| BUSINESSWEEK ONLINE : MAY 31, 1999 ISSUE | ||||||||
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| BOOKS
The Dangers Lurking in the Global Economy THE RETURN OF DEPRESSION ECONOMICS By Paul Krugman Norton 176pp $23.95 Late last summer, as Asia's economic woes and currency devaluations pulled Hong Kong into a deepening recession, the city-state was nearly blindsided by the machinations of a few high-stakes speculators. Although Hong Kong insisted that it would never abandon the currency board that anchored its dollar to the U.S. greenback, a few hedge funds saw a chance to make a killing out of its problems. According to insiders, the funds sold short something like $30 billion worth of Hong Kong stocks and then exchanged the proceeds for U.S. dollars--thus putting pressure on the Hong Kong dollar. If the move forced the government to devalue, the funds stood to make a bundle on their currency transaction. If the government chose to defend the Hong Kong dollar by pushing up interest rates, local stocks would tumble, and their short position would pay off. Hong Kong did neither. Instead, it used its massive reserves to buy stocks, causing the funds to lose money on their short positions. Although free-marketeers viewed the move as heresy (Milton Friedman called it ''insane''), Hong Kong won the skirmish, and local stocks have since appreciated by some 75%. This riveting tale, recounted by Paul Krugman in The Return of Depression Economics, illustrates one of the book's underlying messages: that today's high-speed global economy can confront countries with sudden unexpected threats that require creative, unconventional responses to stave off disaster. Krugman also believes the basic problem facing much of the world today is the same problem it faced during the Great Depression, albeit with less urgency--insufficient demand to employ idle capacity. Until policymakers face up to this fact, he warns, they are likely to choose incorrect or inadequate remedies to cure their nation's ills. Krugman's book is also a lucid exposition of how economies work, grow, get into trouble, and--one hopes--get out of it. Economists are not known for making complex ideas accessible to the general reader, but Krugman accomplishes this with effortless grace and style. Starting with an appraisal of the so-called Asian miracle, he chronicles the tremors that have shaken the developing world in the 1990s, from Mexico's 1995 ''tequila crisis'' to the meltdown that spread from Thailand in 1997 to Malaysia, Indonesia, South Korea, Russia, and Brazil. Although the story is familiar, Krugman enlivens his account by providing historical perspective, rich details, and anecdotes that advance his argument. Several themes emerge: First, it's clear that global financial-market liberalization, pushed strenuously by the International Monetary Fund in the 1990s, hasn't lived up to its promise. Rather than allocating global savings more efficiently and stimulating growth, unfettered capital markets have too often encouraged speculative inflows and outflows of hot money that have destabilized local economies. And links between lenders--banks, mutual funds, and currency speculators--have proved to be so sensitive that panic can quickly spread from one to another and from country to country, including the U.S. and Japan. Second, the idea that nations whose economies collapsed deserved their fate is exaggerated. Mexico, Brazil, and Argentina, for example, had implemented wide-ranging economic reforms. And though Asia's emerging nations had flaws, such as cronyism and weak banking systems, most of them also had economic profiles that international lenders prize: high savings rates, balanced budgets, and low inflation. What made these countries vulnerable, says Krugman, is that they chose to open their economies to international capital flows and then snapped up the short-term dollar loans foreign lenders were eager to supply. And what compounded their woes when those lenders panicked was the IMF's insistence that they practice fiscal austerity and raise interest rates to superhigh levels to reassure the market and keep their currencies from tanking. Like other observers, including this magazine, Krugman argues that such traditional medicine exacerbated the wounded nations' slumps. This undermined market confidence even more, worsening the financial contagion it was supposed to contain. The good news is that the economies most battered by the recent financial maelstrom appear to be bottoming out. Further, the IMF has relaxed some of its strictures and is rethinking its philosophy. The bad news is that millions of people are still unemployed, recoveries are still fragile and uncertain, and it will take years to repair the damage. In addition, as Krugman stresses in one of his chapters, Japan, one of the world's leading economies, seems unable to extricate itself from a debilitating eight-year bout of chronic stagnation. In short, today's global economy remains a far more dangerous place than many people appreciate. To make it less so, says Krugman, policymakers will have to reconsider conventional orthodox thinking that regards inflation as always bad and interference with markets as inherently counterproductive. Krugman offers some prescriptions. He advises Japan to adopt a moderately inflationary monetary policy to get its citizens to start spending. He thinks emerging nations should consider using taxes to discourage local companies from borrowing in foreign currencies. And he believes that imposing temporary capital controls can be helpful in defusing financial crises. All worthy ideas. More are needed. BY GENE KORETZ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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