The imperialism of free finance

14 August 1997

A century ago, the western powers justified colonialism with the theory of free trade. The more markets were opened up, and the more freely trade flowed, the better it would be for all parties. It followed that countries which did not understand this theory should be persuaded to open up, for their own good. If they resisted, then the colonial powers would march in and open them up, in the best interests of all concerned. Historians dubbed this the "imperialism of free trade".

Of course the benefits of free trade were not equally distributed. Advanced countries exported manufactured goods at a high margin, and bought back food and raw materials cheap. Over the decades, this unequal exchange widened the wealth gap between the rich colonialists and the colonised poor.

In the past twenty years, international finance has grown more rapidly than international trade. In the fifteen years from 1977 to 1992, the global volume of foreign exchange trading increased almost fifty times. Money now swills around the world much faster and in much larger amounts than trade goods. Has the imperialism of free trade been replaced by the imperialism of free finance?

The World Bank and IMF promote financial liberalisation with arguments that echo the theory of free trade. If financial markets are open, they say, then capital flows to where it is most needed. This benefits both those who own the capital, and those who get to use it. Everyone wins.

But in practice, the process of liberalisation is painful. In country after country, financial liberalisation has led to a disastrous financial crash. The UK in 1976. The pan-European wobble in 1992. Mexico in 1995. Brazil. Argentina. Japan. And now Thailand. The lead time from liberalisation to disaster is in the range of 5-8 years.

Usually the IMF gets called in to clean up the mess. But with its growing experience about post-liberalisation disasters, why doesn’t the IMF do more to prevent them happening in the first place?

Probably because in the first round of liberalisation, countries always hold something back.

In the Thai case, the government refused to liberalise the baht, refused to open up the land market, and refused to let foreigners very far into finance and banking. There were historical and emotive reasons behind this reluctance. The pegged baht had become an article of technocratic faith. The land market is a nationalistic issue. The world of finance and banking has been a well-tended cartel. Not so long ago, the finance and security companies hired a foreign consultant to advise them how to keep foreigners from swamping their business.

Presumably, experience has taught the IMF that only a financial crisis overcomes this resistance to liberalisation.

Certainly a financial crisis seems to be doing the trick here. The baht is afloat. Property magnates are clamouring for government to let foreigners in to boost the property market. Many of the finance companies which paid for the anti-foreigner consultancy are now touting for foreign buyers. Finance licences are available at fire-sale prices. Some experts believe that a secret condition for Japanese loan assistance will be greater inroads by the Japanese banks.

So Thailand’s current crisis is just a stage in the liberalisation programme. Where gunboat incidents were the trigger mechanism of the imperialism of free trade, financial crises play the same role in the imperialism of free finance.

This is provoking some uncomfortable reactions. Many fear that the benefits of free finance will be distributed just as unequally as the benefits of free trade were. Thai banks and financiers will fall prey to the built-in tendency of capitalism for the strong to swallow up the weak. The profits from Thailand’s finance industry will be drained away to the centres of international banking.

Instinctively, these concerns are often expressed in the language of colonialism. At the recent USIS seminar, a leading businessman commented: "This IMF thing is just like being colonised." Another said: "We avoided old-fashioned imperialism, why can’t we avoid this?" On a TV talk-show, an audience participant complained: "The government has pawned the country to the foreigners."

But others are enthusiastic. At the USIS seminar, Virabhongse Ramankura painted the crisis as an opportunity to liberalise faster and further. There is no turning back, he argued. And in today’s globalised world there is no alternative. Either liberalise, or become like Burma. It’s impossible to be partly liberalised, just like it’s impossible to be partly pregnant. Countries which try to stall, just slip behind. Better to take this opportunity, Virabhongse argued, to open things up, get more foreign involvement in our financial system, become more truly globalised.

Some foreign journalists and financial analysts are having fun painting the crisis as a cataclysmic ending: "would the last person leaving please turn out the lights". But the cannier ones see it as a beginning. The ever-expanding pool of international finance needs more places to invest. In the world league table of prospective investment sites, Thailand still ranks high in the longer term. This crisis is a necessary stage in opening up the Thai market for the future.

Note: the two finance houses which produced the gloomiest projections of Thai economic prospects at mid-year (UBS and Soc-Gen Crosby) were among the fastest to make tie-ups with the first sixteen dead finance firms. Gloomy prospects were not a signal to stay away, but an opportunity to jump in.

"The financial gorilla", wrote a US economics professor, "is a ravenous growing beast." The gorilla needs Thailand as a place to feed. Ironically, the scale of the current crisis is a measure of Thailand’s fast-growing importance to the world economy.