Chris Burford wrote:
> I am not sure whether I properly grasped the context of Jiang's statement
> first time round. Should I understand from your comments that China as a
> whole does not have much to fear from Soros, but that Hong Kong remains
> vulnerable to raiders in one form or other, and Jiang at this reception for
> Hong Kong representatives, was publically demonstrating that China as a whole
> would try to extend a protective shield to Hong Kong at least by warning
> raiders on Hong Kong that they would suffer financial consequences to their
> other interests in the whole of China?
Hong Kong prides itself as the most open free market economy in the world. Yet
it has been forced since July 1997 by events to adopted interventionist
government policies to protect itself from the financial tumults of the Asian
crises.
China has repeatedly praised Hong Kong for its interventionist measures since
August 1998 against Western hedge funds attacks on the overvalued HK$. China
has openly pledged its substantial foreign reserves (US$160 billion) to back HK
in maintaining its fixed exchange rate if necessary. HK has been highly vocal
in supporting a call for a new international financial architecture, in concert
with Japan and Europe, to which Washington gives only lip service by insisting
on market fundamentals.
Jiang, through the direct experience of Hong Kong, was reaffirming the views of
Mahathir, the first Asian political leader to criticize Soros by name was
Mahathir. The prime minister of Malaysia, a anti-Communist during the Cold War,
is emerging as a leading voice in Asian economic nationalism:
"At the worst point of the crisis, the Malaysian Ringgit was devalued by the
currency traders by some 60% against the US Dollar while our stock market lost
two thirds of its capitalization, i.e., more than US$200 billion. As a nation
and a people, we have become impoverished. Our banks and corporations almost
collapsed." (HANOI, VIETNAM, 15/12/1998, THE 6th ASEAN SUMMIT.)
Mathathir's views, branded as demagoguery at first in the West, are vindicated
increasingly by events. Some of these views, summarized from his various
speeches, are widely held in Asia.
Since July 1997, the risks of protracted global deflation seems more real than
ever. Neither the IMF nor the G-7 have been able to deal effectively with the
twin problems of the artificially strong dollar and the large and spreading
manipulated devaluations of national currencies around the globe. For the
affected nations, the combination of massive short term capital flight and
stock market collapses, exacerbated by IMF conditionalities of high interest
rates and austerity programs, sharp devaluations have led to tragic destruction
of hard-earned wealth and a severe drop of living standards. Certainly market
forces have not created Smith's "universal opulence which extends itself to the
lowest ranks of the people". The only trickling down has been poverty and
misery. In a world of 6 billion people only about 1000 currency traders and a
few rich investors in their funds seem to enrich themselves further through the
unbridled manipulation of the free market.
This view is now shared by increasing numbers across ideological spectrums.
The pat IMF prescription for all economic ills of nations -- high interest
rates, balanced budget and current external payments adjustment -- have proved
ineffective and destructive. It is shortsighted and lacking in consideration
for the great differences in the economies of different countries. To these
have been added banking reforms calculated to increase failure rates and to
protect Western creditors at all cost. To the IMF, the demands of the lenders
are treated as sacrosanct while the destructive impacts on society are regarded
as irrelevant. The concept of lender liability does not apply in the Third
World.
Thus those who dutifully implemented IMF prescriptions saw their economies
worsened to the point where recovery may now take decades, and only if the
poisonous IMF medicine is quickly withdrawn. The IMF has now admitted that it
had made a "slight mistake" in dealing with the Asian economies. It may be
slight for the IMF but the cost to the countries of Asia is horrendous.
Trillions of dollars of hard-earned assets and economic capacities have been
destroyed, lost forever. In fact, lives have been lost, families ruined,
governments fallen and ethnic animosities intensified. The cooperative
partnership between neighboring countries has been undermined and regions
destabilized.
The abuse of the free market by a few capitalists from developed countries have
earned them quick and mind boggling profits amounting to billions but the
destruction they wreak on their victims is far greater than what they make for
themselves. There is a massive net loss for so little gain on the part of the
capitalist manipulators. This is far more vicious than skimming 5% off the top
by organized crime, or the exploitation of old time capitalism.
There is an emerging consensus that there must be better ways to promote any
economic system, even if it is capitalistic, than to destroy whole countries
and regions and to cause untold misery for millions of people. Free market is
not worth such fatal pain.
The so called creative destruction (Schumpeter) indulged by the powerful
Western economies is not creative at all in the current global context.
Creative destruction is nothing more than an attempt to explain away a
destructive self-serving act, an attempt to justify the unjustifiable reality.
All over the world, the imposed devaluation of the national currency and the
manipulative fall in share prices render local companies and banks attractive
for takeovers by foreign capital. Since one of the conditions for IMF/Western
rescue is to open the country to unrestricted foreign investments, foreign
capital can acquire at firesale prices distressed local companies including
basic utilities, telecommunication and energy. It is also possible for foreign
investors to set up wholly foreign owned banks, utility companies, land and sea
transport, etc., to control Asian economies.
It is argued by IMF that since the foreign companies moving in are richly
capitalized, market confidence would be regained, resulting in the appreciation
of the currency as well as recovery of the stock market. In other words, the
takeover of the economy by foreign companies would result in economic recovery,
at great profit to the foreigners who would come in cheap at the lowest point
and stay rich thereafter.
In the heyday of blatant capitalism, i.e., in the second half of the 19th
Century and the beginning of the 20th Century, exploitation of poor workers
was considered as a matter of right in captured markets. Political suffrage
was confined to property owners only and workers should consider themselves
lucky if they could find jobs with low pay. Without capital to provide jobs,
the helpless poor would only starve. The rich took everything for themselves
with doctrinal righteousness.
Marx argued that the wealth produced was the result of the labor of the working
class. It was an injustice to deny workers the full benefits of their
labor. Marx's real argument was moral, the material dialectic was a
scientific observation based on the penchant of human instinct to evolve toward
a higher plain.
Marx felt that workers should own the means of production because worker are
the creators of value while capital was merely a passive storer of value.
Dictatorships of the proletariat is the political vehicle for restructuring the
proper and just economic relationship, with the means of production placed in
public ownership.
Apprehensive of the danger of worker revolutions and violent takeovers of the
governments, Western capitalists/imperialists decided to show a friendlier
face to their workers and colonial subjects. The rights of worker to form
unions, to have living wages and incentive bonuses, to shorter working hours
and paid holidays, to decent housing and medical treatment were recognized
and granted in the advance economies. Oppressive and dirty work conditions
were shifted overseas to the emerging economies. In some advanced countries,
such as Germany, worker representatives even sit on management boards of
companies. Many socialistic practices were adopted in advanced economies in
order to placate workers and to moderate the adverse impacts of business
cycles.
Since WWII, the term capitalism has been gradually displaced by more the more
benign label of the free market. Capitalism ceased to be mentioned in
economic literature. In the process, economists also squeezed out the word
capitalism in official dialogues, the once traditional name for the market
system, with its subjective connotation of class struggle between owners or
managers and workers and with its suggestion of the privileges that go with
various levels of wealth. The word capitalism no longer appears in textbooks
for Economics 101. N. Gregory Mankiw, a 40-year-old Harvard economist and
author of a popular new textbook, "Principles of Economics," told the NY Times:
"We make a distinction now between positive or descriptive statements that are
scientifically verifiable and normative statements that reflect values and
judgments. Ownership of companies was spread to the middle class and working
class through the public limited companies. Altogether businesses became more
democratic."
A whole new generation of economists have grown up associating capitalism only
as a historical term, like slavery, unreal in the modern world.
The ugly capitalist image of private corporations has been replaced by a much
more friendly professionally managed public listed companies.
The new capitalists successfully contributed to the growth of their countries'
economies. In the war against the National Socialists, the capitalists
actually collaborated with the communists in order to defeat the
dictatorships of the fascists. After WWII, through a series of astute capital
management including a stable exchange rate system crafted by economists led by
Keynes at Bretton Woods, the Western neo-capitalists or free marketeers were
able to rebuild their economies using a combination of capitalist and socialist
approach. But the underlying greed of the capitalist never really disappeared.
The communists, on the other hand, did not do so well
economically. The idea that with everyone receiving the same pay and
subsidies they would work just as hard and be equally happy had not been
supported by reality. Productivity and wealth decreased and the working
classes no more appreciate their own dictatorship as they would capitalist
dictatorship. The reasons for this are complex, but there is no denying that
the versions of communism, as it had been practiced since WWII, had not lead to
results as envisioned.
Eventually the Communist system collapsed for reasons that cannot adequately be
discussed in the post. But collapse it did. While communism was around, it
provided a counter-balance to capitalism of the West. Free of the threat of
communism, capitalists now feel uninhibited in doing as they please. And small
countries have no choice but to accept the economic domination of the big and
the powerful economies.
Accordingly, capitalists no longer feel the need to show a human face. With
advances in communication,
their field of operation has become enlarged. Instead of just aiming for
acquisition of the national wealth, they can now go for the wealth of the whole
world. But to do this, certain concepts and values that they had preached in
the past had to be reversed.
The concept of nation states and their independence had to be debunked as
obstacles to globalization. Non-interference in the internal affairs of
nations must give way to the right of the powerful nations to intervene in
order to ensure global standards. Local interest has to be sacrificed in favor
of market forces in determining policies and government leadership.
Carter was the first to claim the right to intervene in any country where
human rights are alleged to have been violated. This was followed by attempts
to use GATT and WTO to link trade with human rights records. Workers' rights
(specifically low wages and humane working conditions in countries serving the
developed economies), the environment etc., are ignored as necessary
transitional conditions. Political human rights is singled out because its
promotion weakens national government authority to resist globalization.
The developing countries saw through this scheme and tried to oppose it in the
GATT and the subsequent WTO. The opposition was muted however, as the
poorest countries were not involved as they were not producing anything to
trade with the developed countries. Besides most of these countries are under
obligation to the developed countries from whom they had obtained aid or loans.
The advent of the Information Age and instant communication brought forth the
idea of the world without borders, a world in which not only information but
capital, goods and people could move freely and exploit business potential
without regard for citizenship or loyalties. It is a good notion if it were
not for the fact that it has been distorted by the developed economies to
exploited to enhance their narrow national interests. In a race fixated world,
free immigration for workers remains a non-negotiable item for advanced (mostly
white) countries. Until that happens, globalization remains a sham.
The exploitation of business opportunities by people with capital and know-how
in most countries has historically been restricted by national laws which
protect the citizens of a country. But because the citizens of the Third World
are poor and do not have the necessary know-how, these opportunities have not
been and cannot be fully exploited as the global economy expands.
Neo-liberals argue that if opportunities and potentials are to bring maximum
benefit to the people, then laws and regulations which favor locals must be
done away with. In other words, there should be massive deregulation in the
emerging economies.
With such deregulation, there would be no more economic borders to hinder the
activities of those with capital and know-how from the advanced and rich
countries. The whole world would be just one open market, open to everyone
who can exploit business potentials to the maximum. Thus a corollary to
globalization, there must be deregulation.
The developing countries were told that deregulation and globalization would
be good for their people. Without these, they would forever be saddled with
incompetent and poorly capitalized local business people usually the cronies
of the leaders, who would provide inferior goods and services at exorbitant
prices. What they were not told was the under financial capitalism, the
appropriation of financial assets is many folds more exploitative than
traditional industrial imperialism. In a matter of a few weeks, entire nations
can be acquired by foreigners with at 20% of its previous market value in a
market whose collapse had been caused by the same foreigners who took their
money out. Simply by moving their money out and then reinvesting the same
funds a few weeks later, foreigner stand to increase their holdings by some
60%. That is robbery by any standard.
Obviously only the biggest corporations can dominate the world. In preparation
for this global domination the big corporations and banks in certain countries
are
already taking steps through mergers and acquisitions to grow bigger. It is
felt that in any one field of business
there needs to be only a few giant corporations -- three or four for the
whole world would be ideal. The small national corporations must allow
themselves to be acquired or to perish in the one-sided competition.
Unfortunately for the powerful advocates of globalism and deregulation, the
most highly developed of the developing countries are not taking too kindly to
these ideas of deregulation and globalization. They do not reject them
completely but demand time to strengthen their companies and banks. Their
delaying tactics merely make the giant countries and their corporations
impatient. Somehow they must be forced to speed up, or be penalized with
sanctions.
The powerful economies of the West and their giant corporations might not have
actively conspired. But the opportunity was thrown into their laps when
currency traders attacked and devalued the currencies of all those developing
countries which were delaying globalization. The short term investors in the
share markets of the countries attacked by currency traders then abruptly
pulled out their capital causing a drastic fall in share prices and aggravating
the economic situation.
Faced with this unprecedented financial crisis in which the national wealth
was at least halved, the governments of these developing countries had to ask
for the help of the IMF. As the IMF believed that recovery could only be
brought about by foreign companies taking over partially or completely the
local companies distressed by the falls in the currency and shares, one of the
conditions insisted upon by the Fund was the removal of the restrictions on
ownership of local banks and companies by foreign investors. As a result of
the countries accepting this condition foreign companies could acquire all
the big and profitable companies or hold controlling interest in them.
These foreign companies would be giants which operate globally. Their funds
would be huge and they would dominate the world.
There was a time when big American companies own huge banana plantations in
some of the poor Latin American republics. The revenue of the governments
of these republics came almost exclusively from the banana plantation
companies. If the companies fail the republics would be in grave trouble. It
was in the interest of these republics to accede to the demands of the
companies, including political adjustments. It is flows that the giant
corporations which operate in the countries which have been persuaded to open
up will have the same influence over the governments. These are the new banana
republic on a larger scale.
It has been pointed out that currency traders can devalue any nation's
currency at will. Currency trading is done not by hedge funds alone, but also
by the big
banks. One of these banks is capitalized at over US$600 billion. It is
believable that between these
banks and the currency traders they have almost US$30 trillion. They do not
work in concert of course. Nor do they enter into a conspiracy. But they
do behave like herds. Thus when one of the more important members swing in
one direction, the other will follow. The effect is not unlike acting in
concert. It is an unspoken systemic conspiracy.
Currency traders deny that they have anything to do with the devaluation. But
whoever may be guilty, the fact is that the currencies have been devalued
massively, in one instance by 600%.
What is fact however is that the countries whose currencies have been devalued
suffer economically,
socially and politically. If because of their profligate
ways they were unable to pay their foreign debts, after
devaluation they became even less able to pay their debts. This will awaken
them to their poor skills in managing their companies and they would be more
willing to accept the capital, services and control by foreign companies.
The net result of the globalized deregulated world would be the emergence of
huge corporations and banks with branches in every country in the world.
Their numbers would not be too big as all the small companies and banks would
have been acquired or absorbed in one way or another.
In the old capitalism, the rich controlled the wealth in one or two countries
and exploited the poor workers in
these countries only. Their markets were the political empires that their
governments had acquired. These were captive markets, which not only bought
all the manufactured products at whatever price that was fixed, but also
supplied all the raw materials at prices which were fixed by the rich
industrialists in the metropolitan countries.
This arrangement was neat. Unfortunately in the post-war years, the empires
had to be dismantled. Preoccupation with the Cold War and the need to retain
the allegiance of the newly independent countries kept the Western capitalists
at bay. But once the challenge posed by the Communist bloc was overcome, the
Western capitalists were let loose with government encouragement and often
subsidy.
Today, it is not the exploitation of local labor that is the focus of the new
capitalists. That nasty business is left to national capitalists who have been
financially acquired by Western capital. For Western capital, it is the
financial exploitation of the emerging countries worldwide that promises
unlimited gains. Hence the push for deregulation and globalization.
These Western capitalists do not talk of millions of dollars of profits.
They talk of billions of dollars. They cannot wait to do ordinary businesses
involving time-consuming research, manufacturing and exporting. That is
left to their local subsidiaries. They want to make their billions overnight
over telephones. And currency trading provides them with this mind boggling
profits.
With trillions at their disposal they have become a force that no government
of developing countries can go against. Control of the media enables them to
shape public opinion, censor criticism and generally promote the legitimacy
and the wholesomeness of their concept of the new world order. If they say
globalism is good then the whole apparatus will say so and no one will be
allowed to say otherwise. Those who try are branded as demagogues or just
plain ignorant.
In the globalized deregulated world the future of Asia will be so closely
inter-twined and interlinked with that of the rest of the world that it
cannot be distinguished from the world's future.
Asian countries will prosper again but not as free countries. Their
economies would be dominated and run by the huge foreign corporations,
practically all owned and managed by non-Asians. Southeast Asia will provide a
base for the production of low-cost products to compete with those of certain
large Asian economies which refuse to be controlled. In the end, these
countries too will give in.
Governments will submit because they know they are up against forces which they
cannot defeat. But the people
will show their resentment against those outsiders who will lord it over them
once again with the new financial imperialism. Bitter over the takeover of
their national corporations, they will show their feelings in many ways.
Sooner rather than later, they will yearn for regaining control over their
economies.
They will regard this as a new war of liberation. Even if they want to avoid
violence, violence must come as the new Western capitalists and their local
compradors dismiss the warning signs.
There will be no full scale wars of independence of course. But there will be
guerilla wars which will not be good for anyone.
Maybe this will not be the future of Asia. Maybe Asia will extricate itself
from the present situation intact. Maybe the healthy economic competition
between Asia, Europe and America will be restored. But the new Western
capitalists would not resist the opportunity to dominate the world at great
profit.
It is easy for analysts to slip into the view that currency movements are
purely the function of fundamentals. The market fundamentalists tell us this
is so with incredibly sincere conviction, however loudly the speculators
chuckle all the way to the bank. Since, according to the theology,
currencies cannot fall unless the fundamentals are weak, and since the Asian
currencies have fallen so dramatically, then ipso facto the fundamentals must
be weak even if experts have said that they were strong immediately before.
The truth is that the currencies plummeted even though the fundamentals were
very strong. The truth is that, ipso facto, the fall of Asian currencies were
not a function of basic fundamentals.
On June 17, 1997 -- just two weeks before the July 2 collapse of the Thai
Baht which resulted in a horrendous collapse of the regional currencies, Mr
Michel Camdessus, Managing Director of the IMF, was handing bouquets to
Malaysia for sound economic management, for superb economic fundamentals.
He told an international conference on Global Capital Flows in Los Angeles:
`Malaysia is a good example of a country where the authorities are well aware
of the challenges of managing the pressures that result from high growth and
of maintaining a sound financial system amid substantial capital flows and
a booming property market.'
He noted: `Over the last year, output growth has moderated to a more
sustainable rate, and inflation has remained low. The current account
deficit -- which is primarily the result of strong investment spending --
has narrowed substantially. The increase in the fiscal surplus targeted for
this year is expected to make an important contribution towards consolidating
these achievements'.
As for the banking and financial sector, Mr Camdessus said: `The Malaysian
authorities have also emphasized maintaining high standards of bank
soundness. Non performing loan ratios of financial institutions have fallen
markedly in recent years; risk weighted capital ratios are above Basle
recommendations'.
In 1988, the non performing loans in the Malaysian banking system had
stood at 32.5 percent. In June 1997, just eight years later, its non
performing loans stood at a historic low of 3.5%. This is as dramatic a
performance as one can get. Perhaps this was why the IMF was so impressed and
so complimentary.
At the international level, the entire issue of reform of the international
financial system to ensure currency stability and to contain the activities of
those who buy and sell money for no other purpose than to make profits. The US
remains the main opposition to any scheme to stabilized the world's major
currencies.
Currencies need to be changed if there is going to be international trade.
That is why the leaders of the Western nations met to draw up the Bretton
Woods Agreement, the purpose of which was to agree on a mechanism for
determining the value of one currency against another. The system worked and
enabled the countries bankrupted by the war not only to recover but to
prosper as well. Of course, the Marshall Plan and the opening up of the
American market to Japan played a key role. But if there had been no system
for stabilizing currency values, all the plans in the world would not have
succeeded.
But then some countries in the West decided to devalue their currencies in
order to enhance trade competitiveness. Very quickly a currency market
emerged which took advantage of the mildly unstable exchange rate. True
speculation took place because the funds were relatively small and depended on
intelligent guesswork as to the movements of the exchange rates.
But soon the funds grew huge and were in fact able to move the exchange rates
through their interventions.
The famous herd instincts replaced economic fundamentals.
With the invention of arbitrage and futures trading, the need for exchange
rate stability for the purpose of
trading gave way to the desire of currency traders to make massive amounts of
money in the shortest possible time. An artificial system of devaluation and
revaluation of currencies was devised which enabled currencies to be
appreciated or depreciated literally within seconds. Thus the Indonesian
Rupiah was at one time devalued by more than 600%, then in the space of a few
days recovered by 200 percent. It is still moving up and down by 100 percent
to 200 percent in the space of one day or even half a day.
Paul Volcker in a speech in Hong Kong stated: "An
exchange rate system that produces a 60 percent swing in the yen/dollar rate
over a period of 18 months cannot reflect the fundamentals in any sensible
sense". The Indonesian Rupiah moved 600 percent in the space of five
months. Can it be that all the assets of that huge country with 220 million
hardworking people are suddenly worth only one-sixth of its previous value?
What indeed is the worth of a nation if suddenly someone can devalue and even
bankrupt it?
If currencies can be made useless so easily then, what is the point in a
country issuing its own money? We should go back to barter trading.
It is said that the currency will strengthen if confidence is restored. But
there is no certainty as to what will bring back confidence. Who is
monitoring what and who determines whether confidence should return or not.
There is a lot of talk about market forces. But who constitute market forces
and how do market forces determine what value to give to each act of a
government or an economy under attack.
All in all, the present system, if there is a system at all, is messy,
unreliable and destructive. Can world trade depend on these shadowy market
forces whose methods are not known to anyone except themselves? True, through
hedging the effect of the fluctuation in the exchange rates can be minimized.
But again, this hedging profits only the hedge funds, adding to the cost of
goods and services. If exchange rates are minimally volatile, hedging and
the profits for the hedge funds, would not be necessary at all.
There is nothing to indicate the need for currency trading other than the vast
profits that can be made by currency traders. On the other hand, we now
know the extent of the damage to the economies of whole countries and regions
that currency trading can inflict.
The excuse that currency trading provides market forces with the means to
discipline governments is totally unacceptable.
Currency traders thrive on unstable currency. It is ridiculous to suggest
that they would discipline
governments and reward them with exchange rate stability when such stability
will deprive the traders of the opportunities to make money. Governments do
need to be disciplined but the international financial regime must be bankrupt
of ideas if it cannot find other ways which are less destructive to discipline
governments.
Everything points to the need for an international financial system which
will bring about stability of
exchange rates among other things. Admittedly we cannot bring back the Gold
Standard or the Bretton Woods system.
Fixed exchange rate is no longer possible or realistic. Obviously the
political, economic and social performance of a country will have an effect on
the value of its currency. As for the economy, there are various indices
which can be given points indicating the strength of the economy and therefore
the currency.
There is a belief that when currency depreciates the goods produced by the
country concerned become cheaper and more competitive in the world market.
It may do so but the reduction in cost is always far less than the
percentage of depreciation. This is because all imported inputs will cost
more in local currency and will negate the devaluation of the currency.
Imported inflation will push wages and other domestic costs up reducing
further the advantage of currency depreciation. In the end the lowered cost
is hardly detectable. The products of countries with a depreciated
currency are no more competitive than they were before. In at least one case
the capacity to import foreign inputs is lost altogether because of the
extreme depreciation of the currency.
Individual devaluation or revaluation are not the answers to the world's
economic problem. Improvements in productivity are and such improvements can
be achieved through greater skills, better management and continuous
technological improvements.
Globalization, liberalization and deregulation are ideas which originate in
the rich countries ostensibly in order to enrich the world. But so far the
advantages seem to accrue only to the rich.
True, the poor countries can gain access to the markets of the rich, but then
they do not have many things to export to these markets. The raw materials
which they produce are controlled by commodity markets in the rich
countries. The terms of trade for these keep on deteriorating.
In preparation for globalization the pace of mergers and acquisitions have
been stepped up. Super large banks and corporations are being formed in the
developed countries which will dominate the world. There will be no room for
the small companies in the poor countries to exist, much less to expand and
spread into the rich markets now opened to them.
These are the realities. Yet the Finance Ministers of
the rich North and assorted leaders lauded the currency manipulation
as an integral part of the free trade system.
They demanded that Asia accept impoverishment as evidence of how good free
trade is. They demanded that these countries open wider their countries to
other potential manipulators.
Marxist economist have not had much to say about the global exchange rates
regime and its role in promoting the expansion of finance capitalism. The
embrace of Marxist ideas by the Third World after WWII was directly related to
Lenin's linkage of capitalism to imperialism. The new financial imperialism is
creating widespread opposition toward finance capitalism. Yet Marxism has been
slow in filling the new need.
Henry C.K. Liu
