Washington's Double Standard

An editorial by Eduardo Porter in yesterday’s New York Times points out the double standard in the U.S. government’s response to the current financial crisis, vs. the remedies it has supported for the rest of the world: “Could this be the same United States that backed the International Monetary Fund’s get-tough strategy during the emerging-market crises in the 1990s—pushing countries from Asia to Latin America to slash government spending and raise interest rates to recover investors’ confidence and regain access to lending from abroad?” The IMF advocated—and indeed coerced—high interest rates and reductions in government spending. But the solution in the United States is lower interest rates and expensive stimulus spending. Porter cites Joseph Stiglitz (who was chief economist at the World Bank at the time that “structural adjustment” was forced on Asia and Latin America) as one economist who sees a double standard here. He cites Larry Summers, who was Treasury Secretary at the time of the 1990s financial crises, as one who denies a double standard.

We agree with Stiglitz and Porter. As D&S collective member and blogger Larry Peterson noted in an earlier posting:

In a shocking display of bad taste at best, and ignorance at worst, a Lehman Brothers economist referred to last week’s Fed action as “shock therapy.” Most of the readers of this blog will need no reminding that the same phrase was used to describe the structural adjustment programs that caused “lost decades” for much of the poor and developing world. The only difference, of course, is that “shock therapy” for them meant jacking up interest rates to stratospheric levels—and subsequent capital outflows which enriched many Western investors, while for us, it has meant a dramatic drop in interest rates.

The source of this comment from the Lehman Bros. economist? The New York Times, of course.

2 thoughts on “Washington's Double Standard”

  1. I am no expert but wasn’t the debt, as a ratio to their GDP, much bigger in the countries that had structural adjustments imposed on them? Doesn’t that make a difference?

  2. They did have higher debt-to-GDP ratios, if only because the US is by far the world’s largest economy; and even with our large fiscal and current-account deficits, our debt-to-GDP levels are much lower than most of the countries who had structural-adjustment programs imposed on them.But there is an important factor that goes beyond debt-to-GDP ratio in explaining the susceptibility of these countries to crises. The US dollar is the world’s reserve currency (even with the dollar taking a beating and talk circulating about an eventual challenge from the euro these days), and hence the U.S. can borrow in its own currency, while many of the big borrowers of yesteryear had to borrow in dollars or other major currencies like sterling, Swiss Francs, Japanese Yen, etc. That meant that when the U.S. raised interest rates, the real cost of servicing the debt in local currencies went up, and indeed skyrocketed when this contributed to the credit crunches, capital flight, and bankruptcy waves that could follow periods of U.S. monetary tightening, like in 1997-8 (the Asian crisis).So why isn’t this happening during the current panic? Well, after the Asian and dot.com meltdowns, many of the countries who had structural-adjustment programs foisted on them not only cut their debt-to-GDP ratios (they had, to, after all, as part of the structural-adjustment programs): they also began to amass huge reserves of U.S. dollars to prevent this sort of thing from ever happening again. And this time, in a striking reversal from 1998 and the other crises, it is Asian Sovereign Wealth Funds, amongst others, who are buying up stakes in US and Western firms affected by the subprime crisis. So: though high levels of debt were a part of the problem, that’s not the whole story by a long shot.

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