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Are Free Markets Failing?


Free-market economics and political liberty were the worldwide hallmarks of this decade--and may still be the basic, underlying trends. But something has happened, a shadow of doubt on the inevitability of open markets in Russia, Hong Kong and elsewhere, a threat to historic reforms in Brazil and other Latin American countries.

Storm clouds are no longer beyond the horizon, but are threatening a global depression that would scuttle even the strong U.S. economy. "The biggest financial challenge facing the world in a half century," President Clinton calls it.

But what really happened? If liberalizing trends were positive, what turned the landscape negative? Have free markets failed us? If not, can they restore prosperity to Asia, stability to Russia and Latin America, help China and Japan to reform? In this special section, The Times looks at the new global economy, defining its power bases and explaining its workings.


The yearlong Asian crisis, the collapse of the Russian economy, the frightening gyrations of world currency and stock markets pose a central question for the world: Are free markets failing?

And if they are, might many nations retreat from democratization and increasingly open trade and investment, moving instead toward autocratic governments and closed markets?

These very questions indicate that the current turmoil marks a critical juncture for the world--one that could determine its basic political and economic direction well into the next century.

It wasn't supposed to be this way.

When the Berlin Wall came down and communism and the Soviet Union went into the ashcan of history in 1989-91, those watershed events were said to signal a new dawn of political and economic freedom in the world, the ultimate triumph of the American system of open markets and democratic government.

Francis Fukuyama, a former U.S. State Department policy official, wrote a book titled "The End of History" that summed up the spirit of the time. Totalitarian government and socialist central planning were now proven failures, Fukuyama wrote. The future belonged to "individual freedom" and free markets.

It was easy to feel that way. All of Asia was rollicking as investments from global financial markets built industries that made goods for export and raised living standards in South Korea, Indonesia, Thailand, Malaysia and other poor countries.

Japan's big economy, though slowing, was helping to finance these Asian developments--it was the "conductor of the Asian orchestra," as one U.S. scholar put it. China was growing under a Communist government that encouraged private enterprise. Russia, a new democracy, was noisily trying to convert its economy to free-market principles.

And the United States, after a stall because of defense budget downsizing, was in a new kind of economic recovery, led by small companies and heavy investment in computers, communications and other high technology. The stock market soared.

But suddenly, all has changed. Virtually all of Asia stands in recession. The most worrisome is Japan, the world's second-largest economy, which is locked in paralysis and unable to repair a crippled banking system. Latin America is battered and bleeding, its free-market reforms ignored and punished by fickle world investors. Russia is in political and economic chaos.

President Clinton on Monday described the crisis as the "biggest financial challenge facing the world in a half-century" and called on all the major nations to work together to restore stability and economic growth.

Thus, in little more than a year, a world economy that promised almost endless growth and prosperity has sunk perilously close to global depression.

Small wonder that people and countries around the world are questioning the whole idea of global free markets.

Retreat has begun. Malaysia has slapped controls on the trading of its currency. Governments in Hong Kong and Taiwan have gone to battle with foreign speculators by buying shares in companies to prop up local stock markets.

These countries are suddenly asking whether it's such a good idea to allow their money to be freely converted into other currencies and to allow foreign money to finance their economies.

Ironically, China--which remains under tight government control and has partly insulated itself from the gyrations of world markets because its currency, the yuan, is not freely convertible--is being complimented by economists for keeping greater control of its economy.

Are free markets failing us?

Not necessarily. But they urgently need help.

"I look upon the Asian crisis and that of the global capital market as analogous to the U.S. as it moved to a national market in the decades after the Civil War," said Jeffrey Garten, a U.S. Commerce Department undersecretary in 1993-95 who is now dean of Yale's Graduate School of Management.

In that time, money flowed and the oil, steel and telephone industries were built, but there were no regulations, no infrastructure of finance and investment.

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