Double standards in the West’s crisis policies

Martin Khor

The global crisis has entered the phase of recession in the real economy of a number of countries. Recent actions of Western countries contrast sharply with the advice they gave Asian countries a decade ago, revealing clear double standards.

The global crisis has entered the phase of recession in the real economy of a number of countries. Recent actions of Western countries contrast sharply with the advice they gave Asian countries a decade ago, revealing clear double standards.

The global crisis has entered the phase of recession in the real economy, at least in the economies of the United States and many European countries. Recent actions of Western countries to counter both the financial crisis and the strong recessionary trends have in many cases gone against their own predominant free-market non-interventionist ideology.

Even more interestingly, their recent policies contrast sharply with the advice that they and the International Monetary Fund (IMF) that they control gave to Asian countries during their financial crisis a decade ago, revealing clear double standards.

Western leaders have announced one remarkable policy after another, aimed at saving their financial institutions and system from ruin. The measures have to some extent stemmed the hemorrhage in the financial sector in the US and some major Western European countries, giving some breathing space to their banks and other institutions.

In Iceland, however, the problems were so deep-seated that no measures could save the financial system from imploding. Some East European countries like Ukraine and Hungary are turning to the IMF for rescue funds.

Financial problems are also becoming acute in some developing countries. Pakistan’s foreign reserves are at a precariously low level and it is seeking several billions of dollars in emergency loans. Even South Korea is now seen as a potential candidate for crisis.

More governments are now extending a blanket guarantee of savings deposits in commercial banks. It started with Ireland, then Germany and other European countries followed. This was closely followed by Malaysia and Singapore after Hong Kong took a lead in Asia.

Once one government gives the guarantee to avoid a possible run of the banks, other governments are hard pressed to do so, to avoid funds flowing out to the countries providing the guarantee. This is one sign of the fragile state of confidence in the banking system.

Global

Though there is some respite in the finance sector, the global stock markets have not yet recovered their nerve, and sentiments are moreover weighed down by anxieties over the looming recession and fears for the health of industrial companies.

The past weeks have seen some astonishing Western government actions. The United States injected capital into its nine biggest banks in the start of a $250 billion equity-related recapitalisation scheme. Switzerland, the haven of safe banking, had to launch a $60 billion rescue action for its biggest bank UBS (comprising an outward transfer of $55 billion of its toxic assets and $5 billion as capital injection).

But at least the situation on the financial front is calming down in the US and Western Europe, since the markets know that the governments now have the will to bail out the banks.

But this improvement in finance has now been offset by worries about the “real economy”.

The economic problems have now spread to the sectors providing goods and services. In the United States, unemployment is up, industrial production down while the consumer sentiment index in the US fell from 70 in September to 58 in October, spelling big trouble ahead as consumer spending is the main engine pulling the growth of the US economy and the world economy.

The past weeks have also remarkably revealed the practice of double standards by Western leaders and the IMF. The actions they now take are the opposite of what they prescribed for the Asian countries during their financial crisis a decade ago.

The affected Asian countries (South Korea, Thailand, and Indonesia) were instructed to raise their interest rates sharply, a move seen as needed to counter inflation (though the inflation rates were low in the Asian countries) and to attract investment funds.

Instead, this led to consumers and companies being unable to service their debts, thus raising the banks’ non-performing loans. Recession soon followed, which in turn dampened investor confidence instead.

In contrast, the reduction of interest rates is seen in the West as a major tool (the other being fiscal stimulus) for countering recessionary trends. Each decision by the US Federal Reserve or the European central banks to cut the interest rates even by small fractions of a percentage point is greeted with near rapture by the stock markets.

Demonstration

The Asian countries were also ordered by the IMF not to come to the assistance of their ailing local banks and companies, on the grounds that this would waste public funds and cause “moral hazard.” In Indonesia, many local banks (including sound ones) collapsed because the Central Bank was told not to rescue some of the banks that were in trouble. But in recent weeks, the European leaders announced government measures backed up by almost $3,000 billion (comprising capital injection, purchase of banks’ toxic assets and loans, guarantees for savers’ deposits, and guarantees for new unsecured bank loans).

The Western leaders have explained that what is paramount is to save their financial system from meltdown and their economies from collapse. Thus, there is almost no limit to the amount of funds that the governments will provide.

The Asian countries also wanted to save their economic system from collapse, but they were told not to extend funds to save their companies, and they also had to implement the very policies that converted a financial crisis into an economic recession.

The then IMF chief Michel Camdessus told Asian leaders not to give in to the temptation of going back from financial liberalisation policies. Instead, the countries should press on with even more liberalisation, he told an ASEAN finance ministers’ meeting at the height of the crisis.

But recently, the present IMF head Dominique Strauss-Kahn warned of a global financial meltdown and urged the US and Europe to do even more to prop up their institutions and economies.

And European leaders led by Gordon Brown of the United Kingdom, Nicolas Sarkozy of France and Angela Merkel of Germany are advocating stronger financial regulation, after they moved to nationalise many of their banks - both of which represent big retreats from the liberalization that Camdessus pressed Asian leaders to continue with.

Speculation

Ten years ago, leaders of ASEAN countries, led by Malaysia, fingered speculation activities by hedge funds and other institutions for pulling down the local currencies and stock markets through manipulative methods such as short selling.

They asked the IMF to study the role of hedge funds and speculation in sparking the Asian crisis. Camdessus personally reported to the ASEAN leaders that speculation and hedge funds played no role in the crisis. The problem was the lack of good governance in the ASEAN countries, and speculation was a healthy activity, he concluded.

Now, the captains of the big banks which have suffered sudden sharp drops in the value of their shares, have blamed speculators and their short selling activities. The US, Britain and several other countries banned short selling of financial stocks.

When bank loans in Asia went sour, this was blamed on poor management, cronyism and corruption. But when the Western financial institutions spun bad quality housing loans into securities and spread the “toxic securities” across the globe, this was described with the euphemism “sub-prime”, as if it were merely a technical error.

- Third World Network Features