May, 1998


In search for stability

In the wake of the Asian financial crisis the situation in Russia changed dramatically. There is a feeling of special urgency to correct the direction our couniry follows. The road to effective reforms is still being searched. The outcome of this effort is crucial to the future of Russia.

In Russia the major victim of the "Asian flu" was the government of Viktor Chernomyrdin. President Yeltsin realized in full that due to his long-serving prime-minister's acquiescent support of successive monetarist reforms, masterminded in recent years by Anatoli Chubais, the Russian economy is on a wrong track. It lost almost 50% of its industrial production. Economic landscape in Russia altered to the worse.

Governmental failures to meet its obligations to the citizens became constant and irritating for common people. Many of them do not receive their salaries and pensions lor months.

The central element, which spurred the governmental crisis in Russia, was a loss of public confidence in monetary policies. Their mistakes are many. Among them one can name the conspicuous neglect lor national industry and agriculture. Another blunder was the accumulation of precarious foreign debts and poor understanding of Russia's proper place in the global economic environment.

Globalization is a process to which our Academy already drew attention. Globalization is like a big tide coming to the shore of every national economy. The inflow of finances into a domestic economy often brings positive results. However, the time comes when this tide retreats. Every national government should be concerned with what is left behind - strong economy or financial crisis.

It is important to understand basic factors.

International financial system is unpredictable. It develops in several directions simultaneously. The interplay of global financial forces is so complex that they may bring catastrophic results to one country and prosperity lo the other. Global financial markets to some extent resemble a roulette. A risky "bet" may cause a national economy to suffer a prolonged recession.

For 6 years the Russian government had made many risky "bets". They were the result of a simplified faith that financial markets guarantee prosperity. This misguided belief was so strong that the Russian highly centralized economy was relieved from any substantial slate support. Governmental structures lost influence over economic situation. Russia turned both into a mine field for nascent national business and potential Mecca lor foreign portfolio investments.

As to direct investments, and they are the best remedy against further financial flues, they are coming to Russia step by step, rather slowly. This strange phenomenon, in my opinion, is explained by political and geopolitical factors. Russia is still regarded in the West by many politicians and politologists as the main rival. Such psychology gets in the way of normal relations.

Any society, including Russia, is a complex. The past years demonstrated a decisive turn from a state-led economy, overburdened with hyper-inflation, to an economy with sound finances as far as inflation and budget deficits are concerned. At the same time the production sector of the Russian economy was neglected and financially undernourished.

So called "new Russians" are not Henry Fords or Duponts. Some of them turned to financial speculations, others grabbed public enterprises for a fraction of their real cost. The justification of such a faulted approach was based on an argument that quick privatisation would bring about a class of energetic businessmen with a secure income, who would become the country's wealth-creators. In practice, such neo-liberal economic policy overestimated individualistic qualities at the expense of community and ushered in vices of corruption, self-profiteering and greed.

It is important to learn these lessons of history well to avoid further increase ol social stress in Russia. The Asian financial crisis is a vivid example of contradictions between priorities of private capital and national economies. Lessons of Asia tell us that without a strong modern state, geared to balance private and national interests, even advanced economies are at the mercy of blind market forces. The fate of young developing economies is obvious - they will become weaker unless forces of global financial markets arc tamed.

Today Russia and many other countries are in search of stability that would permit effective adjustments to the conditions of globalization.

The situation in Asia

Today the situation in Asia is still unclear to the point, when IMF predicts for South-East Asian (SEA) countries (without South Korea and Japan) a modest 1,7% increase in GNP. At the same time experts from OECD forecast the rate of development for Malaysia and Singapore up to 6%. Predictions for China's GNP are up to 9% and for Thailand from 2 to 5,4%.

Many questions are posed:

Why the crisis in one country, Thailand, engulfed the whole Asian region?

Why did the Asian model, which for 10-15 years was considered "a miracle", suddenly plunged into crisis of unprecedented proportions?

Was the crisis purely financial or also politically motivated? Is there proof that it was instigated by speculators?

What regions of the world benefited from the "Asian flu" the most'? 

Whal was and will be the role of lMF in the process of globalization?

Is the crisis at the end?

These questions still do not have clear answers except one the. The "Asian miracle" received severe blows from the same forces which helped to create it.

The first quarter of 1998 showed that Asia risks a second financial threat that could overshadow the crise that began in 1997. If we look into a situation in Japan or Korea it is difficult to avoid a conclusion that the financial markets are heading towards another disaster.

Take for example Korea. The nation is on the verge of another bankruptcy. The IMF demands from the Korean government to carry out far-reaching reforms as a condition for giving in full a rescue package of nearly 60 billion USD. Korea lags behind in promoting these reforms. Its total debts are rising. Up to 3.000 small and middle-size companies declare bankruptcy every month. In April 1998 the Korea Development Institute estimated that total debts in South Korea come to about 728 billion USD. That figure includes more than 150 billion owed to foreign banks. The debt situation is deteriorating. The financial crises in Asia has not been cured at all. If speculators succeed in their attempts to devalue the Hong Kong dollar and the Chinese yuan on foreign-exchange markets, the recovery of the Asian economies will slow down considerably.

Until 1993 direct investments constituted the main inflow of foreign capital into Asian economies. Since then indirect portfolio investments crowded in. In Thailand and South Korea the bubble of portfolio investments became especially inflated. Later events reflected an integration of Asian economies into global financial markets to the extent when, in the opinion of investors, there were no "safe heavens". With the first signs of crisis they flew away. On the contrary, China, which in 1997 received 20 billion USD direct investments, was affected by the crisis only marginally.

Our view of the situalion in Asia must be realistic and balanced. The future of Asia may not be bleak at all. Globalization has already integrated economies of Asia, Europe and the US to a high degree. The capitalist West is not interested in a prolonged Asian crisis. A vacuum on Asian financial markets may create a possibility for unprecedented socialist China's expansion in this region. IMF has chosen a road of urgent help to Asia. For me stabilization of its markets the West spent in 1997 - first months of 1998 around 117 billion USD. This policy aims at securing 30% of American exports that go to Asia and at curbing cheap Asian export to the US and Europe. If, for example, Singapore goes bust, "Boeing" will lose one of its best consumers. Every cloud, indeed, has its silver lining but the general situation in Asia is unhealthy. At the moment everybody looks towards IMF and World Bank as possible saviours.

Who needs IMF? 

In the globalization environment - everybody, but for different reasons.

For the USA and other major developed nations of the West IMF is at present mainly an insurance against the spread of Asian financial crises. At the same time programs of IMF and World Bank promote systematic trade liberalization. On the whole this process favours developed countries.

IMF promoles US interests in Eastern Europe and Russia by restructuring their economies from a state-dominated to a market-oriented.

There are fears of an accelerated ruble depreciation due to budget problems. Such expectations are explained by low prices of oil and other raw commodities on international markets and the inefficiency of tax collection in Russia. On the other hand, it is unlikely that Russia may go bankrupt. Its resource-rich economy can sustain a large volume of debt.

Up to now Russia manages to develop without drastic ruble depreciation, though it is unrealistic to expect that the Central Bank of Russia in present circumstances will be able to halt further slow devaluation of the national currency. Russia can stabilize its economy only if it increases its manufacturing industry exports and raises productivity of labour force in economy as a whole. It will take several years, far beyond "Yeltsin's Era", to cure the Russian economy. It needs urgent inflow of resources into the production sector of the economy.

One of the biggest problems of the Russian economy is the huge inefficiency of the labour market. Wages in the State and even private sector often are not paid for months. IMF by its deeds creates an impression that such situation is a part of the "stabilization" process. It would be interesting to see, how the government of Mr. Kirienko is going to tackle unpaid salaries problem. The internal market without balanced supply and demand policy will stay weak and open to negative influence from external financial markets.

The Asian financial crisis of late 1997 is still in progress. Globalization means growing interdependence not only of individual countries but of whole regions. The negative results of fragile financial markets can be met with a new paradigm of national competitiveness. The efforts of Russia are to be directed not only at seeking to get foreign capital to come in, but at preventing Russian capital leaving the country, not by controls but by incentives.

The Russian society, after bitter lessons of the past, has a better understanding of its needs and place in the process of globalization. States must not retreat from important economic functions. They are to deal with tensions between global and local (national) interests. The task is now far more complex than in the past. The so called "free world market" looks set to be a dominant form of economic activity in the XXI century. Will it deliver to people real progress or economic growth for rich and crisis for the poor? In a just world order the answer will depend not on IMF but on collective wisdom of humanity, job creation, social justice, ethics and moral values.