1997 - the Year that Started it all
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Some historians, when they will look back at 1997 will probably identify it as "The Year that Started It All". This year has been crucial in so many respects that it is hard to decide which trends and developments to omit.
Still, five developments stand out. Contrary to popular opinion, the crisis in South East Asia, though the most media-conspicuous is hardly the most important or lasting. Crises like this (and worse) happened before only to have a happy ending. Enough to mention the terrifying 1982 collapse of virtually all South America - today these very nations are world leaders and beaters (Brazil is the 8th biggest economy).
Or the 1994-5 crisis in Mexico (who remembers it ?). This is the nature of financial markets : they react disproportionately to changes in economic realities.
And the realities were and are harsh. Bad loans, political involvement in economic processes best left to markets, corruption, cronyism, monopolization and oligopolization, trade protectionism, collaboration with the criminal world, favouritism, state subsidies, opaque accounting methods, weak regulators, deficient legislation, lack of fiscal discipline which resulted in huge twin (trade and budget) deficits - this is a partial list. But it is as typical to the Czech Republic as it is to, say, Thailand. Indeed, the financial markets punished both.
But the Southeast Asians should count their blessings. The onslaught of the currency and stock markets forced the hands of the governments to reform, to clean up, to revamp, to let go of sinking enterprises. Two years of excruciating pain - and the tigers will re-emerge : leaner, meaner, more rational, better managed, meritocratic, more competitive and profitable. The year 2000 will surely witness the global dominance of these much-derided countries. But first Japan, India and (to a lesser extent) China - the three regional giants and locomotives - must be drawn into the storm. China's currency will suffer a huge devaluation. India will be in the throes of a recession. Japan will deteriorate and its banking system and capital markets will be annihilated. But all the while, these countries will look outside to grow, they will export to survive. When the crisis abates, they will emerge as the uncontested owners of world international trade.
All the world is in transition. Western Europe has as high an unemployment rate as Slovenia, say. Germany and France are as rigid as the worst countries of the former Soviet Bloc. But - subject to the pressures of a globalizing economy - they all succumb to what we can safely call : "The Anglo-Saxon Model".
This model is characterized by high labour mobility. It is easy to hire and fire people and people move a lot geographically. It is a law abiding, fair play, equal opportunity scheme of things. It entails minimum involvement of Big Government, encouragement and protection of competitive practices, transparency and honesty of decision making processes, merit based promotions and job allocation, openness of all social structures, fierce protection of property rights, respect of human and civil rights, basic freedoms (for instance, of expression and of political association). It promotes trade, business and exchange of information, services and goods. It does not discriminate against anyone on any grounds (at least ideally).
And it is precisely this model that is being emulated by many (example : Israel), forced on some (most of Central and Eastern Europe) and belatedly adopted by others (Southeast Asia after the shock). Russia, the Czech Republic, even more tranquil countries such as Slovenia - all metamorphesize. Feeling the heat emanating from the IMF, the World Bank, Donor countries, foreign investors, foreign financial institutions, international financial markets - these countries bow their head. They open up their banking systems. They privatize (and re-privatize) in earnest, for a change. They seriously regulate their capital markets. They say no to political cronies and kick them out of government. They punish corruption. They legislate transparency into procurement methods and other decision making processes. They take political fingers out of many pies. In short : they reform and become more and more like the USA. One doesn't argue with success and ever since the Roman Empire there has been no success story equivalent to the USA.
This bodes well for Central and Eastern Europe. 1998 will be the year of a few of them, Russia included (following a massive IMF intervention). Foreign investment will be redirected from the turbulence of South East Asia to the calming waters of this hitherto imprisoned region. Everyone will benefit, Macedonia included.
In all this, the IMF had a unique role. In a bizarre historical circle it reverted to its roots : it was established as lender of last resort to the devastated economies of post WW2. Lately, it is again doing exactly that : lending money to economies devastated by another kind of war, with the financial markets. It granted 17 billion USD to Thailand and finished by granting 60 billion USD to South Korea. There are grounds to believe that this is not the end.
Luckily, the IMF money comes with the right strings attached. They dictate to the recipient countries and the latter are amenable to its preaching, humbled and exhausted as they are. they teach these government fiscal discipline, monetary restraint, macroeconomic stability, abolition of corruption, to weed out business failures and to encourage economic successes. Reluctantly, those in need of the IMF's stamp of approval in order to borrow in the foreign capital markets (and, thus, to survive), implement the measures. Witness Romania and Russia. Then they see that the recipe works and that the economy is reviving (again, Russia).
This, the transformation of the IMF into a mega-scale educational facility with money to back its instruction - is one of the most important developments this year. The IMF, single handedly, can (and, possibly, will) bring the American dawn upon this world : prosperity for all. True, this is a new form of colonialism. True, the American model is horrendously deficient in many respects (lousy education, the disintegration of the family and so on). But why don't we postpone the debate concerning these shortcomings until after we have 4.6% unemployment as they do in the USA ?
But a multilateral organization, no matter how mighty, would not have been sufficient. To inflict such painful changes upon angry nations and governments, a much bigger power was needed, the power of money.
There is a lot of talk in the last decade or so ("The New Paradigm") about the globalization of the markets and the single entity that the world is fast becoming. To a previous generation this was known as "The Global Village". This is mostly fantasy. The world is much LESS global (integrated) today than it was, say, 80 years ago. Still, in one respect, it has become a unity : capital. The world's financial markets ARE one and the same. If anyone needed proof, "Black Monday" supplied it (27/10/97) when Wall Street collapsed because of the Thai and Hong Kong exchanges thousands of miles away. Four months earlier there was another mini-crash attributed to fears that Japanese investors will sell their holdings of American government bonds. The currency markets are trading 1200 (no mistake : one thousand two hundred) BILLION USD DAILY (no mistake : daily) !!!
The markets force governments to devalue if they demonstrate lack of fiscal rigour or poor trade records. Actually, markets today dictate to government what to do in almost all spheres of macroeconomy. Britain was ejected from the EMS (1992), the currencies of the Southeast Asian countries were devalued by up to 60%, interest rates remained unchanged in the USA - all due to the regulating influence of the markets. They know best and they provide a direction with which no one can argue. The markets are always right. This, the power of the markets have been proven beyond doubt this year.
Left defenceless (read : devoid of government protection), investors scurried to find shelter. A major psychological shift is underway. Whereas in the last 15 years investors preferred yield over safety - they are changing their minds and fast. No longer the attractions of emerging markets, the roller-coaster of exotic stock exchanges, the allure of legendary yields in previously unheard-of markets. No, investors now prefer plain, dull American Government bonds and the US dollar. This, the flight to safety will characterize 1998.
Of course, maybe the clearest sign of globalization is the surprising number of countries which will join in the first wave of European Monetary Union (the European Single Currency, Euro, project). It is surprising politically (Euro-enthusiasm is growing, not fading despite the heavy social costs of the undertaking). It is surprising economically (barring Greece, all the members qualify). This and the growing number of regional trade pacts (83 at the end of 1997) within and outside the framework of the WTO serve to demonstrate the growing integration of this once fragmented world of ours.
1997 was the second year in a row that the output of services outweighed the combined industrial and agricultural outputs. This was facilitated by the knowledge and information industries - their growth and technological breakthroughs.
Not all trends are so obvious. An example is what is happening
in the field of infomedia. This is the hybrid off-spring of informatics
and media, where the computer meets the television. The trend has been
clear for many years : Internet available on television, television available
on the computer screen and telephony (voice and data) available on both.
But 1997 witnessed the first practical steps towards the realization of
this dream / nightmare. Microsoft purchased WebTV (manufacturer of a set-top
box which allows for Internet surfing through the television set). It is
also trying to team up with leading cable TV companies (it has invested
1 billion USD in one and is negotiating with others). The cable companies
came up with an open standard for the transmission of data (including VOD
- Video On Demand) through cable TV. The phone companies are talking to
anyone who is willing to listen. This merger of companies, marriage of
technologies and making of standards may, arguably, be the biggest contribution
of 1997 to human annals.