*{How Can We Deal with the Casino of Global Capitalism? [http://www.weforum.org/site/knowledgenavigator.nsf/Content/How%20Can%20We%20Deal%20with%20the%20Casino%20of%20Global%20Capitalism%3F?open&topic_id=300250000&theme_id=300]

            29.01.1999

            Annual Meeting 1999}

            The past year's financial volatility has triggered serious debate on the future of global capitalism. Panellists at the session "How Can We Deal with the Casino of Global Capitalism" offered diverse views on the problems faced by developing countries in their transition towards a free market economy.

            Leszek Balcerowicz, Deputy Prime Minister and Finance Minister of Poland, said that the rapid globalization of financial services has not necessarily created new types of risk. Rather it has only increased those risks due to imprudent decisions by governments, banks and borrowers. Nevertheless, Balcerowicz emphasized that it is impossible to reverse financial globalization because of the speed and the magnitude with which it has taken root all over the world. "It is like fire," he said. "Though it is dangerous, it is better to live with fire than without it." The Deputy Prime Minister pointed out that developing countries have to improve the quality of their decision-making, particularly in the financial sphere. However, he said that the problem of introducing early warning systems is that the warning may be either ignored or disregarded. Balcerowicz added that fiscal discipline matters in financial globalization. "Premium is being paid to countries pursuing prudent fiscal policies. So it pays to have restraints on fiscal policy."

            Laurence H. Meyer, Member of the Board of Governors of the US Federal Reserve System, felt that the casino analogy is not helpful because capitalism is not a zero-sum game. Global capitalism, he said, is a system where everyone can win. Countries can avoid vulnerable situations if they learn from the crisis and take active steps to strengthen their economies. "Countries should focus on institution-building on the local level and cooperate with international institutions on the global level." The instability of the global economy, he felt, is being amplified as countries make a transition towards free markets. He recommended that countries should consider restrictions on short-term capital flows, as in Chile. He reiterated the need for a global contingency financing facility for countries pursuing sound economic policies.

            Guillermo Ortiz Martinez, Governor of the Central Bank of Mexico, said that developing countries, which open up to receive short-term inflows, have received a mixed blessing. While capital flows have benefited developing countries, the experience of the last few years clearly demonstrates the risks. "In Mexico and East Asia, the volatility and instability of these flows have caused tremendous stress and damage," said Martinez. "So at the political level of many countries at the moment, there is very little enthusiasm towards globalization". He feels that this may even translate into political change as voters grow disillusioned with the side-effects of globalization. "It is difficult to explain to a Mexican housewife why she has to pay higher interest rates on her housing loan because Russia has defaulted," he said. He added that the one lesson of globalization is that history repeats itself regularly. "There is a striking similarity between the Mexican and the East Asian crisis," said Martinez. "The big question is whether governments can cope with situations of high volatility".

            George Soros, Chairman of Soros Fund Management, said that the global economy faces an unprecedented crisis because of the international community's ability to cope with crisis. "We are now entering the 20th month of the crisis and something is broken in the international financial architecture," said Soros. "In Brazil, we had an IMF programme even before the crisis was brewing - in fact it was the most anticipated crisis." However, IMF programmes have traditionally favoured lenders over borrowers. The institution imposed harsh conditions on countries. The IMF only intervenes in countries during a time of crisis. Hence the institution has limited capacity in preventing crises, which should be at the heart of the efforts to build a new global financial architecture. He cautioned that the international community is losing momentum in introducing new steps to deal with economic crises. Brazil is a tragic example because the situation was easily containable, had the authorities and the IMF worked closely in introducing sound policies and building investor confidence.                  

                  *{Contributors:       Balcerowicz Leszek
                  Meyer Laurence H.
                  Ortiz Guillermo
                  Soros George}