Unions and political movements that favor policies aimed at more stable economic growth and employment and fairer sharing of economic costs and benefits have been on the defensive against the neoliberal globalization juggernaut in both industrialized and developing countries. Greasing the juggernaut has been the veto power of financial capital over national economic policies, unleashed by the liberalizing and globalizing of financial markets. Left of center regimes, attracted to capital flows, but cowed by their crisis-laden volatility, are being forced to reverse policy direction in an effort to halt capital outflows, as witness the current travail of the Radical Frepaso regime of Argentina. Retaining the confidence of the volatile financial markets has displaced equitable sharing of economic costs and benefits as the primary consideration shaping macroeconomic policy. Financial globalization has thus been facilitating a broader neoliberal drive to replace the social welfare and full employment orientation of early post-WW II welfare capitalism with pre-WW I trickle-down economics.
However, the progressive lifting of national controls over private international capital transactions, which picked up speed after the 1960s, was followed soon after by an increasing frequency of national currency and banking crises, with many spilling over into regional and even global crises. The spillover threats, the sizeable public funds devoted by consortia of the major financial powers to contain the threats, and hostile political reactions in the debtor countries, are now evoking a crisis of confidence among the advocates of financial liberalization.
Increasing numbers of academic economists have come to view liberated financial markets as inherently inefficient and prone to excessive volatility, and a growing proportion favor a return to capital controls. Some, of neoliberal pursuasion, see the controls as essential for protecting the rest of the neoliberal policy agenda, notably free trade. Others, who favor the mixed economy orientation of welfare capitalism, see capital controls as having protected the industrial promotion policies and egalitarian welfare and full employment programs of the first post-World War II quarter century dubbed nostalgically the Golden Age of Capitalism against hostile reactions from the capital markets. And among economists who still believe in the efficiency of liberated financial markets, a growing number now blame the increasing frequency and severity of the 1990s crises on the use of publicly funded “bailouts” to contain the crises. The reasoning is that such bailouts increase “moral hazard,” an insurance industry notion that insuring against loss from risky behavior diminishes the insured’s incentive to behave prudently. By analogy, public bailouts of creditors and debtors in today’s financial crisis encourage more risky lending and borrowing that produce a deeper crisis tomorrow.
Concurrently, at the official level there is now virtually unanimous rhetorical agreement among central banks, finance ministries, and intergovernmental financial institutions (IFIs), such as the IMF and the World Bank, on the need somehow to reform “the global financial architecture” in order to bring greater stability to international capital flows. Thus far,however, few concrete actions have emerged from the official deliberations on architectural reform, and most reform proposals from the academic critics have been kept off the official agenda.
One rather obvious reason for this is the makeup of the official commissions assessing reform proposals. Participation has been restricted thus far to senior central bank and treasury bureaucrats of the major financial powers, whose modus operandi has long been to accommodate to the views of the privatefinancial institutions under their jurisdiction, and to senior IFI officials whose tenure has depended, among other factors, on responsiveness to the positions of the major financial powers that fund and control their institutions. The reactions of the financial firms of the major powers to proposed reforms are thus given great consideration, whereas developing countries are being offered merely token participation in the deliberations [Griffith-Jones and Kimmis, 1999]. Moreover, participating bureaucrats cannot deviate from the basic tenet of their institution’s neoliberal creed, that liberated financial markets are inherently efficient. That is, they will price capital assets correctly and thus allocate investments effectively in accordance with the changing trends in the supply of and demand for goods and services, unless knocked off kilter by market distorting government intervention. The reforms should therefore concentrate on correcting the policies, while nurturing and advancing global capital market liberalization.
Downlaod
Why International Capital Mobility Should be Curbed, and How it Could be Done
