Since the end of the Cold War, open markets and open economies have been extolled as the generators of wealth. With the demise of communism following the fall of the Soviet Union, this neo-liberal argument was given further impetus. The reborn ethos of openness was thought to herald the second burst of capitalism. Only this time, it was to be on a scale unprecedented in the history of mankind.

Complemented by the relentless process of globalisation and the integration of economies, this was eventually to lead the rest of the world into the beginning of a new global civilisation.

Over the past decade, the globalisation thesis has become so widespread that it has been endorsed by practically all spectrums of society. Essentially, the trends of globalisation and neo-liberalism have been regarded as two sides of the same coin.

The recent experience in East Asia has undoubtedly shaken off some of the glib assumptions about globalisation and neo-liberalism. The seismic contagion has provoked a serious re-thinking along such lines especially among the seriously afflicted.

It has gone to underscore the basis of the anti-thesis of globalisation and openly questioned the sense of Anglo-American ultra-liberalism. On a worldwide scale, it has challenged the postulates of the benefits of free market capitalism which was assumed to have routed all other forms of economic organisation.

A priori, the crisis which has extended beyond the East Asian geographical space should no longer be simply termed the "East Asian crisis". Rather, as Richard Higgot and Nicola Phillips of Warwick put it, the events in East Asia and the subsequent spillover on the eve of the 21st century represent the first "crisis of globalisation".

The backlash against liberalisation and globalisation in the aftermath of the crisis has persuaded some to evoke a reconstitution of Keynesian policies. Others have called for socialism while the more radical ones have gone as far as advocating Marxism.

What have we learnt from the crisis? For one, markets cannot be left entirely to free-marketeers. The breakdown of Bretton Woods in the 1970s and the gradual dismantling of exchange controls in the 1980s, accompanied by progressive leaps in telecommunications and information systems, resulted in the development of a whole new range of speculative instruments and an explosion in transborder financial flows.

Over the years, First World countries and powerful institutions including the IMF, the World Bank, the Organisation for Economic Cooperation and Development and the World Trade Organisation (since its inception in 1995) have been vigorously pushing for trade and financial liberalisation. During this period, liberalisation of the economy did not progress symmetrically. The liberalisation of the international trade structure has been slow and as such, has allowed developing countries a certain comparative advantage. This cannot be said of the international capital markets where liberalisation is virtually complete.

Competitive dynamics, the need to lure capital and the growing advocacy of the advantages of neo-liberalism have been the driving force behind many developing economies' move to liberalise their capital markets. In this sense, should states themselves be blamed for having voluntarily instituted liberalisation initiatives and removing barriers to capital movements (and for many of them, doing so ahead of time)?

Essentially, there are stark differences between free trade and free capital flows. Economic logic and evidentiary trends of the success of free trade orientation over the past three decades have obviously given a solid basis to neo-liberal theories and have been a major force behind the push towards accelerated liberalisation and deregulation across economic and geographical space.

Nonetheless, the same logic does not necessarily hold true for unfettered financial and capital flows. The "Chicago-school" economist Milton Friedman once said that speculative flows tend to be "stabilising and welfare-enhancing" as speculators betting against "fundamentals" would be wiped out in the marketplace.

Financial markets, however, are not characterised by auto-regulation as supporters of neo-liberal theory would have it. Rather, volatility and anarchy rule.

Economic historian Charles Kindleberger described capital flows as subjected to "panics, manias and crashes". In the absence of international financial governance, unfettered capital movements facilitate speculation and this will continue to remain a pillar of risks to the international financial market if nothing is done to remedy the situation.

Malaysia was among the first to call for a revamp of the international financial architecture to curb speculative flows. This initially received a cool response and her decision to impose selective capital controls stunned the world. Nevertheless, the idea of market-based controls and curbing destabilising capital flows has since gathered support from various countries all over the world. More encouragingly, Paul Krugman agreed that capital controls may be necessary in crisis circumstances provided they are temporary and meant to give "breathing space" to undertake reforms and stabilise the economy. Of late, the Asia Pacific Economic Cooperation and the United Nations have called for reform of the global financial system and the adoption of prudential and precautionary measures to limit the impact of rapid capital flows. This must all be very discomforting to the high priests of neo-liberalism. Globalisation is assumed to pose fundamental challenges to the economic realm of nation-states. According to business guru Kenichi Ohmae, as the nation-state no longer generates real economic activity, it has forfeited its role as a critical participant in the global economy. It also leads to the perception of an erosion in state authority and political choices over time.

Sovereignty is being redefined. In the wake of the crisis, the International Monetary Fund plunged into national policies as it endeavoured to solve the problems. It went much further than just asking for a revamp of national strategies and macroeconomic policies by insisting on a total restructuring of existing institutions and practices.

Globalisation is actually a misnomer. Inequalities and imbalances abound. Although there has been an impressive increase in capital flows to emerging markets, the bulk of the trade, investment and financial flows are still heavily concentrated within The Triad (North America, Europe and Japan), a trend which is likely to continue for some time.

In this sense, it is paradoxical to see that along the way, increasing globalisation and liberalisation have, in fact, metamorphosed into a form of hierarchy of power and influence under the First World countries. The internationalisation of the economy could ultimately lead to a strengthening of the state in its role in national, regional or multilateral governance mechanisms. Under current circumstances, while acknowledging an intensification in the convergence of economies through globalisation and liberalisation, it will be crucial to provide a controlling framework or infrastructure over national and international financial markets to prevent a repetition of the economic catastrophe.

A clear and ordered system of governance embracing states, regional groupings or international organisations on a multilateral level could be explored. Beneath this, and more importantly, states themselves must show the political will to support this agenda.

At the same time, it is important that the blame for the recent problems is not heaped entirely on global forces and liberalisation. In many instances, states themselves are partly to blame. Had there been greater prudence and vigilance in governance and monitoring, many of the problems could have been avoided. While national economic governance becomes more complex as a result of global economic convergence, the threat to the Westphalian Order of nation-states may turn out to be more metaphorical than real.

One must remember that the future economy will be one which is predominantly market-oriented and increasingly globalised. This means that a nation's course of growth and development in the new economic era will depend not only on domestic elements but be increasingly influenced by global factors. Nevertheless, it is unlikely that nation-states will relinquish all sovereignty to supranational institutions and the market outright. The new role of the state will, however, be one which augments the function of the market rather than replace it. Nonetheless, the state or government still remains the best agent to provide governance, implement regulations and dictate policies.

In future, states will mean both nation-states and region-states embracing a host of nation-states. Increasing inter-connectedness and co-operation among nation-and region-states will become the norm but in essence, states will remain predominantly capitalist, operating within the logic of the new global competitiveness. They will continue to be actively involved in setting economic strategies.
 

By T.C. Tan - Malaysian Institute of Economic Research (MIER)
This article was published in the New Straits Times (Malaysia) on 10 July 1999.