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Far East: Analysis From Washington -- Markets Measure Crises

Washington, 22 May 1998 (RFE/RL) -- Coverage of the resignation of Indonesian President Suharto calls attention to a shift in the way in which much of the international community assesses any political change. Instead of considering the impact any development has on the populations most immediately involved or on the international system as a whole, commentators are measuring political developments increasingly in terms of their impact on stock market prices.

In the case of the Suharto resignation, for example, both reporters and analysts noted with approval that it had sent Asian stock prices higher on Thursday. And they predicted similar or even greater gains in Indonesia itself once the markets there reopen.

Similarly, much Western coverage of developments in Russia and the other post-Soviet states has focused on the impact this or that development -- be it the current miners' strike or a change in government -- has on prices in the stock markets of the countries involved.

This use of changes in stock market prices in many ways is entirely appropriate. Individuals and institutions that trade in stocks inevitably make judgments about the impact of any development on the value of such stocks in the future.

If these traders believe that political events will have a positive impact on share values, they will tend to bid prices up in the wake of such changes. And they will tend to bid prices down if they believe that political developments will have a negative impact on share prices.

Consequently, for many people, the direction of the stock market provides a summary and apparently objective judgment on all political developments.

And thus it should come as no surprise that ever more news stories and commentaries include a reference to stock market shifts as the measure of the meaning of political changes.

But if this use of stock market trends is understandable and up to a point defensible, it is based on three debatable assumptions, each of which may often be problematic precisely because it is so rarely acknowledged.

First, this use of the stock market as a measure of political change assumes that those involved in stock market trading have a full and accurate understanding of the event in question.

If this assumption were justified, all stock traders would be rich. In fact, they are just as prone to misreading the situation as anyone else. And nowhere is this more the case than in the short term where the passions of the moment may overwhelm more sober judgments.

Indeed, except for noting that Sukarno is gone, no one involved in the markets is in a position to say exactly what will happen next.

Second, this approach assumes that those involved in the stock market are the only ones whose judgment matters.

Not only do those involved in the stock markets form a relatively small portion of the population, but the conditions that benefit the marketplace may or may not benefit larger groups.

One reason that traders pushed Asian markets higher is that Suharto's successor promised to implement an austerity package. That may ultimately bring the Indonesian house into order, but in the short term, it may increase the hardship of the Indonesian people.

Moreover, stock markets generally prefer stability over instability and thus tend to prefer stable governments, however undemocratic they may be.

Indeed, many of those stock traders who now see the departure of Suharto as being a good thing for the markets saw his authoritarian approach as a good thing for the markets only a few years ago.

Neither then nor now did the markets appear to factor in what his regime or its departure means for the political and economic lives of the Indonesian people. And third, and most problematic of all, this approach assumes that anything that produces economic optimism should inevitably generate political optimism.

The relationship between economic change and political development is extremely complex. Sometimes economic growth leads to a more participatory political system, but sometimes it has just the opposite effect.

And consequently, to assume that any development that advances a country's economy inevitably will help to produce a more open and democratic society, as some commentaries have suggested, is more than problematic. Stated this way, it is simply wrong.

The changes in Indonesia do give some grounds for optimism, but the evidence for that comes not from the stock markets but from the streets of Djakarta.