Focus on Trade #30, Part 3 of 3 (fwd)

[Robert Weissman <rob@essential.org>]

FOCUS ON TRADE
Number 30, October 1998
Part 3 of 3

A regular bulletin produced by Focus on the Global South, Bangkok,
Thailand

Focus-on-Trade is a regular electronic bulletin providing updates and
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IN THIS ISSUE 

Part 1
The Financial Crisis: Deja Vu All Over Again
by Robin Broad

The beginning of the end of the Washington consensus
by Nicola Bullard

Draft Declaration from the participants of the Bank Information Center
Strategy Meeting October 9-10, 1998

Part 2
Another World Depression
By Jayati Gosh

Asia opts for a do-it-yourself solution
by Nicola Bullard

Part 3
Regulation or Barbarism
by Nicola Bullard

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Regulation or Barbarism
by Nicola Bullard* 

In 1996, $97 billion of private capital flooded into Thailand,
Indonesia, the Philippines, Malaysia and South Korea – the five
countries most effected by the Asian crisis. In 1997, the tide had
turned, and these countries experienced a outflow of $12 billion. In
net terms, that is an astounding $109 billion reversal of fortunes. 

In contrast, the United Nations Commission on Trade and Development’s
latest Trade and Development Report notes that there has been
virtually no change in levels of foreign direct investment in these
same five economies from 1996 to 1997.  What can we learn from these
figures? The lesson is very simple, and one that is now gaining wide
acceptance amongst the economic establishment, the G7, and even the
IMF itself. And the lesson is that uncontrolled speculative capital
was one of the major factors in the Asian economic collapse, and is a
threat to the stability of the national economies and to people and
their livelihood. 

The responses to this revelation are varied: Malaysia’s Prime Minister
Dr Mohamed Mahatir has taken matters into his own hands and
implemented a series of tough capital controls, currency speculator
George Soros – who lost a cool $2 billion in Russia -- is calling for
regulation, and even the IMF in its latest capital markets report
notes that "the combination of a weak banking system and an open
capital account was an accident waiting to happen."  Having made this
Edison-like discovery, the Fund continues that "policymakers need to
undertake an orderly opening of their financial systems and may need
to consider imposing temporary measures to restrain certain types of
inflows." 

Welcome to the real world.

That we need to cool down hot money is evident – but how to do that is
the more difficult question. The answer depends on how you perceive
the problem. 

Free market economists see it as a problem of safety nets and
information: they say we need a better system of checks and balances
to readjust the inefficiencies of the market and more information so
that the market can make better decisions. The kind of regulatory
mechanisms proposed aim to improve prudential supervision and
transparency, make sure institutions behave predictably, establish
global norms which clear the stones from the path of the free market
and put up bold signposts. In other words, they want to reduce market
risks.

Others, however, see the problem differently. It’s not a matter of
making the market work better for capital, but making the market work
better for people. Regulation of  speculative capital flows is the
first and necessary step so that people and governments can reclaim
their economic sovereignty, rather than being swept aside by the tide
of private capital as it moves in and out at the whim of the market.
>From this view, therefore, financial regulation and surveillance are
only part of the answer to a much bigger question. 

If we look Asia is it evident that uncontrolled and hysterical
movements of private capital – both in and out – was one of the major
causes of the economic meltdown. However, governments in the region
had been persuaded and encouraged by the World Bank and the IMF that
financial liberalisation, backed by pegged currencies, was necessary
to suck in the foreign capital to fuel growth. Therefore, they
liberalised their capital accounts and backed their currencies,
clinging to both poles of the policy doctrine long after either was a
sound option. But repeated currency attacks and uncontrolled capital
flight eventually forced dramatic currency devaluations,  plunging
these economies into debt and recession. It became clear very quickly
that financial liberalisation is a revolving door, that money can go
out just as easily as it comes in.

The democracy deficit
Beyond the simple economic causes and effects of the Asian crisis is
an underlying problem which exists at every level, and which is
central to any discussion about why we need a new global economic
order, and what it should look like. And that problem is democracy –
or more accurately, the lack of  democracy. 

Locally and nationally, governments pursued export-oriented
development which largely benefited an elite, deepened inequities and
destroyed the environment. The economic crisis has simply exacerbated
existing problems and rolled back the not insignificant gains of the
past twenty years. It has also shown the fragility of these gains.

Nationally and regionally, elites defended their behaviour in terms of
cultural relativism – dismissing anyone who criticised their
authoritarian ways as cultural imperialists imposing Western values.
For their part, Western capitalists, governments and multilaterals
were complicit: rapid growth, expanding markets and political
‘stability’ was the perfect combination to fuel global growth and
create mutual benefit between the elites of the North and South. In
this respect, the North’s abandonment of President Soeharto is
staggering in its hypocrisy. His authoritarian credentials were
well-established and human rights groups in Indonesia and
internationally consistently raised well-founded concerns over issues
such as repression of the Aceh independence movement, the colonisation
of East Timor and the state’s overwhelming coercive powers. However,
it was only when Soeharto showed his economic incompetence, or
obstinacy, by not bowing to the IMF, that the West pulled the rug out
from under him.

Internationally, the institutions who are steering the global economy
are secretive, ideological and incapable of dealing with the
complexity of the problems that the world confronts today. None more
so that the IMF which, through it’s misguided prescriptions and
repeated blunders in Asia, has shown that its ideologically blinkers
render it incapable of responding to complex, diverse and volatile
situations. Nor does it  learn from experience, as the latest debacle
in Russia has shown. The World Bank, for all its breast beating and
reformist rhetoric, is equally culpable. If there was any intellectual
integrity in that organisation, they would make a clean break from the
IMF and simply refuse to clean up their mess. The World Bank’s social
safety nets are a nonsense, especially when the need for them can in
large part be traced to the incompetent and recession inducing
policies of its sister organisation. In addition, they are pitifully
small amounts compared to the needs created by the crisis. The fact
that governments have to borrow additional money for these programmes
just adds salt to the wound.

But, the democracy deficit is most staggering in the financial sector
-- commercial banks, mutual and pension funds, currency speculators,
finance companies, security traders, merchant bankers, stock analysts,
investors, brokers, bonds dealers – these are the faceless, nameless
players who operate in the shadows, beyond accountability except, 
possibly, to their shareholders and investors.  According to economic
theory, they take the risks, and either reap the profits or bear the
loss.  But, as we have seen in Asia, the private sector made the
profits but, for the most part, was able to handpass the losses to the
public sector, thanks to the IMF. That’s one way of spreading the
risk.

However, the IMF cannot go on bailing out investors forever, hence the
call for a market based mechanism to reduce risk. Regulation of this
kind – for example through better surveillance and disclosure – might
make the market work better, but there is precious little evidence to
show that the market – as presently constructed -- makes things better
for the vast majority of the world’s population which is excluded from
the benefits of a globalised free market. 

Nonetheless, certain kinds of regulation and institution building are
integral to expanding political participation and economic democracy.
Regulation should be a tool which allows local communities, national
governments and regional groupings to manage their economies in the
interests of their populations, and a means of ensuring the
accountability of institutions and governments to their populations.

There is no silver bullet
Although we are facing global economic problems, we would be foolish
to pin our hopes on a  ‘global’ solution. As activists we spend a
great deal of time critiquing and attempting to reform the
international institutions of economic globalisation – the World Trade
Organisation,  the International Monetary Fund and World Bank. These
institutions are not accountable, they are not democratic, they
consistently favour the strong over the weak, the rich over the poor
and there is no reason to believe that an international regime charged
with regulating financial movements would be any different – we would
end up with yet another multilateral organisation, dominated by the
G7, with a mandate to do little more than take some of the risks out
of the market and bully recalcitrants like Dr Mahatir into towing the
line. And then we will have to spend the next twenty years working out
what on earth they are doing, telling them they should consult more
with NGOs, and arguing for social and environmental conditionalities.
It’s a waste of our time, and doesn’t solve the problem.

We must take a radical approach which is grounded in a fundamental
commitment to increasing political participation for all people and
economic democracy for all people. 

While some solutions may be best applied internationally – for
example, a Tobin Tax – many, and probably most, solutions can only be
worked out and implemented locally, nationally and regionally. That
is, power over economic policy must be handed back to people and their
governments. For the past fifteen years -- certainly since the Latin
America and Africa debt crisis --  the IMF, the World Bank, the US,
Europe and their transnational corporations, have systematically
stripped developing countries of their economic sovereignty. At the
same time, the progress of democratisation in many developing
countries has been painfully slow, and in some cases gone backwards.
And these two things are not unrelated. The impoverishment and
indebtedness caused by structural adjustment programs and the
obsession with growth encouraged by the IMF and World Bank, has
created a political vacuum which progressively sucks power away from
people. 

The power of money
Economic power is real power – as we have seen all too clearly in
Asia. The governments of Asia’s tiger economies had power so long as
their growth rates were booming. They were able to put the democratic
aspirations of their populations on hold promising economic
prosperity.   Of course, this was not accepted without struggle and in
Thailand, for example, the democracy movement has made tremendous
progress in the past twenty years. But in late 1997 investors and
speculators stripped that ‘power’ away from governments as soon as
they pulled their money out. In Indonesia the consequences are most
dramatic and the economic and political crises have become
indistinguishable from each other. In Thailand, the Philippines and
South Korea, governments have been pushed aside and replaced but
disillusion is evident as people realise that even their new, more
democratic governments have ceded economic sovereignty to the IMF and
that they respond more to the directives of letters of intent than to
the mass protests of landless farmers and laid-off workers. There is
something wrong with this picture.

So, in our discussion about regulation, we need to ask what we are
hoping to achieve. If the answer is simply to avoid ‘aberrations’  –
such as the Asian economic crisis – in the forward march of economic
globalisation then we are on the wrong path. It’s as though we have
decided that the gas-guzzling sportscar is the model we prefer, and
even though the road tests show that it is unstable, dangerous,
environmentally destructive and unaffordable --  it is still the
preferred model. All we have to do is make some adjustments here and
there so that it stays on the road at high speeds. However, if the
answer is regulation as a means of reconstructing global economic
relations, for the purpose of creating greater intra- and inter-
national democracy, then we need to go back to the drawing board and
start again. 

The basis for our design should be increasing political participation,
economic democracy and social justice. This means pushing decisions
down the ‘food chain’. Minimally, it means stripping the IMF of its
assumed power to impose policy conditions on governments. Minimally,
it means allowing governments to establish whatever kinds of barriers
they think are necessary to protect their domestic economies from the
unpredictable global economy. Minimally, it means recognising that
there is no single solution – even though the advocates of economic
globalisation would wish that it were so. The results will be messy,
sometimes idiosyncratic, incremental, a pain in the neck for
transnational corporations and anathema to the zealots of economic
globalisation. But, the global economy needs to be deconstructed and
build again on a sound moral basis of equity and sustainability. No
amount of tinkering and reform of the existing global financial
architecture will get this result. No amount of surveillance and
disclosure will put economic power back into the hands of the mass of
people.

Getting rid of hot money
We have to do a lot more than ‘cool down hot money’ – we have to get
rid of it and discredit the whole notion that there is anything useful
in speculation. The financial market, as it presently operates, serves
very little useful purpose and is, for the most part, non productive.
It does not create anything that you can eat or hold or sell or use.
It does not add to the public good, and it distorts our collective
understanding of what is valuable and productive.

And one of the ways of cooling down hot money is to redirect it into
productive channels. And here is one of the great conundrums of the
present economic system: the massive accumulation of finance and
speculative capital is due to overproduction – which is a bewildering
concept considering that we live in a world where four-fifths of the
population struggles daily with poverty. Yet, this is true. The
massive profits of transnational corporations and banks have no where
‘useful’ to go, so they go into speculation. In addition corporations
make such stupendous profits that they have little need for
traditional banking services, so banks have found new ways of making
profits by diversifying into securities and non-FDI activities. This
explains the appearance of incomprehensible financial instruments
which manipulate and capitalise on the cracks in the market to make
quick profits. In addition, the massive growth of pension and mutual
funds –  due in large part to the privatisation of social security and
the individualism inherent in neo-liberal economics – has created an
enormous pool of highly  mobile capital in search of maximum return. 

But the other side of overproduction is demand, and here is the key. A
stunningly simple solution to the problem of excess profits, is to
expand markets – that is, to put more money in the hands of more
people, so that they can buy the simple, basic life enhancing consumer
goods that countries like Vietnam, China, Thailand and Brazil are so
good at producing. The good news for the US is that it does not need
to shoulder the burden of consuming the world’s output on its own! 

Redistribution of wealth and purchasing power to the four-fifths of
the world who are not being given a chance to pull us out of this
recession would give the economy a kick start, would ease the problem
of overproduction, and provide all sorts of useful ways to recycle
profits. It would also cool down global capital markets.

However, creating this demand requires significant social reform in
terms of asset and income distribution – it means land reform and wage
and labour reform. Industrialisation via cheap labour and natural
resource exploitation is no longer viable. We have reached the point
where further economic growth can only be achieved by expanding
domestic markets and by expanding our definition of what is productive
to include public goods, culture, the environment, and human security.
We are at a moment in history where economic necessity coincides with
social justice. 

Crisis of globalisation
In the past months, the contagion has spread far beyond Asia to Russia
and to Latin America. Obviously, this is not an ‘Asian crisis’. It is
not even a global crisis, it is a crisis of ‘globalisation’. In
response Bill Clinton and Tony Blair have called for ‘sweeping
changes’ to the Bretton Woods institutions – in speeches that could
have been written by the IMF, so tame are their prescriptions. 

But we cannot leave this matter to the G7 or even the G22. The logic
of globalisation is that as we become more interdependent and
integrated, inequalities between nations will begin to disappear,
which is all the more reason to bring all members of the globalised
economy – not just the G7 – to the table. In addition, there must be a
role for civil society groups in discussion of alternatives. 

There are some immediate tasks ahead of us, and the first and most
important is to ensure that the task of constructing the new global
economic order, and the institutional architecture which supports
that, is not left to the G7 and the outdated and undemocratic Bretton
Woods institutions. That would be like giving matches to the arsonist.

* This paper was presented at the Halifax Initiative Roundtable on
Financial Regulation, 29 September, Ottawa


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end Focus on Trade #30, Part 3 of 3


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