Development Redefined: How the Market Met Its Match by Robin Broad & John Cavanagh

Author:Robin Broad & John Cavanagh [Broad, Robin & Cavanagh, John]
Language: eng
Format: epub
Tags: Political Science, General
ISBN: 9781317261230
Google: bjQeCwAAQBAJ
Goodreads: 28132842
Publisher: Routledge
Published: 2008-01-01T00:00:00+00:00

Hot Money

During the 1990s, the World Bank, the IMF, and the U.S. Treasury expanded their initial focus from the free-trade and longer-term investment strand of the Consensus to the financial planks, “encouraging” governments around the globe to open their stock markets and financial markets to short-term investments from the North. The resulting quick injections of capital from mutual funds, pension funds, and other sources propelled short-term growth in the 1990s, but also encouraged bad lending and bad investing.

Between 1990 and 1996, the amount of annual private financial flows entering poorer nations skyrocketed from $44 billion to $244 billion. Roughly half of this was long-term direct investment, but most of the rest—as recipient countries were soon to discover—was footloose, moving from country to country at the tap of a computer keyboard.

In mid-1997, as the reality of this shortsighted lending and investing began to surface, first in Thailand, then in South Korea, and then in several other countries, Northern investors and speculators panicked. Their “hot money” fled much faster than it had arrived—leaving local economies without the capital they had come to depend on. Currency speculators exacerbated the crisis by betting against the local currencies of the crisis nations, sending local currency values to new lows.

IMF advice seemed only to quicken the exodus of capital. Currencies and stock markets from South Korea to Brazil nose-dived. And, as these nations slashed purchases of everything from oil to wheat, prices of these products likewise plummeted. The financial crisis stalled production and trade in such large economies as Indonesia, Russia, South Korea, and Brazil, leaving in its wake widespread pain, dislocation, and environmental ruin. Exact figures are hard to come by, but the main international trade union federation estimates that, by the end of 1999, some twenty-seven million workers in the five worst hit Asian countries—Indonesia, South Korea, Thailand, Malaysia, and the Philippines—will have lost their jobs.4

As economies collapsed, elite support for the Washington Consensus began to crumble. In the pages of the Wall Street Journal, former U.S. secretary of defense Robert McNamara likened the crisis to the Vietnam War, implying that then U.S. Treasury secretary Robert Rubin, his deputy and successor Larry Summers, IMF managing director Michel Camdessus, and the other top managers had lost control.

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