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East/West: Analysis From Washington -- Global Markets And National Economies

Washington, 5 October 1998 (RFE/RL) -- The globalization of financial markets is rapidly overwhelming the capacity of either individual states or the international institutions these states have created to cope with such a situation.

And this disproportion between global markets and a world of nation states is pushing countries in two very different directions, neither of which appears likely to overcome the immediate crisis but both of which may in fact make it worse -- at least for some of the countries most likely to be affected.

Not surprisingly, the rapid movement of economic problems from one country to another and even from one region to another has sparked calls in many places for the erection of a variety of new protectionist measures, the traditional remedy for dealing with uncertain international economic times.

But while such steps are likely to be increasingly popular and thus attractive to the leaders of individual countries, they are likely to hurt not only the country that imposes them but also everybody else as well.

Countries that impose restrictions on the flow of capital or goods will inevitably find it harder to attract the kind of international investment and trade that increasingly sustains their national economic life. And at the same time, the decision of one or more country to impose controls will only exacerbate the economic difficulties of others.

That kind of spiral, albeit on the flow of goods rather than capital, often has had the effect of turning a recession into a depression and of spreading the pain across national borders rather than limiting its impact.

Because these consequences are so well-known and so obviously negative, many Western leaders are calling for the adoption of a very different remedy, one that has never been effectively tried but that has many potentially attractive features.

Under the terms of plans announced in the United States last week, the International Monetary Fund would be given both more money and the right to intervene sooner to help countries on the way toward economic difficulties overcome them before these problems became crises.

As numerous analysts have pointed out over the weekend, small interventions at the right time would not only be far less costly to the international banking system but also allow countries to continue to benefit from the free flow of capital around the world.

While attractive, such plans may prove to be extremely difficult to implement.

First, they rest on the assumption that international bankers or indeed anyone else know where and when to intervene. In fact, the record of the past decade suggests that neither has a clear idea of just what to do.

Only a few months ago, many people were talking about having repealed economic cycles in some major Western countries, and others were suggesting that IMF intervention in Asia and elsewhere had been successful.

But as U.S. Treasury Secretary Robert Rubin pointed out last Thursday, recent events have made it clear that the experts do not really understand all the factors at work and may on occasion take steps that could even make a bad situation worse.

Second, the kind of early interventions that some are now proposing would be certain to offend many of the governments that might be expected to welcome them. Not only would such actions by the IMF have the effect of requiring these regimes to be far more transparent in their economic activities, but they would also represent a severe limitation on national sovereignty.

Under such arrangements, national governments would have to be willing to follow the directives of the international financial community even when those directives might requires these regimes to take measures that would be deeply unpopular among their own populations.

Thus, at least in principle, the IMF might demand that countries raise taxes or reduce spending, actions certain to offend at least some of the people in the countries involved. And because such interventions would be more likely in small and weak countries than in large and powerful ones, they would almost certainly trigger precisely the kind of nationalism they are intended to prevent.

And third, intervention by the IMF be it early or late may not create a culture of dependency as some have feared, but such actions, especially if they become frequent, are likely to create a culture of irresponsibility, one in which national governments may act as they please until and unless the IMF intervenes.

But such irresponsibility by itself will entail real costs. On the one hand, it will further reduce the control electorates have over officials. And on the other, it will certainly lead many in countries being told what to do to blame those delivering that message be they domestic or international.

That too will have enormous political consequences, as well as economic ones, when pressures increase in particular countries for their governments to break ranks and protect their own populations, even at severe costs to others.

And thus the current crisis seems likely to be more prolonged and potentially dangerous than many now hope, a reflection of a world in which once again economic arrangements and political ones do not correspond.