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Global economy in 1998

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2. There are many views of the state of the global economy in the late summer-early fall of 1998. Below are some of these views. From your reading of Commanding Heights (Yergin and Stanislaw), current news accounts, research into various economies and Macroeconomics (Dornbusch and Fischer), critically analyze these statements as to the type of policies that national economies and the IMF should pursue over the course of the next few years. Has the free market system of capitalism failed and the "battle between government and the marketplace that is remaking the modern world" (Yergin and Stanislaw) tilting toward government? Or, is there a middle ground that needs to be reached with a global regulatory structure created that makes countries and their financial systems more transparent and less tied to "crony capitalism"? Express your views, but back them up with fact and supporting argument.
2.1. The Economist (September 5, 1998) "The World Economy on the Edge: The risks of a deep global recession are increasing. But it can be avoided so long as policymakers heed some lessons from history."
2.2 The Economist (September 5, 1998) "The Economist all-items commodity-price index has fallen by 30 percent since mid-1997, to its lowest level in real terms for over 25 years. The prices of industrial commodities are now at their lowest in real terms since the 1930s. This has severely hurt commodity producers, not just in Latin America and Africa, but also in Australia and Canada." (add in the U.S. farmers).
2.3. The Economist (September 5, 1998) "Capitalism in retreat? A related and more worrying backlash against the free markets is the increasing interest on the part of politicians and economists in market intervention or capital controls as a solution to the crisis.....On September 1st, Malaysia imposed strict controls on capital movements. And respected American economists are also now arguing the virtues of capital controls. This, he (Paul Krugman) suggests, would break the link between domestic interest rates and exchange rates to get their economies growing again....Indeed, the biggest risk now to the world economy may lie not so much in a deep recession, which could be averted. It is that there may be a wholesale retreat for free markets."
2.4 Robert Kuttner (Washington Post, September 7, 1998, p. A25) "Free Markets and a Free Fall World Economy. Economic reconstruction after World War II accepted the necessity of a mixed economy. In that era, the United States and the International Monetary Fund recognized that emergent economies could no be the prisoners of private speculative capital. The postwar system regulated private money flows and stabilized currencies to allow nations to develop. Today's IMF, perversely demands exposure to speculators as a precondition of assistance....What we need is a program of stabilization and reconstruction in the spirit of the post-World War II years, with limits on speculative money flows and more development aid."
2.5 Washington Post, December 22, 1997, p. A1) "IMF Credibility Is on the Line In Asia Bailout, Agency Should Rethink Rescues, Some Critics Say, 'Since the time the IMF has signed each Asian bailout program, the respective Asian currencies have continued to plummet,' said Jeffrey Sachs."
2.6 Jeffrey Sachs (The Economist, September 12, 1998, p. 23) "Global Capitalism, Making It Work. "Global capitalism genuinely is the best chance for the developing world to gain a foothold on the economic-growth ladder; but with current institutions, global capitalism will not succeed widely enough or credibly enough to create a stable world system.... The IMF bought into the investment bankers' mantra: exchange-rate stability above all else.... The more these economies tried to defend their currencies, the more they incited panic."
2.7 George Soros (The Wall Street Journal, September 15, 1998, Op. Ed) "The Crisis of Global Capitalism. ...there remains the urgent need for Congress to authorize an increase in the capital for the IMF....Bailouts did encourage foolish behavior by banks and other lenders, which could count on the IMF when a country got into difficulties (a moral hazard problem). But, the moral hazard now operates in the opposite direction, in not enabling the IMF to do its work when it is most needed."
2.8 Henry Kissinger (Washington Post, October 5, 1998, p. A21) "Perils of Globalism, The IMF is no longer suited for dealing with economic crises. The IMF must be transformed. It should be returned to its original purpose as a provider of expert advice and judgement, supplemented by short-term liquidity support.... Regulatory systems should be strengthened and harmonized; the risks that investors are taking should be made more transparent.
2.9 John Maynard Keynes, 1931 "We are today in the middle of the greatest economic catastrophe of the modern world...the view is held in Moscow that this is the last, the culminating crisis of capitalism and that the existing order of society will not survive it." As quoted in The Economist (September 5, 1998), page 19.

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This called for opinions, so I gave you mine. They need not be yours. Make sure that whatever you use here is rewritten. Take a look at least some of the sources here. It comes to 16 double-spaced pages. One problem is that some of the comments intersected to a great degree.

Critically analyze these statements as to the type of policies that national economies and the IMF should pursue over the course of the next few years. Has the free market system of capitalism failed and the "battle between government and the marketplace that is remaking the modern world" (Yergin and Stanislaw) tilting toward government? Or, is there a middle ground that needs to be reached with a global regulatory structure created that makes countries and their financial systems more transparent and less tied to "crony capitalism"? Express your views, but back them up with fact and supporting argument.

The Economist (September 5, 1998) "The World Economy on the Edge: The risks of a deep global recession are increasing. But it can be avoided so long as policymakers heed some lessons from history."
"The Economist all-items commodity-price index has fallen by 30 percent since mid-1997, to its lowest level in real terms for over 25 years. The prices of industrial commodities are now at their lowest in real terms since the 1930s. This has severely hurt commodity producers, not just in Latin America and Africa, but also in Australia and Canada." (add in the U.S. Farmers).

Like 1997, 2013 has seen another massive fall in commodity prices. The boom and bust cycle is an intolerable means of economic development. This is for several reasons: first, it encourages speculation, which creates immense profits for some. Of course, none of this is productive labor. Such speculation distorts prices and shows that the "market" has no relation to capitalism. Second, when the bust comes, many investors act surprised. Now, this might be irritating, but there is an fallacious element in economic psychology that suggests when things are going well, they will continue to do so. Speculators' lives are based on the opposite concept.
When the bust cycle comes, the shocked and surprised owners and investors are suddenly bought up by those with the cash and credit to survive such busts. These low periods are times when the self-serving "economies of scale" create conglomerates that are no longer part of a market, but have close ties with states and are first to be given loans. Banks, when they get nervous, only loan to Warren Buffet and maybe the people who run British Petroleum. All others should not apply.
Part of the problem is that, since the housing bubble burst, commodity speculation has become an attractive substitute for large and well capitalized conglomerates. When any commodity is the target of futures contracts, this effectively means that huge amounts of these are removed from the market. This is not a "free market" but yet another oligarchic market failure. When coupled with huge debt and a lack of confidence in the economy in general, price volatility is the result.
In the mid 2000s, all commodities, but especially agricultural ones, were rising in price at a huge rate largely due to these anti-market contracts. In 2000, there was only about $30 billion on overall commodities speculation. In 2008, this had risen to $300 billion. Commodity prices peaked in 2011, only to plummet more recently. This is music to the speculator's ears. High speed trading means that a few major banks can control markets and prices.
In 2011, the Commodity Futures Trading Commission fully admitted that price volatility is the result of speculation and rapid turnover of futures.
Further, they also stated that consolidation of commodity producing and trading firms is the result of this same practice. Thus, in accordance with the Dodd Consumer Protection Act, they passed several regulations that limited futures. The administrative regulations, as was well known at the time, has no effect, since these futures contracts are international and are easily laundered through a myriad of institutions. Governments do not have the resources to track these.
Of course, markets cannot be manipulated and still be called "markets." Today, western banks, to a limited extent barred from commodity trading, are moving to Asia, where that sector has yet to develop a strong financial infrastructure. Oil is another of these commodities. Volatility since 2008 has been extreme. In oil's case, however, while speculation controls a solid 60% of price, the use of political instability and US intervention also has a decisive impact. Rates of return from hedges also has a clear impact.

"Capitalism in retreat? A related and more worrying backlash against the free markets is the increasing interest on the part of politicians and economists in market intervention or capital controls as a solution to the crisis.....On September 1st, Malaysia imposed strict controls on capital movements. And respected American economists are also now arguing the virtues of capital controls. This, he (Paul Krugman) suggests, would break the link between domestic interest rates and exchange rates to get their economies growing again....Indeed, the biggest risk now to the world economy may lie not so much in a deep recession, which could be averted. It is that there may be a wholesale retreat for free markets."

In 1998, regardless of the massive crisis that just swept much of southeast Asia, there was no retreat from capitalism by the dominant states. In 2013, there certainly is. During the 1997 crisis, one factor did not come up in any mainstream news report: that the one country totally unaffected was China (Peking). There is one important reason for this: the state controlled the currency and the banks. The party did not dictate economic investment, but laid out goals to be achieved in a general sense.
Capitalism and the free market are not the same. If anything, they are antagonistic. Smith's version of the market, and many others, are basically small producers in a specific territory that know their customers. The existence of global conglomerates is not a free market, it is capitalism, that is, the rule of capital. Conglomerates and banks do not respond to markets, they create them.
In 1997, however, privatization in Russia and Ukraine had turned both economic powerhouses into third world states. "Markets" were introduced into a country where major economic enterprises were in the hands of elites. These and those with them merely took advantage of their access to buy these "privatized" assets and ship most of the value overseas. It is difficult to believe that Washington, Harvard and the governments of those two hapless countries could not have figured this out.
Yet, one standout remains. Belarus. As Russia and Ukraine descended into de-industrialization and total fiscal, monetary and industrial collapse, Belarus continued to show high ...

Solution Summary

The solution discusses the global economy in 1998. The risks of a deep global recession is provided.

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