New York Times February 21, 1999

Markets Are Freer Than Politicians

By DAVID E. SANGER

WASHINGTON -- Yevgeny Primakov, the former KGB spy who is trying to tighten his hold as Russia's prime minister, has gotten a pretty fast education about the ugly choices the global economy presents to leaders of some of the world's great and once-great powers.

Every few weeks a team of economists from the International Monetary Fund shows up in Moscow to determine if Primakov has put together what they politely term a "realistic" budget. By that they mean a budget that contains a plan to actually begin collecting taxes, bring the costs of pensions and subsidies under control, manage interest rates and pay back debts owed to the West. Their recent message is simple: If the numbers don't add up, the long-halted aid won't resume. And don't count on welcoming back the burned investors who fled Russia last August.

To add to the agony, Primakov is getting an equally clear -- and entirely contradictory -- message from the oligarchs whose support he needs, from ordinary Russians who want relief from soaring prices, from the itchy military that wants to get paid and from the Communists who point out that these indignities were unheard of before Russia began paying lip service to the idea of a market economy.

Russia's struggle between the forces of global economic integration and domestic economic disintegration, between going the IMF way or going its own way, is an extreme case, but it is hardly unique. Even as the world economy seems to be stabilizing after 20 months of chaos, the political tensions engendered by those events are only worsening. From Brasilia to Beijing to Tokyo, leaders who once talked, Clinton-like, about the benefits of plunging into a globally integrated economy are now talking about how to get out of the pool.

Former Secretary of State Henry Kissinger put it bluntly three weeks ago at the annual meeting of the gods of a globalized economy in Davos, Switzerland: "It is not politically tolerable to prescribe long periods of austerity. It has not worked in any country, and in Indonesia it has produced a political catastrophe."

The Clinton administration is not on the same wavelength as Kissinger. It continues to prescribe austerity and fiscal rectitude, even while talking about the need for "social safety nets" in places like Russia and Brazil. But listen carefully, and you can hear the White House recalibrating. Last week President Clinton's national security adviser, Samuel Berger, was talking about a new challenge: Dealing with the "very real fear of a swing back away from democracy and market economics" overseas because of the pressures of austerity.

A four-part series in The New York Times last week described the economic carnage that created this backlash -- from the enormous increase in the flow of international capital around the world to the unpredictable consequences when that cash rushed out of nations that had become addicted to it but were unable to regulate their financial systems. Add to that a dash of crony capitalism, the effects of falling prices for everything from pigs to gasoline, and the sheer panic that sets in when investors conclude that last month's "emerging market" is this month's basket case, and you have the ingredients for a global mess.

Only now, though, are people beginning to explore the political consequences of that collapse, which are as varied as the countries where economic contagion spread. Brazil's governors responded to the country's crisis by threatening to default on their debts rather than give up populist programs; Japan's lawmakers are pressing the Bank of Japan to vastly increase the amount of yen in circulation, an inflation-creating strategy Japan hasn't tried since 1939. (It didn't work out so well then.)

Whatever the solution, all are discovering one immutable fact: For all the talk about the wonders of joining the global market, it greatly reduces a nation's political choices.

When times are good it is easy to satisfy investors, who want low risk and high returns, while keeping the masses happy. That was the story of Asia: As money poured in and jobs were created, the free markets seemed not just a godsend, but an ideology. But the moment they stopped delivering prosperity, interests diverged. The IMF, backed by the United States, saw salvation in fiscal discipline, high interest rates to draw back investors and a continuing commitment to open markets. The investors demanded government guarantees that their investments would be protected -- or they would take their cash elsewhere.

The investors won the first round. But now Indonesian rickshaw drivers and Chinese steel makers are demanding that their governments take care of them first. Suddenly the market forces that were seen as the path to national salvation have become the enemy of national sovereignty; who wants to let some bond traders in New York, much less the IMF, dictate how much can be spent on unemployment insurance?

"Few people would die with the words 'free markets' on their lips," notes Daniel Yergin, who has chronicled the rise of the markets in the 1980s and '90s and the consequent reduction of state power. And so all of a sudden, from Davos to Shanghai, the talk is about re-imposing control on the markets to protect the citizenry.

But that isn't so easy to do, not in a world grown dependent on foreign capital to build the office buildings and the factories.

This struggle between what investors demand and what politicians think they need to do to satisfy their constituencies is visible every day, in different guises. French President Jacques Chirac arrived in Washington last week and before stepping inside the White House went to the headquarters of the IMF, where he declared that it was time to reimpose control over the exchange rates of the three major currencies: the dollar, the yen and the new euro. Treasury Secretary Robert Rubin, a free marketeer, made it clear that he views Chirac's idea as a form of madness. In the name of keeping currencies aligned, he said, a country whose economy was slowing -- say, the United States -- might have to raise interest rates, worsening the slowdown.

Another form of the struggle between state control and markets is playing out in China, where the Communist Party's legitimacy these days rests almost entirely on its ability to deliver economic growth. When greater economic liberalization served that purpose, the leadership in Beijing talked about market socialism. But now growth is slowing -- the government insists the economy expanded 7.8 percent last year, but the figure appears to be a figment of statistical imagination -- and there are no new jobs for those laid off from decrepit, uncompetitive state-owned industries. With small riots breaking out, the government is suddenly more worried about stability than economic reform. A senior Clinton administration official talks of China's new "command economy," in which banks are instructed to keep lending money to failing state-owned enterprises, a formula for disaster. And foreign investment in China, once the hottest play on the globe, is slowing dramatically.

Then there is Russia, whose downward spiral, Berger says, is a greater threat to U.S. security than a strong Soviet Union was. But the solution Washington is adopting seems a series of Band-Aids: Clinton's latest budget includes money to pay Russian nuclear scientists in hopes that they won't seek employment with Saddam Hussein, and it provides humanitarian food aid around the edges. But the old strategy -- pretending that Russia is rapidly turning into a market economy, and providing billions in loans through the IMF to get it there -- is an approach Washington now views as bankrupt. So do Russians like Vladimir Ryzhkov, a member of Parliament who told an audience at Davos that Russia is now so weak it "is incapable of implementing serious reforms."

The managers of the global crisis insist there is a third way -- that austerity need not mean abandoning the poor or the unemployed. Stanley Fischer, the No. 2 official at the IMF, says the portrayal of his organization as heartless economists devoid of a social conscience is "arrant nonsense." But he also points out that the IMF does not have the resources to rebuild a Russia or an Indonesia; only the private markets have that kind of cash. And if the leaders of the emerging markets want to attract that money again, they are going to have to listen to what the investors want as attentively as they listen to the protesters in the streets.