Paul Krugman, discussing commodity prices, posts a nice chart of recent trends in the world economy. Developing countries are recovering much better than rich ones.
Krugman modestly forgets to point out that he had something to do with this. He and Joseph Stiglitz may be treated as weird bearded hippies in Washington; but beards, Nobel Prizes, and sound analysis seem to go down better in Asia. They are listened to with respect, ever since Krugman defended Malaysia’s capital controls during the Asian financial crisis of 1997. Stiglitz subsequently blamed the whole thing on the misguided sectarian pressure on developing countries from the IMF and the World Bank to open up their financial markets and allow the miracles of Wall Street financial innovation to work their magic. Somehow this always happened to work out better for the bankers than Third Worlders in the street.
The trenchant criticisms of Krugman, Stiglitz and Sachs have provided vital intellectual cover to burnt-fingered Third World finance ministers in pushing back successfully against this pillar of the Washington consensus. So successfully that the policy plank has been quietly dropped by the World Bank and IMF – which has even been pushing the Russian government to reintroduce capital controls.
Capital controls may well have prevented the banking crisis in the very financially interdependent rich countries from propagating to the rest of the world. Typical developing countries only faced a trade slump: nasty while it lasted, but no permanent damage, unlike a banking crisis, which leaves the victims enfeebled by debt overhangs and broken credit channels for years.
Krugman’s chart also bears thinking about in geopolitical terms. Continue reading “The double whammy”