Turmoil Is Free Market Watershed
The astounding worldwide stock market turmoil of the past week signals a watershed in global economic development. It is a demand by global investors that all countries adapt their economies to the dictates of open markets.
Just as the fall of the Berlin Wall in 1989 marked the triumph of the American political system over Communism, so the latest crisis marks the triumph of the American economic system of open markets over state-run economies.
Open-market principles insist that countries such as China loosen state controls over industry and investment and allow international investors, in some real way, to be arbiters of its economic policies.
Indeed, it was international investor suspicion that stock prices of China’s state-owned companies were inflated that led to the market crisis of the last week.
The crisis began in Hong Kong where investors saw the stock exchange increasingly introducing shares in Chinese companies that were not businesses in any traditional sense of the word. Rather, these so-called Red Chip companies were corporate shells designed to raise capital through Hong Kong so that the Beijing government could inject assets into state-owned corporations and give them the appearance of private companies.
They were popular with investors with the approach of the July hand-over of Hong Kong to Chinese control, and such Red Chips quickly rose to a market value of $60 billion. Now, Red Chips have tumbled in value along with other shares on Hong Kong’s market.
Demonstration of Investors’ Power
It was the most dramatic demonstration yet of the new power of global stock market investors to dictate terms to ostensibly powerful governments. But it wasn’t the only recent case of investor revolt.
Smaller nations, notably Thailand, Malaysia, Indonesia and the Philippines, felt the lash of open market pressure in July. Global investors, in effect, objected to the way those countries took in the world’s investments in their infant stock markets and then poured the funds into grandiose state projects or real estate developments of dubious economic value.
“This crisis will one day be seen as a milestone in the evolution of a truly global capital market,” said Jeffrey Garten, dean of the Yale School of Management and a former U.S. undersecretary of Commerce.
“Markets can be great levelers,” Garten added. “They say to every country, if you want the world’s money, we want investments that are reasonable, open, transparent and producing real returns.”
That model of open companies, reporting to shareholders, making decisions on sound economic principles rather than national favoritism or because the project’s developer is brother-in-law of a government official, is one that the United States has long championed and largely lived by.
Its opposition in recent decades has come from the so-called Asian model of Japanese companies. They have operated behind a wall of trade and investment restrictions to take advantage of access to open markets in the U.S. and other countries. But they did so without letting U.S. companies enjoy access to their huge markets. U.S. policy has fought for years to open up Japan’s system, and that battle is finally achieving some success.
Japan has been forced by seven years of recession and continual international pressure to begin opening its financial system to foreign competition and to the free-market rule that investments earn a return.
But China presented a new and even larger Asian model. China’s policy--announced in September by President Jiang Zemin, who meets President Clinton in Washington this week--was to create 1,000 large state-owned companies. Some of them, Chinese officials declared, would qualify for the Fortune 500.
But they wouldn’t be like IBM or other companies on that list of the largest corporations. If IBM wishes to raise money from stock investors it must issue a detailed prospectus explaining what it is going to do with the funds and how it plans to earn a return on investment. And government regulators must verify the claims in the prospectus.
Companies Can Avoid Disclosure
China’s companies would not have to go through such explanations. Rather, say numerous Western business negotiators in China, officials there seem to think the world’s capital should be forthcoming simply because they want to build infrastructure projects.
This crisis has come about because the world’s investors have declared such terms unacceptable.
The markets’ challenge to state economies has been met with howls of protest. Malaysia’s ruler, Mahathir Mohamad, and others in Asia have charged that their currency devaluations were forced by a conspiracy of speculators.
But the pension funds and mutual funds of the world are not speculators. By and large, they are patient investors seeking to earn returns with which to pay pensions and social benefits to their clients.
The pension and mutual funds, now having grown to trillions of dollars, represent something relatively new in the world. Each day, enormous sums whirl across the globe, ceaselessly investing in currencies, stocks and bonds of every nation. Ultimately, those investment flows determine everything from the interest rate on your mortgage to the employment of a nation’s workers and the living standards of its citizens.
To be sure, Malaysia, Thailand and other countries might well be genuinely puzzled by the workings of those investment flows. After all, Thailand and Malaysia scarcely had stock markets 10 years ago.
Investment capital in developing countries was allocated by the central state government or, as in most cases, it didn’t exist at all. But the global spread of technology, which has given workers in developing countries training to work on sophisticated machines making products for the world markets, has changed all that.
Ancient Societies in Global Markets
All of a sudden, ancient societies became involved in the global markets for goods and services, and for capital. The new money pushed up living standards very fast, making people believe they had discovered a new way to mine gold.
But in this crisis, those new nations in the world economy are learning that access to global capital carries with it responsibilities--to use the capital efficiently and in ways that produce a return for investors.
Yet, developing countries are not the only ones being taught lessons in this crisis. France and other European countries have suffered economic setbacks because their customers in Asia have had to devalue their currencies and throttle back their economies.
According to Joanne Perez, Paris-based economist for Merrill Lynch, “Europe has built its whole recovery scenario on exports. A lot of the potential European export markets are at risk.”
France, exporter of Airbus jetliners, as well as fine wines, perfumes and haute couture clothing for Asia’s nouveaux riches, has a lot to lose. Thirty-five percent of the French output of goods and services is derived from exports, and what growth France’s economy has had of late has been driven by sales of goods and services abroad.
Perez estimates that the Asian market meltdown will cut France’s economic growth rates by at least 0.5%, adding further to the country’s 12.5% unemployment problem.
Indeed, the United States, too, can anticipate fallout from the crisis. Many economic experts are predicting that the low-wage countries of Asia, their costs reduced even further by currency devaluations, will now try to regain economic health by pouring out exports to the big, open U.S. market.
One Southern California businessman, David Castro, owner of Industrial Precision Tool, a distributor of machine tools, reports “a flood of cheaper products from Indonesia, Thailand and other countries coming into the market. If a machine part sells for 17 cents, they’ll send it in here for a nickel.
Spread Aid to U.S. Interests
True enough, the U.S. economy endures competitive pressures because it does largely play by the open market rules of trade and disclosure. But in the world economy emerging for the 21st century, the spread of open markets will support U.S. interests which lie with a world where investments can earn returns and trade can be on rational terms.
Japan discovered the value of open markets when its financial system failed to produce the investment gains needed for pensions for its aging population. That’s why Japan is deregulating that financial system today, opening it to participation by U.S. and other foreign firms. “The hope is to raise the average return on pension investments,” said Eisuke Sakakibara, vice minister of finance, at a recent World Economic Forum meeting in Hong Kong.
Times staff writers John-Thor Dahlburg in Paris, Mary Williams Walsh in Berlin, Richard Paddock in Moscow and James F. Smith in Mexico City contributed to this report.
