BEWARE THE SLOSHING OF LOOSE CAPITAL
PCDForum Column #20 Release date December 1, 1991
by Donella Meadows
The fashionable solution to the economic woes of a community, state, bank, or nation, is to open its boundaries. The idea is that a larger system, more capital, bigger markets or the involvement of more parties will somehow solve the problem. It would be wise, however, to look out the door before opening it to see what's waiting to come in. Free trade, free banking, free movements of capital can create problems of their own.
The experience of my own once rural community in the Northeast United States demonstrates the consequences of huge waves of money sloshing around looking for quick returns. About 10 years ago, land values around here started to rise. That attracted some smart money, which made values rise more and caught the attention of still more investors.
Pretty soon any old house or woodlot was increasing in value by 25 percent per year. Money flooded in. Old houses and wood lots turned into subdivisions, condominiums and shopping malls--way more than anyone needed. Then the bubble burst and the money drained away with amazing speed, seeking 25 percent returns somewhere else and leaving behind a trail of bankruptcies.
We who live here were hurt on both the upswing and the downswing.
On the upswing, farmers and small businessmen couldn't compete for land or storefronts against out-of-staters with huge bankrolls. Only the rich could buy houses. Large parcels were snatched up, logged over, and spit back out onto the market in small lots. Taxpayers were faced with million-dollar school-expansion bonds. Roads had to be widened. Landfills filled up. Easy money attracted sharks, resulting in scams and scandals that undermined the integrity of local government.
On the downswing, we're the ones who became unemployed. Local business that had geared up to service the boom found themselves over expanded. As land and housing prices fell, some people found themselves in technical bankruptcy; though they had met every mortgage payment, the value of their property no longer provided collateral for their loan. Banks failed. Local and state governments went into deficit. Taxes rose to repay government bonds issued to finance the expansion just as we were least able to pay them.
On a recent visit to Southeast Asia I found Bangkok caught in a similar dynamic. Thailand is Asia's hot spot these days, the place of 25 percent returns, the magnet for panicked capital leaving Hong Kong and for investors from Japan seeking cheap land and cheap labor. In a 70-mile circle around Bangkok, you can see construction booms everywhere. Billboards announce the coming of office buildings, condominiums, shopping malls, tourist hotels.
Is this the development Thailand needs? The profits go to places far away. Only a few Thai people can afford the apartments and shopping malls that are displacing farms and villages. Most live in slums and work for low pay serving rich foreigners. The government struggles to provide water, electricity, sewage lines, and garbage dumps, not for the people, but for the hotels. Bangkok residents breathe in the dust of construction, swelter in persistent traffic jams, and live with pollution that is blighting the new resorts and turning the tourists away. Eventually there will be a crash, vacancies, bankruptcies, when capital flows out again to Asia's next hot spot.
In downtown Bangkok a shiny convention complex was being rushed to completion in order to host the World Bank/IMF conference held there in October. The government leveled a nearby squatter settlement so high-level visitors wouldn't get the wrong impression about Thailand's economy. To save the international dignitaries from Bangkok traffic, officials closed the schools for three days and declared a government holiday.
There is a vast difference between responsible investment and the tidal waves of loose money that wreak such havoc around the world. Responsible investment is rooted in the community and recognizes that a community can sustain economic returns only if its environment is intact, its infrastructure is adequate, and its people are educated, healthy, and sharing sufficiently in the wealth to create a market for its products. Experience suggests that such conditions depend on government placing really tough restraints on the uses of outside capital. If a government isn't willing to do that, it's best to keep the doors closed--to be patient and let the community grow through local businesses, local banks, and people who live in and care about the place where they put their money.
Donella Meadows is an independent researcher and syndicated columnist on global issues and an adjunct professor of environmental studies at Dartmouth College. This column was prepared and distributed by the PCDForum based on her syndicated column of the same title published in the Valley News. Her address is P.O. Box 58, Daniels Rd., Plainfield, VT 03781, U.S.A.