the countries had been successful not only in spite of the fact that they had not followed most of the dictates of the Washington Consensus, but because they had not.
As anecdotal evidence, some people I know who inhabit the far out fringes of monetary reform got the ear of an adviser to Malaysia's Premier, Mahathir, who was convinced by their analysis and recommendations.
To wit, capital controls etc.
The result was that Malaysia came through the crisis relatively unscathed, and of course Mahathir was a pariah in the global financial system therafter....not that this bothered him...
It will take a little more time to assimilate this Diary, but migeru and I are in agreement that Keynes International Clearing Union proposal and Bancor were along the right lines.
I differ from Keynes in that I think the system can be architected on a Peer to Peer networked basis without a central financial institution creating the necessary globally acceptable currency - which IMHO should be "unitised" energy.
The greater proportion of value in circulation is the use value of land, and this is necessarily land-locked (ie with capital controls built in) since a Unit based on land rentalo values would only be redeemable on a geograhic basis.
It was John Law, 300 years ago, who first proposed monetising land rentals, but his proposal was for "securitisation". I advocate "unitisation" through new generatiions of quasi "REIT's and a "Debt - Equity Swap" on a massive scale. "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
Malaysia and China By contrasting what heppened in malaysia and China, two nations that chose not to have IMF programs, with the rest of East Asia, which did, the negative effects of the IMF policies will show clearly. Malaysia was severely criticized during the crisis by the international financial community. Though Prime Minister Mahathir's rhetoric and human rights policies leave much to be desired, many of his economic policies were a success. ... As the regional crisis grew into a global crisis, and international capital markets went into a seizure, Mahathir acted again. In September 1998, Malaysia pegged the riggit at 3.80 to the dollar, cut interest rates, and decreed that all offshore ringgit be repatriated by the end of the month. The government also imposed tight limits on transfers of capital abroad by residents in malaysia and froze the repatration of foreign portfolio capital for twelve months. These measures were announced as short term, and were carefully designed to make it clear that the country was not nostile to long-term foreign investment. Those who had invested money in Malaysia and had profits were allowed to take them out. On September 7, 1998, in a now-famous column in Fortune magazine, the noted economist Paul Krugman urged Mahathir to impose capital controls. But he was in the minority. Malaysia's Central Bank governor Ahmad Mohamed Don and his deputy, Fong Weng Phak, both resigned, reportedly because they disagreed with the imposition of the controls. Some economists—those from Wall Street joined by the IMF—predicted disaster when the controls were imposed, saying foreign investors would be scared off for years to come. They expected foreign investment to plummet, the stock market to fall, and a black market in the ringgit, with its accompanying distortions, to form. And, they warned, while the controls would lead to a drying up of capital inflows, they would be ineffective in stopping caital outflows. Capital flight would occur anyway. Pundits predicted that the economy would suffer, growth would be halted, the controls would never be lifted, and that Malaysia was postponing addressing the underlying problems. Even Treasury Secretary Robert Rubin, usually of such quiet demeanor, joined in the communal tongue-lashing. In fact, the outcome was far different. My team at the World Bank worked with Malaysia to convert the capital controls into an exit tax. Since rapid capital flows into or out of a country cause large disturbances, they generate what economists call "large externalities"—effects on other, ordinary people not involved in these capital flows. Such flows lead to massive disturbances to the overall economy. Government has the right, even the obligation, to take measures to address such disturbances. In general, economists believe that market-based interventions such as taxes are more effective and have fewer adverse side effects than direct controls, so we at the World Bank encouraged Malaysiato drop direct controls and impose an exit tax. Moreover, the tax could be gradually lowered, so that there would be no large disturbance when the interventions were finally removed. Things worked just as planned. malaysia removed the tax just as it had promised, one year after the imposition of controls. In fact, Malaysia had once before imposed temporary capital controls, and had removed them as soon as things stabilized. This historical experience was ignored by those who attacked the country so roundly in the one-year interim. Malaysia had restructured its banks and corporations, proving the critics, who had said that it was just with the discipline that comes from free capital markets that governments ever do anything serious, wrong once again. Indeed, it had made far more progress in that direction than Thailand, which followed the IMF prescriptions. In retrospect, it was clear that Malaysia's capital controls allowed it to recover more quickly, with a shallower downturn, and with a far smaller legacy of national debt burdening future growth. The controls allowed it to have lower interest rates than it could otherwise have had; the lower interest rates meant that fewer firms were put into bankruptcy, and so the magnitude of publicly funded corporate and financial bailout was smaller. The lower interest rates meant too that recovery culd occur with less reliance on fiscal policy; and consequently less government borrowing. Today [2002], Malaysia stands in a far better position than those countries that took IMF advice. There was little evidence that the capital controls discouraged foreign investors. Foreign investment actually increased. Because investors are concerned about economic instability, and because Malaysia had done a far better job in maintaining that stability than many of its neighbours, they were able to attract investment.
By contrasting what heppened in malaysia and China, two nations that chose not to have IMF programs, with the rest of East Asia, which did, the negative effects of the IMF policies will show clearly. Malaysia was severely criticized during the crisis by the international financial community. Though Prime Minister Mahathir's rhetoric and human rights policies leave much to be desired, many of his economic policies were a success.
...
As the regional crisis grew into a global crisis, and international capital markets went into a seizure, Mahathir acted again. In September 1998, Malaysia pegged the riggit at 3.80 to the dollar, cut interest rates, and decreed that all offshore ringgit be repatriated by the end of the month. The government also imposed tight limits on transfers of capital abroad by residents in malaysia and froze the repatration of foreign portfolio capital for twelve months. These measures were announced as short term, and were carefully designed to make it clear that the country was not nostile to long-term foreign investment. Those who had invested money in Malaysia and had profits were allowed to take them out. On September 7, 1998, in a now-famous column in Fortune magazine, the noted economist Paul Krugman urged Mahathir to impose capital controls. But he was in the minority. Malaysia's Central Bank governor Ahmad Mohamed Don and his deputy, Fong Weng Phak, both resigned, reportedly because they disagreed with the imposition of the controls. Some economists—those from Wall Street joined by the IMF—predicted disaster when the controls were imposed, saying foreign investors would be scared off for years to come. They expected foreign investment to plummet, the stock market to fall, and a black market in the ringgit, with its accompanying distortions, to form. And, they warned, while the controls would lead to a drying up of capital inflows, they would be ineffective in stopping caital outflows. Capital flight would occur anyway. Pundits predicted that the economy would suffer, growth would be halted, the controls would never be lifted, and that Malaysia was postponing addressing the underlying problems. Even Treasury Secretary Robert Rubin, usually of such quiet demeanor, joined in the communal tongue-lashing.
In fact, the outcome was far different. My team at the World Bank worked with Malaysia to convert the capital controls into an exit tax. Since rapid capital flows into or out of a country cause large disturbances, they generate what economists call "large externalities"—effects on other, ordinary people not involved in these capital flows. Such flows lead to massive disturbances to the overall economy. Government has the right, even the obligation, to take measures to address such disturbances. In general, economists believe that market-based interventions such as taxes are more effective and have fewer adverse side effects than direct controls, so we at the World Bank encouraged Malaysiato drop direct controls and impose an exit tax. Moreover, the tax could be gradually lowered, so that there would be no large disturbance when the interventions were finally removed.
Things worked just as planned. malaysia removed the tax just as it had promised, one year after the imposition of controls. In fact, Malaysia had once before imposed temporary capital controls, and had removed them as soon as things stabilized. This historical experience was ignored by those who attacked the country so roundly in the one-year interim. Malaysia had restructured its banks and corporations, proving the critics, who had said that it was just with the discipline that comes from free capital markets that governments ever do anything serious, wrong once again. Indeed, it had made far more progress in that direction than Thailand, which followed the IMF prescriptions. In retrospect, it was clear that Malaysia's capital controls allowed it to recover more quickly, with a shallower downturn, and with a far smaller legacy of national debt burdening future growth. The controls allowed it to have lower interest rates than it could otherwise have had; the lower interest rates meant that fewer firms were put into bankruptcy, and so the magnitude of publicly funded corporate and financial bailout was smaller. The lower interest rates meant too that recovery culd occur with less reliance on fiscal policy; and consequently less government borrowing. Today [2002], Malaysia stands in a far better position than those countries that took IMF advice. There was little evidence that the capital controls discouraged foreign investors. Foreign investment actually increased. Because investors are concerned about economic instability, and because Malaysia had done a far better job in maintaining that stability than many of its neighbours, they were able to attract investment.
Also, when Wall Street says "foreign investors will be scared off for years" they really mean foreign speculators. Real investors "are concerned about economic stability" and were not scared off by capital controls.
Investment needs to be added to our Newspeak dictionary, right alongside reform, flexibility and freedom.
- Jake If you only spend 20 minutes of the rest of your life on economics, go spend them here.
"Saving" on the other hand has always been understood to mean NOT transaction activity. One keeps capital. The safekeeper or custodian may lend one's capital as is permissable by law, in so far the custodian must remit one's capital ON DEMAND. Ownership of capital is not conveyed by any, none, zero, zip, exchange.
Currency is the final vestiges of productive asset ownership in western society is property (a) quantity of currency (b) quantity of labor.
"Neo-cons" --whose business model depends on intermediary calculation of exchange value (business value)-- promulgate the superiority of unearned income by capital usury, i.e. interest payments, "opportunity risk" as compared to earned income, i.e. labor payments. Neo-cons happen to own inordinate quantites of (a) currency and (b) labor, or surplus capacities to be rented to those who own none, by virtue of monopoly protections, vested in assets (inanimate or animate property), enforced by the state.
Amazing!
Burton K. Wheeler: I saw the Depression coming. Joe Kennedy [FDR SEC chair] came to see me. He said, "I'm afraid I'm gonna wake up with nine kides and three homes and no dough." I said, "Do you want to be safe? Buy gold." He came to me again. "They've take my gold." I said, "Buy silver buillon." He came down once more. "They're taking my silver buillon." I said, "Do you want to be perfectly safe? Go get a farm, wher you can raise a cow, a pig and some chickens, and put some of those kids of yours to work. But don't get too big, because we might take it from you." He said, "Is it as bad as that?" I said, "No, but it might get that bad." He recounted his experiences as a visitor in Vienna in 1923, as the Depression there affected all classes. "I didn't think it would start as quickly as it did here in the United States." Hoover was President when they passed the Reconstruction Finance bill. I opposed it. Its purpose was to bail out the bankers, the insurance companies and the railroads. I said, "The pressure's gonna be so great that anybody who's got a sick cow is gonna come to Washington to borrow money." Bob La Follette Junior said he's voting for it, because he's afraid there would be a crash. I said, "There would be, but the sooner it comes off, the better." This RFC would only prolong it. The greater our indebtedness, the greater the crash. [Terkel, 303: 1970]
He recounted his experiences as a visitor in Vienna in 1923, as the Depression there affected all classes. "I didn't think it would start as quickly as it did here in the United States."
Hoover was President when they passed the Reconstruction Finance bill. I opposed it. Its purpose was to bail out the bankers, the insurance companies and the railroads. I said, "The pressure's gonna be so great that anybody who's got a sick cow is gonna come to Washington to borrow money." Bob La Follette Junior said he's voting for it, because he's afraid there would be a crash. I said, "There would be, but the sooner it comes off, the better." This RFC would only prolong it. The greater our indebtedness, the greater the crash. [Terkel, 303: 1970]
