City & Business: Emerging markets have become passe
Sunday 17 January 1999
This was a press conference to "clear up misconceptions" about Malaysia. The Honourable Dato' Mustapha Mohamad, Second Finance Minister, sat at the head of the table mistrustfully eyeing us as we eyed him - each side still mystified by the other's culture; each side attempting to gauge the depth of the other's corruption.
Holder of a masters degree from Boston University in the US and author of seven books, Dato' Mustapha is a player in Malaysian politics. He spoke about Malaysia's controversial exchange rate controls with a mixture of intelligence, patriotic zest, irony and non sequiturs. Phrases such as "destabilising, destructive capital flows" and "regaining monetary independence" recurred.
The man from the Financial Times asked what would happen when currency controls were lifted next September and up to $10bn (pounds 6bn) in foreign funds locked in Malaysia left with a whoosh. Dato' Mustapha said he doubted there would be a whoosh, but added that, in any case, the situation was "under study".
Tapping the end of his pen on the pad supplied by the embassy, the man from The Guardian asked Dato' Mustapha about abuses of judicial process in the trial of Anwar Ibrahim, the former deputy prime minister charged with sodomy and other improprieties. Dato' Mus-tapha replied that there was evidence of police brutality, and the police chief had resigned.
This was last Wednesday evening. The context for the press conference was dramatic. Several hours earlier, the news had broken that Brazil's currency was crashing, threatening to re-ignite the crisis in emerging market. Yet the occasion seemed perfunctory. It seemed, indeed, empty and pointless.
THE reason, I concluded, was that the emerging market game is over, so neither Malaysia nor Brazil matter the way they did five months ago. The heart has gone out of the whole "emerging market" concept. The idea of organising the world economy around the principle of globalisation under the watchful eye of the International Monetary Fund is fast becoming as outmoded as the constructs that preceded it: colonialism, post-colonialism, underdeveloped nations, lesser developed nations, and North-South relations.
Brazil and its domino effect on Venezuela, Argentina and Mexico will still generate headlines. The task of stabilising the Brazilian economy will go on as before. The IMF will send delegations to Brazil as before. Brady bonds and other securities linked to the status of Brazil's economy will fluctuate as before.
But the notion that the world will boom or bust depending on how globalisation goes has gone into disconnect. The notion that the end of globalisation is synonymous with some almighty, era-defining financial crash no longer holds water. The achievement of the Washington establishment, and Fed chairman Alan Greenspan in particular, has been to rewire the nervous system of the global markets. Financial markets feel the same sensations with Brazil crashing that they felt when Asia crashed - but the feeling is a phantom one; the amputation has occurred.
This is by no means to suggest that all is well. Rather, it suggests we are sliding down from the 1990s boom into some as yet unquantified slough of economic activity with a whimper rather than a bang.
Warburg Dillon Read economist Andrew Cates forecasts that the Latin American recession to come could depress global economic growth in 1999 from slightly more than 1 per cent to slightly less than 1 per cent. How this affects UK growth is subtle in the extreme, but inexorable. There will be days when people ask: recession? What recession? There will be other days when we awake and ask ourselves how - without seeing it more clearly - our standard of living has been crimped so much.
Indeed, the direction of events today is better stated in biblical than econometric terms: we are heading into the seven lean years following the seven fat ones. To worry about this is futile. To engage in doom-mongering about it is as much yesterday's game as is the emerging markets game.
There is little for us to do but analyse the end of the emerging markets game - sift through the shards of historical material - and invent a new way for the Group of Seven centre of the world economy and the "emerging market" or "Third" world to relate. In a funny way, Malaysia offers us a platform for doing this.
Countries like Brazil continue to go through the motions of playing Washington's game. Brazil accepts the terms of the IMF bail-out programme until it suits it not to. It devalues its currency without con- sultation, even though this was not part of the IMF bail-out programme. Malaysia offers us the relative virtue of calling a spade a spade.
In the emerging market game that was played during the 1990s boom, everyone was a winner while money flowed into the country. Western banks won. Western politicians selling the globalisation concept won. The local power elites in emerging markets won, as they built local businesses and squirrelled away the requisite getaway money in Switzerland. Even the man in the street won - buying a colour TV for his shack, upgrading from a moped to a Suzuki motorbike.
During the dark side of this game - when money flowed out of the country - the Western banks remained winners. Their losses were insured by the IMF. The local power elites remained winners. They might suffer mild discomfort and uncertainty. But they had their money in Switzerland. It was the man on the street who got it in the neck as his currency was devalued, drastically reducing his purchasing power in the global market.
IT IS this game that Malaysian Prime Minister Mahathir bin Mohamad says he won't play any longer. At the Malaysian embassy on Wednesday, Dato' Mustapha defended his government by saying it was safeguarding the living standard of the Malaysian people against currency speculators.
There is hypocrisy in this - to the extent that Mahathir's circle has money in Switzerland, where the gnomes are currency speculators themselves. There may be an element of demagoguery in what Mr Mahathir says. He beats on George Soros to foster xenophobic political support.
But at least he begins a discussion. The Brazilians smile and avoid discussion. Yet fresh discussion about what happens now between the G7 and the so- called emerging markets is necessary. As long as this discussion is restricted to the framework of emergency bail-outs, it is unlikely to do more than hold the old system together.
This is what the G7 means when it talks about "new architecture" for the global financial system, and goes on about reforming the Bretton Woods twins of the IMF and World Bank. The problem here is that the G7 is up to its old tricks in seeking to dictate the terms of global financial reform. The emerging market power elites are up to their old tricks in seeking to intervene in this reform process while protecting their backs.
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