IT WAS SUPPOSED TO have been the "end of history." That was what Japanese American thinker Francis Fukuyama called the triumph of democracy and free enterprise against totalitarian communism early in the decade. The Soviet Union had collapsed and its satellites and successor states embraced, in varying degrees, market economies and political freedoms. China too, that other centuries-old autocracy, had adopted economic elements of Western liberalism while striving to keep political tenets out. Meanwhile, dictators from Pakistan to Paraguay and Poland bit the dust in the face of People Power. It is no coincidence that a leading financier of programs to promote democracy around the world is investor George Soros, who made his billions speculating in free-wheeling global markets.
Now the struggle between believers in individual freedom and proponents of state control is simmering again. Call it Cold War 2. Rather than NATO, it is the IMF defending the West's ideology, using cash with conditions to keep nations in the free-market fold. After over a year, however, the International Monetary Fund's mix of open markets, stringent austerity and economic restructuring has yet to revive countries hit by the Asian Crisis. Indeed, the contagion has spread to Russia and is threatening Latin America and, of late, Wall Street. Even Western economists have questioned the harsh strategies and argued for government actions long opposed by the laissez-faire faithful, like the currency controls recently urged by MIT economist Paul Krugman.
Last week the ranks of market economies broke at last: several nations announced actual or planned restrictions on financial trading of one kind or another. On Sept. 1, the government of Malaysian Prime Minister Mahathir Mohamad imposed exchange controls, finally taking action to shut out the speculators he had always blamed for the Crisis. Criticizing the free-market ideology, the PM declared in a Time magazine article: "Our appeal to the world community to bring order to the market has gone unheeded . . . Malaysia must undertake its own reform." For a few days Mahathir and his country seemed, as he put it, "a heretic, a pariah" in retreating from laissez faire. Then Russia weighed in with plans for a currency board and fixed exchange rates. Ukraine suspended trading in its money, and Singapore began drafting measures against stock-market manipulation.
Finally, Hong Kong, that paragon of open, unfettered markets, unveiled measures to strengthen its link to the greenback, after spending more than $10 billion to prop up stocks and deny speculators gains from attacking the local dollar. And in a statement akin to The New York Times calling for press censorship, Financial Secretary Donald Tsang Yam-kuen urged international efforts to control financial markets and hot-money flows. "There has to be some internationally agreed discipline in regulating the flow of funds used for speculative purposes," Tsang argued on government radio on Sept. 8, a call echoed by the APEC Business Advisory Council. The money czar had just announced yet another package of 30 measures to control Hong Kong's stock and futures exchanges, including a proposal to increase jail terms for the illegal short-selling of shares.
Across the globe, plainly, crumbling currencies and economies are making policymakers, pundits and the public wonder how much freedom - in the markets, if not the streets - is good for the wealth and well-being of nations. No one is predicting the imminent demise of open markets, but devotion to laissez-faire dogma is clearly yielding to pragmatism. Currency controls, trading intervention, economic pump-priming - such heavy-handed measures used to often be ruled out from the start, whatever the practical pluses. Authorities generally gave Adam Smith's unseen hand free rein, no matter who gets slapped around, with the conviction that it would eventually push nations toward prosperity. But now more and more leaders and officials feel obliged to do more than merely leveling the field for market players.
Why the change? To be sure, it is partly due to growing impatience and doubts over IMF cures, whose strictures look set to continue many more months. They were supposed to have lured capital back to the Crisis countries by July, going by Mexico's 1995 experience. But blows to market confidence this year - the Japanese recession, Indonesia's riots, and financial collapse in Russia - kept global investors away. With no respite in sight, policymakers had to look at other options. Moreover, fears that trading curbs would drive away foreign capital became academic, since no money was likely to come Asia's way for some time. Meanwhile, speculators continued to prey upon currencies and stock markets, forcing governments to keep interest rates at prohibitive levels. Something had to give.
SO WAS MAHATHIR RIGHT in castigating and now controlling the markets? Rather than the din of expert comments, market reactions or public surveys, it is long-term results that will ultimately determine whether money curbs are wise or foolish. (Notably, while unhappy with Malaysia's controls, the West and the IMF do not want China to lift its exchange restrictions anytime soon.) Even now, though, Mahathir's move is challenging other leaders to come up with better ways of dealing with the Crisis than simply dancing to the Fund's or the markets' music, at great pain to their constituents. With the prospect of more client countries going their own way, the IMF too is having to rethink its strictures, particularly on budgetary spending, which is desperately needed to prop up banks and rekindle growth.
The bottom line for many governments, from Kuala Lumpur and Jakarta to Moscow and Brasilia: it is no use adopting policies, no matter how well-conceived, that get a government thrown out of power. That was the lesson many leaders drew from the ouster of Suharto after more than three decades in power. In the face of a plummeting rupiah, the Indonesian despot gave no thought to currency controls and imposed a 60% interest rate instead, crushing banks and companies en masse and throwing millions out of work. Under pressure from the Fund, he scrapped fuel subsidies, jacking up prices and triggering riots. It didn't help, of course, that Suharto enjoyed no democratic mandate, and his cronyism and policy flip-flops worsened his economic problems. But it was those woes that brought him down.
No wonder presidents and premiers elsewhere are less keen to stick to their IMF guns in the face of explosive unrest. Boris Yeltsin unilaterally slashed Russia's debt payments, despite bankers' protests, to divert more rubles to unpaid state workers, among other concerns. Suharto's successor B.J. Habibie bargained with the Fund for subsidies on essential goods to continue for a time. South Korea President Kim Dae Jung is taking care with industrial restructuring rather than confronting powerful unions opposed to mass layoffs. Mahathir, of course, did not bother to wait for a third quarter of minus-5% growth before imposing currency curbs, which allow him, at least temporarily, to reflate the economy without collapsing the ringgit.
Which brings up another issue: Is democracy good for economic reform? Those who have long criticized China for stanching political change while pushing economic liberalization now face the spectacle of Russia's collapse after a dozen years of trying to undertake glasnost and perestroika at the same time. The strikes and protests hobbling tolerant governments in Jakarta and Seoul can only give Beijing pause in contemplating its own plans to reform state-owned enterprises. Both Yeltsin and Kim are struggling with parliaments, the former over his choice of prime minister, the latter over 300 stalled bills, most of them needed for restructuring. In Malaysia the firing and intimidation of deputy PM Anwar Ibrahim sadden democrats. But even they might see some virtue in finally knowing who sets economic policy. Many also worry that prolonging the contest between the prime minister and his ex-No. 2 could only erode confidence.
Still, the solution is not repression in the name of strong, solid government, especially since in these days of People Power, no hated regime can really be stable for keeps. Indeed, Thailand's relative success in its climb back from the abyss owes much to the Chuan administration's efforts to win public support for its policies, instead of just handing down marching orders to the populace. Moreover, one crucial lesson from the Crisis is the need for freedom of information and expression, so that pernicious policies are exposed before they do irreparable damage. Democratic openness and accountability are also needed to combat cronyism and corruption, which contributed immensely to the mountain of bad loans and rash investments that crushed the Asian miracle.
Extreme situations, however, like those in Russia and Indonesia, tend to engender extreme measures, sweeping aside the rational and liberal. Hence, by far the gravest threat to freedom today, both political and economic, is not recalcitrant strongmen or unruly speculators and demonstrators - but mass hardship. Just as the Great Depression of the 1930s gave rise to trade-strangling tariffs and goose-stepping goons, the Asian Crisis and its global repercussions cannot but provide ammunition to protectionists, fascists and other control freaks. Thus, when the G7 nations meet in London this weekend to discuss Russia and the restive markets, it will not be just the global economy at stake - but the free world.
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