Capital-Flow Doubters Get Some Respect

If for no other reason (and there is no other reason) than it has revealed hard truths, the Asian financial crisis deserves a measure of our gratitude.

Perhaps the most serious truth is that the world’s capital-flow system may be no more stable than a hillside Malibu home in a downpour, in perpetual danger of a mudslide. The unrestricted gushing of money in and out of countries is a risky formula for trauma, not for systemwide wealth and stability. So testifies the apostate Jagdish Bhagwati--once a top advisor to the former General Agreement on Tariff and Trade, a free-trade institution known as GATT. He makes his public confession that he no longer is a believer in free-market absolutism in the current Foreign Affairs. The economist lambastes what he terms the “Wall Street-Treasury complex” for propagating the self-serving deceit that a nation’s currency can be treated as no different a commodity from, say, shoes. But a coin of the realm is not the same thing as a penny loafer; if it is not protected against foul economic weather, major chunks of national economies will from time to time unravel. Bhagwati warns: “The Asian crisis [showed] that capital movements could repeatedly generate crises. Thus, any nation contemplating the embrace of free capital mobility must . . . consider the probability of running into a crisis. The pretty face [of free capital movement] presented to us is, in fact, a mask that hides the warts and wrinkles underneath.”

This Columbia University professor still swears allegiance to free-market philosophy in other respects, but his defection on this issue is on the order of a Vatican bishop turning up at a Presbyterian pulpit. Unlike hysterical critics such as Malaysia’s Mahathir Mohamad, who indicts evil Westerners for trageting particular currencies, Bhagwati points out the “inherently crisis-prone nature” and the “panics and manias” of the world capital system.

Another truth arising from the Asian-contagion experience is that when economies go south, so too go inept regimes and leaders who should have been sent packing long before. A soaring economy hides many failures. Economically troubled Indonesia now is being transformed into deeply politically troubled Indonesia. Last week the Clinton administration finally terminated a U.S. military-aid program to Jakarta. It should only be a matter of time for Suharto now. The only question is, how much time does Indonesia have?

By contrast, Hong Kong, a different kind of nondemocracy, is hanging tough. This Asian monument to Adam Smith will remain politically stable, and Beijing will continue to keep its hands off, if Hong Kong is able to ride out the crisis. Which probably it will (and probably Indonesia won’t). Commented Burton Levin, a former consul in Hong Kong, at a recent Asia Society California Center seminar in Los Angeles: “The last thing Beijing wanted to do was to have inherited this cosmopolitan success story and turn it into a garbage heap.” Levin asks us to keep our expectations for democracy there realistic by reminding us that Hong Kong, even under communist masters, is now and always has been a “government of business, by business and for business.”

Another issue is America’s obnoxious sense of superiority as it observes the turmoil from the safety of the world’s No.J1 economy. Listen to MIT’s Paul Krugman, the economist who was warning about Asia’s perilous economies long before most people noticed: “The current sense that the United States is on top of the world is based on a huge exaggeration of the implications of a few good years here and a few bad years elsewhere.” Krugman writes, in the same Foreign Affairs issue as Bhagwati that “if pride goeth before a fall, the United States has one heck of a comeuppance in store.”

While not actually predicting that a comeuppance contagion will strike America, Krugman does like Asia’s chances: “Emerging Asia will be back,” he says. The economist who in 1994 burst the intellectual bubble of the Asian “miracle” now reverses direction by certifying the region’s “ability to deliver sustained growth in general.” He is also hopeful about Japan, especially if its economy can neutralize its ministry of finance. The economist depicts the powerful ministry as “seemingly determined to keep the economy depressed” by consistently raising taxes “whenever the country has shown signs of recovery.”

I wish I had listened to Krugman when he all but foresaw the Asian crisis. Of course, so do a few million others. So what does one do now that the Cassandra of Cambridge, putting on his prophet bonnet again, is worrying about a possible American stumble? Ignore the man again? Not moi. America needs to prepare for the day when Asia is fully up and running again by acting humble now. It’s a shame that will never happen, because one way or the other, before too long, we’ll pay.