Global Finance Capital: Issues and Implications
By Kavaljit Singh
Globalisation, one of the most fashionable term nowadays, means different things to different people. Although there is no one particular definition of this term, people normally use trade and investment indicators to describe the growing economic interdependence among the countries. Essentially, the present globalisation consists of two distinct phenomenon - the globalisation of production (related to trade, production and real economy) and the globalisation of finance.
Many commentators view the recent emergence of global finance capital as a new phenomenon. This is not true because in the 50 years before the First World War of 1914-1918, there was massive flow of private capital across borders. Much of it flowed into bonds financing railways, roads and other infrastructure projects. The global financial system, at that time, ran according to the rules of the classical gold standard. In fact, the present phase represents the re-emergence of finance capital on a global scale.
No one can deny the fact that the fact that the globalisation of finance has surpassed the globalisation of production, over the past few decades. With a daily turnover of 1.2 trillion dollars, the global currency trading has gained a life of its own, and is increasingly getting delinked from the flows of real resources and long-term productive investments. The deregulation and globalisation of financial markets and capital account liberalisation -as part of structural adjustment programmes supported by the IMF and the World Bank - in developing countries coupled with lower interest rates and institutionalisation of savings in developed countries are the main factors behind the rapid transborder capital mobility. The transborder mobility has been further enhanced and strengthened by the growing understanding and nexus of the nationalities of developing countries with the global players of finance capital.
Capital Mobility and Financial Crises
However, increased global capital mobility has been accompanied by an increased frequency of financial crises i~ both the developed and developing countries. The fact that there is a positive correlation with international financial liberalisation and financial crises has been well established. Even the International Monetary Fund (IMF) has admitted this fact. In a recent study, which looked into the empirical relationship between banking crises and financial liberalisation in 53 countries during the 1980-95 period, the IMF also came to the conclusion that banking crises are more likely to occur in liberalised financial systems.
Attracted by short-term speculative gains, these financial flows are highly liquid and footloose, and can leave the country as quickly as they come. The problem is further compounded by the domestic structural weaknesses in the financial sector of recipient countries which find it difficult to manage the volatile capital flows. As a result of these factors, one is witnessing an increased frequency of financial crises in both the developed and developing countries. For instance, the European Monetary System remained under siege for almost one year in 1992-93 (which also affected non-EMS countries such as Finland and Sweden), then came the Mexican currency crisis of 1994 and now the Southeast Asian crisis which began in mid-1997.
The speed at which trillions of funds move across the border without any restrictions poses new challenges to policy makers, especially in the developing countries. Before policy makers can take corrective steps to rapid deal with the rapid movements of flows, the damage is already done to the financial markets and the real economy. "We started building the foundations of a house but suddenly we had to host a party." says former Governor of the Indonesian central bank. On one hand, rapid inflows can lead to excessive lending and to bubbles in equity and property markets, while outflows (which are more rapid than inflows) can put downward pressures on currency, stock markets and real assets. The Mexican crisis of 1994-95 and the currency crisis of Southeast Asia in 1997 highlight this problem. Thcse crises were the results of massive and sudden withdrawal of private capital flows, thereby putting further downward pressure on their currencies. South Korea, Indonesia, Malaysia, Thailand and the Philippines experienced-in the aggregate-an outflow of US $ 105 billion in 1997 from an inflow of $93 billion in 1996 to an outflow of $12 billion in 1997. Statistics further reveal that the outflow of funds was almost 10 percent of the combined GDP of these economies and much of this reversal originated from commercial bank lending and portfolio investment.
More than a year has passed, most of crisis-ridden Asian economies are still reeling under its impact. The IMF-led multibillion dollar bailout programs have been unable to prompt an economic recovery. The ripple effect of the Southeast Asian financial crisis continues to rattle markets, not just within the region but even in far away countries of Eastern Europe and Latin America. Very few emerging markets in the world have been left untouched by the crisis. Even the highly industrialised countries are facing the impact of the Asian crisis. The implications of the Asian crisis on the global economy are far reaching as there is hardly any region in the world which has not been negatively affected by it.
However, the global financial system is in serious trouble as it is increasingly getting out of control. Financial globalisation and the need for regulating global capital flows have moved to centre of global stage in the wake of serious turbulence caused by global financial volatility. International financial news which was previously relegated to the back pages of the business sections of newspapers is today's front-page news. The Asian financial crisis and the global economic, turmoil that followed it has further necessitated the need to avert financial crises.
As recent financial crises are the outcome of international financial liberalisation, there is a growing concern to restructure the present international financial architecture. Increasingly, it is being admitted that if the international financial system is not regulated, no country can remain immune from the impact of financial crisis. However, with the rapid decline in the degree of control and maneuverability, national governments (of developing and developed economies) are finding it difficult to pursue independent economic policies which are inconsistent with the interests of global finance capital. There is no doubt that with the increased financial globalisation the power and authority of the nation-state, to a large extent, has weakened. The global financial system is driven more by volatile markets than by governments.
Washington Consensus: Consensus or Diktat?
Not long ago, the collapse of communism and triumph of global capitalism was described by thinker Francis Fukuyama as end of history." In the absence of any countervailing force at the global level, the Washington Consensus, consisting of twin elements - deregulation of economies and globalisation of markets, had become the order of the day in the late 1980s and early 1990s. Since these policies were fully endorsed by the IMF, World Bank and G-7 countries, a large number of countries, willingly or unwillingly, adopted free-market policies ostensibly to benefit from the unrestricted cross-border capital mobility. Although critics had warned about the dangerous consequences of following such policies, but at the decision-making levels, there was hardly any opposition to the Washington Consensus.
But, now it seems that the Washington Consensus has been breached. The policy measures announced by Malaysia, Hong Kong and other developing countries, in the months of August- September 1998, have seriously challenged the undisputed ideology of the free-market global capitalism. Perhaps, for the first time, the supremacy of markets is questioned in a significant manner by the developing world especially after the end of the Cold War.
Recently, some Asian governments either announced capital controls or showed interest in implementing controls in the future, in an attempt to overcome the crisis. On September 1, 1998, Malaysia imposed new controls (both on capital account and foreign exchange) while for two weeks in the month of August, Hong Kong authorities intervened in the stock markets to fight the speculators. Since foreign exchange controls in Hong Kong are banned under the post-hand over constitution, the authorities spent an estimated $ 15 billion to protect its financial markets from the growing attacks from speculators.
It is striking coincidence that these events took place when Russia was passing through worst financial and political turmoil. Russia not only refused to pay some of its foreign debts, but it is also considering going back to a state-led economy with fixed exchange rates and other control measures. At the same time, the Indian authorities also took policy measures to protect its rupee from growing attacks from speculators and corporate bodies. Furthermore, Ukraine suspended trading in its money, and Singapore is drafting tough measures against stock-market manipulation. Taiwan has recently put a ban on any trading of funds managed by US financier George Soros after local dealers blamed those funds for the local stock market's recent plunges. Some Latin American governments have already put restrictions to cool down the "hot money" flows while many other countries are inclined towards implementing controls and other policy mechanisms to address the problems arising from the globalisation of finance.
Furthermore, the IMF's consistent support to full capital account liberalisation (CAL) has come under sharp attacks by many analysts who argue that by achieving CAL, countries do not automatically attract massive foreign investments. For instance in the recent past, many African countries have adopted full CAC but foreign investments are yet to flow there. While China attracted over 63 billion worth of foreign capital in 1997, majority of it as FDI without full convertibility. Similarly, Japan maintained high-speed growth in the l950s and l960s without full CAL. Same is the case with South Korea which enjoyed rapid development when the government controlled financial markets in the l970s and 1980s. However, in 1995, the Korean authorities removed controls on the domestic and international financial institutions in exchange for the membership of OECD. The Korean government's decision to allow banks and financial institutions to lend and borrow without restrictions led to the present crisis. Furthermore, countries such as China and, to some extent, India, have been able to survive the contagion effects of the Southeast Asian crisis because of not adopting CAL. It would be a serious mistake in following an open door policy towards finance capital and thereby enlarging its presence in the Indian markets by removing existing capital controls.
At a time when India and China are emerging as alternative role models and some countries in the region are considering imposing capital controls, it would be a suicidal move if the Indian authorities go ahead with their well-publicised plan of adopting full CAL by the year 2000.
Taming Global Finance Capital
For many years, a number of progressive intellectuals and economists have been advocating a complete restructuring of the unregulated international financial system. However, their concerns and alternative proposals towards building a more transparent and accountable global financial system were, quite often, dismissed by proponents of free capital movement as ideologically-driven, biased, and non-pragmatic. The proponents further argued that there are no policy mechanisms to regulate global capital flows, and the task should be left to the markets to control themselves on the principle of self-discipline. The case against any attempt to regulate the financial flows was built on the assumption that the market is the best tool for determining how money should be invested; if capital is allowed to move freely, markets will reward countries that pursue sound economic policies and pressure the rest to do the same. Since capital account liberalisation was much in fashion in the late l980s and early l990s, any controls on capital movements were strongly opposed.
However, it seems that certain recent events, particularly the Southeast Asian currency crisis and the near collapse of a multi-billion hedge fund, the Long-Term Capital Management, have turned the tide against the free-market financial system. Increasingly, it is admitted that if the international financial system is not regulated, we will continue to witness financial crises. Even the champions of the free-market economic policies, particularly the IMF, World Bank and G-7 countries, are now acknowledging the need and effectiveness of capital controls and state intervention.
In fact, restructuring the global financial architecture has become the key theme in the ongoing international debates, as witnessed during the just concluded annual meeting of the World Bank-IMF. Leading the debate, at the political level, is Tony Blair, Prime Minister of Britain and currently chairman of G-7 nations. In his speech at New York Stock Exchange on September 21, 1998, Blair not only demanded greater openness and accountability of the World Bank and the IMF, he also put forward a five-point agenda including building a new Bretton Woods for the next millennium. Critics had never anticipated that the tide against free-market financial system will turn so quickly.
Since the restructuring of global financial system is not an easy task as the main obstacles to regulate the global financial flows are political (not technical),no meaningful restructuring is possible without the strong political support. Perhaps, more political will is expected from the G-7 countries which account for majority of transborder financial flows.
Given the way in which financial globalisation is taking place, especially in the early 1990s, it is doubtful 'whether a particular country or institution alone can address the problems. This point needs little justification, as it became very evident in the ongoing Southeast Asian currency crisis. Therefore, there is a need to evolve a combination of policy mechanisms to address the issues emerging from the globalisation of finance at-national, regional and international levels simultaneously. In the present global economic and political context, regulating the operations of global finance is not very easy. But the alternative option of totally market-based remedies is not working and has invited catastrophe.
Policy Mechanisms at National Level
In the 1990s, various policy mechanisms to regulate and control financial flows at national levels have been evolved and implemented, particularly in the recipient countries. Although the global trend is towards the removal of restrictions and controls, yet many countries (e.g. Chile, Colombia, Brazil, Indonesia, Malaysia, the Philippines and Thailand) have either continued existing controls or imposed new types of controls to discourage certain types of capital flows during the first half of the 1990s. The controls adopted by the countries differ from one another depending on the composition of flows and specific situations. Chile is one country, which has successfully implemented capital controls while pursuing open economy since 1991. Thanks to these controls, the impact of the Mexican crisis of 1994 on the Chilean financial market was almost negligible, while other countries in the region were badly affected by it. The Chilean experience clearly demonstrates that countries can attract a significant volume of capital inflows, despite imposition of controls to keep off short-term speculative inflows. Similarly, many countries in Latin America have also introduced a set of taxes (e.g. capital gains tax) and regulatory mechanisms to manage the inflows.
Apart from controls on inflows and outflows by the recipient countries, there is an equal need for complimentary kinds of controls by source countries. The recent growth of global institutional investors implies that these flows are completely unregulated in their source country. Although the IMF has suggested that there should be greater surveillance of recipient countries, it has not advocated surveillance of developed countries from where these flows originate. Thus, there is an urgent need for regulatory restrictions on investors by home country regulators; otherwise restrictions in the recipient countries will remain ineffective.
By putting effective controls, source countries will not only protect their domestic investors but also avoid the creation of a crisis-like situation in those recipient countries, which do not discourage short-term volatile capital flows. Lastly, there are certain types of international funds (e.g. hedge funds and mutual funds) which have remained largely under-regulated but are major players in the markets of developing countries and a cause of worry. Adequate regulatory steps need to be taken in the source countries to ensure that such funds are properly regulated.
Of course, capital controls by themselves may not suffice. Serious attention has to be paid at the regional and international levels to restructure the present architecture of global finance.
The Relevance of Regional Mechanisms
With the sole exception of the European Union, there are no regional institutional mechanisms to deal with the issues emerging from the financial crises. Perhaps, more attention is required at the regional level because the financial flows are, by and large, regionally concentrated (particularly in Southeast Asian and Latin American countries), and contagion effects of the currency crises are more disastrous for countries in the region. This fact has been well highlighted by the Southeast Asian currency crisis where the countries in the region were the first to be badly affected by it.
International Regulatory Mechanisms
The need for international supervision and regulation of global capital flows is in tune with the global nature of these flows. Since international financial globalisation can also cause serious damage to world financial markets and the real economy, the policy responses should also be international.
The international regulatory efforts might be difficult to implement (in comparison with national and regional) but are very much needed, as the problems are global. In recent months, several proposals have been made by many individuals and institutions to deal with the volatile financial flows. Below is the short summary of some of these proposals.
The Tobin Tax
Professor and Nobel laureate James Tobin first proposed a global tax on international currency movements in 1972, which is known as the Tobin tax. Tobin advocated this tax as a way of discouraging speculation in short-term foreign exchange dealings, thus minimising shocks from large currency movements. Given the volatility of short-term flows, the Tobin tax could serve as perhaps the best instrument to discourage short-term flows. However, this idea needs to be updated, modified and debated in the present context. The Tobin tax is also desirable from the point of view of its revenue potential. It can generate forex reserves, which can be used during the period of currency flight. Its counterpart domestic currency and financial resources can be used for the removal of poverty, hunger, environmental degradation, illiteracy, etc. The revenue potential of a 0.25 percent tax in the 1970s was relatively modest; with the 1995 global forex volume, annual revenue raised would be closer to $300 billion. This amount is very tempting given the fact that international official aid has declined over the years, and the national governments are faced with less financial resources for social sector spending due to the implementation of structural adjustment programs.
The idea of Tobin tax has certainly generated a lot of interest among many economists, NGOs, trade unions and political groups all over the world. This became very evident during the World Social Summit in 1995, when many social groups and movements advocated the imposition of Tobin tax to raise additional resources to finance developmental projects. The groups could immediately launch a major international campaign for Tobin tax.
A Cross-Border Payments Tax
Another mechanism, quite similar to the Tobin tax proposal, has been put forward by Rudi Dornbusch. He has suggested that even without an international agreement (which is required under the Tobin tax), a cross-border payments tax levied by each country can help in the domestication of capital flows, without affecting the capital investment.
A New Global Institution: World Finance Authority
Professor Lance Taylor and John Eatwell have proposed a new multilateral international institution with adequate executive authority. According to the proposal, this new institution can devise policy mechanisms to monitor and regulate global financial flows. It can also serve as a forum within which the rules of international financial co-operation are developed and implemented. Besides, it could also monitor and regulate the activities of international banks, currency traders, and fund managers.
A New Global Corporation: International Credit Insurance Corporation
George Soros in an article published in the Financial Times on December 31,1997, proposed establishing an International Credit Insurance Corporation. Soros proposal came in the wake of Southeast Asian currency crisis but later on he has admitted that this proposal was "premature because the reverse flow of capital had not become a firmly established trend."
Global Finance Capital and Peoples' Movements
In the international debates and discussions, the issue of globalisation of finance is increasingly taking up an important space. However, peoples' movements, NGOs, and labour groups, in both developing and developed countries, have yet to critically respond in a significant way to the issues emerging from globalisation of financial markets. Perhaps, the most important single reason behind it is a general lack of information and understanding on issues related to global finance. No doubt, the process of globalisation of finance is a new subject for social movements which have been largely dealing with foreign direct investments and official capital flows, both multilateral (e.g. World -Bank, IMF, and ADB) and bilateral, in the past. Besides, financial matters are very complex and require considerable amount of expertise and experience, which, unfortunately, many groups do not possess. Therefore, a well-thought and coordinated action program by the social movements at various levels is yet to emerge.
The Indian Scenario
At the political level, except for a few issues such as liberalisation of insurance sector, there seems to be a growing consensus among mainstream political parties in India for financial liberalisation. This is reflected by the continuation of "reform" process of financial sector by three governments belonging to left, centre and right in the l990s.
In recent years, a number of peoples' movements, NGOs, women's and labour groups have emerged in India. Operating at various levels, such groups have become an important actor in the political arena. These groups have been representing and articulating the issues of poor and marginalised sections of society. But, by and large, the areas where peoples' movements have made the most progress is limited to social and environmental issues. Very little has been done on financial issues despite the fact that financial issues have a considerable impact on people and natural environment. Thus, these groups have yet to critically respond to these issues.
There is no doubt that in recent years, the Indian groups have shown to the world that mass campaigns can be successfully launched campaigns against many World Bank-funded projects (e.g. Narmada dam and Singrauli power projects). Similarly, many struggles and campaigns against FDI have come up in India; examples include campaigns against Union Carbide, Cargill, Enron, deep sea fishing and Nestle. Since the territory of finance capital is new to Indian groups, they are, increasingly, realising the importance of understanding new issues.
Like others, the Indian groups also lack the expertise on global financial issues. Although a large number of research institutes working on financial matters exist in the country, but most of them serve the information requests of corporate sector. Since the reports and journals published by these institutes are very expensive, the activists and movements are unable to afford these. Furthermore, to keep in tuned with the changing economic and political scenario, many institutes have radically changed their perspectives and as a result, have become greater votaries of financial liberalisation in recent years.
Thus, the task of providing regular information to movements has been left to a handful of research groups and socially committed intellectuals. With their limited resources and outreach, efforts are being made to provide information and campaign tools to activists and groups in the country. In recent months, efforts have been made to demystify the complex issues related to globalisation of finance in order to democratise the debates. Such efforts need to be further supplemented by preparation and publication of educational materials for the masses, especially in local and regional languages in India.
However, one is encouraged by the recent attempts by many groups in India to closely work on financial issues, particularly in the context of how international economic relations and institutions profoundly affect the national economic policies and projects. Increasingly, it is being acknowledged that as the financial crises are becoming global in character, their response should move beyond the national boundaries. Never before, the urgent need for transborder alliances and linkages with other groups is expressed as in 1990s. At the same time, activists and groups are also realising that the earlier successful methods and strategies of campaigning and lobbying with official capital flows (World Bank, IMF) or private capital flows (foreign direct investment) may not work in the case of finance capital. The new campaign instruments and tools as well as linkages with other peoples' movements are sought.
What should be the Agenda of Peoples' Movements?
As the financial crises are, increasingly, becoming global in character, the response of the social movements to address these issues should also be global. Although the arena of mass struggles by the movements may remain national, but transborder alliances and linkages with other groups need to be developed and strengthened. Further, the struggles against the global financial system cannot be fought exclusively, it should be an integral part of wider cross-sectional movements against neo-liberalism and global capitalism.
But, the earlier successful methods and strategies of campaigning and lobbying with official capital flows (World Bank, IMF) are unlikely to work in the case of finance capital. While the World Bank and other institutions (multilateral and bilateral) are "public" institutions, have a mandate for poverty alleviation and sustainable development (although one may dispute the seriousness of intent and differ with their approach towards it), on the other hand, private finance capital is only looking for profits, has no developmental agenda, and is only accountable to its shareholders - with no responsibility for public participation and disclosure of information.
Furthermore, it is relatively easier to target campaigns and monitor the funding by the World Bank, the IMF and the ADB, while much of global finance capital is liquid and footloose in nature, moving from one country to another within seconds, thereby making it extremely difficult for social movements and others to monitor it. Similarly, the earlier strategies of campaigning (e.g. labour, legal or environmental action) on private capital flows that were largely in the form of FDI may not work in the case of footloose finance capital.
In the given economic and political context, an action program calling for total elimination of global financial flows is unlikely to succeed, although it may be desirable. The author is of the opinion that action programs based on restricting international financial liberalisation and selective delinking from short-term and speculative funds may have better chances of success. This, however, does not mean that one is blindly supporting long-term FDI and other types of financial flows. There is no doubt that the cost of FDI is also high as capital can move out through royalty payment, dividend, imports as well as other illegal and legal means.
The strategies of struggles will differ from country to country depending on specific context; still a number of common action programs could be planned at both recipient and source countries. At the national level, the groups and movements should advocate for greater regulations with regulatory bodies. Efforts should be made by activists and groups in India to put strict capital controls on the inflows of speculative funds in order to prevent the emergence of a crisis-like situation. In this context, it will be worthwhile to examine the efforts by Chile and Malaysia to put controls on inflows in order to restrict "hot money" flows. Similarly, other policy mechanisms (e.g. capital gains tax) could also be explored to deal with such flows.
Although with globalisation, the power of nation-state to pursue independent economic policymaking has weakened, still nation-state can restore relative autonomy in the management of its economy, as witnessed recently in Malaysia. Despite globalisation, the nation-state is not going to wither away, activists and groups should make efforts to make it accountable and democratic.
The NGOs and peoples' movements in source countries will have to take serious notice of global finance capital. They will have to exert public pressure on regulatory bodies for strict regulatory mechanisms and disclosure standards. Certain types of financial instruments (e.g. hedge funds) are highly unregulated in their source countries. The recent collapse of U.S. based international hedge fund, Long-Term Capital Management, illustrate this point. There are over 2000 international hedge funds operating in the international financial markets without any regulation. In source countries, any campaign against the global finance capital is unlikely to succeed without the support of middle class investors who invest their savings in the mutual funds, pension funds, bonds and other financial instruments. Since the size of this community is very large, running into millions, the capital collectively contributed by them is in trillions of dollars. In U.S. alone, the proportion of investment of households/individuals in mutual funds account for over 35 percent. The American mutual fund industry with assets of $4 trillion, account for over half of the World's mutual fund assets. After all, a substantial amount of capital - which the inteniational fund managers move across the border - belongs to this community.
While working at the national level (both recipient and source countries), peoples' movements and groups will also have to address the issues at the international level. At the international level, the peoples' movements should join hands with other like-minded groups to launch a major campaign for Tobin tax. The groups will have to closely monitor the developments related to the creation of a World Financial Authority. They will have to ensure that this authority should function under the UN system, besides it should have a wider developmental agenda with an open and democratic process.
In the immediate context, campaigns against the OECD proposal for a Multilateral Agreement on Investment (MAI), which includes capital account liberalisation, should be further strengthened. Similarly, campaigns against the rewriting of IMF articles favouring full capital account liberalisation as well as against the liberalisation of trade in financial services under the WTO agreement should be immediately launched by social movements in India.
In the coming days, activists and groups will have to grapple with and take notice of two major international institutions that deal with finance capital. These institutions are the Bank of International Settlements (BIS) and the International Organisation of Securities Commission (lOSCO). The BIS is the oldest international financial institutions. Located in Basle, its mandate is to monitor and regulate private bank lending. While lOSCO, based in Montreal, works on securities issues. Unfortunately, both these bodies have not come under close public scrutiny, unlike the World Bank and the IMF.
Finally, I am of the opinion that peoples' movements need new tools of analysis and advocacy to deal with the globalisation of finance. It is high time that activists and groups start understanding the language, procedures and working of finance capital in order to effectively deal with it.
(Kavaljit Singh is the coordinator of Public Interest Research Group. He is author of A Citizen's Guide to the Globalization of Finance (Madhyam Books- Delhi, Zed Books- London, DAGA Press- HK 1998).