COPENHAGEN–The most peculiar aspect of the Asian economic crisis so far is that no one has mentioned the three words, John Maynard Keynes. Yet the response both from national governments (in particular Japan), the International Monetary Fund (IMF), Washington and, now with Monday’s meeting in New York, the commercial banks joined by the securities houses, has been utterly and totally Keynesian–prime the pump.
Keynesian economics, intellectually derided by the Chicago school, in particular Milton Friedman, and politically rubbished by Margaret Thatcher and Ronald Reagan, has had its comeback. “Signs of solution are at last beginning to emerge where it matters most, in Japan”, editorialized the Financial Times approvingly on Monday (but without mentioning the word Keynes), “the use of public funds to support the banking system and a readiness to put fiscal policy on an expansionary track”.
Yet, even now, elements of anti-Keynesianism persist in the current economic doctoring. The IMF has insisted too much on monetary tightening in Thailand, Malaysia, Indonesia and, in particular South Korea. And it has shied away from criticising military expenditures, thus allowing governments to focus their cost-cutting on social expenditures whose greatest impact is as always to hurt the less fortunate.
These, important errors though they be, are minor flaws compared with the refusal to open the door to a wider intellectual appreciation of Keynesian teaching on the need for greater liquidity resources for the IMF.
If the IMF had had the resources Keynes envisioned, argues Mahbub ul Naq, the former finance minister of Pakistan and a constant campaigner for resuscitating Keynes’ intellectual legacy “then the Asian crisis would have been avoided”. “South Korea’s economic condition”, he told me over the phone from Islamabad, “has been blown up out of all proportion to its fundamental strength. What South Korea has is not so much an economic crisis as a liquidity crisis”.
Just before the end of the Second World War the western powers decided to rethink the international financial system. Meeting in July 1944 at Bretton Woods their top experts, including Keynes, discussed a new world order, convinced that the global system could not be left to the mercy of unilateral action by governments or to the unregulated workings of the international markets. Thus emerged the IMF and the World Bank. It was at the one and the same time a great achievement and a great disappointment. Over the last five decades both institutions have been invaluable but this success only begs the question what might they have done if Keynes’ original vision had not been cut down to size.
Keynes proposed an IMF whose resources would be equal to one half of world imports. In practice the IMF today controls liquidity equal to only 2% of world imports. It can impose only a modicum of the financial discipline necessary in an age when speculative private capital movements crossing international borders are of the order of $650 billion every 24 hours.
Keynes saw the IMF evolving into a world central bank able to issue its own reserve currency sufficient to meet the needs for expansion whenever and wherever needed. The IMF does have so-called Special Drawing Rights but they amount to only 3% of world liquidity. In the mid 1990s the IMF’s managing director, Michel Camdessus, campaigned hard for a modest increase in these and also for an increase in quotas to strengthen the IMF’s capital base, but Washington and Bonn rebuffed him.
Keynes regarded balance of payments surpluses as a vice and deficits as a virtue. It is deficits that sustain demand and generate increased employment. He went so far as to argue that outstanding trade surpluses should be penalised by an interest rate of 1% a month. Thus, in Keynes’ vision, there would be no persistent debt problems as surpluses would be used by the IMF to finance deficits.
Keynes would have had no time for the present gambler’s paradise–private investors’ speedy entry into and exit from financial markets in search of quick gains. This not only precipitated the present Asian crisis but it has seriously undermined longer-term investment. In an age when the combined reserves of all central banks amount to one day’s worth of foreign exchange trading, the ability of individual countries and the IMF to stop a quite irrational haemorrhaging of the proportions we have just witnessed is totally undermined.
Besides more available PUBLIC liquidity we are in urgent need of some sort of breaking system when the PRIVATE liquidity system spins too fast. Hence the renewed interest in academic circles of the proposal of the economics Nobel prize winner, James Tobin of Yale University, for a tax of 0.5% on international currency transactions. This would curb excessive speculation, while yielding around $1.5 trillion a year for health and educational development.
So who among the greats of the new year of 1998 will dare resurrect the name of John Maynard Keynes? “Ring out the false, ring in the true”!
