Kelab Keristamingsari

When I first uttered the unutterable in Hong Kong sometime late last year that Hayek is history I was then bombarded with accusations of having turned my back on Adam Smith. Not too long later however, we heard reluctant acquiescence from liberal institutions that the free-market principles that guided American financial development would no longer count as biblical injunctions.


In the presence of such an erudite audience today, let me take the liberty to indulge further in the discourse. Just to be clear, I make no claim to pioneering new ideas but suffice to say that I am a mere commentator having had some experience in managing an economy which was also going through one of the worst financial turmoil in Asia. We need to remember only the boom-and-bust cycles articulated by the 19th century economists such as John Stuart Mill or Alfred Marshall, before we get carried away with the modern orthodoxy, which depicts financial markets as effective, stable, and self-correcting mechanisms.

The advocates of spontaneous order which had hitherto attained the level of religious orthodoxy having rammed free market strictures about self correction and deregulation are now conspicuously silent. What went wrong?

True, the reaction against command economies of the Orwellian kind as exemplified by the Soviet Union and other Communist countries in the past was well founded. But was there really a need to subscribe to a theory where absolute reliance is placed on the law of chaos? The issue here is not whether the free market system and the pricing mechanism based on competition is viable; but in stubbornly holding on to the view that markets are benign, championed by the likes of Hayek and a distinguished pedigree of Nobel laureates such as Milton Friedman and his Chicago protégés, with Alan Greenspan as the turn of the century poster boy, Wall Street enjoyed more than two decades of financial deregulation. During this time, we witnessed the unfolding of Enron, Worldcom, and so on and the Sarbanes-Oxley laws dealt only piecemeal. But what was left unchecked was the proliferation of the weapons of financial mass destruction —such as mortgage-backed securities and collateral debt obligations. In place of the earlier institutional giants, we now have on parade the largest financial institutions in the world, brought down to their knees.

The unprecedented government bail outs nailed the lie to the dictum that the State should not interfere in the free market processes. Hayek’s devotional mantra that the invisible hand will eventually work to rectify things has vaporized into mere Harry Potter hocus pocus.

The stimulus packages in America, the UK and some other EU countries are so massive that even die hard Keynesians are spoofed. It is true that the Keynesians believe that pump priming itself with the necessary checks and balances is indeed the most effective way of powering economies out of their recessionary corners but the concern we have is the unfettered adoption of polices of reducing the cost of funds to near zero, while government goes on a spending spree on even more borrowed money. The Federal Reserve and other central banks buy up Treasury bonds and other government papers in order to give that much needed shot in the arm for the economy still waiting for the invisible hand to appear. They call this “quantitative easing” but everyone knows this is just a euphemism for borrowing one’s way out of debt.

It remains to be seen whether this phase of irrational exuberance in borrowing is different from the Keynesian prescriptions to counter the 1930s Great Depression. To be sure, the once unassailable doctrine of spontaneous order has been dealt a body blow that is destined to consign it to the dustbin of economic history. That America is opting to bail out its banks and insurance companies at arbitrary values rather than allowing the law of free market supply and demand to take its course is therefore a damning indictment of its fundamental economic principles.

What then is the real lesson to be learned from this crisis?

Is this a systemic failure arising from the unbridled practice of free-market principles or is it a case of the prophetic truth coming home to roost, that is, he who sows the wind must reap the whirlwind?

One of the strongest arguments today is that deregulation has led to the current fiasco. To go further some have made the case that regulations were always there but the regulators slept on the job. Some finger pointing here is inevitable. Alan Greenspan has already been whipped. Fannie Mae and Freddie Mac, they say, is a classic case of regulators failing to detect the cheating by accountants, something that would have been easily uncovered by a bit of fraud specific forensic accounting. It would have required just a bit more diligence perhaps but certainly it was no rocket science.

The underlying causes however must go back to the question of easy money which remained the substratum of the American political economy for the last three decades. This came on the back of a new religion of financial alchemy spawned from the fertile womb of Wall Street, a religion using sophisticated financial reengineering calculated to transform debt into wealth. This was the philosopher’s stone by which the largest economy in the world by sheer consumption alone was able to not just eke out an existence but to thrive and prosper.

To my mind, this financial maelstrom undermines not only the economic foundation but the political and moral substructure of Western capitalism. We still believe that market economies which stand solely on the feet of homo economicus are doomed to fail because the dictates of a humane economy impel us to consider ideas about right and wrong, social justice and the dignity of man. Shakespeare’s dictum against making “the orphan pine while the oppressor feeds” is a timely reminder. It must jolt us back to the issues involving the great divide between general welfare and distributive justice.

We don’t say this perched on any kind of moral high ground. It was a similar kind of profligate spending that had got us into the 1997 Asian financial crisis. And we lectured and hectored. But unlike the scenario in the U.S. there was certainly greater oversight in Asia and more regulatory control. Corruption and abuse of power featured more prominently in the case of Asia. In fact, there was a case that rogue institutions were working hand in glove with lawyers and accountants to maneuver their way through the regulatory process.

In Asia it was a case of over legislation providing a labyrinthine cover for shady and questionable transactions. And the rich were bailed out at the expense of the poor. This is where the question of accountability and transparency reigns high.

To be sure the lessons of moral hazard were relentlessly knocked on our heads in the wake of the Asian crisis and at the risk of sounding repetitive, let me say again that the massive bail outs that we are seeing today in America are nothing if not classic instances of moral hazard going bezerk, made all the more ironic considering that we are looking at the bastion of free market capitalism.

Perhaps it’s time we took another look at the factor-price equalization (FPE) theorem. We know that it was through exuberantly inflated prices of goods and services that made it possible for Americans to carry on indulging in overconsumption while the rest of the world particularly Asia had to settle for much less. As those trained in economics and international trade will tell you, this mirage will be shattered eventually as the FPE theorem sets in to bring into equilibrium the relative prices of these goods and services across the world. This may have been a tad too theoretical in the distant past but with the pace of globalization and international finance and free trade flowing the way it is now, the impact can be real.

And it is one of the great ironies that this poster nation of liberal democracy and free market capitalism is so heavily indebted to the poster nation of autocracy and command economy. Indeed it is well known that China is the biggest funder of the US federal deficit. Other Asian nations as well as Middle Eastern countries not renowned for open and liberal governments are also substantial investors.

There is the dynamics of economic self-interest and geopolitical imperatives. The question is still how long will Asian and Arab investors continue to prop up these prices?

Yes, the world has had a good five years or so of robust economic growth spearheaded no doubt by the emerging economies, but the policy shift in Asia is already under way from monetary tightening to monetary loosening. The East Asian juggernauts are moving fast with the billions in spending package proposed by Taiwan, Japan and China together with de rigueur tax cuts and interest rates lowering.

While at the start of the financial implosion, there were still brave echoes of decoupling immunity shielding Asian countries, any suggestions today would have been dismissed by the bloodbath that went on in the Asian equity markets. While it is true that generally banks in Asia are still holding up, the fact is that our economies are too closely intertwined with those in the locus of the financial meltdown. The upside of globalization that allowed export-oriented countries to thrive has a very sharp downside as well so a recession on one side of the world spreads quickly to the other. The 9% reduction in global trade predicted for this year is rendering a crushing blow to once vibrant and thriving economies.

The myth that if your exports dry up for the U.S. market there is always the emerging economies as a buyer of last resort is all but shattered. All domestic demand indices until only several weeks ago were falling. Property prices are heading south in India and construction figures in China show the steepest ever decline particularly for Shenzhen.

Growth through productivity and competitiveness remains our pathway to prosperity. It has liberated millions from the scourge of poverty and destitution and enabled our people to enjoy freedom and decent living conditions.

The temptation to explode the government bureaucracy during recessionary times must be avoided. The weight of a bloated and inefficient bureaucracy can do more harm in the long term. Money invested in entrepreneurship and stimulating the private sector will generate more value for the economy in the short and long term.

Adequate measures for ensuring good governance are essential. Government spending guided by a policy that shows little transparency in the award of contracts is a clear warning sign of mismanagement of the economy.

More importantly the spending packages that have been announced should focus on projects that are good for business and good for people. A social agenda during recessionary times would ensure that critical institutions such as public health and education are not neglected. Infrastructure development should seek growth areas in industry, public housing and strengthening transportation and communication between urban and rural areas. Fiscal intervention could then find areas to increase demand through tax cuts and incentives to hire workers and enhance their human capital through training and development.

For us in Asia, history has proven that growth through increased productivity and competitiveness is the only path to achieve prosperity. It has liberated millions from the scourge of poverty and destitution and it has enabled our people to enjoy freedom and decent living conditions. In region dominated by the economic powers of China and India the 600 million people living within Asean represent a formidable foundation upon which to regain prosperity.

It is true that our interests have never been more closely intertwined. As Asean nations buy and sell more from and to each other, as our economies become even more intimately linked by investment flows and multinational operations, and as our national borders become more porous, our fortunes will become even more inseparable and indivisible. A determined effort will be necessary to crystallize these bilateral ties into a firm and coherent pact.

A cohesive Asean regional cooperation remains an elusive goal and history has taught us that when push comes to shove Asean nations will tend towards unilateralism. This should be avoided at all costs. We would agree with Prime Minister Abhiset’s view that “As the financial crisis deepens, the world will look towards our region for action and for confidence.”

There is a greater calling that we face during these uncertain times. A looming recession and the risk of social upheaval make for a volatile political situation. Growth oriented policies that ignore the social dimension will spurn greater disenchantment. The overall societal objectives of distributive justice and fairness must not be ignored as we identify a way forward. With millions at risk of sinking into poverty as jobs become scarce the steps taken to revive ailing economies must not overlook the needs of the poor and marginalized.

We are likely to witness some leaders revive the mantra of Asian Values – that in the pursuit of economic growth the rights of the individual are peripheral. Unpopular governments would certainly need a pretext upon which they can silence dissent against policies that fail to address the problem of unemployment, poor public infrastructure and lack of quality social services.

On the contrary a prosperous Asia is merely an illusion if material wealth is subsumed in a sea of repression and denial of basic human rights. True prosperity must be accompanied by with political empowerment of the ordinary citizen. Fundamental freedoms such as the freedom from hunger, freedom from fear and exploitation, and the freedom to peacefully practice one’s religious beliefs are so basic for the growth of a truly humane society.

The growth of civil society and renewed economic prosperity will not be possible without regional stability. The political resolve to formulate an Asean pact with a mechanism to institutionalize agreements on trade, finance and human rights is necessary. This has proven no easy task but is still attainable. We must establish strong interdependibility, economic and political. The nurturing of democracy and civil society, in tandem with economic growth — for democracy and growth are not mutually exclusive — is our best guarantee of regional peace and security for future generations.

Posted by keristamingsari at 8:34 AM