Good government will bring financial markets to heel

ON lessons learnt at the IMf jamboree

The pace of progress at the annual World Bank and International Monetary Fund meetings is, usually, glacial. The assorted dignitaries can spend years talking in impenetrable jargon about decisions whose implications are, to all except aficionados, completely obscure. This year's meeting in Hong Kong brought, by contrast, big and even startling developments.

Some of them were less obviously exciting than others. For instance, the IMF got the go-ahead for a quota increase and redistribution and a special allocation of Special Drawing Rights (SDR). Dry as it sounds, this subject caused a massive row between the developed and developing nations three years ago, and delicate negotiations have been going on ever since. What it means is that member governments have agreed to increase the IMF's capital by 45 per cent, and tilt the balance of shareholding in the fund to better reflect the growing economic strength of newly industrialised countries.

In addition, the new allocation of the IMF's Special Drawing Rights, its basket currency, will also give member countries a fair share. These apparently technical housekeeping agreements are part of the process of giving fast-growing countries a greater voice in the international financial institutions.

Of more obvious interest was the unexpected focus of the meetings on what the IMF and World Bank should be doing in the modern world, and the consensus that the answer is reducing poverty, furthering social goals, making government more open and transparent, and cracking down on corruption. In short, the delegates talked about how to make the world a better place, and agreed on the steps needed even though in some cases this was inevitably only a matter of paying lip service.

However, this surprise agreement on the ends produced a fissure between the developed and developing countries over the means. The new split showed up in several ways, most dramatically in the war of words between Mahathir Mohamed, the Prime Minister of Malaysia, and the financier George Soros. But it was also revealed by the developing countries' resistance to plans for the IMF to enhance the free flow of capital around the world, and by surprise Japanese proposals for an Asian Monetary Fund whereby Asian neighbours would give each other financial support.

The disagreement boils down to one group of countries having second thoughts about capital liberalisation after this summer's currency and stock market crisis in South-east Asia. There was a fear amongst developing country finance ministers and bankers that if global capital could do this to the Tiger economies then nobody would be safe from the risk of a sudden crisis. They put out a statement saying that while they would support "orderly" capital liberalisation, it must not be allowed to put too much stress on countries already struggling to adjust to globalisation. They gave only tentative backing to the IMF's wish to amend its articles to make freedom of capital movements as well as free movement of goods and services fundamental to its operations.

These hesitations were reflected in support for the idea of an Asian Monetary Fund, a $100bn (pounds 62bn) fund that would stand ready to support any country in the region that got into the kind of crisis they have seen this summer. The fund would therefore be a kind of barrier that could be raised when the tides of free capital became too disruptive.

There are some good arguments against putting this kind of defence system in place, the main one being the question of "moral hazard". This means simply that investors would take bigger risks knowing that a large pot of money was ultimately available to bail them out than they would if there was no safety net.

With investors in Mexico rescued in 1995, and investors in Thailand in 1997, how long would it be before another country facing a run on its currency decided the time had come to activate the new fund?

However, the point is that the battered Asian economies are keen to sign up to such a fund because they feel they need protecting from the odd hurricane in the financial markets. After this summer, free capital flows look pretty destructive.

The debate was of course at its starkest in Hong Kong in the high drama - or was it farce? - of the Mahathir/Soros debate. Mr Mahathir complained: "Quite a few people who are in the media and in control of the big money seem to want to see these South-east Asian countries and in particular Malaysia stop trying to catch up with their superiors and know their place." He touched - rightly - on the fear of many in the developed world that countries like Malaysia are "stealing" jobs and business. As he put it: "To the yellow peril of yesteryear will be added the brown peril. The Europeans will be overwhelmed."

Mr Mahathir is quite right to condemn this for both its racism and its falsehood. As he said in the speech, world-wide trade and investment do not add up to a zero-sum game where one country's gain is another's loss. He also reflected a widespread feeling that trading in the international capital markets is divorced from anything real that is going on in the world. "No real money is involved, only figures," he said.

Although the outspoken Prime Minister went well beyond logic in concluding that currency trading must therefore be banned, his speech did reflect in extreme form some of the new concerns in South-east Asia. His opponent in the debate also conceded that there were problems with global capitalism. George Soros said: "Financial markets are inherently unstable and international financial markets even more so. International capital flows are notorious for their boom-bust pattern."

However, he concluded, not that governments should try to ban the markets, Malaysian style, but rather that the existence of the global markets demands a different kind of government. Broadly speaking, an open and democratic government will be less vulnerable to the deficiencies of financial markets - and he criticised Asian governments for clinging to an autocratic and corrupt politics.

The world's most famous financier therefore ended up reaching the same conclusion as the finance ministers and central bank governors: the next big issue in economic progress is better government. But until that lesson is put into practice, the IMF will find it heavy-going on its plans for capital liberalisation. The experience of the 1930s, when the international financial system broke down, suggests that financial crises do nothing to improve the prospects of open government.

Nor is there anything to suggest that this summer's crisis has prodded South-east Asia on to a higher political plane. The Thai government is in turmoil, while Mr Mahathir's autocratic tendencies seem to have been reinforced. Free markets police bad governments very effectively, but freer markets do not necessarily improve bad governments. These have to want to improve themselves to reap the benefits of economic liberalisation.

Start your day with The Independent, sign up for daily news emails
Arts and Entertainment
Buttoned up: Ryan Reynolds with Helen Mirren in ‘Woman in Gold’
filmFor every box-office smash in his Hollywood career, there's always been a misconceived let-down. Now he says it's time for a reboot
Actress Julianne Moore wins the Best Actress in a Leading Role Award for 'Still Alice' during the 87th Annual Academy Awards in Hollywood, California
Ross Barkley
footballPaul Scholes says it's time for the Everton playmaker to step up and seize the England No 10 shirt
'We will fix it': mice in the 1970s children’s programme Bagpuss
Life and Style
2 Karl Lagerfeld and Choupette
ebooksA special investigation by Andy McSmith
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

SThree: Graduate Recruitment Resourcer

£20000 per annum + commission: SThree: Sthree have an exciting opportunity for...

Recruitment Genius: Telesales Executive - OTE £32,000+

£18000 - £32000 per annum: Recruitment Genius: A Telesales Executive is requir...

Ashdown Group: Marketing Manager - B2B, Corporate - City, London

£45000 - £50000 per annum + benefits : Ashdown Group: A highly successful, glo...

Neil Pavier: Commercial Analyst

£50,000 - £55,000: Neil Pavier: Are you a professionally qualified commercial ...

Day In a Page

War with Isis: Iraq declares victory in the battle for Tikrit - but militants make make ominous advances in neighbouring Syria's capital

War with Isis

Iraq declares victory in the battle for Tikrit - but militants make make ominous advances in neighbouring Syria
Scientists develop mechanical spring-loaded leg brace to improve walking

A spring in your step?

Scientists develop mechanical leg brace to help take a load off
Peter Ackroyd on Alfred Hitchcock: How London shaped the director's art and obsessions

Peter Ackroyd on Alfred Hitchcock

Ackroyd has devoted his literary career to chronicling the capital and its characters. He tells John Walsh why he chose the master of suspense as his latest subject
Ryan Reynolds interview: The actor is branching out with Nazi art-theft drama Woman in Gold

Ryan Reynolds branches out in Woman in Gold

For every box-office smash in Ryan Reynolds' Hollywood career, there's always been a misconceived let-down. It's time for a rethink and a reboot, the actor tells James Mottram
Why Robin Williams safeguarded himself against a morbid trend in advertising

Stars safeguard against morbid advertising

As film-makers and advertisers make increasing posthumous use of celebrities' images, some stars are finding new ways of ensuring that they rest in peace
The UK horticulture industry is facing a skills crisis - but Great Dixter aims to change all that

UK horticulture industry facing skills crisis

Great Dixter manor house in East Sussex is encouraging people to work in the industry by offering three scholarships a year to students, as well as generous placements
Hack Circus aims to turn the rule-abiding approach of TED talks on its head

Hack Circus: Technology, art and learning

Hack Circus aims to turn the rule-abiding approach of TED talks on its head. Rhodri Marsden meets mistress of ceremonies Leila Johnston
Sevenoaks is split over much-delayed decision on controversial grammar school annexe

Sevenoaks split over grammar school annexe

If Weald of Kent Grammar School is given the go-ahead for an annexe in leafy Sevenoaks, it will be the first selective state school to open in 50 years
10 best compact cameras

A look through the lens: 10 best compact cameras

If your smartphone won’t quite cut it, it’s time to invest in a new portable gadget
Paul Scholes column: Ross Barkley played well against Italy but he must build on that. His time to step up and seize that England No 10 shirt is now

Paul Scholes column

Ross Barkley played well against Italy but he must build on that. His time to step up and seize that England No 10 shirt is now
Why Michael Carrick is still proving an enigma for England

Why Carrick is still proving an enigma for England

Manchester United's talented midfielder has played international football for almost 14 years yet, frustratingly, has won only 32 caps, says Sam Wallace
Tracey Neville: The netball coach who is just as busy as her brothers, Gary and Phil

Tracey Neville is just as busy as her brothers, Gary and Phil

The former player on how she is finding time to coach both Manchester Thunder in the Superleague and England in this year's World Cup
General Election 2015: The masterminds behind the scenes

The masterminds behind the election

How do you get your party leader to embrace a message and then stick to it? By employing these people
Machine Gun America: The amusement park where teenagers go to shoot a huge range of automatic weapons

Machine Gun America

The amusement park where teenagers go to shoot a huge range of automatic weapons
The ethics of pet food: Why are we are so selective in how we show animals our love?

The ethics of pet food

Why are we are so selective in how we show animals our love?