New York Times February 21, 1999

Global Markets' Lethal Magic

During the cold war, Americans feared the military ambitions of Russia and China in the great battlegrounds of Asia and Latin America. Today the territory is familiar but the danger is different, as the United States awaits the aftershocks of a global economic crisis. As The Times reported in a series of articles last week, no one forecast the start of the new contagion in Asia two years ago. Nor did many foresee how it would spread quickly to Russia and Latin America. Rich nations and investors were blind to the weaknesses of the worldwide boom, and their initial "solutions" when the collapse started often made things worse. Now there is no clear path out of the morass.

The Times series dispelled any temptation to be complacent about the American economy's supposed imperviousness to distant trends. In an era of interconnectedness, American farmers, steelworkers and ordinary citizens dependent on investments and pension funds were shown to have already been hurt. The horrendous human cost overseas could also be seen in the vanished hopes of rickshaw drivers, entrepreneurs and fledgling investors whose families had been reduced almost overnight to poverty and hunger. For much of the world, the magic of the marketplace extolled by the West in the afterglow of victory in the cold war has been supplanted by the cruelty of markets, wariness toward capitalism and new dangers of instability.

Much of the credit for staving off an even worse disaster goes to Treasury Secretary Robert Rubin and his deputy, Lawrence Summers, who along with Alan Greenspan at the Federal Reserve have energetically worked with finance ministers and central bankers in other countries to minimize panic. But as many in the Administration now acknowledge, they and other officials got caught up in the euphoria of the early 1990's and pushed developing countries to open their markets to foreign capital when, in retrospect, they were not ready for it. An important lesson is that the mantra of privatization, investment and deregulation of markets overseas should have been accompanied by greater caution and attention to openness, sound financial infrastructures and efforts to root out corruption.

Because the experts failed to anticipate the crisis, many of their actions proved counterproductive. The International Monetary Fund, focused on maintaining fixed exchange rates, forced countries to accept austerity steps that only precipitated bankruptcies and killed growth. At the World Bank, officials fear that the monetary fund's economic prescriptions can hurt recovery, not hasten it. The second lesson, then, is that there needs to be greater understanding of the broad social and political implications of economic theory, more diplomatic sensitivity and certainly more coordination among the "doctors" trying to revive the patient.

The final lesson will be the hardest to figure out. The United States must participate in developing new structures to monitor the new forces at work in the global economy. Institutions like the I.M.F. and World Bank may have made mistakes, but they need to be strengthened, not abandoned, as the best available way to insure that there is enough warning as the next crisis hits. Some experts suggest a kind of global Federal Reserve system to regulate the global economies, while others insist on the absolute sovereignty of the marketplace. Whatever happens, some form of greater financial coordination is in order, with more attention to the underpinnings of healthy markets, including a modern banking system and bankruptcy laws.

From the early 19th century and the start of the industrial era, the United States suffered a terrible cycle of boom-and-bust. There were times of great euphoria when the United States attracted foreign capital, only to crash, leaving investors empty-handed. The Great Depression and World War II helped set in place the modern system of regulation, disclosure and government safety nets. The world is far from reaching that point, but it is not too soon to think in terms of heading in that direction, and certainly being clear-eyed about the risks as well as the magic of the marketplace.

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