Book review - Global finance:

New thinking on regulating speculative capital markets


Editors Walden Bello, Nicola Bullard and Kamal Malhotra. Published by The University Press, Dhaka, and Zed Books, London and New York, in association with Focus on the Global South, Bangkok, 2000.

- Bill Rosenberg

Available for Watchdog readers from One World Books (who kindly provided the review copy) for more than 20% off the recommended retail price: $55, postage paid. Send orders to One World Books, Box 68 419, Newton, Auckland, Fax (09) 845 6354.

TINA* is dead. This book shows there is a growing wealth of practical ideas and well considered arguments on how to deal with the dangers presented by global finance markets, other than rolling over and accepting them. Not that all the ideas are by any means new: many are the result of the same painful lessons that were taught in the 1930’s Depression (as many of the authors show) about the dangers of footloose capital. But that gives the ideas the wisdom rather than the frailty of age. (TINA = There Is No Alternative, the rallying cry of the Thatcherites and Rogernauts. Ed.).

Even if you are not interested in capital markets (but if you are concerned about "globalisation", you should be) this book has some inspirational chapters. Susan George’s brilliant nine page "Short History of Neo-liberalism" (Chapter 2) is worth a read if only to recharge your batteries of both indignation ("it is our job to glory in inequality" – Margaret Thatcher) and hope ("we have the numbers on our side, because there are far more losers than winners in the neo-liberal game"). "The Death of the Washington Consensus?" by Robin Broad and John Cavanagh, adds to this with an informative background to the formulation and penetration of the poisonous policies which the International Monetary Fund (IMF) and World Bank enforce, and their ever more shaky status. From personal experience they describe how the "Washington Consensus" became a religion, beyond criticism within the institutions themselves, how it deliberately ignored any objective but growth – Washington was not interested in equity, social issues or the environment – and failed even at that when economies collapsed.

The editors, with Marco Mezzera, provide an excellent introductory Chapter 1, which summarises the problem (as spectacularly demonstrated by the Asian financial crisis in 1997), gives its background in post-WW11 economic and political developments, and outlines the three main approaches to reform.


The first – "It’s the wiring, not the architecture" – is the US position, which says that everything is basically sound. We just need to tinker with increased transparency, tougher bankruptcy laws, better regulation of financial institutions – and then greater capital flows to "stabilise" local financial systems, all under a strengthened IMF. The self-interest of this ostrich-like tactic (and it is no more than that in solving the problems) is obvious.

The second approach – "Back to the Bretton Woods* System" – is willing to advocate tougher controls at the global level. It generally supports the international financial transactions tax (the Tobin tax) which would "throw sand in the wheels" of capital movements to slow them and reduce the profitability of speculation. Global and national capital controls (such as those in Chile and Malaysia) are backed, but also regional controls and institutions such as an Asian Monetary Fund. The idea is to move short-term capital to longer term loans and foreign direct investment. Tariffs are seen as useful accompanying measures for economic development. Reforms of the World Trade Organisation (WTO), IMF and World Bank would aim at a less doctrinal push for free trade and capital account liberalisation, greater power for developing countries, and more autonomy for countries to pursue development along their own, possibly divergent, models – but still in a context of global capitalism. Some advocate a World Finance Authority to impose regulation on global capital flows, and act as a forum to develop and implement the rules of international financial activity, by coordinating national monetary authorities. (* The 1944 meeting at Bretton Woods, in the US, gave birth to the IMF and World Bank. That whole system of global financial architecture is referred to as the Bretton Woods System. Ed.).

Third is "It’s the Development Model, Stupid!" It regards the IMF and WTO as unreformable because of their deep neo-liberal indoctrination and the overwhelming power within them of the US. It therefore wants them abolished. It is sceptical of the possibility of imposing global capital controls: national capital controls are much more realistic, accompanied perhaps by regional arrangements. More fundamentally, it questions the problems that over-reliance on foreign investment and export domination bring to economic and social development, particularly in developing countries. In other words, it takes the needs of each economy and society as primary and looks at what that implies for investment and trade policies. Five proposals are at the top of the "deglobalisation" agenda for at least some in East Asia:

  • Growth must be financed principally from domestic savings and investment rather than foreign investment;
  • Development must be oriented around the domestic market as the principal locomotive of growth rather than exports;
  • To stimulate the domestic market, demand for those goods must be increased – or in other words, sustained growth demands equity;
  • Regionalism driven not by "free market" integration but by regional import-substitution and protected market integration, as an adjunct to the domestic market;
  • Ecologically sustainable development – seen to be one of the "hard lessons" of the 1997 crisis.

There is much that New Zealanders should think about in these proposals for our own development – but also because these may become the direction of our neighbours to the north.

South African, Patrick Bond, who is a particularly penetrating and well-informed analyst, provides a cutting analysis of five positions on the economic crisis in Chapter 5: "Their Reforms and Ours". The five positions are similar to the three of Bello et al, but Bond dissects them more critically, leaving more questions than Bello’s answers about the viability of any of them. He divides the "wiring, not the architecture" set into the "Old World Order", which just wants to restore the USA’s dominant position, perhaps penalising some excessively greedy bankers on the way, and the "Washington Consensus". "Back to Bretton Woods" he calls the "Post-Washington Consensus" and centres it around the likes of ex-World Bank Chief Economist, Joseph Stiglitz; speculator George Soros; flexible neo-liberal Paul Krugman; and deregulatory shock therapist Jeffrey Sachs. However in general they are not willing to tamper with the dynamics of the free market. To them he adds a number of "more durable" UN agencies and left-leaning Green and social democratic parties in Europe and Japan with a deeper interest in promoting human welfare.

Tamed Nationalists

He also divides the "It’s the Development Model, Stupid!" group into two. One he calls "Third World nationalism", which, while it has some genuinely progressive tendencies, he says at best is "attempting to join the system, playing by its rules, and, having discovered that the game isn’t fair, adjusting the rules somewhat in the Third World’s favour". He quotes Nelson Mandela as being typical of this tamed nationalism when he told South American leaders: "Globalisation is a phenomenon that we cannot deny. All we can do is accept it." Nationalism (such as Mahathir’s in Malaysia) is too frequently accompanied by internal repression. While acknowledging the great successes of international cooperation in the final group – the "New Social Movements" – he points out the lack of a basis for cooperation with the Third World nationalists because of their authoritarian nature.

In addition he identifies two "fault lines" in the social movements. The first is the tendency of the more conservative "co-opted non-government organisations (NGOs)" or "Co-NGOs" to "cut pragmatic yet ultimately absurd and untenable deals with the Establishment" such as endorsing the US-Africa "Growth and Opportunity" free trade deal, and numerous negotiations over the environment. The second is whether the task should be to work with the "Post-Washington Consensus" reformists to construct a global State regulatory capacity building on existing institutions, or to "defund and denude" the IMF, World Bank, WTO etc in order to reconstitute progressive politics at the national scale. Bond concludes by suggesting that the challenge for those in the social movements is to "think globally, act globally, but redefine the economic and financial systems at the scale of the nation State, for a less uneven form of capitalist development".

A chapter from one NGO in this social movement, by Jessica Woodroffe of the World Development Movement of the UK, outlines WDM’s proposals for focusing on transnational companies as the transgressor rather than countries. In effect it suggests a code of conduct based on existing "core standards" from bodies such as the UN, International Labour Organisation, World Health Organisation, Food and Agriculture Organisation, the Rio Declaration, Agenda 21 and United Nations Conference on Trade and Development (UNCTAD). It proposes a Core Standards Commission with powers to investigate and take legal action against companies, backed with action at international and national levels.

Case studies of China (Chapter 12) and Malaysia (Chapter 10) strengthen the empirical case for capital controls, while Chapter 11 provides a outline of theoretical issues and policy options for controlling international capital movements. These make clear the inconsistency between complete capital account convertibility and domestic economic and social development.

World Financial Authority?

Other chapters (4, 7, 8) look at failings of and alternatives to current international financial institutions. Chapter 4 looks starts from the premise that "our primary medium and long term objective should be economic growth by human development" (p42). It advocates strengthening both national and regional arrangements to contest the existing global institutions, but also the creation of a democratically accountable World Financial Authority above the IMF and World Bank, which is responsible for overall regulatory oversight and other governance over the global financial system, armed with executive powers and mandatory sanctions.

In a related context, Chapter 3, which evaluates proposals coming from the UN, is as important for who its author is (Carlos Fortin, Deputy Secretary General of UNCTAD) as for what it says. UNCTAD is one of the few official international bodies that has (at times) provided alternative analyses and policies to the "Washington Consensus"-dominated institutions. Fortin acknowledges at the outset the limitations of the organisation: "The ideas that I will be presenting are those that command a consensus within the various parts of the [UN] Secretariat, and which furthermore appear to have some possibility of implementation. Therefore you may find that the proposals do not go far enough." But what he shows is that in UNCTAD there is at least room for discussion, which does not exist in those other orthodox cathedrals. He identifies a number of areas in which he thinks modest change is possible. These include ending the domination over economic policies of concern for preventing inflation; the use of capital controls such as used in that "model of liberalisation", Chile; the availability of funds which are not tied to IMF conditions to tide countries over crises, and better "stand-still" provisions when countries are unable to pay their debts; and the problems presented by the international rating agencies, which tend to exacerbate economic and financial crises. Fortin mentions the irrelevance of foreign direct investment to the development needs of all but the relatively few developing countries in which it is concentrated.

Dealing with national insolvency is also dealt with in detail in Chapter 13, where arrangements for "international bankruptcy" are discussed, which would allow nations to recover (as insolvent companies frequently do) without having to succumb to IMF tutelage.

For advocates of the Tobin tax, two chapters (14 and 15) make a technical and persuasive case that it is practically possible, given (not a small matter) the political will. What becomes clear though are the limitations of the tax, even if the financial powers such as the US allow its implementation. As the authors of Chapter 14 write (p201):

"There are two clear limitations to the Tobin tax: first, it does not stop major speculative attacks on a given currency. And second, it does not solve the problems caused by the disappearance of the previous international monetary system, and by the fact that it has not yet been replaced. The Tobin tax only represents a ‘few grains of sand thrown on the roaring fire of international finance’".

The tax would greatly reduce the constant speculation which drives currency movements and instability. It would not even begin to address the issues of development that require a much broader range of tools.

This book develops the "It’s the Development Model, Stupid!" approach, and therefore shows some of the tensions Bond analyses. While the agenda which Bello, Bullard, Malhotra and Mezzera identify is a real one for East Asia, it does not represent all tendencies. But the essentials there are present throughout the book: a focus first on the needs, stimulation and development of the domestic economy; drive that from a social and ecological agenda, rather than simplistically pursuing economic growth; reduce dependence on foreign capital and recognise the need for capital controls; deduce appropriate international trade and investment policies from these rather than allowing trade and foreign investment to dominate the domestic agenda. New Zealand would do well to adapt and adopt this approach.

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