Strong trend towards short-term capital controls

The global financial crisis has shown that there are systemic risks as a result of financial flows. In view of the absence of any adequate mechanisms to deal with this problem, there has now emerged a strong trend in favour of the adoption of some kind of short-term capital controls.

by Chakravarthi Raghavan

THERE is now a very strong trend in favour of adoption of some kinds of short-term capital controls in situations that would justify such controls whenever countries are under pressure and feel the controls could be beneficial, United Nations Conference on Trade and Development (UNCTAD) Secretary-General Rubens Ricupero said on 23 October.

Ricupero, who shared the podium with the Thai Deputy Prime Minister, Dr Supachai Panitchpakdi, at a press conference on the outcome of the UNCTAD High-Level segment on the financial crisis, was responding to questions about the clear difference of views that emerged at the meeting on 22 October between 'foreign investors' and their plea to be left free to invest anywhere and make profits, and the UN regional commissions that realised the systemic nature of the crisis and the need for controls and regulations.

At the High-Level segment, chaired by Supachai, the executive heads of the UN regional commissions, the Economic Commission for Africa (ECA), Economic Commission for Europe (ECE), Economic Commission for Latin America and the Caribbean (ECLAC), Economic and Social Commission for Asia and the Pacific (ESCAP), and Economic and Social Commission for Western Asia (ESCWA), presented their regional perceptions of the financial crisis that began in Thailand in Asia in July 1997, and is now gripping all the regions of the world, including the industrialised countries.

All the executive heads of the commissions, in nuanced ways, underscored the non-functioning of the international finance system and the inability of individual countries to cope with systemic problems caused by the nature of the current financial flows, and the herd behaviour of foreign investors, and underlined the need for international actions, particularly to curb short-term capital flows, in both the host and home countries.

But two representatives of Wall Street firms, Ms Joyce Cornell of Scudder Kemper Investments, a portfolio fund investor which claimed to be active in Africa, and Goldman Sachs International, a global investment bank which was formerly headed by the present US Treasury Secretary Rubin, spoke with differing nuances but with the basic message that countries should not interfere with flows of capital into and out of a country, but rather take measures to provide confidence to the investors and markets.

Earlier, in his opening remarks, Supachai spoke of the perceptions and views that came from the actual operators and the need to involve business sectors both in the work of governments of countries and at international level in the work of organisations like UNCTAD, and the need to sort out some of the 'myths' against the foreign direct investment (FDI), and for countries to create a friendly atmosphere to promote investments. In response to questions, he also explained the various steps that the Thai government had taken to liberalise operations of foreign investors.

Conflict of interests

Ricupero was asked to comment on the somewhat diametrically opposing views that emerged at the High Level segment - as between the two Wall Street firms whose basic message appeared to be to have full freedom to go wherever they could make money for their asset holders and exit whenever they wanted, and the views of regional commissions for some controls and regulations, and against financial or capital account liberalisation.

Ricupero said there was a clear-cut conflict of interests that went to the very root of the differences in positions of the two sides.

He referred in this connection to the views of Prof. Jagdish Bhagwati [against capital convertibility of multilateral investment rules at the World Trade Organisation (WTO)] in his interview in December 1997 with an Indian newspaper and his subsequent article this year in the Foreign Affairs quarterly.

'Those people operating in financial markets and Wall Street have a clear interest in increasing the area for their operations and they gain very much from the arbitrage,' Ricupero said.

Ricupero recalled that the Trade and Development Board President, Amb. Chuk Man See of Singapore, had quoted George Soros as saying at the Davos symposium in February, that if financial markets were in equilibrium no one would make profit.

New IMF official position

The profits of the Wall Street operators and firms, Ricupero said, come from arbitrage and they have an interest in having as few controls and obstacles in terms of inflows and outflows of capital and funds as possible.

'But this issue is only a particular angle of the wider problem. One has also to hear and take account of the views of ministries and departments of treasury or finance in countries... Even Robert Hormutz (of Goldman Sachs) recognised this in respect of the controls that Chile has on short-term borrowing and capital flows to discourage speculative inflows of capital. Even the International Monetary Fund which till recently was opposed has been taking a very cautious position and has moved away. Not only has the IMF been attracted to the idea of short-term controls in Asia, but the views of its Deputy Managing Director, Stanley Fischer, showed that this is now practically the official position of the Fund that in some circumstances short-term capital controls are justified.'

Ricupero added: 'There is now a very strong trend in favour of adoption of some kind of short-term capital controls in situations that would justify such controls, i.e. where countries feel they are under pressure and controls could be beneficial... Of course it will always remain a matter for decision by the authorities of each country and in the light of the situation that the country faces.'

Need for rethinking

Asked to comment on a letter by Bhagwati in the Financial Times (against investment rules in the WTO, but rather for dealing with investment rights and obligations, labour rights and environment questions outside the WTO framework), Ricupero said he had taken serious note of Prof. Bhagwati's letter, which was in line with what he has been saying about investment rules. This reinforced the value of the work going on in UNCTAD to provide assistance in this area to the developing countries.

A number of speakers, business representatives of the 'real economy' from the region as well as officials of regional commissions, underlined the problems arising from the completely unregulated and often unsupervised functioning of the international financial markets and operators, and the need for some rethinking on these issues to find solutions.

The Executive Director of ECLAC, Jose Antonio Ocampo, said the crisis had brought out the systemic risks at play and the non-working of the international financial system.

'There are no adequate instruments for financial globalisation, and while short-term actions to avoid the crisis spreading are needed, ad hoc arrangements would not be sufficient either.'

The crisis has shown 'we all have to be humble', said Ocampo, a distinguished economist from Colombia. 'We do not know how to predict them or manage them when they occur. We know of the herd behaviour of investors, but know much less about the crisis.'

There was need for controls on short-term capital flows, in both the recipient and the source countries of such flows, Ocampo said. 'This is not the time to think of capital market liberalisation, but on the need to create truly global institutions to cope with these issues,' he added. (Third World Resurgence No. 99, November 1998)

Chakravarthi Raghavan is the Chief Editor of the South-North Development Monitor (SUNS) from which the above article first appeared.