We need to be careful not to confuse financial market reform with following the US model of regulation, if finance is to remain a servant, not master, of the real economy.
For the last 50 years, many people in the developing world, including in India, have had a love/hate relationship with the United States. As one wag said, when slogans were shouted, during the Vietnam War for example, calling upon “Uncle Sam to go back”, at least some of the slogan shouters were silently saying “but take me with you”. Too many middle class parents’ aspiration for their children was education in the US, leading to the coveted Green Card. And for good reasons: one of the world’s richest countries; great universities and research establishments, at the cutting age of new technology; a democracy which welcomed immigrants providing practically unlimited potential to become wealthy. (The per capita income of ethnic Indians in the US is the highest of any ethnic group. No wonder of course: the best and brightest of the Indian education system go there). The fact that English was the language of that country also helped. So did the glamour of Hollywood, and the fact that the average American is so open, generous, helpful and articulate.
This halo was all the brighter in relation to finance. US practices were considered to be the ideal, their accounting systems fool-proof and transparent, and the regulators effective and efficient. In short, any statement starting with “In the US….” ended all argument, perhaps even thinking. “Reform” came to be synonymous with adoption of US practices — whether on the virtues of floating exchange rates, a liberal capital account, market efficiency, or any other issue. The fascination with the US is such that the two most recent committees on banking sector reforms in India were headed by persons who have spent much of their working life in the US.
Surprisingly, this image was not damaged too much even after a series of accounting and other scandals — Enron, WorldCom, insider trading, Mr Milken’s junk bonds, the astounding dishonesty in the way the dotcom IPO bubble was blown by the investment banks in the late 1990s, etc. Regulators? One only needs to be reminded of the more recent case of Bernard Madoff whose Ponzi scheme, ultimately totalling $65 bn, continued for a couple of decades despite the Securities and Exchange Commission investigating his activities on numerous occasions.
In our fascination with the US we forget the umpteen weaknesses and contradictions of the economy:
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Equally poor and costly to all concerned has been the US record in its foreign military adventures: Korean war, a stalemate; Vietnam, a defeat; Iraq, false pretexts, and a withdrawal leaving the country in a mess; Afghanistan, a likely repetition of the Vietnam experience. The almost unquestioned backing of Israel in a display of breath-taking double standards, has fertilised Muslim extremism. One major success: the first Iraq war. The collapse of the USSR was perhaps more the result of the inefficiencies and rigidities of the Soviet system, which imploded, rather than any active effort to break it.
But coming back to the financial sector, surely the events of 2007-08 originating in the sub-prime mortgage market in the US, should open our eyes to the reality of how naked the Emperor is. In the recent World Economic Forum annual meeting in Dalian, a Chinese participant remarked, “The teachers have made big mistakes” (Martin Wolf, Financial Times, September 14). The fact is that, as Arjun Jayadev of the University of Massachusetts commented in an article in the Economic and Political Weekly (September 5) on the draft report of the UN Commission on Reforms of the International Monetary and Financial System, chaired by Nobel laureate Joseph Stiglitz, the deregulation of the financial sector “was more a reflection of a particular philosophy than the adoption of hard-headed economic thinking and evidence.” He further argues that “the events of the last two years mark the end of a long period of ascendancy for a particular vision of the global economy. This vision variously called neoliberalism, deregulated capitalism or market fundamentalism…. the (UN) report suggests the need for a radical rethinking of the paradigm that had come to hold a hegemonic sway over economic thinking and policy.” As the United States Congressional Oversight Panel on the Troubled Asset Relief Program (TARP) concludes in its report on regulatory reform, “At the root, the regulatory failure that gave rise to the current crisis was one of philosophy more than structure.”
Overall, the best and the brightest in the US have often displayed a tendency to get carried away on big issues whether in military adventures or in financial regulation — to its own, and the world’s, detriment. As we carry on with our agenda of financial sector reforms, we need to be careful not to take the last 30 years of US economic philosophy as gospel.
It is not my argument that the US has nothing to teach us. Indeed, much of the credit for the changes we introduced in 1991 (and which have benefited us immensely) should be given to the US-dominated IMF; one doubts whether, but for the balance of payments crisis, the changes would have been palatable to our political masters. Overall, I remain convinced of the benefits of globalisation, of the capitalistic model of economic growth, but also the need for the government to play a major role in distributive justice. And, we need to be careful not to confuse financial market reform with following the US model of regulation, if finance is to remain a servant, not master, of the real economy.