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Today, the world media are awash with talk about reform of the global financial architecture. However, the published reports focus mainly on discussions taking place within the Group of Seven or the larger Group of 22, particularly on the debate between the finance authorities of the United States and those of Europe and Japan. Sometimes, there are some reports that come out on proposals from the United Nations Conference on Trade and Development (UNCTAD) or from some government in the South. But little weight is attached to the latter by media commentators, even when substantively these views merit consideration.
Of course, if one is a Jeffrey Sachs or a Paul Krugman, of course, ones views are given some currency. If you are not a neoclassical economist, forget it. And if you come from the world of NGOs, your views dont count at all. This is, of course, interesting because when it comes to global trade, US Trade Representative Charlene Barshefsky, and WTO Director General Renato Ruggiero are talking about consulting civil society and about actively and democratically involving all of us in the globalization process. But when it comes to the world of high finance, these are matters of allegedly great complexity that are best left to the experts and the managers of the world economy like Alan Greenspan, Robert Rubin, and Larry Summers, whom Time has anointed as The Committee to Save the World.” Or to the much-broader Group of 22 countries handpicked by the US, whose three reports released in October 1998 have been anointed as “the international communitys definitive statement on reforming the international architecture”(1)
Why Are We Here?
The overriding purpose of this conference is to get the rest of us to crash this exclusive party talking about the financial order of the world. We need to do this for several reasons. First, because those who are actively debating this issue are, for the most part, still arguing within a paradigm of neoliberal economics that has been central to generating this crisis. Second, because devising a global financial order is not simply a matter of technical economics but one that must be informed by values, and the main values and priorities of those who are managing this process are different from those of you and me. Third, because this process is, first and foremost, a question of power, and unless we do out best to gatecrash this gathering, what will emerge will simply be a global architecture that will benefit a very small global elite and continue to marginalise the vast majority of the worlds peoples.
Considerations on Finance Capital
Before discussing strategies being proposed for global financial reform, let me advance some propositions.
First of all, I think we need to put to rest once and for all the idea that the Asian crisis is not a product of “crony capitalism.” What brought about the crash of 1997 was not crony capitalism but “casino capitalism.” Even at the height of the Asian financial collapse in September of that year, Stanley Fischer, the American deputy managing director of the IMF, was blaming the crisis on the fact that “markets are not always right. Sometimes inflows are excessive, and sometimes they may be sustained too long. Markets tend to act fast, sometimes excessively.”(2) And even the Economist, one of the premier organs of market fundamentalism, had to admit that “the economic pain being imposed [by global capital markets] on the ex-tigers is out of all proportion to the policy errors of their governments.”(3) The Fund and the US Treasury, of course, continue to uphold the rightness of their obsession with “reforming” domestic economic and financial arrangements, but the credibility of this approach is eroded daily by the spectacular fashion that IMF straitjackets are suffocating economies in Thailand, Malaysia, and Indonesia.
Second, finance has been the cutting edge of the globalization process. The integration of commodity markets via free trade and that of production systems via TNC subsidiarization have proceeded apace, but both processes have been outstripped by the integration of global capital markets under the aegis of London and Wall Street. Third, finance, which was liberated from the confines of the Keynesian state by the Thatcherite and Reaganite ideological revolution, has steadily gained “ascendancy over industry” and other sectors of the economy, to borrow the prescient characterisation of the 1991 UNCTAD Trade and Development Report.(4) This pre-eminence of the financial sector is related to the crisis of dwindling growth or deflation that deflation which has increasingly overtaken the real sectors of the global economy. This crisis has its roots in overcapacity or under-consumption, which today marks global industries from automobile to energy to capital goods.(5) Diminishing, if not vanishing, returns in industry has led to capital being shifted from the real economy to squeezing “value” out of already created value in the financial sector.
The result is essentially a game of “global arbitrage,” where capital moves from one capital market to another, seeking to turn profits from the exploitation of the imperfections of globalised markets by taking advantage of interest-rate differentials, targeting gaps between nominal currency values and “real” currency values, and short-selling in stocks, that is, borrowing shares to artificially inflate share values then selling. Not surprisingly, volatility, being central to global finance, has become as well the driving force of the global capitalist system as a whole.
Third, since differences in exchange rates, interest rates, and stock prices are much less among the more integrated Northern markets, movements of capital have been much more volatile between the capital markets of the North than the so-called “Big Emerging Markets” of the South and Asia. Thus while crises are endemic to the finance-driven global capitalist system, the crises of the last few years have been concentrated in the emerging markets.(6) Since late 1994, we have had Mexican financial crisis, the “Tequila Effect” of this crisis in Latin America, the Asian crash, the Russian collapse, the unravelling of the Brazilian real, and the spinoff of the Brazilian crisis on the rest of Latin America.
Fourth, despite the global financial systems proneness to crises, finance capital operates, as Robert Kroszner describes it, “in a realm close to anarchy.”(7) That deregulation at the national level has not been replaced by reregulation at the international level is because finance capital has accumulated tremendous political power over the last two decades. While finance capital was liberated from the straitjacket of the Keynesian economy by the Republican administrations of Ronald Reagan and George Bush, it has been under the Democratic administration of Bill Clinton that financial interests became paramount in the foreign economic policy of the US government. Represented in the inner sanctum of Washington by Treasury Secretary Robert Rubin, a former arbitrage artist, and Federal Reserve Chairman Alan Greenspan, a former Street consultant, the so-called Wall Street-Treasury Complex stands foursquare against any serious financial regulation. The power of this lobby stems partly from the strength of the interests it represents, but even more from its ideology of market freedom, which it markets as applying not only to trade in goods but also to the mobility of capital.
Fifth, the crisis of the developing countries of the South is not simply one of exposure to unregulated financial flowsone can easily be fixed with capital controls at both the global and national level. The financial deregulation of their economies that has proven so devastating is simply the latest phase of a development model that they have internalised over the last two decades under the aegis of IMF-World Bank structural adjustment programsone that makes foreign markets and foreign capital the twin engines of development. In other words, the Mexican Crisis on 1995, the Asian Collapse of 1997, and the Latin American unravelling of 1999 were events waiting to happen to economies where liberalization of trade and investment had become equated development, and where import substitution, trade policy, and industrial policy had been vilified as anti-development.
The Three Schools of Global Financial Reform
There are now a thousand and one proposals for world financial reform, ranging from proposals for preemptive crisis mechanisms to reform of the International Monetary Fund to establishment of a “World Financial Authority.”(8) Rather than take them up one by one in technical fashion, let me instead go into the heart of the matter, power and interests, and group the most important proposals into three different strategies. I will call the first the “Its the wiring, not the architecture” approach. The second might be termed the “Back to Bretton Woods” school. And we might christen the third strategy as the “Change the development model” strategy.” “Its the Wiring, not the Architecture”(9)
One might say that this is basically the US positionthough it is shared to some degree by many of the G-7 members, with probably the notable exception of Japan.
This school assigns primacy to “reforming” the financial sectors of the crisis economies along the lines of more transparency, tougher bankruptcy laws to eliminate moral hazard, prudential regulation using the “Core Principles” drafted by the Basle Committee on Banking Supervision, and greater inflow of foreign capital not only to recapitalize shattered banks but also to “stabilise” the local financial system by making foreign interests integral to it. When it comes to the supply-side actors in the North, this perspective is to leave them to voluntarily comply with the Basle Principles, though government intervention might be needed periodically to catch freefalling casino players whose collapse might bring down the whole global financial structure, as was the case last year when the US Federal Reserve had to organise a rescue of the hedge fund Long Term Capital Management after the latter was unravelled by Russias financial crisis. the Russian crisis unravelled the hedge fund Long Term Capital Management.(10) The farthest the Group of Seven has gone in terms of dealing with the controversial hedge fund question was to issue a declaration in October 1998 commenting on the need to examine “the implications arising from the operations of leveraged international financial organizations including hedge funds and offshore institutions” and “to encourage off-shore centers to comply with internationally agreed standards.”(11)
Finally, when it comes to the existing multilateral structure, this view supports the expansion of the powers of the IMF, proposing not only greater funding but also new credit lines, such as the “precautionary credit line” that would be made available to countries that are about to be subjected to speculative attack. Access to these funds would, however, be dependent on a countrys track record in terms of observing good macroeconomic fundamentals, as defined traditionally by the Fund.
While much has been made of the conflict between the US and the other members of the G-7 countries in the world press, in fact, the articulated differences appear to be marginal. France and Germany (at least before the resignation of Oskar Lafontaine), with some support from Japan, have proposed the establishment of “target zones” that would reduce the fluctuations among the yen, dollar, and euro. There are no virtually no suggestions from the European Union on controlling capital flows on the supply side.
Japan has made additional proposals on the IMF, but these are variants of the position of either the US government or some US think-tanks: more IMF monitoring of hedge funds, getting the IMF to push private creditors and investors to participate in a rescue program instead of bailing them out, and providing a “certified” line of credit to countries that follow good economic policies which are under speculative attack, something similar to Clintons precautionary credit line.(12)
“Back to the Bretton Woods System”
The second school of thought would put tougher controls at the global level, in the form the Tobin Tax or variants of it.(13) The Tobin tax is transactions tax on capital inflows and outflows at all key points of the world economy that would “throw sand in the wheels” of global capital movements. Controls at the international level may be supplemented by national-level controls on capital inflows or outflows. A model of such a measure is the Chilean inflow measure that requires portfolio investors to deposit up to 30 per cent in an interest-free account at the Central Bank for a year, which has been said to be successful in discouraging massive capital portfolio inflows. For some people, there is an ill-concealed admiration for Prime Minister Mohamad Mahathirs tough set of outflow measures, which included the fixing of the exchange rate, the withdrawal of the local currency from international circulation, and a one-year lock-in period for capital already in the country.(14)
In addition to controls at the national and international level, regional controls are also seen by proponents of this view as desirable and feasible. The Asian Monetary Fund is regarded as an attractive, workable proposal that must be revived. The AMF was proposed by Japan at the height of the Asian financial crisis to serve as a pool of the foreign exchange reserves of the reserve-rich Asian countries that would repel speculative attacks on Asian currencies. It was, not surprisingly, vetoed by Washington.
The thrust of these international, national, and regional controls is partly to prevent destabilising waves of capital entry and exit and to move investment inflow from short-term portfolio investment and short-term loans to long-term direct investment and long-term loans. For some, capital controls are not simply stabilising measures but are, like tariffs and quotas, strategic tools that may justifiably be employed to influence a countrys degree and mode of integration into the global economy. In other words, capital and trade controls are legitimate instruments for the pursuit of trade and industrial policies aimed at national industrial development.
When it comes to the World Bank, the IMF, and the WTO, the thrust of this school is to reform these institutions along the lines of greater accountability, less doctrinal push for free trade and capital account liberalization, and greater voting power for developing countries. Like the G-7, advocates of this approach view the IMF as a mechanism to infuse greater liquidity into economies in crisis, but unlike the G-7, they would have the Fund do this without the tight conditionalities that now accompany its emergency lending. Some people in this school accompany their proposals to reform the Bank and the Fund with a recommendation to establish a “World Financial Authority,” whose main task, in one formulation, would be to develop and impose regulations on global capital flows and serve as “a forum within which the rules of international financial cooperation are developed and implementedby effective coordination of the activities of national monetary authorities.”(15) In other words, the Fund, World Bank, and WTO continue to be seen as central institutions of a world regulatory regime, but they must be made to move away from imposing one common model of trade and investment on all countries. Instead, they must provide a framework for more discriminate global integration, that would allow greater trade and investment flows but also allow some space for national differences in the organisation of capitalism. In the vision of Dani Rodrik, the current chief economic adviser to the G-22, a grouping of developing countries. the ideal multilateral system appears to be substantially a throwback to the original Bretton Woods system devised by Keynes that reigned from 1945 to the mid-seventies, where “rules left enough space for national development efforts to proceed along successful but divergent paths.”(16) In other words, a “regime of peaceful coexistence among national capitalisms.”(17)
Not surprisingly, this perspective has resonated well with economists and technocrats from developing countries, the devastated Asian economies, and the UN systemwhich is said to the refuge of Keynesians who fled the neoliberal revolution at the World Bank and academic institutions.
“Change the Development Model”
Those that we classify as belonging to this school regard the IMF and WTO, in particular, as Jurassic institutions that would be impossible to reform both owing to both their deep neoliberal indoctrination and the hegemonic influence within them of the United States. The world would be better off without them since they serve merely to order the global system in favour of the North.
The same scepticism marks their view on the possibility of imposing global capital controls or prudential regulations on hedge funds and other big casino players, again because of the strength of neoliberal ideology and financial interests.
National capital controls are seen as much more promising, and the experiences of China and India in avoiding the financial crisis, of Chile in regulating capital flows, and Malaysia in stabilising its economy have convinced proponents of this view that this is the way to go. Like the “global Keynesians,” this school would also see regional arrangements such as the Asian Monetary Fund as feasible and workable.
Where the proponents of this view differ from the global Keynesians is that their advocacy of capital controls is accompanied by more fundamental and thorough critique of the process of globalization that goes beyond its blasting away legitimate differences among national capitalisms. Buffering an economy from the volatility of speculative capital is an important rationale for capital controls, but even more critical is the consideration that such measures would be a sine qua non for a fundamental reorientation of an economy toward a more inner-directed pattern of growth that would entail, in many ways, a reversal, though limited of the globalization process. The main problem, from this viewpoint, is not the volatility of speculative capital, but the problem lies in the way that the export sector and foreign capital have been institutionalised as the engines of these economies. The problem is the indiscriminate integration into the global economy and the over-reliance on foreign investment, whether direct investment or portfolio investment, for development. Thus while the current crisis is wreaking havoc on peoples lives throughout the South, it also gives us the best opportunity in years to fundamentally revise our model and strategy of development.
Changing the Development Model
What are some of the priorities of this alternative model of development? What makes it different not only from the neoliberal model but also from the national capitalisms stoutly defended by Dani Rodrik?
Comprehensive, integrated formulations are few and far between in our region today, but the following ideas, proposals, or visions are being actively discussed throughout East Asia today:
While foreign investment of the right kind is important, growth must be financed principally from domestic savings and investment. This means good, progressive taxation systems. One of the key reasons for the reliance on foreign credit and foreign investment was the elites of East Asia did not want to tax themselves to produce the needed investment capital to pursue their fast-track development strategies. Even in the depths of todays crisis, conspicuous consumption continues to mark the behaviour of Asias elites, who also send so much of their wealth abroad to safe havens in Geneva, Tokyo, or New York. Regressive taxation systems are the norm in the region, where income taxpayers are but a handful and indirect taxes that cut into the resources of lower-income groups are the principal source of government expenditures.
While export markets are important, they are too volatile to serve as reliable engines of growth. Development must be reoriented around the domestic market as the principal locomotive of growth. Together with the pitfalls of excessive reliance on foreign capital, the lessons of the crisis include the tremendous dependence of the regions economies on export markets. This has led to extreme vulnerability to the vagaries of the global market and sparked the current self-defeating race to “export ones way out of the crisis” through competitive devaluation of the currency. This move is but the latest and most desperate manifestation of the panacea of export-oriented development.
Making the domestic market the engine of development, to use a distinctly unfashionable but unavoidable term, brings up the linkage between sustained growth and equity, for a “Keynesian” strategy of enlarging the local market to stimulate growth means increasing effective demand or bringing more consumers (hopefully discriminating ones, that is) into the market via a comprehensive program of asset and income distribution, including land reform. There is in this, of course, the unfinished social justice agenda of the progressive movement in Asiaan agenda that has been marginalised by the regnant ideology of growth during the “miracle years.” Vast numbers of people remain marginalised because of grinding poverty, particularly in the countryside. Land and asset reform would simultaneously bring them into the market, empower them economically and politically, and create the conditions for social and political stability. Achieving economic sustainability based on a dynamic domestic market can no longer be divorced from issues of equity.
Regionalism can become an invaluable adjunct to such a process of domestic market-driven growth, but only if both processes are guided not by a perspective of neoliberal integration that will only serve to swamp the regions industries and agriculture by so-called “more efficient” third party producers, but by a vision of regional import-substitution and protected market-integration that gives the regions producers the first opportunity to serving the regions consumers.
While there are other elements in the alternative development thinking taking place in the region, one universal theme is “sustainable development.” The centrality of ecological sustainability is said to be one of the hard lessons of the crisis. For the model of foreign-capital fuelled high-speed growth for foreign markets is leaving behind little that is of positive value. In the case of Thailand, at least, it is hard to dispute this contention. As many of you visiting this once lovely city can testify, 12 years of fast-track capitalism is leaving behind few traces except industrial plant that will be antiquated in a few years, hundreds of unoccupied high-rises, a horrendous traffic problem that is only slightly mitigated by the repossession of thousands of late-model cars from bankrupt owners, a rapid rundown of the countrys natural capital and an environment that has been irreversibly, if not mortally, impaired, to the detriment of future generations.
In place of 8-10 per cent growth rates, many environmentalists are now talking of rates of three to four per cent or even lower. This links the social agenda with the environmental agenda, for one reason for the push for high growth rates was so that the elites could corner a significant part of the growth while still allowing some growth to trickle down to the lower classes for the sake of social peace. The alternativeredistribution of social wealthis clearly less acceptable to the ruling groups, but it is the key to a pattern of development that will eventually combine economic growth, political stability, and ecological sustainability.
These and similar ideas are already being discussed actively throughout the region. What is still unclear, though, is how these elements will hang together. The new political economy may be embedded in religious or secular discourse and language. And its coherence is likely to rest less on considerations of narrow efficiency than on a stated ethical priority given to community solidarity and security.
Moreover, the new economic order is unlikely to be imposed from above in Keynesian technocratic style, but is likely to be forged in social and political struggles. This fire down below is likely to upset the best laid plans of the tiny elite that are trying to salvage an increasingly unstable free-market order by tinkering at the margins of the global financial order and calling it reform.
* This paper was prepared for the Conference on “Economic Sovereignty in a Globalised World,” Bangkok, March 23-26, 1999. Walden Bello, PhD, is professor of sociology and public administration at the University of the Philippines and co-director of Focus on the Global South, a research, analysis, and advocacy program of the Chulalongkorn University Social Research Institute in Bangkok. He is the author or co-author of ten books, including the recently published A Siamese Tragedy: Development and Disintegration in Modern Thailand (London: Zed Press, 1998).
(1) Barry Eichengreen, Toward a New Financial Architecture (Washington, DC: Institute for International Economics, 1999), p. 131.
(2) Stanley Fischer, “Capital Account Liberalization and the Role of the IMF,” Paper presented at the “Asia and the IMF Seminar,” Hong Kong, Sept. 19, 1997.
(3) Economist
(4) Quoted in UNCTAD, Trade and Development Report 1998 (Geneva: UNCTAD, 1998), p. i.
(5) See, for instance, “Barbarians at Bavarians Gates,” Economist, Feb. 13, 1999, p. 22.
(6) Stanley Fischer, “On the Need for an International Lender of Last Resort,” Speech delivered at the joint luncheon of the American Economic Association and the American Finance Association, New York, January 3, 1999.
(7) Randall Kroszner, “The Market as International Regulator,” in Mastering Finance, p. 399.
(8) A list of the more significant proposals are found in Barry Eichengreen,Toward a New Financial Architecture (Washington, DC: Institute for International Economics, 1999).
(9) Among the documents that broadly share this view are the following: Group of 22, “Reports on the International Financial Architecture, Working Groups on Transparency and Accountability, Strengthening the Financial System, and International Financial Crises, Oct. 1998; Morris Goldstein, The Asian Financial Crises: Causes, Cures, and Systemic Implications (Washington: Institute for International Economics, 1998); Robert Rubin, “Strengthening the Architecture of the International Financial System,” Speech at the Brookings Institution, Washington, DC, April 14, 1998 (downloaded from Internet); Stanley Fischer, “On the Need for an International Lender of Last Resort,” Paper prepared for the joint luncheon of the American Economic Association and the American Finance Association, New York, January 3, 1999; and Barry Eichengreen, Toward a New International Financial Archictecture (Washington, DC: Institute for International Economics, Feb. 1999).
(10) Federal Reserve Chairman explicitly opposed regulation of hedge funds during hearings at the US Congress in October 1998, when the LTCM fiasco occurred. See David Ignatius, “Policing Hedge Funds: Whos in Charge Here?,” International Herald Tribune, Feb. 22, 1999., p. 6.
(11) Quoted in “Towards a New Financial Architecture: A Report of the Task Force of the Executive Committee on Economic and Social Affairs of the United Nations,” United Nations, New York, January 21, 1999.
(12) As summarized by David de Rosa, Miyazawas Big Ideas on How to Run the IMF,” Bloomberg News column, reproduced in Manila Times, March 3, 1999, B13.
(13) Among the documents that might be said to broadly belong to this viewpoint are the following: Task Force of the Executive Committee on Economic and Social Affairs, United Nations, “Towards a New International Financial Architecture; UNCTAD, “The Management and Prevention of Financial Crises,” Trade and Development Report 1998 (Geneva: United Nations Conference on Trade and Development, 1998), pp. 83-110; Dani Rodrik, “The Global Fix,” New Republic, Nov. 2, 1998 (downloaded from Internet); John Eatwell and Lance Taylor, , “International Capital Markets and the Future of Economic Policy,” CEPA Working Paper, No. 9, Center for Economic Policy Analysis (CEPA), New School for Social Research, Sept. 1998; Roy Culpeper, , “New Economic Architecture: Getting the Right Specs,” Remarks at the Conference on “The Asian Crisis and Beyond: Prospects for the 21st Century, Carleton University, Ottawa, January 29, 1999.
(14) See, for instance, Roy Culpeper.
(15) John Eatwell and Lance Taylor, p. 14.
(16) Dani Rodrik.
(17)Ibid.
Walden Bello*
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