But as former Russian official Boris Fyodorov noted, the money mostly helped Moscow avoid moving toward a market economy: “The IMF was pretending that it was seeing a lot of reforms in Russia. Russia was pretending to conduct reforms.” What has prevailed in Russia has consequently been the law of the jungle, rather than the rule of law.
East Asia’s policy failure derived from the belief that societies should not erect a wall of separation between the private sector and government.
Thus, for years, domestic credit in Malaysia, Thailand, Indonesia, and South Korea has been allocated with a heavy dose of politics. When pervasive malinvestment became evident, Asian governments could no longer defend the unrealistic rates at which they had pegged their currencies.
Japan, now suffering from $1 trillion in bad bank loans, has only made a bad situation worse for the region by hesitating to implement necessary reform.
In Latin America, it is no coincidence that Brazil, a regional laggard in liberalization, was the first to feel the chill. Though the government has tamed inflation in recent years, it has increased its spending prodigiously, leading to a growing 7.9% budget deficit that is eroding the foundations of its own pegged exchange rate. Fully two‐thirds of Brazil’s deficit is due to the state’s bankrupt “social security” system.
In the global economy, free‐flowing capital disciplines governments, inducing them to follow more rational policies. Had exchange rates in Asia or any of the other crisis countries in the developing world been determined in the free market, government policy mistakes would not have so disastrously accumulated without the market’s immediate and visible judgment.
The system also fails to function when governments step in at the national level, and internationally through the IMF, to bail out investors caught in a crash. The implicit or explicit guarantee of a bailout dulls the incentive of investors to be wary of countries that stray from sound fundamentals, which in turn insulates politicians from market pressure.
Indeed, the proliferation of government‐subsidized risk since 1982 has led to severe banking crises in the developing world, costing those countries 10% to 25% of their GDPs in more than 20 cases. The lesson is clear: to avoid crises, countries should not combine liberalization with socialist policies.
The alternative to the free market is stagnation. Consider the case of India, whose rulers for more than four decades blocked imports and foreign capital while smothering domestic enterprise in the name of social justice. The result has been enduring poverty for hundreds of millions.
By contrast, living standards in the more outward‐oriented and capital‐friendly nations of East Asia long ago surpassed those of India. In 1996, before the economic whirlwind hit, the people of Hong Kong enjoyed a standard of living 16.2 times higher than their Indian counterparts.
If Hong Kong’s economy contracts 5% this year, as expected, its standard of living will still be 15.4 times higher than India’s. In South Korea, even after sharp contraction this year, per capita GDP will remain more than eight times higher than in India.
The long‐term growth created by economic freedom far outweighs the risks of short‐term fluctuations. It does not require religion to see that government intervention of the kind that Messrs. Greider and Kuttner seem to idolize promises more instability without the hope of a more prosperous future.