Money, money everywhere, but nary a drop to drink
Speaking Notes for the G6B People’s Summit
Saturday, June 22, 2002
Pamela Foster, Coordinator, Halifax Initiative Coalition
Panel: Consequences of Neo-Liberal Economic Models
We heard today about some of the impacts of trade liberalization. I will focus on financial liberalization, which is often the precursor to trade liberalization, with serious impacts of its own.
First, I will give a quick overview of financial liberalization.
Second, I will highlight some of it problems and impacts.
Third, I will provide some alternative strategies, which all can be summarized as re-regulation of financial markets and investment.
Financial liberalization refers to the removal of barriers on movement of capital ie: money and the deregulation of the financial sector.
In 1944, 44 countries got together at the invitation of the United States in Bretton Woods, New Hampshire to discuss management of the global economy, post WWII and post-Depression. John Maynard Keynes, the famous economist, was part of the UK delegation to the Bretton Woods conference. He was opposed to the free movement of capital and defines globalization as I think many in this room would want to see it. I quote,
I sympathize with those who would minimize, rather than maximise economic entanglement among nations. Ideas, knowledge, science, travel, hospitality – these are things that should of their nature be international. But let goods be homespun, whenver it’s reasonable and conveniently possible and above all, let finance be primarily national.
The US approach was to maximize the free movement of goods, services and capital. With the UK highly indebted to the US, as was much of the rest of Europe, in the early post-war period, the US vision, that of unfettered movement of capital, goods and services, prevailed.
The Keynes vision is not completely absent in the Bretton Woods Agreement which gave birth to the World Bank, the International Monetary Fund and the General Agreement on Tariffs and Trade. The IMF for example had a mandate to provide a stable international monetary system that would promote trade, growth and high levels of employment. The impact of IMF lending and policy advice on job creation is not taken into account, nor prioritized.
The role of the Bretton Woods Institutions in promoting neo-liberalism is what gives rise to the term you have heard already today – the Washington Consensus – which is another term for the Wall Street, Treasury Complex.
The IMF has for years been pushing to amend its Articles of Agreement to require fully open capital accounts, complete financial liberalization, to be a pre-condition of IMF membership, promising the promised land.
Promises of the Promised Land – Problems and Impacts
Advocates of financial liberalization argue that it is an economic good – providing credit, jobs and growth, thereby reducing poverty.
I would like to look at problems and impacts of financial liberalization but first I’ll explain two kinds of investment – portfolio and foreign direct.
With financial liberalization, money is no longer only a means of exchange, it itself has become a commodity.
Currency speculators per day trade two trillion dollars. If one stacked up this amount of dollars, it would be 40 times higher than Mount Everest. There has been a complete divorce of the financial economy from the real economy – the economy where we work, buy and sell products and services.
In 1977, currency speculation was 3.5 times the dollar value of world exports. In 1998, it was 68 times more.
The entire volume of global trade is 6.5 trillion per annum. This amount is equivalent to 4.3 days worth of foreign exchange trades.
100 companies do the majority of speculation, and 10 companies control 52% of this. 80% of the trades happen in 7 countries.
80% of foreign exchange purchased is sold within 7 days, and 40% within 2. It is gambling on a currency casino.
Foreign Direct Investment is not a panacea. The New Partnership for Africa’s Development, NEPAD, which is being shopped before the G8 at the upcoming Summit, calls for increased FDI. 10 countries, none in Africa, receive 70% of FDI activity in developing countries. Stats on FDI rarely account for transfer pricing or outflows and how much FDI resulted from mergers and acquisitions resulting from privatizion.
- Limit the role of the state to maintaining a sound investment climate and law and order.
Advocates will argue that opening domestic banking sector to foreign ownership will result in much needed capital and know-how. However, it often results in the Multinational Banks coming in, who then work with mulitnational companies. In other words domestic enterprise does not flourish but instead slowly gets squeezed out of markets. Example in Ghana, where the National Bank of Ghana was taken over by Barclays. Barclays eventually closed the rural, unprofitable branches. Now Ghana is a largely rural country. The impacts of this were multiple. Less access to credit for rural farmers and enterprises, less domestic savings available for national enterprises and governments.
- Reduce government spending and force export orientation
Reserve holdings carry a considerable cost. A dollar held as reserves is essentially a dollar of foregone investment for a developing nation. If these nations had not increased their reserve holdings, they could have used this money to support investment in physical or human capital. The cost of the build-up of reserves is then the difference between the return on investment in people and the economy developing nations and the small returns (typically 1-2 percent real returns) available on the assets held as reserves.
Governments are forced to put higher and higher amounts into reserve holdings to be able to buy back currencies for example, in the case of a speculative attack, or to high short term debt.
- Instability and volatility
Post crisis and pre-crisis – which ties into foreign exchange reserves and a sound investment climate.
- Multiplier Effect
Companies take profits made by foreign direct investment and put it into the financial markets rather than reinvesting in the companies. No incentive for resource conservation. Instead company can take maximum yield even if it means devastation of a resource and invest profits in financial markets, on the presumption of higher rates of return. There is risk, as seen by Enron through its playing in the derivatives market. Moral hazard is minimized however by commercial risk insurance provided by MIGA for example, an arm of the World Bank group and by IMF – through its bail-outs which go to enable countries to pay off foreign investors (foreign exchange reserves cannot keep up with foreign investment).
- Loss of sovereignty
Citizens and governments are increasingly held hostage by creditors and investors, see chill effect.
Domestic financing, debt cancellation, closure of tax havens, the Tobin tax, etcetera. There is literature on the Tobin Tax at the back of the room.
For years, the masters of the global economy have argued that the Tobin tax is not feasible because it would be impossible to track hot money. However, measures put in place to track terrorist money demonstrate it is possible to track capital flows.
Another world is indeed possible.