-->Auerback immer wieder lesenswert


International Perspective, by Marshall Auerback

Capital Controls: Argentina Revives An Old Debate
July 1, 2003

Last week markets reacted badly to the decision by Argentina’s new government to introduce controls on short term speculative portfolio flows. The stock market, one of the world’s best performers this year, promptly fell 7 per cent on the news.



In this world of turbo-charged capital moving from country to country at the mere press of a button, one can understand the chagrin of traders when this highly profitable form of activity is curtailed in any respect. To restrict capital flows also flies in the face of much of the prevailing neo-liberal market deregulation that is said to be the one of the key foundations of a 20-year global bull market in equities. So has Argentina got it wrong or is the market’s sell-off last week simply an exercise in self-serving nonsense?



There has been a tendency (incorrectly, in our view) to conflate TRADE liberalisation with the gradual opening up of capital accounts, particularly in the emerging world. Long time advocates of free trade, such as Jagdish Bhagwati, concede that there are parallels between the unrestricted flow of capital and free trade: interference with either leads to the loss of economic efficiency and constraints on economic freedom. And capital controls, like trade restrictions, can be a crutch that substitutes for necessary policy changes.



On the other hand, Bhagwati notes important differences. Although liberalized trade can create adjustment problems for import-competing industries, the likelihood of these being serious is low, and they can be remedied through relatively modest programmes of assistance. In any case, increased trade itself boosts economic growth, helping a country to adjust to new competition. Free flows of capital, however, can bring panic and crashing markets and currencies, particularly in developing countries, as was clearly the case during the emerging markets’ financial crisis of 1997/98.



In regard to the latter, the primary source of that crisis was global mobile short term capital, which had proven to be essentially speculative and in the end destructive to the small economies of emerging Asia. These economies flourished when capital controls prevented inflows of global short term capital during the 1960s through to the early 1990s. Their Achilles heel was to allow such inflows in the 1990's. Their high savings rates necessitated"deep" domestic structures of debt intermediation which can easily be destabilized by exogenous shocks. When positive trends in emerging Asian markets crested, such mobile global speculative capital flows reversed. This capital flow shock convulsed the delicate domestic financial structures of these countries, setting off currency, financial and economic crises which were then greatly aggravated by the wholly inappropriate and disastrously deflationary polices of the IMF and US Treasury.



It was clear to us that, if anything, the savings rates of the emerging Asian economies were too high; at the margin it was hard to find efficient uses for domestic savings. Additional savings from abroad could not be allocated to efficient investment. If foreign short term capital was basically unwanted and destabilizing, it was inevitable that there would be capital controls to limit short term capital inflows in the future. China employs extremely strict capital controls. It was our view that, as a consequence, China would weather the Asian firestorm fairly well and provide the economic growth that would make it as the locomotive for economic recovery in the region. China would emerge as the leader in the region and the Chinese model, with its strict capital controls, would encourage some measure of controls throughout Asia.



This is in fact what has happened. As a consequence of emerging relatively unscathed from the 1997/98 financial crisis, China is slowly but surely emerging as the new economic locus of Asia. We believe it is only a matter of time before its currency begins to challenge the dollar as a reserve currency alternative or, at the very least, provides the basis for some kind of Asian currency union.



The first signs of this break from the prevailing US-dominant global economic order are beginning to emerge. The Institutional Strategist reported last weekend that 11 Asia-Pacific nations had launched a new $1 billion Asian bond fund (ABF) drawn from their huge central bank reserves to speed the development of a regional bond market. The effort was the brainchild of Thai Prime Minister Thaksin Shinawatra, who recently lamented that Asian savings financed investment (malinvestment?) in major G-7 economies, rather than in Asia, thereby holding back economic growth in the region.



And now we have a further move in the direction of economic heterodoxy with the Argentina announcement last Wednesday to impose a limited form of control over short term inflows. Details of the controls, the first major economic announcement since the government of Nestor Kirchner came to power last month are still to be announced. But Roberto Lavagna, the newly appointed economy minister fleshed out the proposal when he indicated that the government would force capital inflows not linked to foreign trade to remain in the country for at least 180 days. This is clearly a very mild form of regulation, clearly tailored to capture speculative short term inflows, rather than FDI.





Despite being the current"flavour of the month" amongst the leveraged speculative community, Argentina still faces substantial problems. B
anks need to be recapitalized; defaulted obligations will amount to $76.7bn by the end of this year, according to the Financial Times; by year end the country will owe a further $95.8bn in performing credits. Public debt will stand at 130% of GDP by year end. The last thing the country needs therefore is to have its recovery program disrupted by the capricious whims of short term speculators.



The destruction wrought on the emerging world by global mobile capital flows has by and large profoundly changed assessments around the world regarding the contribution to welfare made by the free flow of short term capital. The staunchest advocates of capital convertibility and unfettered short term capital movements---the US Treasury and the Fed---continue to argue that the basic problem of financial instability in countries like Argentina lies in the flawed financial structures of the recipient countries. Of course, being the world’s largest net debtor, the US has the greatest vested interested in retaining maximum access to foreign capital; its “advice” must be assessed in that context. But in light of the experiences of the emerging Asian economies in 1997/98, many are now prepared to concede that there was a private market failure in foreign capital crowding into these into these small economies at one moment and reversing direction in the next.



The countries that have suffered greatly from these short term capital flows see in these flows not merely market failure but unbridled speculation with destructive intent. The railings of Dr. Mahathir of Malaysia against hedge fund speculation aimed at forcing devaluations in Thailand and Malaysia were well publicized at the time that his control introduced a limited form of exchange controls (which were quietly eliminated years later when economic prosperity returned). The election two and a half years ago of an unabashed anti-IMF populist in Thailand as Prime Minister was another instance of this challenge to prevailing economic orthodoxy. But Thaksin’s economic “heresy” has also worked: A credit expansion, a vastly superior business climate and a stock market which has been the top performer in Asia this year, all provide vivid testimony to the success of his party’s policies, and suggest that the “failure” to embrace IMF orthodoxy is not a recipe for economic failure.



Now in the West we are hearing from the bastions of free market capitalism itself similar assertions regarding the inappropriateness of global short term capital flows for small emerging economies.



Former Federal Reserve Chairman Paul Volker has contended,

"The IMF's stance was influenced by the US Treasury and left many small economies dangerously exposed to turbulent capital flows. The visual image of a vast sea of liquid capital strikes me as apt," Volker said in April."The big and inevitable storms through which a great liner like the USS United States of America can safely sail will surely capsize even the sturdiest South Pacific canoe."

Worse yet was the assessment of George Soros:

The rethinking must start with the recognition that financial markets are inherently unstable. The global capitalist system is based on the belief that financial markets, left to their own devices, tend towards equilibrium. They are supposed to move like a pendulum: they may be dislocated by external forces, so-called exogenous shocks, but they will seek to return to the equilibrium position. This belief is false. Financial markets are given to excesses and if a boom/bust sequence progresses beyond a certain point it will never revert to where it came from. Instead of acting like a pendulum financial markets have recently acted more like a wrecking ball, knocking over one economy after another.



Similar assessments are now to be found among the G-7. Japanese officials have long expressed"sympathy" with the resort to capital controls by Malaysia, Taiwan, and China; likewise, the governments of France and Germany. Even within the IMF, which until 1997 had been trying to rewrite its articles of agreement to make an open capital account along with an open current account mandatory upon its members, has considered that"…deliberations about (capital) controls were still going on, apparently with the IMF's blessing". The new controls would try"…to protect countries from the over volatility of short term flows…" of capital. (Our emphasis)

Alarmed at the implications of the world’s greatest debtor finding its access to the desperately needed inflows of foreign funds potentially curtailed, the Bush administration and Fed have started to fight back. The Bush administration has insisted that the recently concluded trade pacts for Chile and Singapore include provisions penalising them for the use of any controls on capital. This short-sighted view marks a discouraging triumph of ideology over experience and good sense.

The inclusion of a rigid rule against capital controls in a trade agreement makes things even worse. If controls were imposed, even in the midst of a financial crisis and with the approval of the IMF, American investors would have to be compensated. A decision on damages would be made by trade arbitrators, whose macroeconomic expertise is not exactly compelling. Experience under the North American Free Trade Agreement has revealed the limitations of"trade" arbitrators in issues requiring a broader economic perspective.

Commenting on these trade agreements recently, authors Jagdish Bhagwati and Daniel Tarullo noted the following:

“The intention of the Bush administration to use these two agreements as"templates" for other trade agreements, possibly including the Doha round, means that acceptance of the capital control provisions could engender a trade policy that causes far-reaching damage.

The prohibition on capital controls has the makings of a US foreign policy debacle. Imagine that a government imposes short-term capital controls in order to manage financial problems. Compensation will ensue, but only for American investors. The citizens of the developing country will then see a rich US corporation or individual being indemnified while everyone else in the country suffers from the crisis. One would be hard-pressed to think of a better prescription for anti-American outrage.”

One would think that the leaders of developing countries all over the world would have learned some lessons from the outcomes of the 1997-98 crises, especially with regard to the potential usefulness of capital controls in certain circumstances. In particular, Mr. Greenspan argued that the application of controls in Malaysia would doom that country to be an investment and economic backwater, whereas in fact it helped stanch the bleeding there while other nations that declined to go with controls, such as Thailand and Indonesia, faced more devastating results. And above all, it was China with its vastly greater controls over capital flows and currency values that came out the best in the whole affair.

Which is why we are encouraged by the Argentinean response both in terms of its contents and, equally important, the timing for introducing these controls. When interest rates were raised by the Asian countries under IMF pressure, people worried that high interest rates would raise the pace of bankruptcies and lead to economic recession, debt defaults, and social unrest; as a result capital fled Asia. When countries like Korea moved to lower their interest rates their currencies appreciated. The main impetus for the controls came from the recent rapid appreciation of the peso against the dollar, and the goal was to prevent a recurrence of the sorts of asset bubbles precipitated in places like Thailand or Malaysia, where such hot money proved highly destabilizing.

As these controls are being introduced by the Argentine authorities during a period of relative stability (when it has again become the darling of speculative investors), rather than imposed in response to desperate financial weakness, we expect the fallout to be minimal, despite the invariable cacophony of voices of dissent on Wall Street, who will argue in a self-serving way that such controls bring all sorts of distortions to economies which introduce them.



In fact, the die is cast. The actions of most of the major participants in the huge leveraged speculative community provide vivid testimony to the notion that global mobile capital has proven to have become essentially speculative over the past 10-15 years. Whether this is an inherent trait of markets, as Soros would contend, or a recent"pathological development", as we would argue, it is now widely agreed that global mobile capital has been speculative and destructive. Emerging Asia in particular saves too much. With its sky high savings rates, its undervalued currencies, and its vast current account surpluses, it does not need foreign capital over the long run and might, as the recent establishment of the Asian Bond Fund illustrates, begin to redirect its capital inwardly, away from the US. This region will also begin to shun foreign short term capital. We also believe that some form of regulation, capital controls or"Tobin tax" is inevitable. Argentina’s move reflects a further acknowledgement of this inevitable reality. No amount of heavy-handed US muscle to advance the administration's narrow, ideologically driven aims will change this fundamental new fact of life in today’s markets.