Unfettered Capital Wreaks Havoc

By Ellen Frank

Once upon a time, and not so very long ago, most countries restricted the flow of money across their borders. National sovereignty in economic affairs depended upon this. In order to manage their economies, in order to prevent mass unemployment and social upheaval, governments needed the ability to invest, borrow, spend, hire people. To pay for their spending, they needed the ability to print money and control interest rates. But the power to print money and control interest rates is meaningless if the wealthy, who own most of the money, can simply trade their money for a foreign currency and abscond with the wealth. Thus, after World War II, virtually every nation (the U.S. being a very rare exception) placed restrictions on how, when, and how much of its currency businesses and speculators could take out of the country. These restrictions were known as short-term capital controls.

As businesses went global in the 1980s, they pressured governments to eliminate capital controls. An American company producing appliances in Italy for the European market didn't want to be stuck holding its earnings forever in the form of lira in Italian banks. The home office wanted dollars in New York. Multinational businesses and banks wanted the freedom to cash in lira for dollars or francs for yen, as they wished. As global companies spread their operations over the world, capital controls dissolved in their wake. And as controls dissolved, first in Europe, then South America, finally in Asia, speculators—bankers, currency traders, mutual fund managers—moved in. In country after country, financial operators poured money in, eagerly trading dollars or yen for pesos, cruzieros, rupiahs, and rubles, then using the proceeds to lend (at high interest rates) to new, fast-growing businesses or to play the local stock market. Fortunes were made in the receiving countries. In Russia, Mexico, Brazil, Indonesia—the list goes on and on—savvy businessmen and corrupt government officials, touting their open markets, sold off parts of the local economy and pocketed the proceeds.

Today, the concerns that drove countries in the past to restrict this sort of money-trading have, as they say, come home to roost. In Mexico, in Russia, in Korea and Thailand, the bankers and fund managers who lent and bought so eagerly proved just as quick to turn heel and flee. When foreign money pulled out of these countries, their stock markets crashed, banks failed, businesses defaulted on loans and closed for lack of credit. The value of the local currencies plummeted, rendering essential imports unaffordable. While the international banks run to the International Monetary Fund (IMF), clamoring for repayment, the victims of these financial hit-and-runs remain in critical condition. Mexico, for example, with its corrosive unemployment, still has not recovered from its encounter with global banks in 1994 (remember the peso crisis?). The countries of East Asia, whose "crisis" began one year ago, are still reeling, the bottom not yet in sight. Russia, virtually comatose since the ruble crisis of 1991, is now devastated by a new round of capital flight.

Boosters of unfettered money—the global finance industry and its mouthpiece, the IMF—predictably, blame the victims. "Crony capitalism!" "Inefficiency!" "Poor fiscal management!" they crow. They, the public is assured, knew it all along. They, we are told, do the world a service, forcing backwards countries to modernize. What the free-market folks fail to explain is this: If these markets were so inefficient, these economies so badly managed, why were the global banks and fund managers so hot to lend them money in the first place?

Market-boosters have another argument. If the public (via the IMF) doesn't pay off the banks' bad loans and restore their shaken confidence, who will provide new loans to these, now desperate and depressed, economies? How will Mexicans buy corn, Indonesians buy rice, Russians buy grain for their hungry? Are they to starve? Furthermore, if the crisis countries can't buy American-made stuff, Americans will lose jobs. The banks appear to have the world economy in a choke-hold. Countries that can't attract money from the global financial markets can't buy goods on world markets. But the global finance companies won't lend countries money—particularly little countries whose currencies aren't of much use internationally—unless the public underwrites the debt. And here's the kicker. If the banks and mutual funds lend lots of money to a country, then get spooked and start pulling out, thereby setting off a financial panic and causing their own losses—they still want to be repaid.

It is by now obvious that the IMF's response to these "crises"—forcing countries to raise interest rates, the better to attract foreign money to pay their debts to foreign money-lenders—while a boon to financial institutions, is disastrous for the world economy. The crisis in Asia has made it abundantly clear that the prospects for world economic cooperation and development can no longer rest on the whims and dictates of the global financial establishment. It is time to reinstate controls on short-term capital movements. Simple restrictions like imposing taxes, waiting periods, or quotas on cross-border money flows are workable, enforceable and demonstrably effective. The power and mobility of global finance must be curbed.