Financial Globalization: New Challenges for Peoples' Movements
By Kavaljit Singh
There is no denying the fact that the globalization of finance has surpassed the globalization of production. With a daily turnover of 1.2 trillion dollars in 1995, the global currency trading has gained a life of its own, and much of it is hardly related to the real economy. The deregulation and globalization of financial markets - as twin elements of the Washington Consensus - in developing countries coupled with lower interest rates and institutionalization of savings in developed countries, are the main factors behind the rapid transborder capital mobility.
However, increased global capital mobility has been accompanied by an increased frequency of financial crises in both the developed and developing countries.1 The fact that there is a positive correlation with international financial liberalization and financial crises has been well established. Even the International Monetary Fund (IMF) has admitted this fact. In a recent study, which looked into the empirical relationship between banking crises and financial liberalization in 53 countries during the 1980-95 period, the IMF also came to the conclusion that banking crises are more likely to occur in liberalized financial systems.2 As recent financial crises are the outcome of international financial liberalization, there is a growing concern to restructure the present international financial architecture. Surprisingly, the need for effective and meaningful regulations is not only expressed by leftists economists or radical groups, even the true believers of liberalization and globalization are also advocating the relevance of capital controls and regulatory mechanisms. Critics had never anticipated that the tide against free-market financial system would turn so quickly. Perhaps, certain recent events, particularly the contagion effects of the Southeast Asian currency crisis and the near collapse of a multi-billion hedge fund, the Long-Term Capital Management, seem to have contributed in the sudden change of mindset. Increasingly, it is being admitted that if the international financial system is not regulated, no country can remain immune from the impact of financial crisis.The Response of Peoples' Movements
In recent months, restructuring of the global financial architecture has become the key theme in the ongoing international debates, as witnessed during the just concluded annual meeting of the World Bank- IMF. However, peoples' movements, NGOs, and labor organizations, in both developing and developed countries, have yet to respond - effectively and critically - to the issues emerging from globalization of financial markets. There could be two important reasons behind this. Firstly, financial markets are a new subject for peoples' movements, which have largely been dealing with either foreign direct investment (FDI) or official capital flows - multilateral (e.g. World Bank, IMF) or bilateral. Second, and perhaps more importantly, there has been a lack of information and understanding on issues related to global finance. No doubt, financial matters are very complex and require a considerable amount of expertise and experience, which, unfortunately, many groups do not possess. Therefore, a well-thought and coordinated action program by the social movements at various levels is yet to emerge.The Indian Scenario
At the political level, except for a few issues such as liberalization of insurance sector, there seems to be a growing consensus among mainstream political parties in India for financial liberalization. This is reflected by the continuation of "reform" process of financial sector by three governments belonging to left, center and right in the 1990s.3 On the other hand, social movements, NGOs, and labor groups, operating at the non-party political space have yet to critically respond to these issues. There is no doubt that in recent years, the Indian groups have shown to the world that mass campaigns can be successfully launched campaigns against many World Bank-funded projects (e.g. Narmada dam and Singrauli power projects). Similarly, many struggles and campaigns against FDI have come up in India; examples include campaigns against Union Carbide, Cargill, Enron, and Nestle. Since the territory of finance capital is new to Indian groups, they are, increasingly, realizing the importance of understanding new issues.4 Like others, the Indian groups also lack the expertise on global financial issues. Although a large number of research institutes working on financial matters exist in the country, but most of them serve the information requests of corporate sector. Since the reports and journals published by these institutes are very expensive, the activists and movements are unable to afford these. Furthermore, to keep in tuned with the changing economic and political scenario, many institutes have radically changed their perspectives and as a result, have become greater votaries of financial liberalization in recent years. Thus, the task of providing regular information to movements has been left to a handful of research groups and socially committed intellectuals. With their limited resources and outreach, efforts are being made to provide information and campaign tools to activists and groups in the country. In recent months, efforts have been made to demystify the complex issues related to globalization of finance in order to democratize the debates.5 Such efforts need to be further supplemented by preparation and publication of educational materials for the masses, especially in local and regional languages in India.What should be the Agenda of Social Movements?
Given the present geo-political conjuncture, one cannot expect any major structural changes in the global financial system to take place, without mass mobilization and empowerment of people in both developed and developing countries. Perhaps, more in the developed countries from where the majority of these financial flows originate. As the financial crises are, increasingly, becoming global in character, the response of the social movements to address these issues should also be global. Although the arena of mass struggles by the movements may remain national, but transborder alliances and linkages with other groups need to be developed and strengthened. Further, the struggles against the global financial system cannot be fought exclusively, it should be an integral part of wider cross- sectional movements against neo-liberalism and global capitalism. But, the earlier successful methods and strategies of campaigning and lobbying with official capital flows (World Bank, IMF) are unlikely to work in the case of finance capital. While the World Bank and other institutions (multilateral and bilateral) are "public" institutions, have a mandate for poverty alleviation and sustainable development (although one may dispute the seriousness of intent and differ with their approach towards it), on the other hand, private finance capital is only looking for profits, has no developmental agenda, and is only accountable to its shareholders - with no responsibility for public participation and disclosure of information.6 Furthermore, it is relatively easier to target campaigns and monitor the funding by the World Bank, the IMF and the ADB, while much of global finance capital is liquid and footloose in nature, moving from one country to another within seconds, thereby making it extremely difficult for social movements and others to monitor it. Similarly, the earlier strategies of campaigning (e.g. labor, legal or environmental action) on private capital flows that were largely in the form of FDI may not work in the case of footloose finance capital.7 In the given economic and political context, an action program calling for total elimination of global financial flows is unlikely to succeed, although it may be desirable. The author is of the opinion that action programs based on restricting international financial liberalization and selective delinking from short-term and speculative funds may have better chances of success. This, however, does not mean that one is blindly supporting long-term FDI and other types of financial flows. There is no doubt that the cost of FDI is also high as capital can move out through royalty payment, dividend, imports as well as other illegal and legal means. The strategies of struggles will differ from country to country depending on specific context; still a number of common action programs could be planned at both recipient and source countries. Some of the common action programs are outlined below. These are not definitive but could serve as a starting point for further debate and development.Action Programs in Recipient Countries
At the national level, the groups and movements should advocate for greater regulations with regulatory bodies. Efforts should be made by activists and groups to put strict capital controls on the inflows of speculative funds in order to prevent the emergence of a crisis-like situation. In this context, it will be worthwhile to examine the efforts by Chile and Malaysia to put controls on inflows in order to restrict "hot money" flows. Similarly, other policy mechanisms (e.g. capital gains tax) could also be explored to deal with such flows. The recent experience in the recipient countries suggests that policy makers and regulatory bodies, very often, tend to overlook the problems during the boom periods (when massive capital flows move in). However, their response is quicker during the bust periods. The policy makers cannot remain blind to the fact that those people (usually the upper middle class and rich) who are the main beneficiaries during the boom periods are not the real losers during the bust periods. While vast sections of society (consisting of the poor and lower middle class) do not gain during the boom period, as their purchasing power is very limited or negligible - are the worst sufferers during the bust phase, which is accompanied by job losses, fall in real wages, high inflation, high taxes, and reduced public expenditure. Although with globalization, the power of nation-state to pursue independent economic policymaking has weakened, still nation-state can restore relative autonomy in the management of its economy, as witnessed recently in Malaysia. Despite globalization, the nation- state is not going to wither away, activists and groups should make efforts to make it accountable and democratic.Action Programs in Source Countries
The NGOs and peoples' movements in source countries will have to take serious notice of global finance capital. They will have to exert public pressure on regulatory bodies for strict regulatory mechanisms and disclosure standards. Certain types of financial instruments (e.g. hedge funds) are highly unregulated in their source countries. The recent collapse of U.S. based international hedge fund, Long-Term Capital Management, illustrate this point. There are over 2000 international hedge funds operating in the international financial markets without any regulation. In source countries, any campaign against the global finance capital is unlikely to succeed without the support of middle class investors who invest their savings in the mutual funds, pension funds, bonds and other financial instruments. Since the size of this community is very large, running into millions, the capital collectively contributed by them is in trillions of dollars. In U.S. alone, the proportion of investment of households/individuals in mutual funds account for over 35 percent. The American mutual fund industry with assets of $4 trillion, account for over half of the World's mutual fund assets. After all, a substantial amount of capital - which the international fund managers move across the border - belongs to this community. In recent years, a few attempts have been made by NGOs in U.S. and other western countries to sensitize the investor community about the wider implications of their investment. Similarly, a number of funds (popularly known as socially responsible funds) which invest only in socially and environmentally sound projects have come up in recent years. However, the recent experience shows that some socially responsible funds do not behave differently from any other profit- seeking fund. These funds also have a tendency to overreact on "herd instinct". To illustrate this point from a perspective of a recipient country, an example of Thailand is cited here. When the speculative attack on the Thai baht was launched in early July 1997, all kinds of funds, including socially responsible funds, quickly moved out from the region, thereby precipitating the crisis. Thus, from a perspective of recipient country, they are not much different from any other funds. The NGOs and groups, particularly in the source countries, will have to keep this larger picture in mind while supporting such funds.The Need for International Action
While working at the national level (both recipient and source countries), peoples' movements and groups will also have to address the issues at the international level. The need to work at the international level is necessitated by the fact that financial globalization can also cause serious damage to world financial markets and the real economy. The growing trend towards mega-mergers and acquisitions in the banking and financial sectors further calls for international action in terms of regulation and supervision. Some of the proposals to deal with the financial issues at the international level are discussed below. Tobin Tax: Given the volatility of short-term flows, the Tobin tax could serve as perhaps the best instrument to discourage short-term flows. However, this idea needs to be updated, modified and debated in the present context. The Tobin tax is also desirable from the point of view of its revenue potential. It can generate forex reserves, which can be used during the period of currency flight. Its counterpart domestic currency and financial resources can be used for the removal of poverty, hunger, environmental degradation, illiteracy, etc. The revenue potential of a 0.25 per cent tax in the 1970s was relatively modest; with the 1995 global forex volume, annual revenue raised would be closer to $300 billion.8 This amount is very tempting given the fact that international official aid has declined over the years, and the national governments are faced with less financial resources for social sector spending due to the implementation of structural adjustment programs. The idea of Tobin tax has certainly generated a lot of interest among many economists, NGOs, trade unions and political groups all over the world. This became very evident during the World Social Summit in 1995, when many social groups and movements advocated the imposition of Tobin tax to raise additional resources to finance developmental projects. The groups could immediately launch a major international campaign for Tobin tax. A New Global Institution (World Finance Authority)?: Since the existing international financial institutions are unable to deal with the global financial issues and cannot enforce regulations, a proposal for creating a new global institution (World Finance Authority) has been put forward by Lance Taylor and John Eatwell.9 According to the proposal, this new institution should have adequate executive authority to monitor and regulate global financial flows. This institution could ensure transparency and accountability of the IMF and the World Bank. Besides, it could also monitor and regulate the activities of international banks, currency traders, and fund managers. At this stage, it is unlikely that such an institution will be created, given the hostility of global financial institutions, particularly the IMF and fund managers, to have a supranational body to oversee their operations. However, the British Prime Minister, Tony Blair, who is also chairing the G-7 nations, has recently supported the need for such an institution.10 In an unexpected move, India's Finance Minister, Yashwant Sinha, has also endorsed the need for such an authority.11 The groups will have to closely monitor the developments related to the creation of a World Financial Authority. They will have to ensure that this authority should function under the UN system, besides it should have a wider developmental agenda with an open and democratic process. In the short run, ongoing campaigns against the OECD proposal for a Multilateral Agreement on Investment (MAI), which includes capital account liberalization, should be further strengthened. Similarly, campaigns against the rewriting of IMF articles favoring full capital account liberalization as well as against the liberalization of trade in financial services under the WTO agreement should be immediately launched by the NGOs and movements. In the coming days, NGOs and others will have to grapple with and take notice of two major international institutions that deal with finance capital. These institutions are the Bank of International Settlements (BIS) and the International Organization of Securities Commission (IOSCO). The BIS is the oldest international financial institutions. Located in Basle, its mandate is to monitor and regulate private bank lending. While IOSCO, based in Montreal, works on securities issues. Unfortunately, both these bodies have not come under close public scrutiny, unlike the World Bank and the IMF.12Towards A New Strategy?
Finally, I am of the opinion that peoples' movements need new tools of analysis and advocacy to deal with the globalization of finance. It is high time that activists and groups start understanding the language, procedures and working of finance capital in order to effectively deal with it. Perhaps, activists need to heed the advice of Brent Blackwelder of Friends of the Earth, "NGOs need a 'quantum leap' from Washington to Wall Street."13 Notes and References 1. UNCTAD, Trade and Development Report 1998, United Nations, 1998.
2. Asli Demirguc-Kunt and Enrica Detragiache, "Financial Liberalization and Financial Fragility," Working Paper WP/98/83, IMF, 1998.
3. Kavaljit Singh, The Southeast Asian Currency Crisis and India: Impact and Implications, PIRG, 1998, (forthcoming).
4. Shripad Dharmadhikary, "Campaign Against Narmada Bonds," in Kavaljit Singh, A Citizen's Guide to the Globalisation of Finance, Madhyam Books and Zed Books, 1998.
5. See, for instance, Kavaljit Singh, 1998, op.cit; Arun Ghosh, Asian Currency Turmoils and WTO Issues: Lessons for India, CSGTSD, 1998.
6. Welcome Speech by Brent Blackwelder, International Training programme on International Private Finance, Friends of the Earth and National Wildlife Federation, Washington, D.C., July 15, 1998. 7. Kavaljit Singh, op.cit, 1998 (forthcoming).
8. For a detailed discussion on the Tobin tax proposal see, M. Haq, I. Kaul and I. Grunberg (eds.), The Tobin Tax: Coping with Financial Volatility, Oxford University Press, 1996.
9. John Eatwell and Lance Taylor, "International Capital Markets and the Future of Economic Policy," CEPA Working Paper Series III, Working Paper No. 9, August 1998 (Revised September 1998).
10. Tony Blair, "Designing A New International Financial System for A New International Financial Age, " Speech to the New York Stock Exchange, New York, September 21, 1998.
11. "Ministry to hold talks with vigilance panel," Business Line, September 16, 1998.
12. Talk by Kavaljit Singh, International Training programme on International Private Finance, Friends of the Earth and National Wildlife Federation, Washington, D.C., July 19, 1998.
13. Brent Blackwelder, op.cit.
Kavaljit Singh is the coordinator of Public Interest Research Group. He is author of A Citizen's Guide to the Globalization of Finance (Madhyam Books, Delhi and Zed Books, London, 1998).
His forthcoming publications include Regulating Global Capital Flows: Policy Challenges and Alternatives. The author can be contacted at the following address:
Public Interest Research Group
142, Maitri Apartments
Plot # 28, Patparganj
Delhi- 1100 92
Ph: 2221081, 2432054
Fax: 2224233
E-mail: kaval@pirg.unv.ernet.in
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