Financial Bloodletting

The financial meltdown spreading across the world's emerging markets is calling into question the supposed benefits of unbridled capitalism and its suitability for developing countries
undergoing economic turmoil.

With the International Monetary Fund (IMF) having already come under sharp criticism for applying strait-jacket policies to economies suffering large capital outflows, economists are picking up the
theme and taking it a step further.

In essence, some are arguing that there need not be a one-size-fits-all version of capitalism, particularly not the Anglo-American approach as advanced by institutions such as the IMF. Instead,
alternative models, organised with an eye towards interventionist policies, even capital controls, may be more suitable for countries whose democratic political development is still in relative
infancy.

Put simply, the central question is whether free markets are worth holding on to at all costs if all they breed is turmoil and economic insecurity for a country's citizens.

"The raison d'etre of governments everywhere is their ability to protect citizens from insecurity," said John Gray of the London School of Economics. "A regime of global laissez-faire that prevents
governments from providing this protection is creating conditions for still greater political and economic instability."

The power of unfettered markets and the argument that ever freer trade in goods and services and capital is mutually beneficial is a theory that has gained unchallenged acceptance throughout much of
the industrialised and developing world. It is the orthodoxy propelling the recommendations and policies of the IMF, the U.S. Treasury and the interests of those in the financial centres of New York
and London, say economists.

However, at a time when events in one part of the globe can ripple across time zones and undermine the health of otherwise sound economies, doubts have emerged over whether this orthodoxy has not
promised more than it can deliver.

Critics say global capitalism has taken on the trappings of a casino, with international investors shifting funds around the globe at dizzying speed in order to profit from the latest crisis or
escape its damaging consequences.

"When we penetrate the fog of implausible assertions that surrounds the case for free capital mobility, we realise that the idea and the ideology of free trade and its benefits . . . have, in effect,
been hijacked by the proponents of capital mobility," said Jagdish Bagwhati, professor at America's Columbia University, in a recent article. "But the weight of evidence and the force of logic point
in the opposite direction, towards restraints on capital flows."

Unregulated capital flows have even come under fire from those who have profited the most from them. Financier George Soros, for example, has argued that the private sector is ill-suited to
allocating international funds and has called for the creation of an International Credit Insurance Corporation. The organisation would guarantee international loans to a country up to a debt level
that was considered not excessive. Lending beyond that threshold would not be insured.

Strangely enough, even savvy investors such as Soros have been caught in the malestrom currently engulfing the financial world. His much followed Quantum Fund recently acknowledged losing two
billion dollars because of Russia's troubles.

Proposals for greater regulation of capital markets are, however, considered intellectual heresy by policy-makers brought up on free-market ideology. The market is seen as the most efficient way of
channelling resources, whether capital or goods, throughout the global economy. But some analysts say the downside to free flowing capital, the harm inflicted on GDP growth for economies in turmoil,
and the attendant social costs, suggests that the burden of proof may be shifting from those who oppose to those who favour free market capitalism.

Regarding Asia's dire straits, U.S. economist Paul Krugman says exchange controls may be the only way the region will be able to buy itself a period of stability so as to put its financial affairs
back in order. Importantly, Krugman compares China's experience with the rest of Asia. "Why hasn't China been nearly as badly hit as its neighbours,'' he asks. "Because it has been able to cut, not
raise, interest rates in this crisis, despite maintaining a fixed exchange rate, and the reason it is able to do that is that it has an inconvertible currency.''

Advocating currency inconvertibility sets off immediate alarm bells among the policy mandarins in Washington and the Group of Seven industrialised powers.

Ultimately, the central issue concerns balancing the costs of capital controls with the risks at hand. One can either allow the economic turmoil to deepen even further and raise the risk of dangerous
political instability, or stop the financial bloodletting and hopefully buy a period of calm.

"As difficult as it may be for me to accept, some form of capital controls may become necessary for many of these economies," said one European monetary official. Analysts say within the hallowed
halls of institutions like the IMF any restrictions on the flow of capital would undoubtedly be seen as significant step backwards in the development of emerging economies.

Moreover, there are fears that such interventionist policies would further damage the already fragile international confidence and put back the pace of economic reforms indefinitely.

Yet some stress that the time has come for alternative solutions, even if they appear draconian. The status quo is simply no longer an alternative. "If Asia does not act quickly, we could be looking
at a true depression scenario," added Krugman. "Extreme situations demand extreme measures."