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In a move of some significance,
George Soros, the much-celebrated financial czar of the "new
economy", has announced his decision to retire into philanthropy.
The hedge fund master, who through his Quantum Fund, drove market
sentiment, placed and quite routinely won big bets in currency and
stock markets, and challenged sovereign nations and their governments,
has been badly bruised by two developments: the sharp fall of the Nasdaq index and the weakening of the Euro. We must recall that by
April 14, the Nasdaq index fell by 34 from its March 10th
peak, and even now rules at around 25 per cent of that level. And
the euro has depreciated by around 10 per cent this year. Unfortunately
for Soros and his managers, the Fund failed to pull out of technology
stocks in time and erred in their judgment on how the euro would move.
In the event the Quantum Fund lost around 20 per cent of its value
(or around $5 billion) in the first four months of this year. A chastened
Soros has decided to restructure his operations, rename his company
Quantum Endowment Fund, invest in less risky assets that promise a
stable return, and use the proceeds for his charitable activities.
The markets are proving too volatile even for a player who built his
empire over three decades by exploiting that volatility to garner
annual returns in excess of 30 per cent.
This development is
more then incidental, because in a world dominated and driven by finance,
the change in sentiment that the Soros decision heralds, can be quite
damaging. Yet, the Bretton Woods institutions and those who manage
current day capitalism exude a new confidence. Underlying that confidence
is the performance of the US economy in recent years, besides the
deficit-financed recovery in Korea and Thailand. As compared with
an annual average rate of growth of GDP of 2.9 per cent during the
decade 1982-91, the US economy has expanded at an average rate of
3.6 per cent during 1992-99 and 4.2 per cent during the last three
years (Chart 1). Moreover, there have been only 2 years during the
1990s (1993 and 1995) when growth in the US has been lower than it
had been on average during the 1980s. Such growth has helped reduce
unemployment from 7.0 per cent during the 1980s and 7.5 per cent during
1992, to 4.2 per cent in 1999. And despite high growth, inflation
in the US runs at 1.2 to 1.5 per cent, as compared with 3.7 per cent
during the 1980s. A change in its inner nature, protagonists of the
new economy argue, has made a combination of high growth, low unemployment
and moderate inflation the norm under capitalism.
Chart 1 >>
It is not too difficult
to discover the obvious flaw in this argument. While the US does constitute
the leading power, both economic and political, in the world system,
it is hardly representative of the whole. In fact, a striking feature
of the 1990s has been a combination of slower growth and substantial
unevenness in the advance of the world economy. To start with, the
1990s have been characterised by slow growth in Japan and across much
of the world. According to the World Economic Outlook, the average
rate of world economic growth during the 1990s was only 3 per cent,
which is below the 3.5 per cent average of the 1980s and the 4.5 per
cent of the 1970s. The figures for 1982-91 and 1992-1999 stood at
2.6 and 1.9 per cent respectively in the case of the European Union
and 4.1 and 1 per cent in the case of Japan. World trade growth, which
accelerated from close to 4 per cent in the year 1992-93 to more than
8 per cent on average over the next four years, rendering national
growth rates less significant, is back to its earlier levels over
the last two years (Chart 2).
Chart 2 >> |
