Chapter 29

GLOBAL STOCK MARKET TURMOIL:

LESSONS TO LEARN FOR THE FUTURE IN ISLAMIC PERSPECTIVES

The recent global financial and economic debacle is full of lessons to learn from. It reflects the follies of man and his speculative animal spirit that the developing countries have copied from economic models of the West. This has given rise to a permanent source of market entropy in the developing economies.

Transacting in a Capitalistic Model with Inherent Instability

What is the essence of the Western socio-economic model? If you agree that theory and application; theory, policy and institutions; values, theory and methods, are all highly correlated acts of the human mind, then there is a message here to understand. A socio-economic model is then an entirety of interrelationships among economy, society and institutions in terms of the critical variables, agents, policies and programs. It reflects both values as well as methods.

Western socio-economic model is methodologically premised on a perception of gaming with uncertainty in it in the pursuit of inordinate wealth at all costs. Individual preferences in this `rugged bootstrap' individualism and their institutional manifestation in the form of Eurocentric hegemony and methodological individualism, are then perpetrated through the mechanisms of Western financial and economic designs. International financial and development organizations fuel this fervour of global managerial capitalism through the economic models that the developing countries have been impelled to imitate in a globalizing world. On the other hand, individuals and groups respond to the underlying material transformation by their hedonic preferences and clashing cultures. The result is a terrain of uncertain, punctuated and evolutionary equilibria (Thurow 1996, Choudhury 1994).

History has witnessed the Eurocentric nature of the Marshall Plan of Europe; of the global governance imparted by the Bretton Woods Institutions; neo-mercantilism and colonialism; Western hegemony in the Gulf Crisis Crisis 1991. Today, similar Western pronouncements are continuing on to play the self-same game in the economic landscape of the developing hinterland. The difference only is this. In place of the armaments of war, the new and more crippling armament now being used is `global' political and economic strategy (Barber 1992).

In recent years we have found many of these. All have tightened the capitalist grip on the imitating developing countries. We have witnessed the growing submission of the developing countries under the binding clauses of the World Trade Organization. We have watched the extending arms of the U.S. over APEC. We have felt the socially marginalizing consequences of the structural adjustment and conditionality formulas of the World Bank and the IMF, respectively. The developing countries face the growing non-tariff barriers on their tradables by regional blocs such as the Economic Community (SESRTCIC 1995).

Above all these is the global financial governance by major industrialized countries and their financial institutions. It legitimates the free capital flows, which in turn aggravate falling currencies and share prices in developing countries while they provide financial reversals for turn-around in Western capital markets -- a game in marginalist substitution of global financial resources. In the recent World Bank and IMF meeting that took place in Hong Kong, the note on focus over financial governance involving capital account liberalization was well reflected in Stanley Fischer's own words: "...the prime goal of the amendment (IMF Articles of Agreement) would be to enable the Fund to promote the orderly liberalization of capital movements" (Fischer 1997).

What comes out of such rule-based governance is entrenchment of a `free' movement of speculative portfolios within the net foreign direct investments in and out of nation states. Those who speculate hold hard currencies. Aggressive governments' monetary interventions in developed countries, such as, selling of foreign currencies, lead speculators in developing countries to move funds freely out of their financial markets. Financial swapping options have thus become a part of the highly volatile portfolio mix of foreign investments (IMF 1995). When developing countries become too prone to the net flow of FDIs (foreign direct investments), they also become subject to the randomness caused by the `free' flow of FDIs in speculative financial issues.

The end result of the industrialized countries' policies on selling out foreign currencies is devaluation of other currencies. This causes developing countries to raise their interest rates -- Mexico, Hong Kong, Thailand, Indonesia etc.. It in turn aggravates the position of speculative savings at the expense of `real' sectoral investments. The accounting of wealth now shows up as the growth of money by the multiplier effect, but not by the growth of real goods and services. Even where high growth rates have been quoted, this was at the cost of high external debt. The result is growth with borrowed funds and a phenomenally increasing flow of speculative FDIs.

Money has dissociated itself from its meaning relating to real growth-- transactions demand. It has instead become a stock of promissory notes pursuing speculative gains. In the latter case, interest rates and currency values together become uncontrollable, relenting to the passions of speculators. Uncertainty results, and in the `global' financial markets, it becomes pervasive and ravaging. This is the message of the model of `global' managerial capitalism along with its sentiments, policies and instruments that developing countries have inherited from the West. Such a model is now the cause, as in earlier times, of yet another great financial and growth debacle that we have witnessed in the recent stock market turmoils (Minsky 1985).

What Have We Learnt from the Stock Market Turmoils?

However, there is a `good side' to the financial crash! It is the knowledge that should by now come to the developing countries on how to transact in an uncertain world. The evolving economic interrelationships in the global economy are being determined not by the empty syndrome of what the politicians and economists harp as `economic fundamentals'. In fact, there are no economic fundamentals left in the face of unbridled financial uncertainties. The lesson we derive is how nations can re-organize their finances, financial instruments, institutional changes and policies toward securing a more speculation-free world?

The question for common wisdom is this: Do you want to melt down in a 8,000 points one-day hike of the Hang Seng-index and then find yourself wiped out by its largest single-day fall of 13.70 per cent, with the Hong Kong dollar devalued by 50 per cent? Can the developing countries continue to remain oblivious to over 633 billion US dollars stock market loss that they mainly have borne? Such contrary behaviour reflect sheer irrational greed with no worthy returns in the end!

Re-organization in global financial markets, discovering of new financial instruments and institutional policies, imply increasingly de-linking of national currencies from single hard currencies and instead linking them to a basket of safe currencies. The capital accounts of developing countries should reflect the movement of finances in terms of such regionally-based currency baskets, both for purposes of holding and for transacting trade and investments in terms of such currency baskets. Speculation must be killed; real growth restored and prospered; large outflow of resources must be arrested by increased attractiveness of real yields and stability in sustained growth. The movement of global finances must be in terms of `real' FDIs; not in terms of portfolios of speculative FDIs.

The Essential Role of Money and Real Economic Values

While nations accumulate inordinate amounts of financial wealth, development planners must not ignore the community microenterprises! There are both important lessons here to be conveyed as well as pity to be reflected in these grim times. The positive message is the `real' sectoral linkages that microenterprises bring about with the process of growth and development -- financial certainty and smoother business-cycle rides. The pity is the consequences of the stock market turmoil on the microenterprises.

I am taking the example of Malaysia here, a country that not only entrenches the noble goal of attaining economic growth with distributive equity, but has also proven the effectiveness of this goal in terms of her growth performance and poverty alleviation for some time now. In Malaysia, speculative issues in KLSE (Kuala Lumpur Stock Market) has carried to near oblivion the long-standing shares for the Malaysian poor -- the Amanah Sahams. Consequently, the key goal of the Malaysian development plan, namely, `growth with distributive equity' has suffered as a result. Growth and distributive equity, prosperity and stability, cannot be simultaneously attained in the face of speculation-ridden financial markets.

The Malaysian Seventh Development Plan (Govt. of Malaysia 1996) records unit trusts as an effective medium of mobilization the financial resources of small holders in KLSE. The Amanah Sahams took the benefit of the Unit Trusts Funds. The number of Amanah Saham holders together amounted to 5.5 million. This was 80.8 per cent of the total number of unit holder accounts in 1995. Now these small scale holders transacting in volatile KLSE have all suffered a death blow.

What must Malaysia do for a

Future Sustained Financial Security?

Thus for Malaysia as an example of a country hard hit by the recent stock market and currency turmoils, what must she do at this juncture of financial uncertainty? Is there a quick fix to it all? Should Malaysia think in long-run terms now? I will propose an answer by taking recourse to a middle way that could take care of the long-run case even while working out the short-run restructuring in Malaysian financial, monetary and developmental issues.

For the short-run, Deputy Prime Minister and Minister of Finance, Dato Anwar Ibrahim, has proposed a short-circuit trading mechanism following the NYSE that would automatically halt trading in a volatile KLSE. I would like to suggest as well, that proper policies must be designed to secure the KLSE from speculative stocks as well to avoid volatility. This would mean disbanding of all trading around global stock issues that hinge upon the following factors: inflated share prices (e.g. Chinese Government's move in Hong Kong); promissory projects that are not linked with the real sectoral output; projects that have not enough proven yields from real sectoral linkages in the short run; financial issues that are based on interest rates; and those that do not generate sufficient real sectoral interlinkages that otherwise must exist to realize economic growth simultaneously with distributive equity. Dr Mahathir has spoken eloquently in recent times against the speculative motives of foreign investors in Malaysia. I would say also that even wealthy Malaysians, who are deeply involved in this same game of hedging for speculation, must be turned away from them.

In the pursuit of greater degrees of sectoral interlinkages, money as an aggregate must be directly linked to such real sectorial activities. It must cease to be a promissory note, as in the Western model of money, growth, output, prices and so-called `economic fundamentals' (Choudhury forthcoming, Choudhury 1991, Desai 1989).

Malaysia as an exemplary country in the Muslim world, has made impressive strides towards Islamizing her economy. The KLSE has floated a lot of shares for the poor, called Amanah Sahams. But it is my judgment that there should have been a more aggressive transformation in this direction as an express policy within the Malaysian development plan and developmental outlook (Govt. Of Malaysia 1991). Thus while Malaysia has erected a Vision 2020 for transforming into an industrialized nation, she needs also to include in this vision a well-defined plan of Islamizing the economy, that would have its own secure modes, institutions and instruments of financing growth and development within a caring society.

Towards securing high powered monetary transactions, Bank Negara (National Bank of Malaysia) should develop a close interrelationship among the growth rates of money, prices, sectoral output and the social targets. Stock market issues would now revolve around the yield on real sectoral and non-speculative project-related activities, rather than around speculative bonds and stocks. This will cause the Ringgit to float around real yields. The proportion of FDIs in real assets will increase above the speculative portfolio FDIs. The balance of payments as well as the internal growth of the economy based on real sectoral outputs and high powered money supply in tandem with the real growth performance, will establish the stability in prices, yields, and hence, share prices and currency values.

The place of interest financing in such financial transformations will be logically annulled. The focus on valuation of stocks around yields in the real sectoral activities makes trade-related activities of greater importance in national accounting. Hence improved methods of foreign trade financing with adequate financial and product diversifications must be built into the economic planning (Islamic Development Bank several Annual Reports, Choudhury 1989)

In the short run, a deliberate target of high powered monetary transformation can commence by securing some segments of stocks in the KLSE market, say the Islamic shares and the Amanah Sahams. Subsequently, the capital market must expand to encompass all portfolio of shares in the long-run.

Internationalizing of such interest-free financing of growth stocks must be encouraged. But there must exist strict contractual agreements between Malaysian investors and other investors operating in KLSE, to stand by speculative-free financial transactions.

Now an additional question must be addressed: How should Malaysia hold her own FDIs abroad? The same rules of non-speculative financing should apply and the financial instruments internationally applied must interlink with the home financial markets. Here the long-run evolution into an Islamic capital market becomes so very important. Islamic regional economic cooperation must open the way to the development of investment, equity, growth, prosperity and stability through a growing stock of high powered money, monetary and economic policy coordination and widening of capital and merchandise markets. Indeed, political as well as economic power will consequentially emanate from such self-reliant transformations. Social well-being is attained in the end with such direct linkages between financial flows and the organization of the real economic activities away from speculative ones.

With all these, we hope that Malaysia can rise through her evolutionary short-run monetary and financial re-organization into security from the highly random and uncertainty core of present days' Western global model of managerial capitalism. With the increased volumes and security of Amanah Sahams, the simultaneous goal of distributive equity can be attained. The overall social well-being of a caring society will emerge!

Conclusion

Thus I recommend the following direction of change: Change monetary aggregates and the concept of money away from investing in speculative projects -- promissory notes! Bank Negara must enact monetary policies for realizing such a financial transformation. This transformation can proceed from the short-run to the long-run. Trade, finance and development must be married together within the real economic performance away from speculations.

While it is apparent that nations can acquire lot of wealth by the force of money multipliers in the face of speculation, yet the long-run result is unsustainable real growth. Indispensably, it will be noticed that after the current belligerence of stock market turmoils, some stability will reappear. But this cannot be taken as a sign of confidence either for the long-run or for immediate benefit for the small scale shareholders. For now a sign of turn-around is due to a smaller volume of trading, done mainly by high risk takers, who are also the wealthy stockholders. The stabilizing turn-around cannot be considered a social relief for an economy that has already gone under with a great number of marginal savers in the capital markets.

Thus the spectre of final extinction in stock-markets, currenc