Crisis Stirs Critics Of Free Markets
The turmoil in the U.S. financial sector is rippling through political debates around the world, giving ammunition to foreign officials who question American economic leadership and are opposed to policies that follow the U.S. model.
In South Korea, the news has been seized by opponents of plans to liberalize the country's financial industry. German chancellor Angela Merkel has refreshed her defense of a law that gives the state an effective veto over takeovers of Europe's largest carmaker, Volkswagen AG. The U.S. effort to convince China to let the market determine the value of its currency may be undermined, analysts there say.
While the U.S. has been a model for Chinese reforms, now it's clear 'the teachers have their own problems,' says Song Guoqing, an economist at Peking University's China Center for Economic Research.
In a world much more economically and financially intertwined than in the past, the U.S.'s troubles of the past several weeks seem to have done more than any downturn in recent decades to sow doubt about the U.S. approach. That has given ammunition to foreign critics while undercutting those who share the American preference for capitalism.
Already, the Bush administration's proposal to spend $700 billion buying troubled assets from U.S. banks has shaken confidence in the dollar among foreign investors who feel the plan could dangerously increase already-high U.S. debt levels. That concern could further weaken the dollar's status as the dominant global currency. China and other countries with huge holdings of U.S. dollars could also seek to shift more assets elsewhere, hurting the already wobbly American currency.
Recent U.S. government moves to take over struggling giants like Fannie Mae and Freddie Mac have strengthened proponents of bigger government in China. Xu Xiaonian, a professor at the China Europe International Business School in Shanghai, points to the government's move last week to halt a sharp market decline by buying stock in listed state-controlled companies - one of the boldest interventions in years by a government that had been trying to reduce its role in the market. The government was 'encouraged by what the U.S. is doing,' he says. 'For a liberal economist like myself, I feel it's even harder to argue against intervention,' because 'the popular view is that the American model is failing.'
The extent of the fallout will depend on the length and severity of the current crisis. A speedy recovery could restore some faith in the resilience of the U.S. system. After previous financial crises, America has gone on to become as strong or stronger.
But America's problems could undercut support for its international priorities, including expanding access for American financial companies in foreign markets, and pushing greater deregulation in continental Europe. 'The U.S. model had a limited attractiveness for Europe before,' says Nina Hauer, a Social Democrat member of Germany's parliament. 'Now it has lost its attraction entirely.'
In Europe, the U.S., along with the U.K., represents a deregulated 'Anglo-Saxon' version of capitalism -- in contrast to Germany's system involving unions and corporations in government and vice versa, and the strong role taken by the French state in shaping corporate decisions. America's track record of fast-rising productivity and growth has pressured Europe to change its ways.
In recent days, German chancellor Ms. Merkel, who ran for office as a free-market reformer in 2005 and has shifted to the left since, has become vocally critical of laissez-faire ideas. On Tuesday Ms. Merkel told 15,000 appreciative VW workers that the law providing government protection of their company promoted long-term thinking -- echoing a traditional German view that untrammelled capital markets can be destructive.
Last weekend, Ms. Merkel expressed her irritation with the U.S. and U.K. for resisting stronger regulation for financial markets, which Germany tried to promote when it chaired the G-8 last year. 'This crisis shows that markets need rules and somebody responsible to watch over them,' says Ms. Hauer, the Social Democrat legislator. 'We were right to keep certain things, such as mortgage loans, more tightly regulated.'
Most economists in Europe still say the region needs more free-market changes to improve long-term growth. And there are limits to how much retrenchment is likely to occur. 'The fact is that no policy maker in Europe has a clear vision of what re-regulation would mean,' says Nicolas Veron, finance-policy scholar at Brussels think tank Bruegel.
Still, Ms. Merkel isn't the only European leader sounding a new tone. French President Nicolas Sarkozy, who campaigned as a pro-American advocate of greater capitalism, called in a speech to the United Nations on Tuesday for a more regulated form of capitalism. 'Let us rebuild together a regulated capitalism in which whole swathes of financial activity are not left to the sole judgment of market operators,' Mr. Sarkozy said.
In Latin America, the U.S. crisis provides a rhetorical opportunity for politicians who espouse greater state control of economies, and who argue the U.S.-backed free-market nostrums are at the root of the region's income inequality.
From Venezuela to Ecuador and Argentina, voters have backed leaders who espouse direct intervention in markets through a variety of unorthodox policies, including price controls, nationalization of industries and in some cases, shirking debt payments. Leaders who hold these views also nearly came to power in Mexico and Peru in 2006.
Economists say, however, that the crisis is more likely to hurt countries such as Venezuela and Argentina that rely on financing from abroad, the cost of which may skyrocket. Brazil and Chile, which have stuck to free-market prescriptions, may find a silver lining: They are overflowing with foreign capital that pushes up their currencies and hurts exports, and that may dwindle.
With their massive interventions in the U.S. financial system recently, the Bush administration and the Federal Reserve have opened themselves to charges of hypocrisy. That's especially true in Asia, where many politicians and economic policy makers in Asia remember how the U.S. and other Western powers pushed tough, market-oriented solutions to the Asian Financial crisis a decade ago, and see a particular irony to Washington's response to its own meltdown.
Sharp-tongued former Malaysian prime minister Mahathir Mohamad, criticized the U.S.'s handling of the financial crunch on his Web site last week. 'I remember well how we were told never to bail out failing companies,' he wrote in his blog (www.chedet.com) on Sept. 18. 'But in the last one year the Fed has bailed out dozens of failing banks, mortgage corporations and other businesses.'
In South Korea, another country hard hit by the Asia meltdown of the late 1990s, regulators have prepared 21 bills for the National Assembly to consider. The measures include creating investment banks, privatizing state-run banks and allowing government pension funds to invest in banks, in a legislative session that began earlier this month.
But key South Korean lawmakers in recent days questioned whether they should even begin to debate reforms when the U.S. financial system is stumbling. The privatization of Korea Development Bank, the largest government-run bank, should be 'reexamined from the beginning,' Lee Jong-koo, a lawmaker from the ruling Grand National Party, said last week.
Reform proponents may have to space out the legislation instead of proposing it all at once, said a government official involved in the effort who asked not to be named, citing sensitivity in the ruling party. Success may depend on whether proponents can 'disassociate themselves with the crisis in the U.S.,' he said.
Some of the recent response seems like thinly veiled schadenfreude. Russian leaders, whose longtime criticism of U.S. international dominance has intensified since the war in Georgia, stepped up criticism of America's financial heft. President Dmitry Medvedev this month blamed the U.S. for causing the global crisis, saying the U.S. 'has let just about everybody else down.' Russia is exposed to U.S. financial troubles through its nearly $600 billion in reserves, much of which are invested in dollar assets.
After years of being criticized for increasing the state's role in the economy in Russia, Kremlin officials haven't missed chances to point out Washington's about-face on free markets. Mr. Medvedev said the U.S. plan amounted to 'partial nationalization of their financial sector.' Moscow's approaches, he said, have been strictly in line with what the Kremlin says is its pro-market policy. |
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