Fw: In Defense of Capital Controls

["Gary Santos" <evs@xxxxxxxxxxxx>]

Henry,

I agree, of course, that liberalized capital markets are an unfair game
especially when the markets are of a country with a weak external position.
And, certainly, as the game is practiced where a fund like CALPERS (the
California Public Pension Fund) can wizz in and out of a stock market or
when portfolios in Treasury Bills do likewise.

But, I would think that foreign investment (and by this I mean job creating,
condo buying, fixed asset constructing investments) benefits LCD countries.
The same could be said for the investments being made in joint ventures for
the outsourcing now growing. These companies should benefit from liberalized
flows since, first, they source their own dollars and, second, it is only
fair that profits be repatriated. And, not all FDI seeks an export market.
Most FDI of late, yes, but that was not the case when Chinese capital flowed
into the Philippines after Mao took over or when Japanese capital came in
introducing products for the local consumer market or when Nauru came in
with their portion of a phosphate fertilizer project or the others that
entered the steel industry, etc., etc. I think these FDI's are good for both
parties. There is benefit in either side of the coin.

Now, if we talk about portfolio flows, that is another matter. No jobs
created. No condos bought. No buildings being constructed. Nada, zilch for
the local economy save a temporary increase in central bank reserves and,
perhaps, a temporarily strong soft currency. Not neo-imperialistic. Better,
a down to earth term like "opportunistic" with utter disregard to the
consequences and harm their exit can bring. Not neo-imperialistic but, by
sheer size, they are hegemonic and are able to move substantially the local
markets.

I agree however that capital controls are the only option for future
portfolio flows which of course will mean that there will be no more
portfolio flows of substance in the future. If only the Fed would give
dollar credit lines payable in local currency...

Gary

----- Original Message -----
From: "Henry C.K. Liu" <hliu@xxxxxxxxxxxxxx>
To: "Gary Santos" <evs@xxxxxxxxxxxx>
Cc: "Harry Veeder" <eo200@xxxxxx>; "EGroup PKT" <pkt@xxxxxxxxxxxxxxxx>
Sent: Monday, June 02, 2003 7:00 AM
Subject: Re: In Defense of Capital Controls


The issue is not good or bad in a ethical sense, not even in an
economics sense.  The issue is good for whom and bad for whom in a game
theroy context.  Since finance globalization had been structured by
those who have surplus capital to invest, it favors capital owners.
Those needing capital had no input into the structuring of a system that
fundamentally affects their fate. Thus neo-liberal market funamentalism
is not fair trade.  It is neo-imperilaism.

Further, the need fo cross border capital movement is not the word of
God.  In fact trade economics up to Bretton Wood substrabed to the
theory that cross border fainance is destructive.  This view was
torpedoed by Nixon's taking the dollar off gold and by the need to
recycle Petro dollars after Opec gained market power.

There is no option for non-dollar economies except to adopt capital
control in the current international finance architecture. And because
of dollar hegemony, FDI will only finance dollar earning enterprises,
leaving domestic development starved for capital. And the State Theory
of mMoney will not work because of foreign exchange implications.

It is not a theoretical issue.  It is an operational issue.
Who would want to particiate in a game where heads you lose and tails
they win?

Henry C.K. Liu

Gary Santos wrote:
> Well, I do not think foreign capital is bad. There were jobs created with
> foreign capital. Foreign capital is neither bad nor good per se. And,
> perhaps, I was wrong in labelling "them" fair weathered friends as it was
a
> mischaracterization of what foreign capital was in the context of the
> 1990's.
>
> Nonetheless, it appears to me accurate that the policy adopted by the
> central bank, in light of the harm a depressed exchange rate could do to
> spending and well being, that capital controls were a justifiable policy
> even with a stated commitment to liberalized capital flows. Everyone was
> caught by surprise, in fact, even the IMF.
>
> I can even fault the Asian countries themselves for a lack of foresight.
> They should have prepared for the possibility that bubbles were to form
with
> such a huge influx of capital and debt.
>
>
>
> ----- Original Message -----
> From: "Harry Veeder" <eo200@xxxxxx>
> To: "post keynesian thought" <pkt@xxxxxxxxxxxxxxxx>
> Sent: Sunday, June 01, 2003 7:57 PM
> Subject: Re: In Defense of Capital Controls
>
>
> If I may interject.
>
> There are two extreme starting positions with respect to the movement of
> capital.
>
> 1) The movement of capital is essentially a good thing,
> with some exceptions.
>
> 2) The movement of capital is essentially a bad thing,
> with some exceptions.
>
> A call for 'capital controls' is consistent with the first position.
> However, if one supports the second position, a call capital controls
> will be viewed with cynicism and suspicion.
>
> Harry Veeder
>
>
>
>
>>From: Gary Santos <evs@xxxxxxxxxxxx>
>>Reply-To: Gary Santos <evs@xxxxxxxxxxxx>
>>Date: Tue, 27 May 2003 20:55:21 +0800
>>To: Tijani Mohammed <sheutij5@xxxxxxxxx>, EGroup PKT
>
> <pkt@xxxxxxxxxxxxxxxx>
>
>>Subject: Re: In Defense of Capital Controls
>>
>>Shehu,
>>
>>It seems to me that capital controls should be part of any developing
>>country's tools. These countries have soft currencies and, by that fact,
>>will be subject to balance of payments problems and impairment of central
>>bank balance sheets in a regime of liberalized capital flows. In the
>>Philippines, I saw the foreign funds get out at P26.50 as the stupid
>
> central
>
>>bank governor held fast to the "floating within a band" policy. Now that
>
> was
>
>>patently wrong from the point of view of those involved in the stock
>
> market.
>
>>When dealers see a big seller out there, they know that the stock price
>
> will
>
>>dive as he matches the bids. Result: All dealers get out of the way and
>
> the
>
>>steep slide in the Index shows that. The Banko Sentral should have
>
> followed
>
>>suit -- let the foreign funds get out at lower and lower exchange rates
>
> just
>
>>as they had to get out of the stock market at lower and lower prices.
>
> Serves
>
>>them right for being fair weathered friends.
>>
>>"Second, the process of internationalization of capital has been
>
> proceeding
>
>>as a strategic component of managed world trade." This seems to imply a
>>cabal and a conspiracy. I have a hard time accepting this as is. The
>
> dollar
>
>>tends to be supported by those who export to the US. It is an integral
>>benefit to the US because its currency is used as reserves. So, I don't
>
> know
>
>>about a cabal.
>>
>>Gary
>>
>>
>>----- Original Message -----
>>From: "Tijani Mohammed" <sheutij5@xxxxxxxxx>
>>To: "Gary Santos" <evs@xxxxxxxxxxxx>
>>Sent: Tuesday, May 27, 2003 3:22 PM
>>Subject: Re: In Defense of Capital Controls
>>
>>
>>Santos
>>
>>Globalization to me encompasses three interrelated
>>factors: globally managed trade, internationalization
>>of capital and state economic intervention. First,
>>much of world trade in primary commodities and
>>manufactured goods is under the control of
>>transnational corporations. Second, the process of
>>internationalization of capital has been proceeding as
>>a strategic component of managed world trade. Finally,
>>state economic intervention to aid these ongoing
>>processes. Unless we see globalization from this
>>perspective, we are likely going to commit
>>unneccessary errors of judgement as to whether capital
>>controls is useful or not useful.
>>
>>Shehu Mohammed
>>Aristotle University of Thessaloniki
>>Greece.
>>--- Gary Santos <evs@xxxxxxxxxxxx> wrote:
>>
>>>Interesting read for me.
>>>
>>>
>>
>>http://www.geocities.com/Eureka/Concourse/8751/edisi04/glob-01a.html
>>
>>>International Herald Tribune
>>>Paris, Friday, February 18, 2000
>>>
>>>
>>>In Defense of Capital Controls
>>>At Trade Conference, a Push to Curb Forces of
>>>Globalization
>>>By Thomas Crampton International Herald Tribune
>>>
>>>
>>
>>--------------------------------------------------------------------------
>
> --
>
>>>----
>>>
>>>At the United Nations Conference on Trade and
>>>Development in Bangkok, Yilmaz
>>>Akyuz, the principal author of the conference's
>>>flagship annual report,
>>>argued that developing nations faced continuing
>>>perils from globalization.
>>>Mr. Akyuz, chief of macroeconomic and development
>>>policies for the
>>>conference, spoke Thursday with Thomas Crampton of
>>>the International Herald
>>>Tribune.
>>>
>>>
>>>Q. Do you approve of capital controls to protect the
>>>economies of developing
>>>countries?
>>>
>>>A. Yes. Unless you have checks and balances in the
>>>movement of capital you
>>>will be subject to the boom-bust phenomenon that is
>>>an integral part of the
>>>current international financial system. There are no
>>>global arrangements to
>>>control international movement of capital, so you
>>>must fall back on your
>>>national policies.
>>>
>>>Q. What about those who argue that capital controls
>>>discourage foreign
>>>investment?
>>>
>>>A. That is nonsense. If you look at new foreign
>>>direct investment, where do
>>>they go most? China. China receives the largest
>>>portion of new investment in
>>>the developing world and China has no capital
>>>account convertibility.
>>>
>>>Q. Do capital controls hinder free trade?
>>>
>>>A. You have to be careful because a lot of
>>>short-term capital flows are
>>>linked to trade, but on the other hand, the world
>>>has had free trade
>>>evolving since World War II under capital controls.
>>>A stable exchange rate
>>>and stable monetary conditions are important for the
>>>expansion of trade.
>>>
>>>Q. What is the role of corruption in creating
>>>financial crises?
>>>
>>>A. Cronyism, corruption and moral hazard were not
>>>major causes of Asia's
>>>recent economic crisis. Corruption and cronyism did
>>>not increase suddenly in
>>>the late 1990s to create the financial crisis. The
>>>institutions and
>>>relationships people blame are not new, what is new
>>>is the opening of
>>>financial flows. The same close government and
>>>business relations that were
>>>praised for creating the Asian miracle, have now
>>>been turned upside down and
>>>receive all the blame.
>>>
>>>Q. How do you view the recovery in many developing
>>>economies?
>>>
>>>A. The markets went down much too far due to the
>>>incorrect orthodox policies
>>>put in place by multilateral financial institutions.
>>>When these policies
>>>were reversed, the economies bounced back. That
>>>fiscal deficits and exports
>>>are driving the economies - not investment or
>>>consumer spending - backs up
>>>our view that the high interest rates and austerity
>>>measures were incorrect.
>>>There is, however, still excess capacity in these
>>>economies and it remains
>>>to be seen how it will be dealt with.
>>>
>>>Q. What is the greatest danger now for developing
>>>economies?
>>>
>>>A. If the U.S. economy slows down and a significant
>>>economic expansion does
>>>not take place in Japan and Europe, developing
>>>nations will face very
>>>difficult time.
>>>
>>>Q. Any sign that America has developed a higher
>>>sensitivity to the delicate
>>>global economic situation?
>>>
>>>A. Alan Greenspan made a very positive response by
>>>cutting interest rates
>>>after the Russian crisis. There were real dangers to
>>>the U.S. economy, but
>>>it is the first and perhaps the only time that U.S.
>>>monetary policy action
>>>was taken with global considerations. I do not see
>>>this as a trend. As soon
>>>as Wall Street went up, Greenspan returned to
>>>setting monetary policy on the
>>>basis of domestic considerations alone.
>>>
>>>Q. What in this Unctad conference compared with the
>>>last one?
>>>
>>>A. It has become clear that globalization is a
>>>process guided by the
>>>powerful few which has created inherent asymmetries
>>>that are hurting
>>>developing countries. The main message coming out is
>>>that globalization is
>>>not delivering and there is a danger of backlash
>>>against freer trade.
>>>
>>>Q. Are you against globalization?
>>>
>>>A. I am not against the greater economic integration
>>>of countries. What I am
>>>against is the process being swayed by the powerful
>>>players or unbridled
>>>market forces. It is not now governed by equity and
>>>fairness.
>>>
>>>
>>>
>>
>>
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