 |
 |
 |
 |
 |
 | ||||
Hopes for rate cut hit the wal... Banks fail in bid to stop crime Bil... Bank gets another nudge to cut rate... Time has come for international credit i... Employment contracts hide host of legal ... Gung-ho farmers set to boost maize outpu... |
Time has come for international credit insurance plan
Loan guarantees could provide the cornerstone for the 'new architecture' of economies, international financier and philanthropist GEORGE SOROS writes in this book extract
It is assumed that with perfect information, markets can take care of themselves; therefore the main task is to make the necessary information available and to avoid any interference with the market mechanism. Imposing market discipline remains the goal. We need to broaden the debate. It is time to recognise that financial markets are inherently unstable. Imposing market discipline means imposing instability, and how much instability can society take? Market discipline needs to be supplemented by another discipline: maintaining stability in markets ought to be an explicit objective of public policy. To put it bluntly, the choice confronting us is whether we will regulate global financial markets internationally or leave it to each individual state to protect its own interests as best it can. The latter course will surely lead to the breakdown of the gigantic circulatory system, which goes under the name of global capitalism. Sovereign states can act as valves within the system. They may not resist the inflow of capital but they will surely resist the outflow, once they consider it permanent. The most urgent need is to arrest the reverse flow of capital. That would ensure the continued allegiance of the periphery, in Asia for example, to the global system. This would in turn reassure markets at the centre and moderate the ensuing recession. It is appropriate to lower interest rates in the US, but that is not sufficient. Liquidity must be pumped more directly into poorer nations. It needs to be done urgently because Brazil is still suffering from the flight of both external and domestic capital and cannot live with sky-high interest rates for much longer. In an article published in the Financial Times on December 31 1997, I proposed establishing an international credit insurance corporation. The proposal was premature because the reverse flow of capital had not yet become a firm trend. The Korean liquidity crisis at the end of 1997 was followed by a false dawn that lasted until April 1998. My proposal fell flat, but its time has come. President Bill Clinton and Treasury Secretary Robert Rubin spoke about the need to establish a fund that would enable periphery countries that are following sound economic policies to regain access to the international capital markets. They mentioned a figure of $150-billion. Although their proposal did not receive much support at the annual meeting of the International Monetary Fund (IMF) in October, I believe it is exactly what is needed. Loan guarantees could be made to countries like Korea, Thailand and Brazil, which would have an immediate calming effect on international financial markets. By injecting liquidity at the periphery, the US proposal could obviate the need to reduce interest rates at the centre, bringing the global economy into better balance. An international credit-guarantee scheme would significantly reduce the cost of borrowing and enable poorer countries to finance a higher level of domestic demand than they are able to sustain currently. It would provide a reward for belonging to the global capitalist system and discourage defections along the Malaysian lines. European central bankers are adamantly opposed to such a scheme because of its inflationary implications. But after the German elections, left-of-centre governments are in power throughout Europe and are likely to prove more amenable to a loan-guarantee scheme, especially when the recovery of important export markets hinges on it. Japan is likely to be supportive as long as the scheme covers Asia as well as Latin America. In this way, the IMF would gain experience in issuing loan guarantees and eventually the method could be institutionalised. I feel it could provide the cornerstone for the "new architecture" everybody is talking about.
Currency regimes
Whatever currency regime prevails, it is bound to be flawed. Fluctuating currency rates are inherently unstable because of trend-following speculation; moreover, the instability is cumulative because trend-following speculation tends to grow in importance over time. On the other hand, fixed exchange-rate regimes are dangerous because breakdowns can be catastrophic; Asia's crisis is a case in point. So what is to be done? Keeping exchange rates flexible would be the safest, but it would make it difficult for the periphery countries to attract capital. Combined with a credit insurance scheme, it could be a sound arrangement. Another alternative is to construct a fixed exchange-rate system that does not break down. A major experiment is now under way in Europe: the creation of a single currency. It is based on the belief, which I share, that in the long run you cannot have a common market without a common currency. I believe, however, the design of the euro is flawed because, in the long run, you cannot have a common currency without a common fiscal policy, including some kind of centralised tax system. But the introduction of the euro was a political decision; the flaws can be corrected politically. With the introduction of the euro, there will be three main currency blocs. Japan faces special problems and the yen is in a state of dynamic disequilibrium so it may be set aside for the moment. This leaves two major currency blocs, with sterling floating uneasily between the euro and the dollar unless Britain decides to join the euro. In the past, the major currency blocs clashed against each other, causing major dislocations in the stock and bond markets. The rise in the value of the dollar was the immediate cause of the Asian crisis. Going further back, currency turbulence touched off the Wall Street crash of 1987. The precipitous rise in the yen in April 1995 was also very disturbing. The need for policy co-ordination has now been recognised and institutional arrangements have been put into place, but the belief in the efficacy of co-ordinated intervention has eroded since the heady days of the Plaza Agreement of 1985, when the G-5 agreed to co-operate in managing exchange rates. It is time to revisit the issue. The emergence of two main currency blocs will create a new situation. Rivalry may be disastrous, whereas co-operation may be easier to arrange between two partners than among many. Perhaps the two main currencies could even be linked in a formal way. Linkage would remove one of the main sources of instability in the global capitalist system, but it would create new problems. Could co-ordination work? Because I am sceptical about the euro, I must be even more sceptical about a global currency. But there may be ways short of total integration. There could be almost unlimited swap agreements in which each side would guarantee the other against a change in exchange rates.
Capital controls
Having open capital markets is highly desirable not only for economic, but also for political reasons. Capital controls are an invitation for evasion, corruption, and the abuse of power. A closed economy is a threat to liberty. Mahathir of Malaysia followed up the closing of capital markets with a political crackdown. Unfortunately international financial markets are unstable. Keeping domestic financial markets totally exposed to the vagaries of international financial markets could cause greater instability than a country dependent on foreign capital can endure. Some form of capital controls may therefore be preferable to instability, even if it would not constitute good policy in an ideal world. The challenge is to keep international financial markets stable enough to make capital control unnecessary. A credit-guarantee scheme could help to accomplish that goal. It is imperative that countries on the periphery be encouraged not simply to turn their backs on the global system in the Malaysian manner. To ensure this, the IMF and other institutions may have to recognise the case for some regulations on capital flows. There are subtle ways in which currency speculation can be discouraged that fall well short of capital controls. Banks can be required to report on the currency positions they hold both for their own and for their clients' accounts and, if necessary, limits can be imposed on the size of such positions. These techniques can be quite effective. Once the principle that some controls are legitimate is established, there could be a lot more co-operation between central banks. It should be possible to curb speculation without incurring all the harmful side effects of capital controls. There are no permanent and comprehensive solutions. One thing is certain: financial markets are inherently unstable; they need supervision and regulation. The only question is whether we have the wisdom to strengthen our international financial authorities or do we leave it to individual countries to fend for themselves? In the latter case, we ought not be surprised by the spread of capital controls.
|