The financial crisis amplifies a serious flaw in the present global financial and payments system. However, successful solutions to draw up a new international financial order are elusive, Thanong Khanthong reports.

IT is clear that the present global capitalist system is breaking apart, with the crisis spreading out from Asia to Russia and now to Latin America. There will be a lot of rethinking as the G-7 and subsequently the G-22 meet some time next month to take a hard look at capitalism, which until the Thai crisis in July 1997 had produced prosperity since the end of World War II.

Nobody knows what the new international financial order will look like, but US President Bill Clinton has ordered Treasury Secretary Robert Rubin and Federal Reserve Chairman Alan Greenspan to convene a meeting of economic powers within 30 days to draw up a new design for the global financial system.

George Soros, the man who broke the Bank of England, said global capitalism, which involves not only free trade but also the free movements of capital, ''is coming apart at the seams''.

The world through the eyes of Soros is neo-imperialistic, a working relationship between the centre and the periphery. The centre is represented by the industrial economies of the West, the periphery by the emerging economies.

''Picture [the global capitalist system] as a gigantic circulatory system, sucking up capital from the financial markets and institutions at the centre and then pumping it out to the periphery,'' he said. ''Until the Thai crisis in July 1997, the centre was both sucking in and pumping out money vigorously, financial markets were growing in size, and countries at the periphery could obtain an ample supply of capital from the centre by opening up their capital markets. In this global boom, emerging markets fared especially well. At one point in 1994, more than half of the total inflow into US mutual funds went into emerging-market funds.''

''The Asian crisis reversed the direction of the flow,'' Soros continued. ''Capital started fleeing the periphery. At first, the reversal benefitted the financial markets at the centre. The US economy enjoyed the best of all possible worlds, with cheap imports keeping inflation in check and sending the stock market to new highs. Yet there comes a point when distress at the periphery cannot be good for the centre.''

However, judging by Rubin's and Greenspan's recent remarks, the US still looks confident that nothing is wrong with the present global capitalist system, despite the engulfing financial crisis that is knocking down emerging economies one by one. To them, the centre is doing fine: the US will continue to have solid growth and low inflation.

For Greenspan, the unprecedented wealth and the bolstered economic power of the US are the workings of US companies' relentless drive toward applying new technologies to cut their costs and improve their products and services. The US economic system, contrary to Japan, is also served by a sound financial system, which has provided the bedrock for seven-year-strong economic growth.

For Rubin, the crisis in the emerging economies has more to do with substantial excesses in lending and credits, which he believes will take time to resolve. ''The circumstances and issues are unprecedented, very complex. People who look for easy answers and guarantees are misguided,'' he said.

In effect, they are playing the brinkmanship game, believing that the US can emerge unscathed from this global financial crisis without yielding to proposed G-7 aid measures, such as interest-rate cuts. Germany, too, has openly opposed an interest-rate cut. Other European countries are also reluctant to cut, because it will require them to consolidate their fiscal positions further. So attempts by the G-7 countries to halt the global financial crisis are off to a rocky start.

Realistically, it is difficult to expect any sensible outcomes from the G-7 or G-22 countries on a new world financial order, even though it is clear that the present global trade and payments system is flawed.

''The post-war economic system was designed by, and principally for, the large industrial economies. Overall, it has served them well. Relatively free flows of capital and goods have enhanced efficiency and have contributed importantly to a 50-year period of sustained economic growth,'' said John Llewellyn of Lehman Brothers.

''However, the emerging economies have not been served anything like so well. Hopes that their newly floating currencies would find, and maintain, their 'right' levels, have proved misplaced. Their exchange rates have been too volatile for comfort, to the extent on occasion of damaging emerging countries' economic fundamentals. And they have often turned out to be more of an obstacle than a catalyst in fostering structural economic reforms,'' he said.

The hallmark of the present order is free trade, free competition and free flow of capital. But representatives of the emerging economies in the G-22 countries may try to call for a new order governed by fair and equitable cooperation and for restrictions on short-term capital flows. They know that they cannot play the catch-up game, whose rules are designed by the ''centre''. A strategist for a Thai commercial bank predicted that if the G-22 meeting failed to come up with a new order, there would be two options for the emerging economies, to join the new bandwagon or to withdraw from the system completely. Those who believe that they cannot beat the global system, like Thailand, will try to rejoin the bandwagon. Others, like Malaysia, who do not believe in the present global capitalist system may opt for a retreat from the open financial system. Then there will be a polarisation in the world's economic system, with weaker countries jumping for cover under rules that they believe will at best protect themselves from the brutal force of capitalism.

Dr Supachai Panitchpakdi, the Thai deputy prime minister, has urged the G-7 countries to take urgent action to halt the global financial crisis, saying that it is wishful thinking that the crisis in the emerging economies will not spread worldwide if nothing is done to stop it.

The following conditions could trigger a global depression:

- First, the yen falls to Y150 to the US dollar or below.

- Second, the Chinese yuan is devalued by 10 per cent to trigger another round of competitive devaluations in emerging-markets currencies.

- Third, the Hong Kong dollar succumbs to speculative attacks.

- Fourth, Russia's meltdown cannot be contained.

- Fifth, Latin American economies get worse.

- Sixth, the Dow Jones Industrial Average falls below 7,000.

- Seventh, US consumers lose confidence in their economy.

- Eighth, war or natural catastrophes strike the world in different parts.