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World: Economists Clash With Politicians At Davos

Davos, 1 February 1999 (RFE/RL) -- The World Economic Forum in Davos is the scene this year of a major clash between the economic and political worlds, a clash which appears to illustrate the way things will develop in future.

Of course, in the exclusive, club-like atmosphere of the Davos forum, the clash does not take the form of political leaders on the one hand shouting at economists on the other. But the divergence between the two camps is tangible.

Former U.S. Secretary of State Henry Kissinger, with his usual analytical clarity, sketched the situation as follows. He told one of the forum's weekend sessions that the world's economic and political structures are now incompatible. The periodic financial crises which have occurred since 1982 have been treated with remedies which require austerity and sacrifice on the part of the populations of the countries involved.

This, said Kissinger, is incompatible with the survival of political leaders, because people will simply turn against them if they impose sufferings which are too great. So the politicians eventually react against the economic policies which have produced the trouble.

The essential task today, he says, is to prevent this incompatibility between the economic and political spheres from developing further.

The economic phenomenon at the center of the controversy is, of course, globalization, the merging of former national economies into a huge international economy. The concept has been widely welcomed by economists as a benign inevitability, with only a few dissenting voices. The political world, too, has largely accepted the process as inevitable, even though the role of governments would be diminished in this new world order.

But this year at Davos, it has become clear that the political world is fighting back along the lines Kissinger sees. Russia's Prime Minister Yevgeny Primakov, Egypt's President Hosni Mubarak, South Africa's President Nelson Mandela, UN Secretary General Kofi Annan and India's Finance Minister Yashwant Sinha, were among those leaders who -- in one way or another -- said globalization has to deliver the goods for ordinary people or it is doomed to fail.

U.S. Vice President Al Gore headed numerous Western officials who also spoke of the fundamental need for the economic system to deliver equality and hope for the ordinary people. At the same time, Gore made a vigorous defense of the free enterprise system, reminding the forum that it has delivered wealth to hundreds of millions of people.

In fact, with the possible exception of Malaysia's Prime Minister Mahathir bin Mohammad, nobody seemed to question the market system as the only realistic basis for the future. Nor did anyone seriously suggest that globalization should be reversed. But it must be modified. The villain so often referred to as the primary source of the trouble was the free flow of capital, the huge inflows and outflows of short-term "hot money" with the power to devastate financial systems which are unprepared to handle such huge sums, or which are structurally flawed.

Some eminent economists, such as American professor Jeffrey Sachs, went so far as to say that countries should avoid short-term money altogether, and concentrate on obtaining long term direct investment -- that is, money which goes into factories and other tangible projects.

Several officials, including First Deputy Managing Director of the International Monetary Fund, Stanley Fischer, commented favorably on Chile's model of capital flow controls. Fischer said that imposing capital controls was rarely sensible. But in the case of countries with immature economies, the IMF would support a model like Chile's. In such a system, quick investment outflows are discouraged by mechanisms like a tax which applies only if the money is moved out of the country within a certain time limit.

In any event, now that the politicians realize ever more clearly that instability cannot be allowed to continue, the hunt for a new world financial architecture, as it is being called, is going forward more urgently. The world's most prominent investor, Hungarian-born George Soros, told journalists that he is proposing a new world order in which the present International Monetary Fund would move more towards the role of a world central bank. It would be a lender of last resort, and would draw up a list of those countries following sound financial criteria and those which were not. He said those countries following good practices would be eligible for help if they got into trouble.

Soros said he had met in private in Davos with U.S. Treasury Secretary Robert Rubin and a group of top experts, whom he did not name, to discuss his proposals. At the forum, much of the most serious action goes on in this way, behind the scenes. That's what makes the forum a valuable instrument for policy development, rather than just a talking place. Soros said Rubin raised a number of objections to Soros's plans. One was the difficulty of deciding which standards should be regarded as acceptable. Another was the question of who would help those countries which were n-o-t following good financial practices, and which got into trouble.

Other prominent figures have contributed other ideas at Davos. The message seems clear. Despite the many differences of view, some of the sharpest minds in the world are now jointly focused on how to make the international financial order safer, while preserving its efficiency .