August 28, 1998
Russia's faltering economy has sparked major market sell-offs in Europe, Asia and America. Is this simply a fact of the new global economy or the beginning a major world-wide recession? Following a background report, four experts discuss the drop in the global markets and its possible implications.
MARGARET WARNER: And joining me now are Daniel Yergin, president of Cambridge Energy Research Associates and Co-author of the book Commanding Heights, the Battle Between Government and Marketplace That's Remaking the Modern World; Adam Posen, an economist with the Institute for International Economics; Walter Russell Mead, senior fellow at the Council on Foreign Relations; and Richard Jacobs, CEO of Newstar, an international investment advisory firm that focuses on Russia. He just returned from Russia last night.
A RealAudio version of this segment is available.
August 28, 1998:
A background report on instability in the international markets.
Join in an Online Forum on Russia's economic and political turmoil.
August 27, 1998:
The Dow falls 357 points.
August 26, 1998:
Russia's economic situation drives down markets around the world.
August 24, 1998:
Boris Yeltsin sacks his government.
July 13, 1998
International lenders agree to loan Russia over $22 billion.
May 28, 1998
Russia's government tries to maintain the value of the ruble.
April 24, 1998
After two tries, Sergei Kiriyenko is confirmed as Russia's Prime Minister.
March 23, 1998
President Yeltsin sacks his cabinet.
The Russian Government Information Network.
International Monetary Fund.
Is Russia the victim of instability -- or the cause?
Dan Yergin, is Russia a victim of the kind of global instability we've seen, market instability, all around the globe this week, or is it driving it?
DANIEL YERGIN, Cambridge Energy Associates: Well, at this point it's driving it, but what we are seeing is the kind of contagion you described. What happened in terms of Russia is that part of the factors were external. The Asian crisis affected Russia and secondly, low oil prices affected Russia. But internally, there is this political struggle over the future of Boris Yeltsin, the last act perhaps of Boris, the Czar, maybe the final scenes we're seeing now, and their inability to get a reform package in to reassure foreign investors, particularly to reform their terrible tax system.
MARGARET WARNER: Rick Jacobs, the international financial establishment responded to Russia's plight, and over the last few years has pumped billions of dollars into it. Why is none of that -- that IMF bailout and other measures -- working?
RICHARD JACOBS, Newstar, Inc.: A few things happened. First of all, in 1992 and 1993, the West missed a huge opportunity to go into Russia and help with structural reforms at the industry level. We just sat on our hands as privatization was happening. The response that you're talking about really occurred as speculators entered the market, drove the Russian Stock Exchange to become the highest and best-performing market in the world, but there was very little fundamental analysis of the companies that were being traded back and forth. The net effect has been that we've pumped money in at the top of the economy and have paid almost no attention to the fact that it's been a sort of a kleptocracy. People have been stealing the country blind for the last eight years. I would estimate that about 15 percent of the GDP there is taken up by crime and tax evasion, not just not paying taxes.
The world economy: "free to crash and burn, as well as free to soar to the heights."
MARGARET WARNER: Walter Mead, let's expand this out to the global economy. Is this kind of volatility that we're seeing in Russia and other emerging markets all throughout this week, is this a fact of life now for this new global interwoven economy that we've got?
WALTER RUSSELL MEAD, Council on Foreign Relations: I think it is. In the world economy today, it is in some ways back to where it was in the 19th century, where you had a very integrated global financial market, and a currency union, and in those days, it was common that panics in foreign countries would spread around the world, the panic of 1857 in the U.S. was really set off by the Indian mutiny. And there was another major depression in the U.S. in the 1890's that was triggered when Argentina defaulted on loans to some British banks. After World War II, the people trying to set up a new financial system tried to create a system where capital flows were controlled and currency rates were regulated. We've gradually dismantled that system for a mix of very good and very bad reasons, and the result is that we now have a world economy that's much freer than it used to be, but that turns out to be, you know, free to crash and burn, as well as free to soar to the heights.
MARGARET WARNER: Do you think, Adam Posen, that since we have this freer, more interconnected economy, that you're going to have these—this volatility, these highs and lows?
ADAM POSEN, Institute for International Economics: It's not inherent. Margaret, I mean, freedom is only as good as the information you use with it. You make stupid choices you get burned. And I think the key word that came out in your report was what Japanese Prime Minister Obuchi mentioned, the word "transparency." And what's been happening in the markets is contagion, which means countries that don't necessarily have that much to do with each other economically are having effects on other countries that don't. For example, you have a Russia, which has deep-seated problems, which we've already heard about, mostly in the tax system, but which isn't competing with Argentina, which isn't competing with Turkey, which isn't competing with Korea, and has almost no trade with those countries and yet somehow is affecting those markets. It's not the speed that matters. It's the fact that the markets continue to act like lemmings. They act in a herd and say when somebody's getting out, oh, I should get out too, and that just goes back to what Richard was saying about checking out the individual companies. And this is the part of the IMF agenda that I don't think gets enough credit. The IMF isn't just there to put out money. The IMF has been trying to put forward conditions and standards that countries have to reveal what loans they've got, what policies they're undertaking. And, in addition, there's been U.S. pressure and market pressure for companies to adhere to western accounting standards. I believe over time, assuming we survive this crisis, then we might have learned something from it, and you pay more attention to the individual investments, less to what everyone else is doing, and then if Russia falls, it's a terrible thing, but it doesn't necessarily drag down our markets.
MARGARET WARNER: Dan Yergin, your analysis of this volatility and whether it's inevitable or inescapable.
DANIEL YERGIN: I think it's one difference from the 19th century is technology. Things happen instantaneously. Somebody in Slolensk and somebody sitting in New York and Singapore sees the same information at the same time and can act upon it. And I think, you know, I was thinking as I was listening to this that the kind of just the last few years, the rise that we've seen in the Dow during that time we've really entered a new global economy. Fifteen, twenty, twenty-five years ago there were perhaps seven stock markets where your pension fund administrator could make investments outside the United States. Now there are 90 emerging markets—stock markets alone—and investors vote on those stock markets and on those nations' economies every day, every hour, and every minute. And what we're seeing is this huge negative vote on Asia, now it's a vote—a negative vote on Russia, and it's spreading to Latin America. So it is very interconnected, and it's underpinned, I might add by very cheap communication. Two decades ago it cost $8 to make a three-minute phone call to London from New York. Today I saw an ad the other day—it's 3 cents.
Equally hurting good and bad economies
MARGARET WARNER: But Rick Jacobs, all this hot capital flowing around, everyone loved it, and the Asian economies loved it when it seemed to be pumping up the Asian economies. But at this point would you say that also when it flees, it punishes—the president said today it punishes essentially the good with the bad, it even punishes economies that are doing the right things?
RICHARD JACOBS: I think that's true to a degree, but, as was said earlier, the key is really transparency. The problem with instantaneous communication is there's reflection, people act immediately, and I think for example, the drop in the U.S. markets this week should not be attributed to Russia. People are finding that as an excuse. What they really want to do is find a new level for the U.S. markets. I guess it was almost two years ago that Mr. Greenspan talked about irrational exuberance. Well, now our manic depressive side has kicked in, and we're having irrational unexuberance, or whatever you want to say.
Russia, arguably, was handicapped by this "hot money." When you pump in large sums of money to a place that can't handle the money, only one thing can happen, and that I think is bad. You cover up a lot of warts. And in the case of Russia, one other thing that happened, I think it also happened in Indonesia—and we're finding it more and more it may have happened in Korea—you see that money also leaves through the back door in ways that you didn't expect—where you have this sort of crony capitalism. I think if you list the countries—Russia, Indonesia, probably South Korea, probably Thailand—and there are some others where you have this kind of absolutely opaque capitalism—lots of things happen below the table, so to speak, that have a big effect. Pumping money in hurts.
A coming political backlash?
MARGARET WARNER: So Walter Mead, what do you think is the likely political reaction to all of this in some of these countries? I mean, in Russia today, for instance, Yeltsin is reportedly talking to the Duma about reasserting some state control over parts of the economy. Is that—do you think that kind of thing is likely to develop?
WALTER RUSSELL MEAD: I think you're going to see a political reaction against liberal market policies, and not because necessarily that reaction is a good idea or deserved, but politicians who are faced with a collapsing economy don't want to blame their crony friends, their crooked deals, or their own incompetence, they'd much rather say, oh, it's this terrible international market capitalism that is backed by the U.S.. And I think we may find that the U.S. is going to end up as a scapegoat in a number of countries, because we've so conspicuously pushed the internationalization of the economy and the dismantling of barriers to flows of capital and sort of that was—that was the way the economy would go forward. I think basically those flows of capital are important and is the way the world economy can go forward, but clearly this process is more complicated than we've led people to believe, and you're going to hear a lot of criticism and Monday morning quarterbacking about how the U.S. did this or that wrong. I mean, he didn't get a lot of popular bitterness about it.
MARGARET WARNER: Well, Adam Posen, does the U.S. and the established economies pay a price if some of these economies, say Russia, for example, steps back, rolls back?
ADAM POSEN: Let's leave aside the special role of Russia, because of their nuclear power. I mean, the war side we have to deal with. Let's leave that aside just a moment. The point is over the long term right now the U.S. economy is very strong. We still only trade less than 20 percent of our economy, most if it with developed countries, and it's not that big of a deal. But over the long term the only way the U.S.—you and I as we get older can make good returns on our retirement money is by investing in emerging markets, because that's where the big advantages are, and this can either be the pension fund going there directly, or it can be a GE or a Boeing or whatever American economy—American company picking foreign direct investment and putting a plant there. But the point is over the long run we need to encourage these countries to play by the rules because it's in all their best interests. And that's the—and play by the rules—I mean, accept some amount of capital, accept property rights, put some limits on the government corruption, accept the fact that you get investments from cross borders and, therefore, you have a responsibility to them. There's no question in the short run there's going to be a back lash but as we see even in Asia and even in Malaysia, which initially during the crisis last summer said some terrible things about the U.S., terrible things about international speculators, actually in the end backed off—
MARGARET WARNER: Dan Yergin, address this backlash question and whether you think it's really threatening to U.S. economic interests.
DANIEL YERGIN: I think that we're going to see it in Russia, we're seeing it in countries like Venezuela, which is also suffering. There's a nationalist reaction in Asia, so it's there. I think that if you look at Russia specifically, you do have to think it is the nuclear weapons, it is the specific concern, and really the specific danger. Russia, itself, was a rather small economy. It's half the size before all of this collapse, only half the size of Brazil. But I think that there is something called confidence, and you really only notice it when it's not there. And a change of mood on the part of investors and sentiment and psychology, which is actually at the basis of markets, that's where the risk is. And if—you know—the stock market is still very high—I think if we saw 8000 a year ago, we would have said that was very high and our economy is strong. But if the negativism carries over to the rest of the economy, that's where the risk is. The other risk is a crisis—a short-fall in our banking institution—some collapse that you don't expect. And there is a rule—and we're going to see it happen in Russia, I'm sure, that it turns out that initially what people say are the losses, who's vulnerable, the numbers always turn out to be more and there are surprises, and that's another thing that we're going to have to keep our eye one, and I think we're going to see a lot of effort this weekend to try and bolster confidence so that Monday doesn't turn into a bad Monday.
ADAM POSEN: If I could add one thing quickly, the one way in which there is a short-term risk to the U.S. economy is if Japan drops the ball because Japan is irreplaceable for the stability of economies that are beginning to recover in Asia, and it is a very big trading partner for us and Europe.
The search for solutions.
MARGARET WARNER: In the couple of minutes we have left I want to talk a little about solutions. Walter Mead, do you think there are international solutions that—I mean, some people are talking about slowing down the flows of capital a little. I mean, address that question, whether there's something that international institutions can look at.
WALTER RUSSELL MEAD: Well, I think we've got to start with the realization that what the IMF has been doing so far in this crisis has not worked, that if you go back to the beginning of this crisis in 1997, when the Thai baht fell, the IMF has considerably underestimated the dangers. It's overestimated the effect of its policy prescriptions, and it has generally failed to achieve the results that it itself said would be achieved by its programs, and so I think we've got to start with the idea that we need some new directions. I think to get into that would take a lot more time than we've got on this show.
ADAM POSEN: I think the key right now in the world today is probably the first time since the late 70's there is no leader in this world. Bill Clinton is hobbled by scandals about which we know the Russians laugh about it, they don't laugh at him; they laugh at us. They think how silly they're worrying about bread next week and we're worrying about somebody's dress. There's a new prime minister in Japan. The jury's out as to whether or not he's a leader, but he's too busy with himself to do anything. Kohl in Germany is running for re-election. France, England—the point is that we have a political crisis that is affecting economies and particularly in Russia right now—it's really a political issue. There's nobody home; there's nobody in charge, and we don't have anybody to address that.
MARGARET WARNER: Dan Yergin.
DANIEL YERGIN: Yes. I think it is a question right now of we need credibility, and if it was not so tragic and potentially so dangerous, the situation with Boris Yeltsin would seem wacko. He appoints people; he fires them; he changes his mind; and he's not a figure of authority. He's hated across the political spectrum, so—when you look around the world, where are you going to find that sort of Rock of Gibraltar? In the Russian situation all eyes—the man of the hour is Victor Chernomyrdin, and he has an enormously difficult situation ahead of him.
MARGARET WARNER: All right. Gentlemen, I'm sorry. That's all the time we have. Thanks very much.