I- etat des lieux et positions en présence / Current

1. What’s wrong with the current international finance?

Many economists attributed the occurrence of Korea’s 1 round crisis to its internal weaknesses: crony capitalism, Chaebol’s lack of transparency and overexpansion, state-directed banking and moral hazards, etc. Such analyses are not incorrect. But they are only half true. Korea’s 1^stst round crisis was more caused by the innate destructiveness of international finance.
In the international finance of today, three powerful, underlying forces have formed a dangerous tiangle, by which financial crises are incessantly triggered. I believe three forces are accumulation of financial capital in the developed economies, integration of financial markets of the less developed world into the global financial market, and aggressive application of information technology in the field of finance. Let’s spend some time to understand those three forces one by one.
The most vivid example of exponentially expanding financial capital is the trends of US stock market index, Dow-Jones Industrial Average, over the past ten years. It is now around 10,000 points up five times from 2000 points ten years ago. It means Dow-Jones increased 500% over the ten years. In contrast, the real economy of the US has grown in terms of GDP only by 3 percent annually. It means US real economy has grown cumulatively 30% over the same period. Doesn’t it sound appalling.
Why such deep discrepancies are observable between the financial economy and the real economy? There are two fundamental reasons for the inexplicable expansion of the financial economy, let alone many other technical reasons. I believe the income disparity between the rich and the poor is the primary driver. According to the world renowned economist, Paul Krugman of MIT, the increase in households income in the US over the past 30 years has been extremely skewedly distributed. It’s been concentrated for the benefit of the privileged. Around 70 percent of the increase went into the top one percent households, while the remaining 30 percent has been shared by 99 percent of the whole households.
Then you will come to argue: “Why do we need to be concerned about income disparity? Now we are talking about global finance. What’s the relationship between income disparity and overexpansion of financial economy?“ That might be your question. But income disparity is a matter of deep concern. It gives rise to the lack of effective demands. You know poor people cannot buy cars, for example, because they don’t have purchasing power, whereas rich people don’t want to buy as many cars as they can afford because they don’t need many cars. The result is simply the lack of effective demands. Because of this, most of big companies in the world hesitate to make investments on facilities and equipments. They are now at a loss for what to do with their surplus capital. They have money, but they don’t have the right things to invest on. As a result, huge surplus capital is drawn into the financial market, creaing financial bubbles in the developed economies. You may have heard that many big transnational companies like GE and GM make around half of their earnings from their financial operations.
Besides, the increase of the aged people matters. You know the prevailing market principle requires the majority of the people over 50s to leave jobs even though modern medicine lengthens their life up to 80s. Naturally, people are getting more and more concerned about their old years. They think national pension system as well as corporate pension system is not fully reliable. What can they do as a safeguard? They all take a sizable portion of their income or sometimes by drawing debts to portfolio investment.
This is why the financial capital keeps expanding in the developed economies. This evasive animal, financial capital, has a peculiar characteristics. It dislikes regulations. It wants every regulation which restricts free movement of capital to be discarded. It wants to move freely whereever it makes high abnormal profits. You know all the crisis-stricken countries has opened their capital markets since late 1980s not out of their own willingness, but in order to meet with the United States‘ unilateral selfish demands.
Let’s go back to the mid-1980s. Everybody will agree that the United States in those days was in a downward spiral in terms of economic strength. It actually lost competitiveness in many established manufacturing industries including cars and consumer electronics due to the advent of Asian dragons and tigers, as well as the aggressive market penetration of Japanese goods. On the other hand, Japan, being supported by accumulated trade surplus, started buying landmark builings in Manhattan and national-pride firms in Hollywood.
At that time, the US was in a critical juncture. It needed a strategy plan for a rebound. It devised a new scheme under which it could recover its national economic strength. The end-result was the Uruguay Round, which aimed to liberalize agricultural trade, to introduce tight intellectual property rights and to open financial markets around the world. Why were those three items targeted by the US? The reason was very simple: those three sectors were the very ones the US enjoyed competitive advantage. As a matter of fact, the US is the biggest producer & exporter of agricultural goods, the front runner of IT industries of which the profit comes from the intellectual property rights, and the breath-taking engineers of casino-like financial industy.
In this context, capital markets of Mexico, Korea, Thailand, Indonesia, Malaysis, and Russia were coerced to open, and consequently free flow of speculative capital led all of them into the financial crisis. Coerced liberalization of capital markets combined with the accumulation of huge financial capital was the root cause of the latest falldown of many countries in the less-developed world.
The last driver in the dangerous triangle is the advancement of information technology. It is heavily applied in the financial sector, accelerating the speed of money transfer up to that of the electronic pulse. With a couple of mouse-clicking on the computer, billions of dollars are crossing the border.
What a surprising new world we are living in, aren’t we? Huge financial capital has become more and more speculative as the financial borders are crumbling down and as the movement of money is fully supported by the IT. This is the new reality by which we inevitably experience tragic currency crisis repeatedly. Unless this dangerous triangle is untied, we will never get out of the vicious trap.
Then what can we do to break the dangerous triangle? Many alternative ideas have been generated and discussed so far in the progressive civil society as well as among academicians and politicians. Due to the time constraint, however, I cannot go into the details. But my position is that partial, piece-meal solutions such as debt abolishment movement of Jubilee 2000 or Tobin tax movement of ATTAC would not be sufficient to stop the crisis and thereby a comprehensive package solution approach is required. Let me show you an interesting chart.
When it comes to the crisis prevention, Tobin tax will be effective only to reduce the speculative currency transactions in foreign exchange markets. But the control on the speculative capital at its origination in developed economies and at its destination in less developed economies is also important. We must devise measures to reduce the generation of speculative capital from the developed economies. At the same time, we must institute the sovereign right of each nation to take discretionary capital control measures whenever necessary, and furthermore resist the WTO’s New Round and various investment treaties if they are schemed out to liberalize the crossborder movement of capital.

Even with such measures, crises will possibly take place. Then we must have ideas on what we can to manage crises. We should not allow IMF to dominate the scene as usual. It must have competitors, something like AMF, WFA, etc. And direct negotiation between the creditor and the debtor must be the priority, for example by following the international bankruptcy code. In addition, if it turns out that the debtor nation cannot afford to serve the principal and interest with its best efforts, debt abolishment measures must be applied as Jubilee 2000 tries to achieve.

What will be the most effective solution to prevent the crisis among all these solutions? I believe to stop the worsening income disparity in devoloped economies is by far the most important. Once it is controlled, there will be no further threatening increase in speculative financial capital. The critical task of designing a better, just world depends a lot more on you living in the affluent North than on people living in the South.
At this point, I must remind a famous remark of Charles Kindlerberger. He pointed out in Manias, Panics and Crashes that there have been a lot of discussions for international financial reform but no significant progress has been achieved so far. It implies reforms at the global level face a lot difficulties and therefore initiative must be driven at the regional or local level.
What can Asia do collectively to lessen the vulnerability of the region from the craze of global finance? Some experts in the progressive circle, for example Waldon Bello of Focus on Global South, suggested that Asian countries should follow more deglobalized approach for their development, relying more on domestic savings and domestic markets. I think it helps us to think differently, but it is not very smart from a strategic point of view. When it comes to the real economic activities, I don’t think Asia should step backward from global interdependencies. What Asia needs to be careful about is the forces to merge them into global financial economies.
One way to strengthen the region’s financial sovereignty is to create a regional currency. However, as European countries experienced over the last half century, to create a new regional currency takes a lot of time and a lot of policy coordinations. I think more realistic approach Asia can think of is to allow the Japanese yen to take a leadership role in the region. Of course there must be a lot of resistance against it. Japan is not considered a reliable leader by its neighboring countries.
Therefore, in order to make an idea of yen bloc working, Japan must be resilient enough to make concessions in many areas.
First, Japan must agree with the dual currency leadership structure in the longer run. When the Chinese yuan becomes an international convertible currency, yen must share its leadership with yuan. Second, Japan must develop a couple of offshore yen markets in the region, apart from Tokyo. Yen’s leadership should not mean the monopoly of yen-based financial transactions in Tokyo. Third, Japan must propose a sound regional exchange rate stabilization mechanism for example by entering into more aggressive swap agreement between central banks. Lastly, Japan must transfer industry technologies and related direct investment towards the region. Its vision of becoming a regional financial power cannot be realized without its strong concessions in the real sector.
So far I have touched upon the first issue of what’s wrong with the current international financial structure and various remedies to correct it. Let me turn to the second issue of “Why the Anglo-american reform is not an answer.