Conflict, consensus in global dialog

By Mar'ie Muhammad

"In this battle or conflict that we call free and open markets, the roster of soldiers or participants is large, diverse and global, and has distinctly different goals, objectives and time parameters. Market participants also have a wide variance of financial means. The fascinating part of this battle is that we all occupy the same space at the same time" (Dean Lundell's Sun Tzu's Art Of War).

KUALA LUMPUR: Globalization, as a final stage of world liberalization in the fields of finance, trade and capital, has become mankind's hope as we approach the end of the 20th century.

At first it was assumed that the spreading of liberalization would not only benefit advanced nations but also developing countries, although it was recognized that, in the early stages, specific communities within developing nations, including their business, would be required to adjust to the new phenomenon.

For advanced countries, economic, financial and cultural globalization has not given rise to too many problems, because institutions, structures and community values in such nations have in reality lived within such a world.

With the completion of the General Agreement on Trade and Tariff, it was also thought that conflicts in international trade would be overcome and replaced by dialog to achieve consensus. Globalization was thus taken as a myth bringing a perspective of new hope, even if full of challenges.

However, after the present crisis struck, starting in Southeast and East Asia before spreading and bringing the world toward global recession, people began to contemplate and ask whether the myth is truly capable of becoming reality or is merely an empty promise, even a source of frustration, especially for the poor communities in the second world.

Globalization in the field of finance is essentially an affirmation and expansion of international financial capitalism, in which the major roles are dominated by fund managers, large institutional investors and hedge funds, all of whom are oriented to seeking the largest possible profit in the short term, although with a certain degree of risk. Their power and strength in organizing and playing the money and capital markets exceeds the strength of official authorities, such as central banks and multilateral agencies, including the International Monetary Fund.

In particular, the incapacity of the IMF to overcome the crisis stems not from any unwillingness to resolve the crisis as quickly as possible, but simply because it is unable to do so. It is certainly true that the countries experiencing crisis possess extremely weak banking sectors and huge amounts of private debt, and are confronted with issues of good governance in the public and corporate sectors. Even so, we cannot ignore the external pressures produced through global financial transactions.

Consequences of this lengthy crisis for the countries of Southeast Asia, and which have landed upon large numbers of poor people, are indeed very frightening.

Indonesia, for example, which had worked hard for 30 years to raise the standard of living of its people, has now found its achievement disappear within the relatively short period of a single year. As an illustration, the number of people living below the poverty line has now leaped fourfold to reach around 90 million people (some 43 percent of the population). Share prices have fallen drastically, and are worse than for the 1929 Wall Street Crash. The value of the rupiah depreciated about 70 percent compared with its value prior to the crisis.

Recognizing the impact of internal factors, the present situation has also arisen because of external shocks brought by the global financial system. In this regard, we need to think afresh about the weaknesses arising from the global financial market and which are a source of instability in the world economy.

Economist George Soros commented on the rethinking process needed before the U.S. House of Representatives' Committee on Banking and Financial Services on Sept. 15.

"The rethinking must start with the recognition that financial markets are inherently unstable. The global capitalist system is based on the belief that financial markets, left to their own devices, tend towards equilibrium," Soros said.

"They are supposed to move like a pendulum; they may be dislocated by external forces, so-called exogenous shocks, but they will seek to return to the equilibrium position.

"This belief is false. Financial markets are given to excesses and if a boom/bust sequence progresses beyond a certain point, it will never revert to where it came from. Instead of acting like a pendulum, financial markets have recently acted more like a wrecking ball, knocking over one economy after another."

Apart from fund managers and their colleagues, the global financial and economic order is heavily influenced by the policies of the United States. Unfortunately, the U.S. response to the crisis in Southeast Asia, which has triggered a slide toward world crisis, has been very different to that at the time of the Mexican crisis.

In addition, the U.S. policy response to the present crisis has been very late, emerging only when everything had become very painful and difficult to manage. Just how significant the role of the U.S. can be was felt when the U.S. decided to lower interest rates by only 25 basis points. That decision alone has resulted in stronger currencies in the region.

It is now fashionable in all international forums, such as G- 7, the IMF, the World Bank and so forth, to discuss the issue of strengthening the global financial architecture. We wonder, however, since the content of this concept is still far from clear, whether it has simply become a buzzword. Consequently, it should not be considered strange if each country with the primary concern of safeguarding its national interests will take its own path to protecting its national interests, including implementing capital account controls.

It is most interesting that the IMF has also started to realize the dangers that can arise from excessively open capital accounts. The Interim Committee of the IMF, at its meeting on Oct. 4, concluded: "The opening of capital accounts must be carried out in an orderly, gradual and well-sequenced manner, keeping its pace in line with the strengthening of a country's ability to sustain its consequences".

Thus, the tendency toward regulated economies and interventionist economics will increasingly be a tendency to react to wild global finance. Policies and actions in line with this tendency could increasingly be fashionable, thereby leading to conflicts with liberal policies and ties. This phenomena will unfortunately hamper the implementation of liberal ties, such as the Asia Pacific Economic Cooperation and GATT.

By way of highlights, some potential dichotomies could take the form of:

1. Global imperatives versus local imperatives:

The basic premise that world economic growth can best be achieved if all nations unremittingly pursue outward-looking and internationally open economies. The failure of global finance in the process spawns the backlash leading to the economic policies that are more nationalistic, more inward-looking and populist.

More particularly, while increasingly regulated economies may not be the ideal sought by developing nations, they may take corrective actions to neutralize negative fallout from globalization.

2. Interdependency versus dependency:

This crisis produces a widening gap between highly industrialized countries and developing economies and globalization, as such could even widen this gap. Under the globalization sphere, we assume that genuine interdependency between developed and developing nations can prevail for benefit of all nations. Unfortunately, the overwhelming economic and technological superiority of developed nations threaten to create and deepen a sense of dependency on the part of the weaker, developing nations.

3. Absolute sovereignty versus relative sovereignty:

Globalization needs each country to participate in this game and should surrender a part of its sovereignty to international order as the supreme state to make this borderless world into a success story. This phenomena, implicitly to question the validity of absolute sovereignty of states, gives rise to potential conflict when nations, especially developing ones, feel the need to pursue different paths in line with their own national interests.

While a primary global agenda must be to resolve such conflicts, this must be done in the interests of the greatest number of mankind, especially the poor and economically weak. In this way, globalization must be viewed and shaped for the benefit of the greatest number of humanity and not simply in the interests of a privileged few.

The writer, a former minister of finance, is currently chairman of the Indonesian Transparency Society (MTI). The article is based on a paper presented at the Business Week Forum in Kuala Lumpur on Oct. 16.