The Asian crisis is a product of casino capitalism, not crony capitalism, writes Walden Bello in the first of a two-part series.

TODAY, the world media are awash with talk about reform of the global financial architecture. However, the published reports focus mainly on discussions taking place within the Group of Seven or the larger Group of 22, particularly on the debate between the finance authorities of the United States and those of Europe and Japan.

Sometimes, there are some reports that come out on proposals from the United Nations Conference on Trade and Development (Unctad) or from some government in the South. But little weight is attached to the latter by media commentators, even when these views merit consideration. Of course, if one is a Jeffrey Sachs or a Paul Krugman, one's views are given some currency. But if you are not a neo-classical economist, forget it. And if you come from the world of NGOs, your views don't count at all.

This is, of course, interesting because when it comes to global trade, US President Bill Clinton, US Trade Representative Charlene Barshefsky, and WTO Director General Renato Ruggiero are talking about consulting civil society and about actively and democratically involving all of us in the globalisation process. But when it comes to the world of high finance, these are matters of allegedly great complexity that are best left to the experts and the managers of the world economy like the expert groups of the Group of 22 countries hand-picked by Washington whose three reports released in October have been arrogantly anointed by one insider as ''the international community's definitive statement on reforming the international architecture . . .''

Or better yet, leave everything to Alan Greenspan, Robert Rubin and Larry Summers, whom Time has anointed as the ''Committee of Three to Save the World''.(Though, if you ask me, they may be better described as the Four Horsemen of the Apocalypse if you include Stanley Fischer, their man at the IMF.)

Exclusive party

There is a need for the rest of us to gate-crash this exclusive party. We must do this for several reasons.

First, because those who are actively debating this issue are, for the most part, still arguing within a paradigm of neoliberal economics that has been central to generating this crisis. Second, because devising a global financial order is not simply a matter of technical economics but one that must be informed by values, and the main values and priorities of those who are managing this process are different from those of you and me. Third, because this process is, first and foremost, a question of power, and unless we do our best to gate-crash this gathering, what will emerge will simply be a global architecture that will benefit a very small global elite and continue to marginalise the vast majority of the world's peoples.

Before discussing the strategies being proposed for global financial reform, let me advance some propositions. First of all, I think we need to put to rest once and for all the idea that the Asian crisis is a product of ''crony capitalism''. What brought about the crash of 1997 was not crony capitalism but ''casino capitalism''. Even at the height of the Asian financial collapse in September of that year, Stanley Fischer, the American deputy managing director of the IMF, was blaming the crisis on the fact that ''markets are not always right. Sometimes inflows are excessive, and sometimes they may be sustained too long. Markets tend to act fast, sometimes excessively.''

And even the Economist, one of the premier organs of market fundamentalism, had to admit that ''the economic pain being imposed [by global capital markets] on the ex-tigers is out of all proportion to the policy errors of their governments''. The Fund and the US Treasury, of course, continue to uphold the correctness of their obsession with ''reforming'' domestic economic and financial arrangements, but the credibility of this approach is eroded daily by the unassailable evidence that IMF straitjackets are suffocating economies in Thailand, Malaysia, and Indonesia.

Second, finance has been the cutting edge of the globalisation process. The integration of product markets via free trade and multinationals subsidiarisation have proceeded apace, but both processes have been outstripped by the integration of global capital markets under the aegis of London and Wall Street.

Third, finance, which was liberated from the confines of the Keynesian state by the Thatcherite and Reaganite ideological revolution, has steadily gained ''ascendancy over industry'' and other sectors of the economy, to borrow the prescient characterisation of the 1991 Unctad Trade and Development Report. This pre-eminence of the financial sector is related to the crisis of dwindling growth or even deflation which has increasingly overtaken the real sectors of the global economy. This crisis has its roots in overcapacity or underconsumption, which today marks global industries from automobiles to energy to capital goods. Diminishing, if not vanishing, returns in industry have led to capital being shifted from the real economy to squeezing ''value'' out of already created value in the financial sector.

The result is essentially a game of ''global arbitrage'', where capital moves from one capital market to another, seeking to turn profits from the exploitation of the imperfections of globalised markets by taking advantage of interest-rate differentials, targeting gaps between nominal currency values and ''real'' currency values, and short-selling in stocks, that is borrowing shares to artificially inflate share values then selling. Not surprisingly, volatility, being central to global finance, has become as well the driving force of the global capitalist system as a whole.

Third, since differences in exchange rates, interest rates, and stock prices are much less among the more integrated Northern markets, movements of capital from North to the so-called ''Big Emerging Markets'' of the South and Asia have been much more volatile. Thus while crises are endemic to the finance-driven global capitalist system, the crises of the last few years have been concentrated in the emerging markets. Since late 1994, we have had the Mexican financial crisis, the so-called ''Tequila Effect'' of this crisis in Latin America, the Asian crash, the Russian collapse, the unravelling of the Brazilian real and the spinoff of the Brazilian crisis on the rest of Latin America.

Fourth, despite the global financial system's proneness to crises, finance capital operates, as Robert Kroszner describes it, ''in a realm close to anarchy''. That deregulation at the national level has not been replaced by re-regulation at the international level is because finance capital has accumulated tremendous political power over the last two decades.

While finance capital was liberated from the straitjacket of the Keynesian economy by the Republican administrations of Ronald Reagan and George Bush, it has been under the Democratic administration of Bill Clinton that financial interests became paramount in the foreign economic policy of the US government. Represented in the inner sanctum of Washington by Treasury Secretary Robert Rubin, a former arbitrage artist, and Federal Reserve chairman Alan Greenspan, a former Street consultant, the so-called Wall Street-Treasury Complex stands foursquare against any serious financial regulation. The power of this lobby stems partly from the strength of the interests it represents, but even more from the hegemonic ideology of market freedom, which is marketed as applying not only to trade in goods but also to the mobility of capital.

Fifth, the crisis of the developing countries of the South is not simply one of exposure to unregulated financial flows -- a problem that can easily be fixed with controls on speculative capital at both the global and national level. The financial deregulation of their economies that has proven so devastating is simply the latest phase of a development model that they have internalised over the last two decades under the aegis of IMF-World Bank structural adjustment programmes -- one in which foreign markets and foreign capital serve as the twin engines of development.

In other words, the Mexican crisis in 1995, the Asian collapse of 1997, and the Latin American unravelling of 1998-99 were disasters waiting to happen to economies where liberalisation of trade and investment had become equated with development, and where import substitution, trade policy, and industrial policy had been vilified as anti-development.

Divergent perspectives

There are now a thousand and one proposals for world financial reform, ranging from suggestions for pre-emptive crisis mechanisms to recommendations for the reform of the International Monetary Fund to several proposals for establishment of a ''World Financial Authority''. Rather than take them up one by one in technical fashion, let me instead go into the heart of the matter -- that is, the interests and ideologies served by the different proposals -- and group the most important recommendations into three different perspectives.

I will call the first ''It's the wiring, not the architecture'' approach. The second might be termed the ''Back to Bretton Woods'' school. And we might christen the third approach as ''It's the development model, stupid!'' strategy.

One might say that the first approach is basically the US position -- though it is shared to some degree by many of the G-7 members, with probably the notable exception of Japan. The basic idea is that the current architecture is sound, there is no need for major reforms, and it's simply a question of improving the wiring of the system. This school assigns primacy to ''reforming'' the financial sectors of the crisis economies along the lines of more transparency, tougher bankruptcy laws to eliminate moral hazard, prudential regulation using the ''Core Principles'' drafted by the Basle Committee on Banking Supervision, and greater inflow of foreign capital not only to recapitalise shattered banks but also to ''stabilise'' the local financial system by making foreign interests integral to it.

When it comes to the supply-side actors in the North, this perspective would leave them to voluntarily comply with the Basle Principles, though government intervention might be needed periodically to catch free-falling casino players whose collapse might bring down the whole global financial structure, as was the case last year when the US Federal Reserve organised a rescue of the hedge fund Long Term Capital Management after the latter was unravelled by Russia's financial crisis.

Finally, when it comes to the existing multilateral structure, this view supports the expansion of the powers of the IMF, proposing not only greater funding but also new credit lines, such as the ''precautionary credit line'' that would be made available to countries that are about to be subjected to speculative attack. Access to these funds would, however, be dependent on a country's track record in terms of observing good macro-economic fundamentals, as traditionally stipulated by the Fund.

Japan has made additional proposals on the IMF, but these are variants of the position of either the US government or some US think-tanks: more IMF monitoring of hedge funds, getting the IMF to push private creditors and investors to participate in rescue programmes -- or ''bailing them in'' instead of bailing them out -- and providing a ''certified'' line of credit to countries that follow good economic policies which are under speculative attack, something similar to Clinton's precautionary credit line.

In sum, it seems fairly obvious that, especially given its priority of transforming developing country financial systems using Northern standards, one of the key objectives of this approach is to extend the reach and deepen the global hold of Northern finance capital in developing economies under the guise of reforming the global financial architecture and stabilising global financial flows.

Tomorrow: It's the development model, stupid!

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WALDEN BELLO is professor of sociology and public administration at the University of the Philippines and co-director of Focus on Global South, a programme of Chulalongkorn University Social Research Institute. This article is abridged from a paper prepared for the ''Conference on Economic Sovereignty in a Globalised World'' (March 23-26, Chulalongkorn University). The meeting, sponsored by Focus on the Global South, has been called to provide civil society input into the discussions on global financial architecture.