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November 17, 2003
In a previous post I briefly mentioned the need to begin to think against the self-regulating market, and then linked to an interview with Joseph Stiglitz as a first step in doing this.
I have been thinking about this recently, given that the current Labor Government in my home state of South Australia seens to be obssessed with dancing to the tune of the international financial market and pleasing the international credit agencies. So it runs budget surpluses and cuts back on welfare spending on its hospitals, schools and environmental repair. There is no money for welfare because we need to have larger and larger budget surpluses. So the public schools and hospitals are run down and lurch from crisis to crisis. The international money market and mobile private capital shape the way we live in South Australia. Spending on hospitals, schools and the environment has to be put on hold indefinitely. First we must gain private international capital acceptance of the way the regional economy is run.
Given the spillover effects of various financial crises that arose from a variety of debt problems, we need to think critically about a world economy dominated by flexible exchange rates and large and volatile private capital flows.
On way to think differently is in terms of the instruments that have been put into put in place to help govern the world economy. One of the instruments is the IMF which is concerned with the short run, the balance of payments, the demand side, the moentary sector, and programme support. It plays a role in adjustment re balance of payments deficits and as a financing institution.
Thinking differently is acting as a critic of the way IMF does its job. Why be critical? Well, the IMF did a poor job in relation to the Asian financial crisis of the late 1990s. It failed to see the crisis coming; it mis-diagnosed the nature of the crisis; it operated in terms of one model fits all in relation to conditionality; it was incompetent and it was closed to criticism. Moreover, the conventional policy of fiscal contraction was inappropriate; the move towards capital liberalisation was premature; the overly contractory programs supported by the Fund encouraged further capital outflow and so made the situation worse; the crisis and IMF conditionality was used to further the interests of US-based private capital and transnational companies; and the IMF bypassed and overrode domestic political processes and interferred with the jurisdiction of sovereign governments.
These criticisms suggest that the role played by the IMF can, and should be questioned. They also suggest that the IMF needs to be reformed, in that it's operations should be more transparent and that it should be more accountable. They disclose that the global market lacks a global institutional framework to regulate international capital inflows.
Raising these concerns in a summary fashion opens up a space to adopt a critical eye towards the hyper mobility of capital, the increased vulnerability of speculative attack on a nation state's currencies, or a sudden reversal of capital inflow due to sudden changes in market sentiment. The free cross-border flow of capital also results in reduced policy control of nation states; eg., its capacity to address issues of internal imbalance that have been caused by the influx of short term capital, which then leads to asset price bubble, the bubble bursting and rapid capital outflow.
Should we not begin to question the idea of free capital mobility and think in terms of imposing capital controls?
Now there is a heretical idea. Borders. That is the second step in thinking against the self-regulating market.
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