Economic crises force capitalism into retreat

FORGET about the stock market. From day to day it will rise, and it will fall, for reasons that nobody will ever be able to explain. The collapse of the Russian rouble set off a wave of selling, even though Russia accounts for less than 1% of America's exports. Then Alan Greenspan, Federal Reserve chairman, gave a talk that was taken as a hint he may cut interest rates, and the market soared. No matter: a few years hence this year's share-price roller coaster will count for little.

Forget, too, about President Clinton's problems. The American political system and the American economy will not be very different 10 years hence if Bill Clinton cedes office to Al Gore, or hangs on to it by his fingernails.

What will matter far more than where the Dow Jones settles or who settles into the Oval Office is the outcome of the new debate about the place of market capitalism in the world economy. Until only a few months ago, ours was assumed to be the age in which free-market capitalism had finally routed all alternative forms of economic organisation. But then the Asian economies went from boom to bust, the Asian contagion spread to parts of Latin America, Russia's idea of what constitutes a market system collapsed under the weight of its inherent contradictions, and the American stock market demonstrated to dismayed investors that down is one of the available directions for share prices.

Now, the triumph of free-market capitalism is being called into question, even by some of its leading exponents. In Hong Kong, an island of free enterprise in a sea of collectivism and cronyism, the government decided that it is not inconsistent with adherence to free-market principles to intervene massively in the stock market so as to shore up prices and punish evil "speculators".

Russia, too, has apparently decided that free markets are not the solution to its problems. Of course, the Russians never really adopted anything remotely resembling market capitalism: among other things, private ownership of land is still forbidden. But a private sector was peeping through the thicket of rules and regulations that hobble fledgling entrepreneurs, a combination of cowboy capitalists who looted state-owned assets and small vendors struggling to meet Russians' demand for everything from shoes to imported foods.

That modest retreat of the state is now over. Clinton's words urging Russia to continue down the road to reform were still echoing in the halls of the Kremlin when Boris Yeltsin nominated the unreconstructed hardliner Yevgeny Primakov to be the new prime minister. The plan now is to pay the back wages due to soldiers, miners and others with freshly printed roubles, and then slap price, wage and exchange controls on the economy in an effort to contain the resultant inflation. The Russian capitalist baby has been strangled in its crib.

Meanwhile, Asia's troubles have revealed that what western analysts have been hailing as the triumph of capitalism is neither a triumph nor capitalism. Thailand, Indonesia, and South Korea, it turns out on close inspection, were not really capitalist economies after all. Instead, they were economies in which governments directed capital, not to its most efficient use, but into the pockets of cronies. That system finally came crashing down.

But the lesson learnt is not that government should keep its greedy and inefficient fingers out of the economy. Instead, the stricken economies are to be subjected to even more government intervention - exchange controls, the shoring-up of favoured banks and companies, and the dismissal of government officials who favour market-based solutions.

It is this retreat of capitalism that has given impetus to two interesting developments. First, advocates of the "Third Way", a Tony Blair-led group of leaders from Brazil, Italy, Germany, France and America who are attempting to find a left-of-centre path between American-Thatcherite free-market capitalism and statist socialism, now anticipate an eager audience for their ideas.

No surprise there. But eyebrows were raised when one of the leading advocates of free markets and free trade, Paul Krugman, an econo-mics professor at the Massachusetts Institute of Technology, took to the pages of Fortune magazine to wonder aloud whether the current run of crises did not require at least a temporary scup-pering of reliance on "the market" to sort things out. Krugman points out that traditional economic nostrums just have not worked. If the afflicted countries raise interest rates and taxes to protect their currencies, economic growth stalls, and even fundamentally sound companies are brought to ruin. If, instead, a country caught up in a downward whirl keeps interest rates low and lets its currency collapse, it triggers capital flight and inflation.

"In short," writes Krugman, "Asia is stuck." The only way out, he says, "is a solution so unfashionable, so stigmatised, that hardly anyone has dared suggest it. The unsayable words are 'exchange controls'."

They may be unsayable in the halls of academe, but not in Asia. In Malaysia, Mahathir bin Mohamed finds such controls far more desirable than the speculators who he claims have brought his country's economy to its knees. And in China, the party leadership is relying on these controls to diminish the impact of the turmoil in the region. Exchange and capital controls allow them to stabilise their currencies without raising interest rates to punishing levels.

Krugman is quick to point out that in the long run government efforts to control exchange rates collapse under the weight of market forces and the corruption that develops as businesses seek to circumvent the controls. This price, though, may be worth paying for "the policy freedom that Asia needs to rebuild its economies".

When a leading advocate of free markets has such second thoughts, one has to wonder whether the triumph of free-market capital will prove insufficiently durable to survive the current crisis in many of the world's economies.