What do Australian Historians and Intellectuals Have to Say About Globalisation?

TIME TO REIN IN GLOBAL FINANCE
by WILLIAM GREIDER
See below for background and related information.
The financial crisis that collapsed Asian economies in mid-1997 and then bounced around the world
was a distant sideshow to most Americans until it reached Wall Street. One year later, when Russia defaulted and Brazil was engulfed by the investor panic, US financial markets plunged too, and some major American banks and brokerages were at risk (as a result of lending billions to such magical schemes as Long-Term Capital Management, the wildly overleveraged hedge
fund that went bust). The Federal Reserve rushed to the fire, supervised a forgiving bailout for Long-Term Capital and swiftly cut interest rates three times to restore confidence. The giddy boom resumed, but the US establishment was rattled. Led by the President, important voices from financial and academic circles began to talk earnestly about the need to reform the global financial
system. "A new international financial architecture," they called it.

 

Nothing has been reformed. Three years after the turmoil and destruction began, the world's unstable financial system remains unchanged and, therefore, still vulnerable to all the excesses of unregulated capitalism that nearly brought it down. Another savage crisis is very likely to occur, somewhere or another, and millions of innocent bystanders will, once again, find themselves wiped out by the blind force of global finance, with its reckless, manic appetite for greater returns. For instance, because global flows of capital are now freed of any moderating controls by national governments, they can surge into a promising "emerging market" like Mexico or Indonesia, overwhelm it with easy money lent short-term for quick profits, then rush out overnight, collapsing the currency and economy. Major speculators, meanwhile, operating from unregulated offshore banking centers, gang up to attack vulnerable currencies from Britain to Malaysia and reap enormous windfalls by forcing them into costly, often exaggerated devaluations. An embattled country like Brazil is compelled to seek the protection of the International Monetary

Fund, which will demand an austerity policy to restore the confidence of
global investors (the very people whose panicky flight triggered the crisis).
These and other destabilizing features of the free-market "architecture"
are among the problems that have not been fixed. When another crisis does
occur (perhaps closer to home), it will confirm the dereliction of the "responsibles."
So the burden of reform devolves to others--those diverse voices around
the world who are uniting now in a movement to challenge the corporate-capitalist
version of globalization. These active citizens, of course, have very little
power to change things themselves, except their intelligence and spirit,
plus an ability to arouse the broader public. This new international movement
understands that the maladies of global finance go deeper than recurring
crises and the danger of a total breakdown. For decades, the poorer countries
have lived with harsh dictation from global capital about what economic
plans their governments may or may not pursue in behalf of citizens, with
brutal discipline if they stray. The cheerleaders describe this as globalization's
"golden straitjacket"--follow our orders, and we will make you rich (someday)--but
people in most societies are learning that the consequences for humanity
are often quite leaden. Some people do get rich, of course, or gain wage
incomes. But as millions learned in Southeast Asia, their escape from poverty
was a temporary thing, hostage to the anxieties of distant investors who
are oblivious to their individual efforts and aspirations.
* * *
The financial
realm constitutes the commanding citadel of the global system--the benefactor
that provides essential capital, the enforcer that disciplines multinational
corporations as well as nations. Its imperious attitudes and amoral operating
assumptions are embedded in every aspect of globalization and implicated
in every complaint, from inhumane working conditions to environmental wreckage,
from the erosion of national sovereignty to the gross and growing inequalities.
Reforming global finance is, likewise, the most formidable challenge, since
many people who can grasp the immorality of exploited labor or wanton destruction
of nature are intimidated by the dense abstractions of high finance.
 An
essential starting point is to remember that this out-of-control global
financial system is a man-made artifact, a political regime devised over
many years by interested parties to serve their ends. Nothing in nature
or, for that matter, in economics requires the rest of us to accept a system
that is so unjust and mindlessly destructive. What follows is intended to
help people think more clearly about the possibilities for reform (two previous
articles, on January 31 and April 10, focused on rules to impose social-moral
values on globalization and the deep economic imbalances in production and
trade that drive the "race to the bottom"). Some plausible, immediate steps
will be described that could impose more order and equity on global finance,
also a grander vision of how the world's divergent economic interests might
someday come together in a new institutional relationship that disarms the
overbearing power of capital while it also reconciles tensions between rich
and poor countries. We begin, however, on the narrow ground where the elite
debate is located because some of its "solutions" may actually make things
worse, especially for poorer countries.
* * *
The public dialogue among
establishment figures started on a hopeful note, with sober pleas for "a
new architecture" from Bill Clinton, Treasury Secretary Robert Rubin, Tony
Blair of Britain and many other influentials. Since then, the discussion
has steadily narrowed and is now reduced to a single question: how to reform
the International Monetary Fund and the World Bank, as if those international
financial institutions (the so-called IFIs) are the only problems to fix.
What's left aside is the private, deregulated marketplace of global investing,
lending and speculation that actually generates the instabilities and gross
injustices. There are a couple of significant exceptions I will mention,
but the general drift of respectable opinion is toward doing as little as
possible--and doing nothing that might upset the bankers and financiers.
In Washington, the reform debate has been hijacked by the free-market right-wingers
in Congress and elsewhere, who propose to eviscerate the IMF and the World
Bank, severely reducing the scope of their lending and their authority to
intervene in crises. The loan windows would be effectively closed to most
poor nations, and discretionary decision-making would be replaced with fixed
and very conservative rules. The right portrays the fund and the bank as
out-of-control bureaucracies that have stealthily accumulated functions
far beyond the original purposes of the Bretton Woods agreement that created
them a half-century ago. In the reconstruction following World War II, the
IMF's initial role was to be the mediating agency that insured stable, fixed
currencies. The World Bank did investment lending to rebuild war-devastated
economies and to help poor countries begin development. It is certainly
true that in recent decades, both institutions have been transformed and
both often make things worse for countries they are supposedly helping,
imposing on them the conservative economic dogma known as the "Washington
consensus."
But the right-wingers make an additional complaint: The IMF
actually causes financial crises--by encouraging investors to take imprudent
risks in the belief that the IMF will come to their rescue with a bailout--and
its functions must be sharply limited. Among their fanciful claims, the
right-wingers promise that if another major financial collapse does occur,
the IMF will be prohibited from executing the kind of big-package bailouts
employed for Mexico in 1995 and Southeast Asia in 1997.
The right-wingers'
anti-IFI message appeals to many social activists on the left, and some
have signed on to the conservative agenda on the assumption that anything
that weakens the IMF and the World Bank is a big step in the right direction.
I share their critique of the IFIs, but their logic seems to me quite naïve
about the actual power relationships in the global system. I suspect they
may come to regret making common cause with the likes of Senator Phil Gramm,
who, as conservative chairman of the Senate banking committee, can do great
damage under the banner of reform.
The right wing's prescriptions are contained
in the recent report from the International Financial Institution Advisory
Commission, created by Congress in 1998 to critique the IFIs and recommend
changes (the chairman is Professor Allan Meltzer of Carnegie Mellon, a hard-money
disciple of Milton Friedman who regularly scolds the Federal Reserve for
being too lax). Treasury Secretary Lawrence Summers, perhaps anticipating
the right's line of attack, has called for a moderate scaling back, but
Harvard economist Jeffrey Sachs is providing liberal cover for the right-wingers.
A leading IMF critic and Democratic appointee to the IFI commission, Sachs
enthusiastically endorsed the conservative recommendations (while privately
assuring friends that he disagrees with the more odious elements).
* * *
At the risk of sounding soft on the IFIs, I observe that the right has grossly
rewritten recent history in order to blame them and absolve private capital.
The IMF and the World Bank have indeed expanded and contorted their purpose
enormously over the past two decades, but in every important instance they've
done so at the behest of the US Treasury, responding to urgent demands from
private banking and finance, mainly the major US banks and brokerages. In
the Third World debt crisis of the eighties, IFI lending assisted the massive,
silent bailout of leading banks like Chase and Citicorp (now Citigroup),
which allowed private banks to back out of huge portfolios of failed loans
yet left the indebted countries of Latin America in even worse shape (a
negative wealth transfer, from poor to rich, totaling $116 billion). In
the nineties the $50 billion bailout of Mexico was engineered by Rubin and
Summers, not the IMF, which as always followed Treasury's orders (a rescue
for the customers at Merrill Lynch and Goldman Sachs, among other firms).
The Asia and Russia bailouts were likewise driven by US policy-makers and
financiers. The IFIs are agents of global capital, not the masters.
 If
the two Bretton Woods institutions were abolished tomorrow, the punishing
chaos and inequities in global finance would continue--and might be amplified
by panicky investors--since these disorders originate in financial markets,
driven by powerful private interests and their self-serving doctrine of
lawless free markets. The right-wingers, along with Jeffrey Sachs, are being
cute when they pretend to recommend no more bailouts. As they well know,
if the next crisis is large and threatening enough, the IMF, World Bank,
Fed and other major central banks will again intervene as lenders of last
resort--regardless of anybody's promises--since "letting nature take its
course" might risk a total meltdown.
Developing countries, meanwhile, will
find themselves in a new straitjacket, probably harsher than the present
one, if the right's agenda prevails. The Meltzer-Sachs commission's majority
insists, for instance, that the IMF lend only to "prequalified" nations
that pass certain tests of soundness--that is, adopt conservative economic
policies and deregulate domestic financial systems so that foreign banks
and brokerages are free to enter and dominate them. Thus the US financial
industry might accomplish through this back door what it has long sought
in formal trade negotiations, like the controversial Multilateral Agreement
on Investment, which was stymied only by vigorous grassroots opposition
from many nations. The Meltzer-Sachs proposals contain other neocolonial
features that are most unfriendly to the poor.
The political plans of the
right may also threaten--even derail--the energetic global campaign under
way to win debt relief for the very poorest nations. Senator Gramm and allies
intend to attach the Meltzer-Sachs prescriptions to upcoming legislation
needed to approve debt relief. If they succeed, Jubilee 2000 could be held
hostage, even stalemated, by Congressional right-wingers insisting on their
version of reform.
* * *
The global financial marketplace resembles a Wild
West territory where bankers and big ranchers try to establish law and order
among the populace while exempting themselves (since they write the laws
in the first place). In this metaphor, the IMF plays sheriff and hanging
judge, dispensing commandments and punishment on behalf of wealthy patrons
while absorbing the wrath of angry citizens. Reforming the IFIs, including
attempts to insert labor and environmental rights into their lending conditions,
may be a noble project, but it will almost surely fail unless this underlying
contradiction is confronted and altered. What this territory needs is new
laws that regulate the behavior of the powerful, that extend due process
and equal protection to the weak as well as the mighty.
The great fiction
promoted by the free-market gurus--that national governments are powerless
to assert themselves in this new world--has always been nonsense but widely
believed. The myth is now being refuted, concretely, by legislation introduced
by a respected establishment Republican. Representative Jim Leach, the moderately
conservative chairman of the House banking committee, has proposed a measure
to assert the influence of US banking regulation over the galaxy of offshore
banking centers--the secretive, unregulated outposts where "dirty money"
from drugs and crime mingles with respectable capital from hedge funds,
major banks and wealthy investors. Leach's proposal is the most meaningful
step toward genuine reform that I've observed (actually the only one) and
ought to inspire reform activists to explore the broader implications.
Last year Leach was powerfully offended by the scandalous money traffic
through the Cayman Islands and other offshore havens that allowed Russian
oligarchs to spirit away many billions and deposit the loot in the Bank
of New York (possibly the same billions the IMF had lent to the Russian
government, though that's not yet proved). Leach discovered that in one
year some $70 billion was transferred from Russian accounts through a tiny
island in the Pacific Ocean called Nauru, population 11,000. Last fall Leach
drafted regulatory legislation that could put a stop to these financial
games, or at least force them into the daylight. The so-called brass-plate
banks, typically existing only as computers set up in obscure locations,
are more than an arcane gimmick, because they channel huge volumes of global
capital, especially from the major speculators, outside official scrutiny
from any government.
Banks in the United States, Leach asserted, should
be prohibited from accepting any of these blind transfers from money shops
if they cannot establish that the money originated from a truly regulated
institution that is, in fact, a real bank (the Clinton Administration introduced
a competing version after the financial industry complained about Leach's).
The issue exposes a central hypocrisy of international finance--a system
that demands "transparency" and "due diligence" from banks in developing
nations while all the best names in international finance use these irregular
outposts. The offshore money, whether clean or dirty, enjoys the same benefits:
avoidance of national laws and regulation as well as avoidance of taxes
(global tax-avoidance schemes may cost hundreds of billions in lost revenues;
no one really knows).
Despite the complexities of global finance, the operating
cortex is relatively small and easily accessible to government regulators--five
dozen or so international banks that handle the foreign-exchange transfers
for everyone else. Nearly all are based in the wealthiest economies, supervised
and regulated by their national governments. The politics is straightforward:
Write tough new rules for these leading banks and everyone else must observe
them (unless they choose not to do any banking with the world's principal
centers of financial wealth).
* * *
New rules are needed to create more
financial stability and equity, but, ultimately, banking regulation can
also be a discreet instrument for upholding social values--public needs
for housing, healthcare, education--since the regulation implicitly influences
access to credit (which borrowers are preferred, which shut out). Not all
of the issues can be reached by national legislation alone, but much of
the disorder will be swiftly remedied if the wealthiest nations, especially
the United States, abandon the crumbling dogma of laissez-faire and accept
the obligation to restore fairness. Here is a brief sampling of some possibilities
proposed by various reformers:
§ Shut off or shut down the offshore
banking centers, both to curb speculation and recapture lost revenues for
national governments. Leach's proposal is a modest first step toward establishing
the standard of law. Tax-dodging and money-laundering are financial issues
that every citizen can understand.
§ Allow nations to impose their
own controls on short-term capital flows in order to disarm the "hot money,"
those frantic capital surges in and out of countries that have triggered
so many crises. The Council on Foreign Relations, an old establishment outpost,
recommended as much in a study group co-chaired by two other Republican
notables, Peter Peterson, Richard Nixon's Commerce Secretary, and Carla
Hills, George Bush's US Trade Representative. Their recommendation departs
from orthodoxy but is not as radical as it sounds. Chile, after all, has
been allowed to do this. It successfully discourages short-term lending
from abroad with a stiff holding-period tax that severely penalizes early
withdrawals (shorter than a year's duration). The United States and other
powers simply have to tell the IMF to back off and let emerging economies
use such insulating devices, perhaps even incentives like Chile's that direct
longer-term capital to the nation's own priorities. One wonders, in passing,
why the Clinton Administration is so shy about the issue of capital controls
when the Council on Foreign Relations has provided establishment cover.
§ Create a quasi-public international investment fund that directs
major volumes of long-term capital to developing countries and thus allows
them to escape the dictates of investors and economic doctrines imposed
by the IMF. A broadly diversified fund, including private and public investors,
professionally managed to produce healthy returns, would bring patience
to the process of globalization--stable capital that is not beholden to
the quarterly earnings of multinational corporations or the feverish mood
swings of financial markets. Governments might set forth the broad principles,
but the fund would have to establish that patient capital can compete profitably
(precisely why private capital loathes the idea). Jane D'Arista of the Financial
Markets Center (her work is available at www.fmcenter.org) has proposed
a closed-end international fund that would function like a giant mutual
fund, but with a sense of history. An alternative version would raise its
capital from a modest tax on global financial transactions and might gradually
displace the World Bank as the leading development lender. Either way, the
goal is to give aspiring nations more freedom from the fickle financial
markets, while assuring the capital inflows they need to develop.
In the
meantime, governments should prohibit the World Bank from financing any
more oil, gas or mining projects--40 percent of the World Bank Group's loan
portfolio last year, according to Friends of the Earth and other environmental
groups. These generate environmental destruction and social upheaval in
developing countries while often propping up corrupt regimes. Private capital
should take these risks, not taxpayers.
§ Create a new international
bankruptcy court to arbitrate claims between creditors and defaulting nations
and provide protective workouts so indebted countries aren't destroyed in
the process. The present system, loosely supervised by the IMF, central
banks and various clubs of private bankers, is utterly one-sided. The fallen
nations are steadily bled, their remaining assets picked over by scavenging
investors, while foreign creditors walk away with no responsibility for
their own mistakes. A global bankruptcy system for nations would develop
equitable principles for settlements and terms of lending that could be
incorporated in every debt instrument of global finance, the legal language
that establishes the obligations of bankers and bondholders as well as their
borrowers. This reform is a more reliable response to the problem of "moral
hazard"--investors who take irresponsible gambles because they believe governments
will bail them out--than anything the free-marketeers have suggested. Professor
Kunibert Raff of the University of Vienna has proposed that nongovernmental
organizations, trade unions and civic groups participate to speak for the
affected citizens in bankrupt nations.
§ Confront and engage the long,
difficult task of constructing a new international system that assures stable
relationships among national currencies. The present system of floating
exchange rates, with its exaggerated swings in currency values, is a central
source of global instability as well as a movable feast for speculators.
With everyone linked to the continuing gyrations of major currencies, the
damage is randomly transmitted: US interest rates rise and trigger a collapse
of the peso in Mexico or the baht in Thailand. Unpredictable exchange rates
lead multinationals to disperse factories so they can hedge currency shifts
by bumping their output from one country to another. This rudderless free
market--$1.5 trillion a day in foreign-exchange transactions--wastes enormous
amounts of capital in unproductive games, while the intimidating instability
also retards growth rates in the advanced industrial nations.
These are
not radical complaints, but points that conservative authorities like Paul
Volcker have made in calling for reforms to stabilize the world's currency
relationships. Unlike previous examples, this problem cannot be easily fixed,
and certainly not by a single nation. Managing the international stability
of currencies was the original purpose of the IMF, but that function was
wiped out three decades ago when Nixon unilaterally discarded the Bretton
Woods system and accepted Milton Friedman's idea of floating exchange rates--money
values determined, every day, in the marketplace. The triumph of laissez-faire
produced the present turmoil. The IMF ought to be phased out, but that's
unlikely until a new, more democratic institution is created to replace
it. Big players can hedge against unpredictable losses, but people can't
hedge their lives, their societies. Global finance needs a supervisory governor
that everyone can trust.
* * *
Set aside current realities and imagine
a different future: Every nation, rich or poor, conducts foreign trade in
its own currency and, therefore, gains greater ability to steer its own
national economic policies. The dollar and the euro, perhaps joined by the
yen, serve as the most reliable anchors but no longer swing wildly in value
against one another, damaging producers and workers on one end or the other.
Poorer nations, exporting and importing in their own currencies, are no
longer compelled to raise "hard currency" reserves to pay back foreign loans;
thus they are free to move away from the model of export-led growth and
concentrate more on domestic development. Exchange rates among the currencies
still fluctuate in value, actively influenced by market forces, but the
speculators have lost their best game. The extraordinary volumes of currency
trading subside; the "hot money" finds less opportunity to panic. The rhythms
of globalization become less volatile and randomly destructive, as investors
discover that the best returns require investing with a longer perspective.
Finance capital no longer acts like an imperious master, but only as one
important agent in capitalism's processes of wealth creation.
All this
is entirely plausible, but to reach this future one has to accept the need
to create some kind of new governing authority for global finance. The most
ambitious and persuasive plan I have encountered was designed by financial
economist Jane D'Arista. The improvements described above are what D'Arista
foresees as possible if the world undertakes a fundamental reordering. Someday,
I predict, political leaders will be compelled to consider something like
this, though I fear it may require a bloody catastrophe to get their attention.
Many reformers will object that this subject is wildly premature, too abstract
for citizens to grasp, too distant from present politics to engage their
scarce energies. Besides, they will say, does anyone really want a new,
more powerful IMF? I disagree. Thinking ahead in larger terms can give self-confidence
to this new movement. Asking hard questions about the future forces people
to clarify their vision. Besides, governing elites are much too timid to
think big for us.
D'Arista's concept borrows from John Maynard Keynes and
Harry Dexter White, co-architects of the original Bretton Woods arrangement,
but the operating principles are adapted to the greater, faster complexities
of today. She calls this new institution an "International Clearing Agency"
because it would act as the currency clearinghouse for payments in international
trade (the place where exporters and importers exchange one nation's currency
for another's). Banks would do the exchanges for them, much the way they
use the Federal Reserve as a clearinghouse for all US banking transactions.
The ICA would not be a true central bank, since it wouldn't have the power
to create money, but many features and functions would be similar. Like
a central bank, it would hold the world's reserves, backed by marketable
financial assets deposited by the participating nations. This financial
base would give it the power to act as lender of last resort in major emergencies
and provide temporary liquidity loans to countries in difficulty (just as
the Fed routinely lends to commercial banks).
The ICA's central function,
however, would be a balancing act among nations and their currencies--keeping
the exchange values of currencies within agreed-upon ratios. If a nation
tried to capture artificial advantage by letting its currency stray, it
would be nudged back in line by its shrinking reserves at the ICA and eventually
compelled, more or less automatically, to correct its economic imbalances
or face a formal devaluation. Thus the ICA would adjust and stabilize the
flows much as the original IMF did. Other times, it would help a country
deal with unexpected shocks like commodity-price gyrations or natural disasters.
Overall, the agency could discreetly counter the runaway surges in financial
activity, just as the Fed is supposed to do. Defending the safety and soundness
of the system is in everyone's interest, not just private investors. It's
an alternative to the Wild West.
Such an institution would have awesome
power, no question about it, but less awesome and arbitrary, I think, than
the unaccountable powers that private capital randomly asserts, for self-interested
profit, over the affairs of nations. Smaller countries, ironically, might
find D'Arista's scheme more attractive because it promises them more sovereign
space to pursue their own ideas of economic development. The centers of
financial wealth--especially the United States--would likely be the skeptics,
since it requires them to surrender much of their ability to manipulate
and dominate others. When the United States developed into a truly national
economy in the late nineteenth century, it suffered repeated, disastrous
financial upheavals that eventually persuaded politicians, albeit reluctantly,
to accept the need for a central bank. The question now is whether the world
has yet had enough of the chaos and profiteering to accept something similar.
* * *
The toughest challenge concerns democratic governance, not financial
design. Who would run and control this institution? Wouldn't the same old
crowd take over and use it to bully others, as with the IMF? D'Arista has
some tentative answers. She proposes a rotating executive committee whose
members must insure representation on two levels--population and economic
output--so that at least half the world's population would be represented
at the table, as would nations that, combined, account for at least half
the world's economic output. I suggest two additional levels of representation--the
world's regions and the people at large themselves. It's not practical,
obviously, to have a popular assembly supervising the global financial system,
but here's a radical thought: Why not elections? I can imagine a regular
worldwide referendum in which people everywhere vote directly to express
themselves--thumbs-up or thumbs-down--on the ICA's performance. A negative
vote would force a change in the leadership, much as in parliamentary systems.
The same principles might be useful for restructuring control of the IMF
and the World Bank (while they exist) or, for that matter, the United Nations
and other international forums that lack credibility and power because they
do not truly reflect world realities.
These are just ideas, of course.
But if nations are serious about the notion that globalization can lead
to worldwide democracy, we ought to look at distant horizons and begin asking
ourselves how this new democracy might work. The vision is simple: putting people first, instead of behind capital.
----------------------------------------------------------------------------
William Greider  is The Nation's national affairs correspondent.
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