Everyone agrees that the global financial system is suffering from a chronic illness. But just what is the sickness that afflicts the world economy?
North American news media call it the "Asian flu". This description implies that the problem is a virulent virus originating in far off Asia that has to be warded off with strong medicine from the International Monetary Fund.
But as Susan Sontag writes in Illness as Metaphor: "To liken a...situation to an illness is to impute guilt, to prescribe punishment". Indeed the IMF's standard prescription is more like a punishment than a cure. The Fund's bitter medicine extracts a devastating human toll by causing mass unemployment, cuts in real wages, hunger and poverty.
If we are going to impute guilt and prescribe punishment then let's make sure we correctly identify what the sickness is and who the guilty parties are.
I think it is entirely erroneous to say that the current financial had its origins in Asia. The financial turmoil that appeared to start in Thailand in the summer of 1997 is only the most recent manifestation of a much deeper malady.
David Korten compares the disease to a cancer, "a pathology that occurs when an otherwise healthy cell...begins to pursue its own unlimited growth without regard to the consequences for the whole." This analogy brings us closer to the truth.
Out of control finance capital is like a cancer because it is destroying the world's real wealth. In Korten's words: "It destroys social capital when it breaks up unions, bids down wages and treats workers as expendable commodities."
While the cancer image describes part of the problem, I prefer to think of what is happening as more akin to a kind of madness. Let me explain why.
Behind the supposedly anonymous force called the "financial market" is a group of very powerful corporations who control a pool of hot money worth over US$13 trillion. I call the managers of these banks, mutual funds, hedge funds, stock brokerages and insurance funds "the money traders".
Business Week describes how this new class of investment fund managers rules over international financial markets: "increasingly dominated by American mutual-and hedge-fund investors, this investor class is far different from the patient banks and multilateral development agencies that once provided the globe's international capital supply." This set of hot money managers can move huge amounts of investments from US Treasury bills to Mexican stocks to German government bond options just by picking up the telephone or with a few strokes on a keyboard.
The managers of "hot money" have become "a sort of shadow world government-one that is irretrievably eroding the concept of the sovereign powers of a nation state". Business Week cites a New York banker who says "Countries don't control their own destiny. If they don't discipline themselves, the world market will do it for them."
How do the money traders exercise so much power? One way is by deciding who will get credit and who will not. Another way they exercise power is by selling off the currencies and bonds of any government whose policies displease them.
Walter Wriston, former chair of Citicorp, one of the largest US financial corporations, boasts about the power wielded by "200,000 monitors in trading rooms all over the world [who conduct] a kind of global plebiscite on the monetary and fiscal policies of governments issuing currencies."
Who gave the money traders voting rights? We never did. Nor do we want them to have a veto over public policy. Yet most politicians act as though they have no choice but to follow the dictates of the money managers.
For the high rollers of international finance people are becoming less and less important both as producers and as consumers. Latin Americans no longer speak about the "marginalized"; instead they refer to "the excluded." In Colombia the excluded have even been described as "the disposable ones."
Individually, the money traders claim that what they are doing is only rational-trying to maximize gains for their clients by buying and selling all kinds of financial instruments whether currencies, bonds, stocks or more exotic derivatives. But collectively what they are doing is hardly sane at all - they are all trying to make money by trading financial instruments with little regard for the real economy, that is activities that produce goods and services that meet human needs.
But at some point the accumulated monetary obligations become a lieu against future production. Thus when monetary debts come due real goods must be produced and sole to make interest and principal payments. In our contemporary world workers' and peasant farmers' incomes are squeezed in an attempt to produce more low cost exports just to keep up some of the interest payments on unpayable debts.
The game of inflated money claims that can only be covered through more and more sacrifices by those who are already poor cannot go on forever. What sane person thinks you can blow up a balloon forever? Eventually it will pop unless there's some kind of controlled decompression. But the money traders behave as though their game of casino capitalism can go on and on.
David Korten sums up the problem this way: "The more the money world becomes globalized, the more the links between the living world and the money world become tenuous,... the more the money system predominates." The challenge we face is to bring control back to the local level, so that the financial system is guided by people "whose view of reality is not shaped entirely by the numbers they see on their computer screens as they trade shares, stock options and derivatives."
Part of the money managers collective delusion is to think that history cannot repeat itself. Over the last two centuries the international financial system has collapsed several times. Charles Kindlebereger has chronicled lending booms that ended in busts in 1810, 1825, 1861, 1890, 1913 and 1928. We ourselves have lived through the "lost decade" of the 1980s that began with the debt crisis of 1982, the Mexican peso crisis of 1994-95 and the current world financial crisis.
If the image of mental illness appears far fetched, listen to the testimony of one of the money traders describing the herd like behaviour of his peers. The speaker is Kerr Neilson who is an executive with one of George Soros' large hedge funds. Speaking in the aftermath of the Mexican crisis of 1994-95, Neilson said:
"What is being made clear by the Mexican problems is that in traded securities, you are going to have to be very careful about where these funds are going and where the herd is... What a lot of people have missed are the implications of the global flow of...funds...where the maniacs, like ourselves, are driving the flow of funds around the world."
No, I didn't make that up. He actually said "the maniacs like ourselves, are driving the flow of funds around the world." The maniacs like Neilson first destabilized Mexico before moving on to Asia. An examination of the lessons from the Mexican crisis is a good place to start to begin to understand their madness.
Over a five-year period from 1989 to 1994 the managers of hot money poured US$99 billion into Mexico alone. Almost three quarters of this amount went into short-term "portfolio investment", that is, purchase of bonds and non-controlling shares. This kind of investment created very few jobs as about half of it went to purchase government bonds. Unlike in Asia where bank loans were the predominant form of credit, Mexico refinanced most of its debt through bond issues. The government of Mexico used the bond market to roll over old debts into new credits rather than face the fact that its foreign debt can never be paid off.
Only 27% of the money that flowed into Mexico in was direct investment. Much of that went to buy some of the 269 state-owned companies that were privatized by the Salinas government. The managers of these newly privatized companies typically reorganized production and shed approximately 400,000 workers from their payrolls.
For the money traders, investing in Mexico was very attractive. Not only did the Salinas government privatize state-owned companies, but it also deregulated the Mexican stock market, known as the Bolsa. It also offered higher and higher interest rates on government bonds and then invented a new type of financial instrument, the tesobono, to keep the money flowing in. The tesobono was a type of government bond that was nominally denominated in pesos but effectively indexed to the US dollar exchange rate. This put the risk of losses due to a devaluation on the Mexican people rather than on the bondholder.
A further reason why the money traders were willing to pour so much into Mexico was the protection offered by the North American Free Trade Agreement. NAFTA's investment chapter (which is the prototype for the Multilateral Agreement on Investment and for any investment talks that may take place in the WTO) prohibits the use of all kinds of performance requirements that might direct investment into productive endeavours. NAFTA (Article 1109 and 1401:2) also prohibits any kind of restrictions on cross border financial flows including profits, interest, dividends and fees.
The mania for speculative investment in Mexico ended with the crisis of December 1994 when the peso was devalued and a massive flight of portfolio capital commenced which continued on into 1995. [Notice on the chart that direct investment did not fall in 1994 and 1995.]
Mexico was powerless to stop this hemorrhage as the maniacs took their money and ran. One reason why Mexico could not use capital controls to stem the tide was because NAFTA leaves Mexico without the tools it needs to confront volatile, fly-by-night capital. Under NAFTA Mexico cannot impose capital controls like those recently adopted by Malaysia.
NAFTA (Article 2104) requires any member country with external payments problems to consult with the International Monetary Fund and adopt any measures the Fund might recommend. Mexico did just that during the peso crisis and found itself in a deep recession. During the 19 months of recession that followed the peso crisis more than 15,800 small and medium sized Mexican firms went bankrupt.
The austerity measures that are integral to all orthodox Structural Adjustment Programs (SAPs) diminish effective demand in the domestic market as peoples' incomes are squeezed. In addition to having to accept IMF-dictated measures, Mexico also had to accept additional conditions framed by the US Treasury just as happened in South Korea. For example, the rescue package required the further opening up of the Mexico's domestic financial system. Foreign banks are now allowed to own 100% of Mexican banks.
The prime beneficiaries of the bailout were the Wall Street investment firms, especially Goldman Sachs and Company, the firm that Treasury Secretary Robert Rubin used to run before he was appointed to the Clinton cabinet. The Wall Street Journal reports that the Goldman Sachs "ranked as the No.1 underwriter of Mexican stocks and bonds on the US and European markets for 1992 through 1994. In those three years......Goldman underwrote US$5.17 billion in Mexican securities." While investment firms were the biggest winners, the people of Mexico are saddled with paying back an even larger debt.
In the wake of the Mexican crisis the IMF and the World Bank acknowledged that too much financial speculation and too little real investment were root causes of the peso crisis. An IMF study on the causes of the Mexican debacle includes a recommendation that emerging markets like Mexico should favour foreign direct investment over portfolio investment. The World Bank's assessment of lessons from the crisis states: "The composition of capital inflows is very important...Keeping speculative capital under control, while encouraging long-term investment - as Chile has done - makes eminent sense."
The recognition that Chile was able to avoid being swamped by the tide of hot money is very important. Chile was the one major Latin American country that escaped the "tequila effect" that destabilized Latin financial markets in the wake of the Mexican crisis. The reason Chile's finances remained stable is largely attributable to its encaje system. The encaje requires that foreign investors deposit a portion of the capital they bring into the country in an interest free account with the central bank. Furthermore foreign portfolio investment had to remain within the country for a minimum of one year. While Chile has temporarily suspended the encaje in recent months, it has not revoked the legislation and retains the authority to reimpose these controls in the future.
But Chilean-type capital controls are not an option for Mexico because they would be illegal under NAFTA.
While the international financial institutions recognized it would be rational to use capital controls they did nothing to encourage them. On the contrary they ignored the lessons of the Mexican crisis and embarked on a process to amend the IMF's Articles of Agreement to promote capital account liberalization. This initiative takes us in precisely the wrong direction.
The IMF already required its members to allow free entry and exit of funds used to settle "current account" transactions, that is, payments for trade in goods and services and interest payments on loans. Under its original Articles of Agreement, IMF member countries were allowed to put restrictions on "capital account" transactions, that is, on funds transferred for long-term investment or payments of principal. Chile's encaje is an example of one kind of capital account restraint. Malaysia's exchange controls are another.
Despite the lesson of the Mexican crisis, the private money traders and the IMF defend the liberalization of financial markets in the name of greater efficiency. However, the historical evidence is that free capital flows do not lead to an efficient use of Investment funds but rather to crises, panics and manias. As George Soros himself has written "The private sector is ill suited to allocate international credit. It provides either too little or too much."
The Asian crisis can be traced to the financial market liberalization that opened up one country after another to inflows of hot money. This led to asset price bubbles that could not be sustained. The United Nations Conference on Trade and Development says the crisis was initially one of illiquidity rather than insolvency. But the IMF's strong medicine turned it into a far worse financial trauma.
The Asian crisis dwarfs the 1994-95 Mexican financial meltdown which required an unprecedented US$ billion bailout mostly from the IMF and the US government. Asian countries have secured two and a half times as much emergency financing.
Walden Bello's description of how finance ministries and central banks in Bangkok, Kuala Lumpur, Jakarta and Manila attracted massive amounts of portfolio investment as shown in the graph could equally apply to Mexico: "liberalization of the financial sector; maintenance of high domestic interest rates to suck in portfolio investment and bank capital; and pegging of the currency to the dollar to assure foreign investors against currency risk."
The results are evident in the white columns on the second chart showing the build up of huge amounts of portfolio investment and bank loans in five countries - South Korea, Indonesia, Malaysia, Thailand and the Philippines in the 3 years prior to the crash of 1997. While the absolute amounts involved in Asia are much bigger than in Mexico alone, the pattern is strikingly similar. (as can be seen when the transparency for Asia is laid overtop the one for Mexico)
The discrepancy that appears for the first year of crisis (1994 in the case of Mexico and 1997 in the case of Asia) is more apparent than real as these are annual flows and I do not have the data to adjust them according to the dates when the crises actually began. If the Mexican devaluation had occurred in June (as did the devaluation of the Thai baht) instead of in December then the two charts would be even more comparable.
What these charts show is a pattern of fly-by-night behaviour by money traders who recklessly pour money into countries only so long as the returns are high but then abandon them at lightening speed at the first sign of trouble.
In the wake of the Mexican crisis there was a revealing interview with a European banker in the Mexico City newsmagazine Proceso. Speaking frankly on condition that he would remain anonymous, the banker was asked to explained why financiers would invest in a country undergoing severe economic, political and social turmoil, where there is a risk of total financial collapse.
The banker's response reveals the cynicism of the money traders:
"When a financier lends money or invests capital, his problem is not to loan to someone or invest in an industry that will not go bankrupt. Potentially everyone can go broke. His problem is to lend or invest up to 15 minutes before the crash...[and then] get out on time."
As with Mexico, the prime beneficiaries of the Asian bailouts are foreign investors from North America, Europe and Japan. Ordinary people have to make sacrifices so that their governments can pay back every penny of these emergency loans. As a condition for receiving IMF credits, Asian governments are required to take over or guarantee loans from private borrowers assuring that foreign lender get repaid.
These bailouts protect private profits while socializing losses. As Martin Khor has written "The IMF practices double standards... On the one hand it insists that the governments play by strict market rules and not put in money to aid ailing local financial institutions and companies. But on the other hand it wants the governments to pay back all the external loans contracted from international banks, including the huge debts of the private sector that have gone sour."
The money traders are involved in and profit from every stage of the cycle. They earn money on their initial loans. They contribute though their speculative assaults to the destabilization of currencies. They reappear as creditors when troubles begin as they take their money and run. They act as "policy advisors" to the IMF when these institutions are negotiating the bailout packages. And they are the largest beneficiaries of the bailouts. Finally, they underwrite the issue of public debt in creditor countries to finance government contributions to the bailouts.
Transnational corporations derive another benefit from this cycle as they take-over foreign assets at firesale prices. At the insistence of the US Treasury, the bailout agreement for South Korea lifted the ceiling on foreign ownership of Korean industrial assets and made it possible for foreign firms to takeover Korean banks.
A similar phenomenon occurred in the wake of the Mexican crisis when foreign ownership rules for the financial sector were relaxed at the insistence of the US Treasury.
A report in the Financial Times of London observed that "The Chinese year of the tiger may prove to be the year of the corporate predator." The British paper announces a string of foreign acquisitions of Asian financial, real estate, pharmaceutical, packaging and telecommunications firms.
Now a similar process is occurring in Brazil which has sold off US$32.2 billion worth of state assets since 1991. Many companies were sold at prices far below their real value. For example the mining giant Vale do Rio Doce went for just US$5 billion, only enough to cover two months of interest payments. Now there is even talk of privatizing municipal sewage and water. As University of Ottawa economist Michel Chossudovsky observes Washington's "hidden agenda" is to take over productive assets and recolonise the Latin American continent.
Michel Chossudovsky calls the current situation of falling standards of living for the majority of the world's population "the most serious crisis in modern history...more devastating than the Great Depression of the 1930s."
He compares the situation, not to a disease, but to "financial warfare [which] knows no boundaries. In Korea, Indonesia and Thailand [and now in Brazil] the vaults of the central banks were pillaged by institutional speculators while the monetary authorities sought in vain to prop up their ailing currencies."
Central banks cannot defend their currencies because the amount of hot money available to speculators far outweighs even the foreign exchange reserves of the industrial countries. The daily turnover of speculative trades on money markets is twice as large as the total reserves of all industrialized countries' central banks.
The global financial crisis must be seen in the context of a world economy plagued by the twin problems of overproduction and lack of effective demand. More goods are produced than can be sold because the workers who produce them are underpaid. Michel Chossudovsky calls our era a global "cheap labour economy". The underlying problem is only made worse by IMF-sponsored Structural Adjustment Programs that impoverish millions of people.
One reason why so many of the billions that were invested in Asia went into dubious speculative activities rather than production of goods and services was the lack paying customers. This lack of effective demand has brought the world to the verge of global deflation that is falling prices due to overproduction.
As Canadian Labour Congress economist Andrew Jackson explains: "When productive capacity exceeds demand prices inevitably fall, unemployment rises, and wages are further put under downward pressure... It is this kind of downward pressure - touched off by a financial crisis - which gave us the Great Depression of the 1930s."
Some business economists say that the way to avoid global deflation is to keep the US economy running at full tilt. Business Week refers to the United States as "the consumer of last resort" warning that if growth slows down in the US "the world could end up with all sellers and no buyers--and on a path that leads to devastating deflation."
While stimulating imports into North America might stave off deflation in the short term, it does nothing to solve the underlying problem. Under the IMF formula, Asian countries' "recovery" is predicated on an expansion of cheap labour exports at the expense of internal purchasing power. But this spiral cannot go on for long as the expansion of these exports is undermined by the destruction of demand. As Chossudovsky puts it "the expansion of exports [from low-wage] countries is predicated on the contraction of internal purchasing power. Poverty is an input on the supply side."
The IMF medicine, as applied in Asia, is not only causing massive poverty. It is also endangering the world economy.
What is needed is another kind of adjustment where wealthy investors are made to absorb their share of losses and the problem of overproduction is confronted by raising the incomes of the poor promoting effective demand for necessities instead of luxuries. Trying to deal with overproduction of unneeded goods by promoting more consumption by those who already have more than enough is no solution. In fact it threatens the ecological health of our planet. The "ecological footprints" left by overconsumption of non-renewable natural resources in North America are already too large.
The global financial crisis has put international monetary reform on the agenda in a way that was unheard of just two years ago. We are at a crucial turning point as both progressive and regressive measures are vying for approval.
Some of the so-called "reform proposals" on the table are clearly regressive. For example, the conditions attached to the US$18 billion funding for the IMF by some Republicans members of Congress are truly deplorable. Their demand that the IMF charge above market interest rates on loans is simply punitive. Other measure that are currently on the policy agenda may appear progressive but amount to only minor tinkering when radical surgery is needed. For example, the Group of Seven industrial countries talk about "a new architecture for the international financial system" is so far vacuous and inconsequential.
Nevertheless, some worthwhile policy initiatives that many of us have been advocating for many years are finally making their way onto the policy agenda. Our challenge, as I see it, is to sort out what are genuinely progressive proposals from what is mere rhetoric.
Let me illustrate what I mean by a divergence between rhetoric and substance by first examining a proposal that has attracted a lot of attention, not because of its merits, but because of its sponsor - the biggest hedge fund owner of them all George Soros.
In an article published in the Financial Times of London on December 31, 1997, Soros sounds like someone who agrees with much of my analysis. He writes that the events in Asia had exceeded everyone's worst fears "including [his] own" and that the efforts of the IMF had borne no fruit. In Soros' own words:
"The prevailing system of international lending is fundamentally flawed, yet the IMF regards it as its mission to preserve the system...Without [the IMF], and without other official creditors, the system would already have collapsed in 1982 and again in 1994-1995. With luck, we may pull through once again. But it is high time to recognize the defects of the system and reconsider the mission of the fund.
"The private sector is ill suited to allocate international credit. It provides either too little or too much. It does not have the information with which to form a balanced judgment. Moreover, it is not concerned with maintaining macro-economic balance in the borrowing countries. Its goals are to maximize profit and minimize risk. This makes it move in a herd like fashion in both directions."
I find this analysis compelling, especially the reference to the inefficiency of the private sector as an allocator of international credit. If the money traders allocated investment dollars efficiently the we would not have one billion workers, or one-third of the world's labour force unemployed or underemployed.
Soros' proposed solution falls far short of what his own explanation would suggest is needed. His proposal is for an International Credit Insurance Corporation as a sister institution to the IMF. This Corporation would gather information about the economic policies of potential borrowing countries, and keep track of the extent of borrowing, both public and private. With this information it would set a ceiling on the amounts it would be willing to insure. Borrowers could obtain favourable terms for loans until the ceiling was reached. For amounts above the ceiling, interest rates would rise and lenders would no longer have their loans insured.
In my view this proposal amounts to an insurance plan for lenders, not a fundamental reform. Soros' scheme would not fundamentally alter the allocation of credit by the private sector nor would it return power to local governments and local communities. In fact his proposal does not even a new idea. The World Ban already has an underused function that can insure international loans. Nevertheless, Soros' critique adds credibility to calls for measures that would actually regulate international capital flows.
When we published Turning the Tide: Confronting the Money Traders early in 1997 we were hesitant about putting forward too ambitious a program for monetary reform because it appeared that most of our ideas were not on anyone's political agenda.
Now all the main ideas we discuss in our book are part of public discourse. Here I propose to discuss seven proposals that are in our book and an eight promising development as a way of opening up the debate on what proposals might help to bring about a progressive resolution to the current crisis.
In Turning the Tide we discuss the idea of convening a United Nations Conference on Money and Finance to create a new Bretton Woods system. While I still hope that such a UN Conference does occur some day, I do not think that such an eventuality is imminent. I think we are more likely to make progress on particular measures to cool down hot money than to achieve monetary reform in one grand moment.
Then why talk about systemic reform? The reason I think we should talk about a New Bretton Woods system is because we need to seize the initiative in defining the agenda for monetary reform, just as civic movements led the debate on the MAI. We need to make a forceful case for replacing the IMF with other kinds of international institutions.
If we are not out front in this debate then we are leaving the terrain open to other like former US Secretary of State George Schultz and Citibank's Walter Wriston and University of Chicago's Milton Friedman who have used the pages of the Wall Street Journal to proclaim:
"The IMF is ineffective, unnecessary and obsolete. We do not need another IMF... Once the Asian crisis is over, we should abolish the one we have."
Yes, we should abolish the IMF. But Milton Friedman's libertarian prescription that governments should simply get out of the way and let the money traders have free reign is no solution either. We need other more progressive governance measures.
Recently, British Prime Minister Tony Blair gave a speech in New York calling for "a New Bretton Woods for the next millennium". Although I have not seen the text, I am told that Mr. Blair's speech did not contain any detailed proposals. Nevertheless, I welcome his initiative because it opens up an opportunity for a debate on actually replacing rather than just trying to reform the IMF.
Talking about a new Bretton Woods enables us to juxtapose our critique of the actual workings of the IMF and the World Bank with the original vision of John Maynard Keynes. At the time of the original conference in New Hampshire in 1944, Keynes wrote the following: "We intend to retain control of our domestic rate of interest, so that we can keep it as low as suits our own purposes, without interference from the ebb and flow of international capital movements or flights of hot money... Not merely as a feature of the transition, but as a permanent arrangement, the plan accords to every member-government the explicit right to control capital movements.
Before the actual Bretton Woods conference took place Keynes wrote several drafts of his ideas for a post-war monetary system for the British government. He even sub-titled one of them drafts "a plan for financial disarmaments". What Keynes had in mind was a monetary system that would have prevented the money traders from interfering with national monetary and fiscal policies thus allowing sovereign states to keep interest rates low in pursuit of full employment.
Keynes wanted a system that would have obliged creditor nations, and not just debtors, to make adjustments to rectify balance of payments disequilibria. Most important of all, both Keynes and his US counterpart, Harry Dexter White, initially wanted members of the IMF to maintain full sovereignty over inflows and outflows of hot money. In an early draft of his proposals for Bretton Woods, White even suggested that governments not allow deposits or investments from another country without the approval of that country's government.
When the New York bankers got win of this key put pressure on the US Treasurer, Henry Morgenthau, to instruct White to modify his draft which he did. Nevertheless, the original Bretton Woods agreement did allow national governments to use some kinds of capital controls.
The decisive factor at the first Bretton Woods conference was not the intellectual merits of Keynes ideas but the reality of US power. As the IMF has evolved over the years it has moved farther and farther away from Keynes vision and become an enforcer of neo-liberal orthodoxy for the benefit of the money traders.
Despite all the criticisms that have been made of the IMF and its role in Asia, the recent October 30th communique from the Group of Seven industrial countries appears to be repeating the history of the original Bretton Woods conference with the United States imposing its position on partners. The key element in that communiqué is more money (US$90 billion) and more power for the IMF. The G-7 endorses President Clinton's proposals for establishing "an enhanced IMF Facility" to offer contingent short-term credit "for countries pursuing strong IMF approved policies".
Furthermore the G-7 communiqué reiterates the goal of "the orderly opening up of capital markets in emerging economies". The only qualifier is that this opening must be carries out "in an orderly and well sequenced manner."
In the US and the IMF's view capital account liberalization is still the goal. The communiqué papers over real policy differences among G-7 countries. French support for capital controls, a Canadian proposal for an Emergency Standstill Clause in international loan agreements and British reservations concerning the advisability of proceeding with full capital account liberalization are barely acknowledged.
For example, a background paper prepared for Mr. Blair by John Eatwell and Lance Taylor argues that the liberalization of capital flows is inefficient due to the volatility of capital markets. Eatwell and Taylor argue for a new World Financial Authority which would supervise the IMF and the World Bank and for abandoning the campaign to rewrite the IMF Articles of Agreement to require full capital account liberalization.
Howard Wachtel's idea of international cooperation to lower real interest rates seemed like an exotic idea from an academic economist when he first published his book The Money Mandarins in 1986. Yet an extraordinary thing happened in September of this year. After much talk in the financial press about a coordinated interest rate reduction among the central banks of the G-7 countries, the stock markets began to anticipate a rate cut. When the actual interest rate reduction was only a quarter of a percentage point stock markets actually fell in the US because rates had not come down far enough.
The idea of financial transactions taxes like the Tobin tax on currency trades has been around since it was first floated by James Tobin in 1978. In the wake of the escalating crisis the proposal is gaining a new momentum. The French newspaper Le Monde Diplomatique has even set up a non-governmental organization known as ATTAC (Action pour une taxe Tobin d'aide aux citoyens) to campaign for the tax.
James Tobin's proposals for taxing international currency transactions with a modest levy of between 0.1% and 0.25% is best known as a measure for slowing down currency speculation. However, the most important effect of a Tobin tax would be to give countries more control over domestic monetary policy allowing for lower interest rates to stimulate productive investment.
In Canada most of the debate on the Tobin tax has revolved around not its desirability but its feasibility given the propensity of the money traders to avoid taxes by shifting operations to offshore tax havens or by inventing new financial instruments. However, there has been a breakthrough in the debate with the publication of a study by Rodney Schmidt, an economist who formerly worked for the federal Finance Department.
Schmidt concludes that a Tobin tax, properly designed "is feasible and can be unilaterally imposed by any country on all foreign exchange transactions worldwide involving its own currency." Schmidt shows that a Tobin tax is feasible if it is applied at the intermediate, netting stage of foreign exchange transactions rather than at the initiation stage when deals are made or at the final settlement stage when payments are completed.
The other main argument for a Tobin tax is its revenue potential. I argue that at a time of declining Official Development Assistance the revenues from taxes on international transactions should be used predominantly for social and economic development.
David Felix and Ranjit Sau estimated that a Tobin tax of 0.25% would raise about US$300 billion a year by 1995 based on the Bank for International Settlements 1992 estimates of daily currency trading of about US$1.3 trillion. The BIS has since reported that daily currency market activity reached about US$1.5 trillion in April of this year. Thus, the revenue potential of a Tobin tax is even larger.
The alternative to massive bailouts of the money traders is to write off or write-down unpayable debts, just as capitalist societies rearrange corporate debts through national bankruptcy courts.
Moreover, debt relief for less developed countries must not be tied to orthodox Structural Adjustment Programs. The World Bank and IMF's Highly Indebted Poor Country initiative offers too little debt relief, for too few countries, over too long a waiting period and has too many harsh conditions attached, namely the obligation to implement orthodox Structural Adjustment Programs over a six year period.
Nevertheless, the HIPC Initiative is important. It has put debt reduction, including the idea that World Bank and IMF debts could be cancelled, squarely onto the political agenda.
In Canada we are taking part in a world-wide Jubilee 2000 debt remission campaign that goes much farther than the insipid HIPC initiative. We are calling for 100% debt remission for low income countries and substantial debt reduction for middle income debtors. Our criteria for eligibility for debt remission includes a more realistic definition of what constitutes "low income" than that of the World Bank. It also includes criteria such as the relationships between government revenues needed for social spending and those dedicated to debt payments that were absent from the original HIPC formula. Under our criteria the Philippines would be eligible for debt remission whereas it is not among the countries deemed eligible for the HIPC initiative.
When we were writing Turning the Tide our calls for renegotiation NAFTA especially the most objectionable parts of the investment chapter that I described earlier seemed a pipedream. What was happening in actual negotiations for other economic integration agreements was worse. Canada was negotiating a bilateral agreement with Chile as a way of the Clinton White House which lacked "fast track" negotiating authority from the US Congress. What was most disconcerting about those bilateral Canada-Chile talks was that Canada was asking Chile to give up its encaje system of capital controls just to get a treaty with Canada.
Fortunately, the Chileans refused and eventually the Government of Canada relented. Now Canada's Finance Minister says he actually supports Chile's encaje system of capital controls albeit only as a transitional measure. This fact, along with the setback for the MAI in the OECD talks in Paris, has given us new hope that the most regressive features of economic integration agreements can be rolled back.
At last April's Peoples Summit in Santiago, Chile we, representatives of civic groups in Canada formed a Hemispheric Social Alliance with partners in Mexico, Chile, Brazil, the United States and other countries throughout the Americas. One of the goals of this continental alliance is to redefine the economic integration agenda by demand that the regressive measures contained in NAFTA's investment chapter not be incorporated into any agreement for a Free Trade Area of the Americas. The suspension of MAI negotiations under the OECD was an important victory, now we must demand that NAFTA not be used for as the basis for investment talks under the WTO.
Back in 1996 it seemed foolish to buck the prevailing ideological winds by talking about legitimate uses for capital controls to stem the tide of hot money flows and allow countries to pursue independent economic policies. Now in the wake of the global crisis, the government of France went to the G-7 Finance Ministers meeting in Washington in October with a proposal to allow capital controls. While the French view did not prevail over the American, it is notable that some G-7 governments are now willing to defend capital controls publicly.
Now some mainline North American economists like Paul Krugman are writing articles in Fortune magazine of all places arguing that foreign exchange controls could be used by Asian countries to allow for the adoption of expansionary monetary and fiscal policies. While Krugman has reservations about the bureaucracy and opportunities for abuse that controls might create, he pronounces them as a better alternative than "trying to regain the confidence of international investors" by keeping interest rates high.
Then when Malaysia actually did impose exchange controls Krugman hurriedly wrote an open letter to Prime Minister Mahathir that was published in a subsequent issue of Fortune. That letter emphasizes that Krugman would only support temporary controls and that they should be carefully designed so as disrupt ordinary business as little as possible.
When we called for the regulation of derivatives trading it seemed like a cry in the wilderness since the high flying hedge funds were the darlings of the investment industry. Then last September one of these funds, Long-Term Capital Management crashed and had to be rescued with a US$3.5 billion bailout from other Wall Street investment firms. Long-Term Capital was perceived as too big and too important to be allowed to fail because its bankruptcy might have destabilized the entire US financial system.
This spectacular failure occurred despite the fact this particular fund was staved by two whiz kid Nobel Prize winning economists who thought they had developed a mathematical formula to beat the odds. They used sophisticated computer programs to make massive wagers on the global financial casino. But as John Maynard Keynes observed back in 1936 "when the capital development of a country becomes the by-product of the casino, the job is likely to be ill-done." Now the regulation of derivatives is firmly on the agenda.
To avoid a new debt trap the world needs a tribunal that could arbitrate the write down of middle income countries' debt ensuring that losses are shared by all creditors just as domestic bankruptcy courts rearrange the debt of insolvent corporations.
Canada's Finance Minister Paul Martin, has taken a modest proposal to the G-7 that would be a small step in this direction. Martin proposes that international loan agreements contain an "Emergency Standstill Clause" that could be activated be debtor countries. After invoking the clause creditors would have 90 days to negotiate a debt rearrangement. The biggest weakness in Martin's proposal is that the IMF Executive Board would have to approve the negotiations. Similarly the UNCTAD Report on Trade and Development 1998 recommends that "debtor developing countries facing speculative attack on their currencies should have the right to impose unilateral standstills on capital transactions."
A standstill arrangement would serve to ward off predatory investors and give countries to renegotiate their debts. If no agreement can be reached with creditors then an international insolvency court should have powers similar to national insolvency laws in the US and Canada which have provisions empowering tribunals to impose settlements.
When an international insolvency tribunal is established it should be independent of the IMF. When I floated this idea at a seminar in Ottawa last month, Jack Boorman, Policy Development Director at the IMF replied that an insolvency procedure could be established under the IMF. In my mind this would be unacceptable as it would tie an insolvency procedure to accepting IMF conditionality.
While reforms like a Tobin tax, permitting use of capital controls, deeper debt relief for low and middle income countries and an international insolvency tribunal under the United Nations are all important, at the end of the day primary responsibility for building just societies remains at the national and local level. We cannot expect the money traders to manage our savings so that they are reinvested in ecologically sustainable development. We have to do it ourselves.
We must be wary of dependence on what the Brazilians Jubilee debt campaign says is "a fearsome Trojan Horse filled not with soldiers but with foreign finance capital" which when brought into Brazil has had disastrous results.
The eight points I have outlined above are not a complete formula for resolving the global financial crisis. But I do believe that they offer more hope than the alternative which is to let the maniac financiers lead us over a cliff into another Great Depression. I believe we must become involved in the debate with our own progressive proposals because just as war is too important to leave to the Generals, financial reform is too important to leave to the IMF and the money traders.
Mis en ligne le 20/03/2003 par Pierre Ratcliffe. Contact: (pratclif@free.fr) sites web http://paysdefayence.blogspot.com et http://pierreratcliffe.blogspot.com