How Wall Street’s Moral Hubris Condones Social Inequality

<i> David Friedman, a contributing editor to Opinion, is an international consultant and fellow in the MIT Japan Program</i>

U.S. hubris is reaching unprecedented heights as Asia’s currency meltdown triggers ethnic riots, and desperate nations like Brazil hike interest rates to 40% to appease skittish investors. Not content with declaring Wall Street’s boom the harbinger of the next American imperium, U.S. financial elites, pointing to political changes in Indonesia and South Korea, portray the power of twentysomething New York analysts to shift around $2.5 trillion a day as a supranational force of justice, rewarding good and punishing evil throughout the world.

Nothing exposes this conceit more than Wall Street’s abrupt withdrawal of $105 billion from South Korea, Indonesia, Thailand and Malaysia last year--an incredible 11% of those countries’ combined gross national product--while romancing South America, where $50 billion is slated for investment despite continuing “emerging market” jitters. Even if the reasons that financiers themselves give for fleeing Asia--inflated currencies, current-account deficits, and corruption, for example--are true, it’s hard to see why South America could be more appealing. Most South American countries, just like the Asians, inflate their currencies for the sake of stable exchange rates. Argentines proudly trade local money even-up for dollars in stores and ATMs.

Fixed convertibility, however, makes imports cheaper and exports more expensive. South America’s current-account deficit is projected to reach $71 billion in 1998, precisely the trend Wall Street claims made Asia so risky.

Then there’s the corruption factor. While some on Wall Street boast that they brought down an oppressive Indonesian regime and elected a former dissident in South Korea, they seem untroubled by the cronyism and graft in much of South America. Support for the sort of accountable, open, democratic governments supposedly lacking in Asia is, in fact, razor-thin in South America. A U.N. poll last year revealed that more than 60% of the region’s electorate is “dissatisfied with democracy.” Another 30% openly advocate or don’t care if they live under dictatorial rule. Former military strongmen dominate elections in Venezuela, Bolivia, Colombia and Uruguay.


If the technical rationales offered for the Asian panic are unconvincing, Wall Street’s moral pretense in light of the social fundamentals its investments ignored is inexcusable. Whatever their mistakes--and Asian leaders put their nations at risk by combining credit expansion, short-term debt and fixed exchange rates--the societies they built achieved what a British relief organization, Oxfam, recently hailed as “the fastest reduction in poverty for the greatest number of people in history.”

According to the World Bank, poverty fell by 27% in Southeast Asia during 1975-85, and by another 35% in 1985-1995. Over the same period, Asia lifted 220 million people above the poverty line, the only place in the world where the ranks of the impoverished actually declined. Universal education, high-tech industrialization and social reforms reduced poverty by 82% in Indonesia, 90% in Thailand and 95% in Malaysia. Incomes of the poorest 20% of households in Indonesia and South Korea approached roughly 8% of national income, comparable to preunification Germany and Sweden, and nearly twice as high as in the United States.

The contrast with South America is stark. While poverty rates fell during the turbulent, reform-minded 1970s, they skyrocketed in the following decade when the continent suffered an authoritarian backlash. Social investments shrank and dissent was forcibly squelched. Wholesale privatizations, often orchestrated by U.S.-trained economists, were eagerly gobbled up by what one Chilean official calls the “piranhas"--wealthy elites who made a killing on former state assets.

Unlike in Asia, the new regimes had no appetite for broad-based education and health initiatives. Today, nearly 30% of all South American primary-school students repeat entire grades. Most receive one-third fewer hours of instruction than students in comparable nations. They consistently rank at the bottom of global academic achievement while Asians score near the top.


The world’s worst inequality grew even more extreme. According to an Inter-America Development Bank study, South American poverty rates shot up by 33% during 1980-1995. The number of destitute poor--those living on no more than $1 a day--rose to nearly 20% of the population. Per-capita income for the richest fifth of the population rose by 10%, while incomes of the poorest households dramatically fell. In countries like Brazil, 20% of the population now controls over 60% of the wealth, while the bottom 20% has just 2% of national income.

Even South America’s more robust growth in the 1990s hasn’t helped. Widespread inequality means that poorer groups benefit far less from development than the rich. Average Indonesian incomes, for instance, are half those in Peru, but 50% of Peru is impoverished compared with about 15% of Indonesia. Sharply divided societies like those in South America must grow several times faster than Asian nations to achieve comparable poverty declines.

Wall Street’s moral pretensions wilt before such realities. Its willingness to exploit technical imbalances in Asia imperils one of the social miracles of our time. Its constant threat of capital withdrawal forces ever greater concessions from countries like Brazil, where 40% of the population is destitute. Walled estates owned by wealthy Americans, some of whom reportedly led the speculative attack on Asia, spring up in dollarized Argentina while unemployment hovers at a continent-high 17%.

Why should we care about Wall Street’s conceit?


One reason is that while media-savvy financiers pat themselves on the back for their contributions to world peace, they are fostering an unprecedented anti-American backlash. There can be little doubt that America’s Eastern establishment was only too happy to deflate what it saw as increasingly insufferable Asian “tigers” and reassert its traditional dominance. But the vigor with which it claims moral victory, not simply an opportunistic economic triumph, is building resentment that will adversely affect U.S. interests for years to come.

Another reason is that the same social myopia evident in Wall Street’s international strategies is infecting U.S. domestic thinking. The celebration of New York’s “comeback,” fed by the dazzling stock-market performance, all too closely resonates with the moral deficiencies global investment patterns exhibit.

Despite an improving economy, the city’s poverty rate rose by 25% in 1989-1996 and now tops 16% of all households, far higher than the national norm. Over the past 20 years, incomes of the poorest 20% of New Yorkers fell by 36%, while those of the richest fifth rose by 46%, producing what is now the greatest income gap in the country. An army of more than 30,000 police patrols New York just as the military guards the privileged in Santiago or Buenos Aires. Unemployment is nearly twice the national rate.

Confusing Wall Street’s ambitions with the national, let alone worldwide, good blinds Americans to the reality that they, too, are vulnerable to capital’s caprice. While even ardent free-traders now call for some moderation of “hot” (short-term) capital volatility, Wall Street apologists counter that fund managers inherently act in the U.S. interest. In a society where politics and public institutions seem ineffective, at best, this claim has surprising appeal. Yet, the only Asian countries that escaped last year’s cataclysmic deflation were those with enough foreign reserves to scare off Wall Street speculators--Japan and Taiwan--or that closely regulate currency flows, such as China. The one South American nation that reduced poverty and unemployment during the 1990s, Chile, taxes foreign capital that is shifted into and out of the country too quickly.


Americans inclined to believe Wall Street’s moral hype would do well to ponder such facts. We live today in a world where U.S. investments are valued more than most anything else. Wall Street thus seems on “our” side. But just as Asia painfully learned, and South America may experience yet again, on the flimsiest pretext, unconstrained by ethical considerations, it will abandon the unwary in a heartbeat.