of Suharto. Jay Cooke, the wizard financier of the Civil War, managed to place what was then the largest banking house in North America as far underwater as the heads of any of South Korea's chaebol. And British and other European investors reacted then just as American and other investors are reacting now: pulling their capital out of the enterprises and economies that only a year before they had seen as profitable goldmines.
We know how this story ends in the absence of international intervention and support. Back in 1873 there was no IMF, the Bank of England saw its mandate as narrowly limited to British financial crises, and the British Treasury Secretary--the Chancellf the Exchequer--took no notice of what went on across the ocean.
British and European capital fled the United States. The amount of railroad miles built in the United States fell by 80%, as the country entered a depression that would not lift for nearly half a decade. Until 1933, it was the U.S. depression that followed 1873 that had the name of "Great Depression."
Now we are watching the same movie, but we have a chance to give it a different ending. Now we have an IMF. Now we have a Treasury and a Federal Reserve that understand the need to safeguard the world economy as a whole. Now we have central bankers and finance ministers who remember 1873--and 1857, and 1866, and 1893, and 1907, and 1929, and 1933, and 1992, and 1994--and who understand that large loans to cushion the adjustment to a sudden loss of confidence and provide liquidity to keep the engine of capitalist development greased can do enormous good at very little risk.
But they can do their job and make a better ending to this movie only if politicians are willing to give Messrs. Camdessus and Fischer, Rubin and Summers elbow room. A good ending will not make sure that every over-enthusiastic speculator or crony capitalist loses his or her shirt. A good ending will not make sure that every East Asian construction or manufacturing worker keeps his or her job. A good ending will not keep East Asian demand for American products as high as in the past, or lower the American trade deficit. A good ending to this movie will, however, make the East Asian recessions of 1998-1999 that follow the East Asian financial crisis of 1997 small.
And to the extent that the politicians seeking hot-button issues, whether Pat Buchanans or Ralph Naders, demand a more perfect world than international central bankers--with their blunt, imperfect, limited tools and powers--can deliver, they lessen our chance to make a better ending to today's movie than the movie of a century and a quarter ago.
J. Bradford DeLong is Professor of Economics at the University of California at Berkeley, a Research Associate of the National Bureau of Economic Research, and Co-Editor of the Journal of Economic Perspectives. From 1993 to 1995 he served the Clinton Administration's Treasury Department as Deputy Assistant Secretary for Economic Policy. He is the author of, among other things, "The Case for Mexico's Rescue" (Foreign Affairs, 1996) and The Marshall Plan: History's Most Successful Structural Adjustment Programme (1993).
Professor of Economics
J. Bradford DeLong, 601 Evans
University of California at Berkeley; Berkeley, CA 94720-3880
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