NGLS Roundup, No. 38, July 1999

 

DEMOCRATIZING GLOBAL FINANCE:

CIVIL SOCIETY PERSPECTIVES ON

PEOPLE CENTRED ECONOMICS

 

 

INTRODUCTION

 

The devastating social and economic impact of the global financial crisis triggered in East Asia in mid 1997 has led a growing number of civil society actors, UN bodies and governments to explore strategies to regain control over global finance, which many describe as a cause of increasing systemic instability and social regress. Proposals range from modest reforms regarding prudential regulation and transparency rules at the national level, to bolder attempts at redesigning a new “international financial architecture” of similar historical significance as the creation of the Bretton Woods institutions in 1944. Others emphasize the need to reorient national economies toward more inner directed patterns of growth through demand boosting national redistribution measures and more discriminate use of foreign investment and trade policy.

 

Many debates in this area have focused on critiquing the neoliberal rationale for unfettered financial liberalization as part of the conventional policy package ascribed to the so called “Washington consensus,” which has been thrown into question in the aftermath of the East Asian crisis. The United Nations Conference on Trade and Development (UNCTAD) which since 1990, has been consistently warning against the inherently destabilizing effects of liberalized global finance, attributed much of the causes of the East Asian crisis in its Trade and Development Report, 1998 to a “colossal market failure” of high risk speculative ventures by international creditors made possible by imprudent financial liberalization “based on the notion of the infallibility of markets.” In a report issued in January 1999, the Task Force of the UN Executive Committee on Economic and Social Affairs also warns against across the board capital account liberalization, stressing that the recent crisis has demonstrated the “enormous discrepancy” between rapid globalization of finance and the lack of proper regulatory frameworks at national and international levels (See Go Between 73).

 

World Bank Senior Vice President and Chief Economist Joseph Stiglitz has also become one of the most visible critics of the Washington consensus. He reproaches this consensus for its ideologically informed “narrow economistic focus,” its failure to understand the role of regulatory institutions for markets to work, its neglect of broader development goals such as education and health, and the need to formulate policies on the basis of democratic consensus building processes at the national level (see NGLS Roundup, December 1998 January 1999).

 

A Loss of Democratic Sovereignty?

A prime focus of a growing number of NGO and civil society campaigning and advocacy coalitions is indeed to address the perceived loss of democratic control over national governments’ economic and social policies. These are said to be increasingly subject to the “discipline” of financial and corporate interests and, under conditions of widespread indebtedness, to the austerity measures accompanying rescue loans made available through international financial institutions (IFIs), which are not accountable to the populations whose livelihoods and life prospects are seen to be jeopardized as a result of these policies.

 

These calls to “democratize global finance” and promote alternative economic paradigms, based on securing and promoting people’s economic and social human rights, led some 300 NGOs, activist groups, trade unions, academics and parliamentarians from 40 countries to participate in a seminal international conference on Economic Sovereignty in a Globalizing World: Creating People Centered Economics for the 21st Century. Held on 23 26 March in Bangkok (Thailand), the meeting was hosted by the Thai based international NGO Focus on the Global South, with the support of Development Alternatives for Women in a New Era (DAWN) and the Structural Adjustment Program Review Initiative Network (SAPRIN).

 

“While financial analysts assess the global financial crisis in terms of stock market indexes and currency values, the real impact is being borne by the millions of people who are being pushed further into poverty as we approach the new millennium. Generations will inherit a debt not of their making, and as the human costs of the crisis continue to mount, speculators and currency traders escape virtually unscathed.   Uncontrolled speculative investment and currency trading have a devastating effect on economic stability and long term development. The crisis has shown that national economies no longer have control over vital aspects of economic policy, and that they too are subject to the whims of the market....The dire human consequences of this demand our attention. It is imperative that international economic relations be reviewed and reshaped to control speculation, regulate financial markets and reduce inequalities between nations, while promoting economic democracy and fostering sustainable development.   All these measures and reforms should aim to give local communities, national governments and regional groupings the chance to pursue economic policies which meet the needs of people, instead of the markets...”   Why We Are Having this Conference, Invitation letter on the Internet from Focus on the Global South

 

The discussions reflected the extraordinary diversity of participants and high quality of their contributions. They combined historical perspectives and analyses of processes leading up to the current crisis with practical policy recommendations and NGO campaigning strategies at national, regional and global levels. The thrust of the strategic discussions focused on the need to “create spaces” for more autonomous decision making by governments at various levels, in a manner that would be democratically informed by human rights principles, sustainability and social development objectives. The guiding principles for such a “people centered” reform agenda could be captured in three “subordinations” proposed by Kamal Malhotra from Focus on the Global South, in his introductory speech to the conference:

·                    subordination of macro and other economic policy making goals to human development and social policy goals;

·                    subordination of global level governance mechanisms to those at the local, national and regional ones, following the principles of subsidiarity; and

·                    subordination of the financial “bubble” economy to the real productive economy.

 

In the final plenary session on strategies and campaigns, Miloon Kothari from the International NGO Committee on Human Rights in Trade and Investment suggested that the existing international human rights and environmental regimes adopted at the United Nations provides the most coherent political and legal framework to mobilize citizen groups transnationally around a radical review of existing policies and practices, and to pressure governments to adopt an alternative people centred agenda.

 

This issue of NGLS Roundup reviews the discussions and main proposals made during the conference.

 

 

HISTORICAL PERSPECTIVES

 

Box 1   “In the 1920s, as the world was careening towards disaster, the League of Nations was single mindedly promoting liberalization of the global economy as the alleged recipe for prosperity and stability. But the more it succeeded, the more unstable the global economy became...As the process gathered pace, speculators made enormous fortunes, even as their ‘irrational’ wages enmeshed the real world economy in a disastrous web of impossible financial obligations. Eventually the world’s financial markets became increasingly unmanageable; real growth faltered; income inequality exploded; social cohesion was eroded; political stability was undermined. In response, those who were getting rich beyond their wildest dreams, were adamant in claiming that the problems were due to the fact that we had not liberalized enough...And for those that were not persuaded by this logic, they were quick to add that ‘there was no alternative’ since finance was now so global that it could no longer be regulated by national authorities...”   —Manfred Bienefeld, Carleton University, Ottawa (Canada), “Can Global Finance be Regulated?”  Plenary II: Global Financial Markets, March 24

 

Transnational Causes of Financial Crises

Throughout the sessions, many speakers took time to present the current crisis in historical perspective. John Dillon, from the Canadian Ecumenical Coalition for Economic Justice said financial crises have been a recurring pattern for nearly two centuries, preceded each time by “manias of foreign lending” that occurred over the years 1808 10, 1823 25, 1856 61, 1885 90, 1910 13 and 1924 28 that all ended in market crashes (see also Box 1). However, the frequency of financial crises has increased since the Bretton Woods system of fixed exchange rates broke down in the early 1970s. Citing Joseph Stiglitz, he said since 1975 there have been banking and currency crises in nearly 100 countries. Mr Dillon added that, according to 1998 World Bank report, Global Economic Prospects for Developing Countries, the 1994 95 crisis in Mexico and the 1997 crisis in Asian countries were largely due to large inflows of foreign capital and not primarily the result of macro economic mismanagement by the countries concerned. The same argument was made about the more recent collapse of the Brazilian Real in early 1999.

 

Such an analysis of the primary causes of financial crises contrasts sharply with the prevailing view among many G 7 nations and executive boards of IFIs, which until very recently, have unequivocally identified the causes solely in terms of the failure of national governments to get the basic “fundamentals” right (for example, through measures such as tight monetary policy, fiscal austerity, financial liberalization, business deregulation and privatization, incentives to foreign investors, open trade and investment regimes and “flexible” labour markets).

 

According to Walden Bello from Focus on the Global South, more emphasis on identifying the “supply side” causes of crises relating to transborder capital movements would also do much to explain the origins of the debt crisis. Just as “irresponsible” Asian banks and companies are now scapegoated for the East Asian crisis, Mr Bello argued, so were “profligate” developing country governments put entirely to blame when the debt crisis broke out in 1982. “Yet then as now,” he said, “the capital flow to the South was more supply driven than demand driven. The hundreds of billions of dollars deposited in international commercial banks by OPEC [Organisation of Petroleum Exporting] countries in the 1970s was a massive amount seeking profitable investment, and the rationale for this movement of capital was provided by Citibank Chairman Walter Wriston, who formulated the famous principle of sovereign lending: that ‘countries don’t go bankrupt’.” According to Mr Bello, the ensuing structural adjustment programmes (SAPs) of the International Monetary Fund (IMF) and the World Bank that “were supposed to discipline profligate governments paradoxically made the developing countries even more open to capital inflows from the Northern financial centres that had brought about the crash in the first place”—by including the lifting of foreign exchange controls and promoting capital account liberalization as part of the conditional policy package.

 

The Ascendancy of Finance

Many speakers at the conference referred to UNCTAD’s analyses on the dangers of the ascendancy of finance over the real economy. The organization’s Trade and Development Report, 1998, states that “modern financial markets are organized less to create wealth and employment than to extract rent by buying and selling second hand assets, and the ‘discipline’ these markets exert on policy makers reinforces the advantages of existing wealth holders.” This ascendancy has been associated with technological changes and the wave of liberalization policies in the 1980s. It exhibited several important traits, according to a framework paper prepared by Focus on the Global South.

·                    As commercial banks pulled back from international lending after their overexposure in debt ridden developing countries, other major financial players emerged as key conduits for cross border capital flows, including investment banks (such as Goldman Sachs and Merill Lynch), mutual funds, pension funds and hedge funds.

·                    The role of banks and conventional lending for the raising of funds was eclipsed by “securitization,” or the transfer of capital via the sale of stocks or bonds. By 1993, securities accounted for US$521.7 billion of international lending, compared to US$136.7 billion in bank loans.

·                    There was an explosion of both old and new activities and instruments such as arbitrage and derivatives. Arbitrage takes advantage of foreign exchange or interest rate differentials to turn a profit, while trading in derivatives refers to buying and selling the risk of an underlying asset without trading the asset itself. Derivatives have been described as very esoteric instruments, which are difficult to understand, monitor or control. They include such instruments as futures, forward contracts, swaps and options.

 

By the mid 1990s, the daily volume of transactions in foreign exchange markets has been estimated at over US$1.2 trillion, only a tiny fraction of which is said to “trickle down” in the real economy. According to the framework paper, one dimension of the ascendancy of finance over the real economy is the increasing role of financial operators with access to large amounts of finance capital working with large stockholders in skewing the behaviour of corporations away from long term growth, significant research and development spending and limited returns on shares, and towards short term profitability and rising dividends.

 

According to some speakers, the ascendancy of finance may be related to a crisis of dwindling growth in the real economy, or “deflation.” This crisis is characterized by overcapacity (or underconsumption), which today marks global industries from automobiles to energy to capital goods. According to one speaker, in 1999 the expected global “output gap” (which measures the difference between actual output and output at full capacity) is expected to be at its worst since the Great Depression of the 1930s. As Mr Bello put it, diminishing returns in key industries have led to capital being shifted from the real economy to “squeezing ‘value’ out of already created value in the financial sector. The result is essentially a game of global arbitrage, where capital moves from one financial market to another, seeking to turn a profit from the exploitation of the imperfections of globalized markets via arbitrage between interest rate differentials, targetting gaps between nominal currency value and ‘real’ currency values, or short selling in stocks, that is, borrowing shares to artificially inflate share values then selling. Not surprisingly [given the ascendancy of finance],” Mr Bello added, “volatility, being central to global finance, has become as well the driving force of the global capitalist system as a whole.”

 

The Rise of Neoliberalism

Many speakers said the intellectual legitimacy of financial liberalization is rooted in neoliberal doctrines that have characterized mainstream economic thinking and policy practice since the 1980s—often referred to as the “Washington consensus.” According to French based author and campaigner Susan George, socially minded intellectuals and activists have underestimated the power of ideas in changing mainstream beliefs. “Starting from a tiny embryo at the University of Chicago with the philosopher economist Friedrich von Hayek and his students like Milton Friedman at its nucleus, the neoliberals and their funders have created a huge international network of foundations, institutes, research centers, publications, scholars, writers and public relations hacks to develop, package and push their ideas and doctrine relentlessly...They have spent hundreds of millions of dollars, but the result has been worth every penny to them because they have made neoliberalism seem as if it were the natural and normal condition of humankind.”

 

Ms George said the central value of neoliberalism is competition—between individuals, firms, nations, regions—as the most efficient means to allocate resources, whether physical, natural, human or financial. An immediate consequence of applying such principles single handedly and above all others, she argued, is a legitimization of increasing inequalities. Citing figures from UNCTAD’s Trade and Development Report, 1997, on rising inequalities within and between nations associated with globalization over the past 20 years, she said there is nothing mysterious about this trend toward greater inequality. “Policies are specifically designed to give the already rich more disposable income, particularly through tax cuts and by pushing down wages. The theory and ideological justification for such measures,” she added, “is that higher incomes for the rich and higher profits will lead to more investment, better allocation of resources and therefore more jobs and welfare for everyone. In reality, as was perfectly predictable, moving money up the economic ladder has led to stock market bubbles, untold paper wealth for the few, and the kind of financial crises [that motivated the organization of this conference]. If income is redistributed towards the bottom 80 percent of society, it will be used for consumption and consequently benefit employment. If wealth is redistributed towards the top, where people already have most of the things they need, it will go not into the local or national economy but to international stockmarkets.”

 

 

A “POST WASHINGTON CONSENSUS”?

 

The scale of the social catastrophe, magnitude and contagion effects of the East Asian crisis, together with the way it was managed by the international community through IMF bailout operations and recessionary measures, have led to an unprecedented “backlash” against the prevailing policy prescriptions and approaches typifying the Washington consensus. However, speakers emphasized that such a backlash is taking many strands, with sometimes contradictory or even diametrically opposed objectives, and are part of a wider political backlash against economic globalization.

 

Some of these currents include “reactionary” forces in various parts of the world, particularly visible in the United States and parts of Europe, whose xenophobic and isolationist agenda has little in common with the human rights, peace, development and environmental agendas of what some participants described as the emerging “new social movements.” These are characterized by transnational grassroots coalitions of solidarity, collective campaigning, research and advocacy, whose impact on global change was particularly visible in the international public mobilization against negotiations at the Organisation for Economic Co operation and Development (OECD) on a Multilateral Agreement on Investment (MAI), which many had described as “a declaration of corporate rule” (see NGLS Roundup, December 1998 January 1999).

 

Patrick Bond from Wits University, Johannesburg (South Africa) said there exist occasional tactical alliances between “neo isolationist” and “left populist movements,” as in the campaign to defeat the United States administration’s “fast track” trade negotiating authority. However, the two must not be confused. The reactionary agenda, he said, could easily lead to “protective tariffs kicking off a downward spiral of trade degeneration reminiscent of the early 1930s.” In contrast, according to Mr Bond, the goals of the new social movements are typically to promote the “globalization of people” and halt or at least radically modify the globalization of capital. “In this regard,” Mr Bond added, “what many such movements are saying is a striking echo of [English economist and British negotiator at the 1944 Bretton Woods conference] John Maynard Keynes’ position (in a 1933 Yale Review article): ‘I sympathize with those who would minimize, rather than with those who would maximize, economic entanglement among nations. Ideas, knowledge, science, hospitality, travel—these are the things which should of their nature be international. But let goods be homespun whenever it is reasonably and conveniently possible and, above all, let finance be primarily national.’ Add political solidarity to his list of what should be globalized,” Mr Bond concluded, “and Keynes would fit nicely into this current.”

 

In between the still by far politically dominant Washington consensus proponents and the new social movements, participants identified a wide spectrum of reform currents, including: free trade advocates that oppose short term capital liberalization; the “post Washington consensus” agenda proposed by Joseph Stiglitz; proposals emanating from UNCTAD and the Task Force of the UN Committee on Economic and Social Affairs. Some of these would serve “to salvage the overall message of the Washington consensus” as Robin Broad from the Washington DC based American University argued, while others would coincide with, or at least not contradict, people centered agendas.

 

According to Ms Broad, “the growing strength of citizen opposition does not yet translate into the ability to create a new overall consensus. Too much of the elite still clings to the precepts of the old consensus. And yet in some key areas the cracks have brought about debate that will inexorably mark the end of the consensus.” What we may be witnessing, she said,  is a “healthy and vibrant era of no overall consensus” that would give much more room for pluralistic debate and space to explore alternatives.

 

At the same time, many participants argued that the Washington consensus was forged within inter governmental fora and institutions that are based on economic and political power rather than democratic principles. Alternative international consensus agreements, many of which are legally binding, have already been reached within the United Nations system, particularly in the areas of human rights (civil, political, economic, social and cultural) and the environment. Thus, many argued, part of the challenge is to ensure that economic policy setting fora and institutions conform with, and indeed support the implementation of, existing UN treaties, insofar as these are consistent with people centred sustainable development.

 

PEOPLE CENTRED ECONOMIC REFORM PROPOSALS

 

Within this spirit of pluralistic debate, considerable time at the conference was devoted to discussing a range of reform proposals that could form the basis for an alternative people centred agenda at national, regional and global levels. Given the highly inter dependent character of national economies, combined with the fact that currently many international trade and investment rules supplant national decision making prerogatives, national level proposals could not be discussed in isolation from the international context, and vice versa. However, the principle of subsidiarity outlined by Kamal Malhotra in his introductory remarks gave some direction as to what actions should be left to local, national and (occasionally) regional democratic processes (implying a “subordination” of global level governance mechanisms to local, national and regional ones), and those that can only be adequately implemented at the global level.

 

Reform of the Bretton Woods Institutions

Participants discussed at length various calls for a “new international financial architecture,” which some world leaders, such as British Prime Minister Tony Blair, said should amount to a “New Bretton Woods for the New Millennium” (see also Box 2). However, they said that judging from the “watered down” G 7 communiqué adopted in 1998, the need for bold reform was still not shared by all G 7 nations, particularly not by the United States.

 

“It’s the Wiring, not the Architecture?”

Walden Bello suggested that the United States position (and to a lesser degree that of many other G 7 countries) could be captured in a school of thought which he called “It’s the Wiring, not the Architecture” school. This school assigns primacy to reforming the financial sectors of the crisis economies along the lines of more transparency, tougher bankruptcy laws, prudential regulation using the core principles drafted by the Basel Committee on Banking Supervision, and greater inflow of foreign capital not only to recapitalize shattered banks but also with the expectation of stabilizing the local financial system by making foreign interests integral to it.

 

According to Mr Bello, “when it comes to the supply side actors in the North [private financial actors], this perspective would leave them to voluntarily comply with the Basel Principles, though government intervention might be needed periodically to catch freefalling casino players whose collapse might bring down the whole global financial architecture, as was the case last year when the US Federal Reserve organized a rescue of the hedge fund Long Term Capital Management after the latter was unravelled by Russia’s financial crisis...When it comes to the existing multilateral structure, this view supports the expansion of the powers of the IMF, proposing not only greater funding but also new credit lines such as the ‘precautionary credit line’ that would be made available to countries that are about to be subjected to speculative attack. Access to these funds would, however, be dependent on a country’s track record in terms of observing good macroeconomic fundamentals, as traditionally stipulated by the Fund.”

 

(Since the Bangkok conference, the IMF Interim Committee has endorsed the IMF Executive Board’s establishment of high interest bearing Contingent Credit Lines which the 10 May IMF Survey described as serving “for member countries with strong economic policies as a precautionary line of defense readily available against future balance of payments problems that might arise from international financial contagion.”)

 

Box 2   “The British call for a new Bretton Woods agreement brings to mind the original vision of John Maynard Keynes before the actual Bretton Woods conference took place in 1944... Keynes wanted a system that would have obliged creditors and not just debtors, to make adjustments to rectify balance of payments disequilibria. Most important of all, both Keynes and his US counterpart, Harry Dexter White, initially wanted members of the IMF to maintain full sovereignty over inflows and outflows of hot money [short term speculative capital]. In an early draft of his own proposals for Bretton Woods, White even suggested that governments not allow deposits or investments from another country without the approval of that country’s government.   “ When the New York bankers got wind of this they put pressure on the US Treasurer, Henry Morgenthau, to instruct White to modify his draft which he did. Nevertheless, the orginal Bretton Woods agreement did allow national governments to use some kinds of capital controls. The decisive factor at the first Bretton Woods conference was not the intellectual merits of Keynes’ ideas but the reality of US power. As the IMF has evolved over the years, it has moved farther and farther away from Keynes’ vision and become an enforcer of neoliberal orthodoxy for the benefit of the money traders.”    John Dillon, Ecumenical Coalition for Economic Justice of Canada. “Money Maniacs and Panics: Making History or Repeating It?” Panel 4: International Measures - Bankruptcy and Debt, 25 March

 

 

 

The Original Bretton Woods

According to Kamal Malhotra, if it is accepted that economic policy should primarily exist to serve medium and long term human and social policy goals, “then it should follow that regional and global financial institutions such as the IMF, World Bank, the Asian Development Bank and the World Trade Organization (WTO) should be more accountable to human and social policy...They should play subordinate roles to regional and global multilateral institutions that are primarily concerned with human and social policy issues, such as the United Nations Development Programme (UNDP) and some of the specialized agencies of the United Nations.” Mr Malhotra said he acknowledged that this is far from today’s reality and that “such a major global governance change will neither be credible or feasible without substantial progressive reform of the entire UN system.” However, he insisted on the necessity of such a “shift in the balance of power back to what was originally intended when the United Nations was created in San Francisco in 1945, meaning that the Bretton Woods institutions were merely meant to be specialized arms of the UN and accountable to it in the same way as [other specialized UN agencies]....The centre of gravity of global economic multilateral governance needs to be shifted away from the current relatively non democratic and narrow finance and economics centred institutions...to relatively more democratic and social and human development centered institutions such as those of the non Bretton Woods United Nations system.”

 

In the view of many participants and speakers, the current “deep neoliberal indoctrination” of the Bretton Woods institutions, combined with the strength of financial interests and the “hegemonic influence within them of the United States,” as Mr Bello argued, make them virtually impossible to reform. The same skepticism marked their view on the possibility of controlling and regulating the operations of hedge funds and other giant financial conglomerates. Efforts should rather focus on national and regional measures to reduce exposure to international speculators (see below). Others said they believed that civil society pressure could bring meaningful changes to the IMF, in the same way that the World Bank’s exposure to NGO criticisms has helped begin to shift the Bank’s development paradigm away from neoliberal economics. A spokesperson of the IMF told the final plenary that the Fund’s senior management was taking steps to open up the institution to the views and concerns of NGOs.

 

Irrespective of these differences in political appreciation, most participants tended to agree on the following campaigning objectives:

·                    To halt current reform efforts in the Fund, as well as in other fora, to include capital account liberalization in its Articles of Agreement, which would remove the flexibility needed for national governments to introduce capital controls (see Box 3) as preventative measures against speculative attacks. (This point was echoed both in UNCTAD’s Trade and Development Report, 1998 and in the January 1999 report of the Task Force of the UN Executive Committee on Economic and Social Affairs. The report states that some developed countries have insistently pursued across the board capital account liberalization in a number of fora, including the OECD, WTO and the Fund, although such measures are “contrary to their own historical experiences, which featured long periods of capital controls and only very gradual liberalization of their capital account in recent decades.”)

·                    To “uncreep” the mission of the IMF back to its original mandate of financing short term balance of payment problems without the right to impose long term structural reforms on sovereign nations. Such reforms should be undertaken through national democratic processes (see below).

·                    To support the creation of democratically managed and socially oriented regional monetary funds to counter the power of what participants described as a de facto G 7 controlled IMF.

·                    To resist any intergovernmental attempt to “resurrect” possible variants of an OECD type MAI, be it at regional level (for example, through a proposed transatlantic economic partnership), or global level (for example, through a “millennium round” of negotiations on “new issues” at the WTO). If an international agreement on investment were to be developed, it would have to be based on the principle of ensuring that transnational corporations abide by core human rights, labour and environmental standards, and ensuring the right of sovereign governments to selectively use “quality” foreign direct investment for the purposes of promoting sustainable development.

 

Box 3   The IMF Articles of Agreement (Article VI, Section 3) currently still allow member countries to “exercise such controls as are necessary to regulate international capital movements.” A 1996 World Bank study notes that as recently as the 1970s, few countries, whether industrial or developing, were without restrictions on capital movements.   Capital controls have been a pervasive feature of the last few decades. In the early post war years, capital controls for macro economic reasons were generally imposed on outflows of funds as part of policies dealing with balance of payments difficulties and to avoid or reduce devaluations. When freer capital movements were allowed from the 1960s onwards, large capital inflows posed problems for rich countries such as Germany, the Netherlands and Switzerland. They imposed controls such as limits on non residents’ purchase of local debt securities and on bank deposits of non residents. When Chile was faced with large capital inflows in the early 1990s, the government imposed a one year unrenumerated 20% 30% reserve requirement on foreign borrowings to be deposited at the Central Bank. In September 1998, Malaysia introduced capital control measures that involved: fixing the exchange rate; setting a 30 day deadline for ringitts held abroad to be returned to Malaysia after which they are deemed worthless; and locking in investments for a one year period.   Source: Various conference documents

 

 

A World Financial Authority?

For the same reasons discussed above, participants were split as to the viability and desirability of a new “World Financial Authority” (WFA). It was proposed that such an institution (also democratically established and accountable to the United Nations) would be given executive powers and mandatory sanctions (comparable to those of the WTO) to regulate and oversee both private financial conglomerates such as hedge funds and global financial institutions such as the IMF. Its main objectives and tasks would include:

·                    ensuring that the operations of global financial markets remain consistent with and promote growth, redistribution and employment in the real economy;

·                    minimizing systemic risk arising from the operations of securities and futures markets (for example, by preventing hedge funds from using borrowed money for speculative purposes, thus avoiding their highly risky and potentially destabilizing leveraged operations);

·                    monitoring and regulating the activities of international banks, currency traders and fund managers;

·                    ensuring transparency and accountability on the part of IFIs;

·                    assisting national governments in improving regulatory and control functions over their national financial systems (for example, through the imposition of capital and/or reserve requirements on all major financial institutions);

·                    ensuring that the capital controls implemented in one country are not subverted by neighbouring countries pursuing contrary (for example, financial liberalization) policies to attract finance capital; and

·                    providing a forum in which the rules of international financial cooperation are developed and implemented.

The main objections to the creation of a WFA, assuming the political will exists to establish such body, were the excessive concentration of powers it would entail given the perceived current geopolitical and economic context outlined above.

 

Other proposals relating to the international financial architecture that many participants believed were more desirable and/or feasible in the shorter term are discussed below.

 

Unconditional Debt Cancellation by 2000

A number of participants at the meeting are part of the fast growing international NGO Jubilee 2000 campaign, which is calling for debt cancellation by the year 2000. This was defined in a consensus text adopted at the first Jubilee 2000 international conference in Rome on 17 November 1998 to include:

·                    unpayable debt, which is debt that cannot be serviced without placing a burden on impoverished people;

·                    debt that in real terms has already been paid;

·                    debt for improperly designed policies and projects;

·                    odious debt and debt incurred by repressive regimes.

The consensus text also says: “Creditor governments, international financial institutions and commercial banks, which are chiefly responsible for the debt crisis, should not set the conditions for debt cancellation. Civil society in the South must play a significant and influential role in a transparent and participatory process which will define and then monitor the use of resources released by debt [cancellation] for the benefit of the impoverished.”

 

This position was echoed in many discussions throughout the conference and was expressed by an unequivocal “rejection” of the G 7 endorsed Highly Indebted Poor Countries (HIPC) Initiative of the World Bank and the IMF. HIPC was regarded not only as too slow and too restrictive, but based on unacceptable “Washington consensus type” economic reform conditionalities, which participants argued have consistently perpetuated and worsened the problem, “as the World Bank [via the recent pronouncements of Joseph Stiglitz] has itself, paradoxically, already recognized.”

 

Standstill and Orderly Debt Workout

Regarding the more recent generation of debt crises resulting from sudden and massive short term capital outflows, many participants argued in favour of a proposal in UNCTAD’s Trade and Development Report, 1998 for an international standstill and orderly debt workout mechanism, derived from provisions contained in the US Bankruptcy Code.

 

Such a mechanism would enable a nation facing a currency attack to impose a unilateral standstill on debt servicing to ward off predatory investors and give the country the breathing space needed to design a debt reorganization plan before a liquidity crisis turns into a solvency crisis. The standstill decision would then be submitted for approval to an independent panel rather than the IMF to avoid a conflict of interest with the Fund’s shareholders. Such a mechanism would avoid “inciting a panic” and be similar to provisions in the WTO allowing countries to take emergency measures.

 

The debt standstill would be combined with “debtor in possession” financing so the debtor country can replenish its reserves and get working capital. Such funds for emergency operations would be much less than the scale of recent IMF bail out operations, which UNCTAD argues have usually come only after the collapse of the currency and are designed to meet the demands of creditors and prevent default. Moreover, in practice these measures protect creditors from bearing the costs of their speculative mistakes and, together with highly recessionary loan conditionalities designed to “restore investor confidence,” shift the entire burden onto debtor country citizens, most devastatingly on the poor, that played no role in causing the crisis. As UNCTAD Deputy Secretary General Carlos Fortin argued in one of the plenaries, “the poor do not benefit from finance led growth, but they pay the price when things go bad.”

 

According to John Dillon, such an alternative mechanism should amount to an “international insolvency tribunal” established through a treaty ratified by the United Nations. Its aims would include ensuring that “creditors bear their fair share of the losses that result from financial crises they themselves provoke through reckless lending [‘bailing in’ rather than ‘bailing out’ measures].” Another goal would be to allow debtor countries to access necessary credits at reasonable interest rates in order to pursue social and economic development. A third goal is to “to enable firms to remain in production instead of being squeezed into bankruptcy or becoming targets for takeover by transnational corporations” at highly discounted prices.

 

Several commentators said the desirability of an international bankruptcy code approach would depend heavily on the adjucators’ de facto independence from the interests of creditors. Otherwise, such a mechanism could result in “even more creditor control and more negative conditionalities,” according to Yash Tandon from the Zimbabwe based International South Network.

 

Equitable International Taxation Systems

Numerous speakers, including representatives of the French based NGO Association for the Taxation of Transactions to Aid Citizens (ATTAC), discussed the prospects and feasibility of international taxation systems such as a “Tobin type” tax on foreign exchange trading. A combination of equitable international taxation systems would serve several mutually reinforcing objectives:

·                    raise much needed funds for social development in a context of dwindling overseas development assistance;

·                    contribute to reducing short term speculative capital flows and financial instability (the original idea of US economist James Tobin who first proposed a small international tax on foreign currency transactions in the late 1970s);

·                    help reverse the increasing regressive character of national taxation systems (partly resulting from financial liberalization), whereby the “exit option” enjoyed by highly mobile capital acts as a powerful disincentive to tax large financial players on an equitable basis.

 

Some estimates suggest that a Tobin tax applied at a 0.2% rate (proposals usually vary between 0.1% 0.5%) would raise annual global revenues of between US$150 billion US$300 billion. This was compared with UNDP’s estimated US$40 billion cost of eradicating poverty, and the estimated US$125 billion annual international costs of implementing the Agenda 21 programme of action adopted at the 1992 UN Conference on Environment and Development.

 

Bruno Jetin from ATTAC said that although many arguments against a Tobin type tax relate to the technical difficulties of its implementation, ATTAC’s position is that the primary obstacles are political. By way of comparison, he said the creation of a single European currency was technically much more complicated than would be the implementation of a Tobin tax, but the political will has been sufficient to make it a reality. He further argued that the application of a Tobin tax does not require that a majority of nations adopt it at once. Tobin type taxes could initially be developed within regional arrangements—not only in the European Union, which is ATTAC’s short term campaigning objective, but others such as the Common Market of the South (MERCOSUR) or the Association of South East Asian Nations (ASEAN). ATTAC has also suggested that the threat of capital fleeing to offshore centres could be offset by international punitive taxes on capital flows to and from these centres. In relation to the objective of reducing financial volatility, Mr Jetin emphasized that the Tobin tax would have to be complemented with other measures, such as capital controls, particularly during moments of speculative currency attacks.

 

Rodney Schmidt, from the North South Institute in Canada, said that many Tobin tax objections relate to the difficulties of monitoring the highly decentralized and mobile nature of foreign exchange trading. These could be overcome, he argued, by using the increasingly centralized financial infrastructure developed by central banks for the interbank or wholesale market for foreign exchange to reduce and eliminate settlement risk. Settling a foreign exchange transaction requires at least two payments, one for each of the currencies traded. Settlement risk is eliminated when these two payments are matched, traced to the original trade and made simultaneously. According to Mr Schmidt, the technology and institutions now in place to support this make it possible for tax authorities to identify and tax gross foreign exchange payments, whichever financial instrument is used to define the trade, wherever the parties to the trade are located and wherever the ensuing payments are made. He said that relatively simple derivative instruments such as forward contracts would be easy to tax. As for the more complicated derivative instruments that may begin to be developed on the foreign exchange market, the Tobin tax could be applied to the price of the derivative that has to be specified in the electronic contract needed to make the trade possible.

 

Some participants expressed concern about the possible ramifications of the decision taken at last year’s WTO ministerial conference to freeze possible efforts to impose customs duties on electronic transmissions (see Go Between 69). If such a decision became a permanent ban on taxation of all forms of electronic commerce, it would exclude a potentially significant source of government revenue, and could be interpreted to exclude taxation of foreign exchange trading, which is primarily performed electronically.

In addition to Tobin type taxes, there were proposals made to levy taxes on transnational corporation sales on a pro rata basis, and to develop international taxation agreements to create a “level playing field” enabling national governments to impose progressive taxes on corporations and financial conglomerates without facing capital flight.

 

National Growth Strategies Through Equity

For many participants, national level strategies were the most important elements for promoting people centred development and “economic sovereignty in a globalizing world.” Seen in this light, the above proposals at the international level were viewed as most fundamentally aimed at regaining greater political and economic space at the national level to pursue alternative development paths that would primarily rely on, and serve to nurture, domestic resources and capabilities.

 

A recurring theme was to build upon development paradigms that go beyond narrow economic growth indicators, such as UNDP’s concept of sustainable human development. According to Kamal Malhotra, if economic policy is to be people centred, that is, supporting sustainable human and social development goals, “then the objective should not be economic growth per se, or even growth with equity, but growth THROUGH equity.” In other words, national strategies would focus on enlarging local markets and stimulating domestic growth through comprehensive programmes of income and asset redistribution policies that would increase the “effective demand” (or real purchasing power) of the lesser off majority of the population. In line with Keynesian principles, equity considerations are not treated as a “trade off” against efficiency, or an “add on” compensatory measure, but as a central element to make sustainable economic growth both possible and socially cohesive.

 

Walden Bello called this “the unfinished social justice agenda of the progressive movements of Asia.” Vast numbers of people remain marginalized because of grinding poverty, he said, particularly in the countryside. “Land and asset reform would simultaneously bring them into the market, empower them economically and politically, and create conditions for social and political stability.” Such reforms would be accompanied by the development of social security programmes that would be much more comprehensive in scope than what was regarded as the critically under resourced “safety net” programmes now promoted by international agencies such as the World Bank.

 

Under such a development model, monetary policy and institutions would be geared to respond to the needs of ordinary households and small and medium sized enterprises (reversing the widespread “credit crunch” that small firms are currently facing), rather than to the interests of short term foreign investors. Combined with redistributive measures to boost the purchasing power of the poor, investment capital would primarily be sought by promoting domestic savings and local entrepreneurship.

 

Capital controls would not merely be used as a “buffer” against the volatility of short term speculative capital, but as a positive tool to selectively promote “quality” long term foreign investment (foreign investment that, for instance, promotes job creation, skills and environmentally sound technology transfer, and stimulates domestic economic activity).

 

This contrasts sharply with the current perception of foreign direct investment (FDI), together with export led growth, as “the main engine of development.” According to Mr Malhotra, “In a world where two thirds of FDI comprises mergers and acquisitions, their potential or real contribution to increasing the production of useful goods and services in the real economy, genuinely adding to sustainable production capacity, increasing employment and creating new productive and useful assets is clearly limited...[G]iven the liberal and competitive foreign investment regimes of most developing countries (for example, tax holidays, full repatriation of profit), the impact of FDI on the balance of payments situations of countries, especially over the long term, is frequently negative.”

 

In addition, export markets would be seen as important but too volatile to serve as reliable engines of growth. In parallel to the above measures designed to expand domestic markets, some speakers suggested strategies of regional import substitution and protected regional market integration that would give the region’s producers the first opportunity to serve the region’s consumers.

 

These alternative models of economic growth were held by a number of participants to be not only people centred but given the appropriate regulatory framework, environmentally sustainable as well. If environmental constraints impose “limits to growth,” then the same level of social well being could be achieved at much lower growth rates than say the 8 10% growth rates pursued during Asia’s “miracle years.” According to Walden Bello, one reason for the push for high growth rates in Asia “was so that the elites could corner significant part of the growth while still allowing some growth to trickle down to the lower classes for the sake of social peace. The alternative—redistribution of social wealth—is clearly less acceptable to the ruling groups, but it is the key to a pattern of development that will eventually combine economic growth, political stability and ecological sustainability.”

 

Box 4   “Governments never inform their citizens how the tax system works within its overall macro economic policy goals. Millions of individual taxpayers are aware only of what amount in terms of income tax they are to pay government annually. They neither understand how the amount is computed, much less of the entire tax structure and system in their country. For instance, most people in the South...do not know that liberal tax concessions and benefits are being given by their governments to foreign equity financing...Neither are they aware of the long list of deductions and tax shelters that corporations are able to utilize for their own benefit.   While citizen's groups, social movements and NGOs have become more familiar with words such as ‘capital flight,’ ‘foreign direct investment’, ‘portfolio investment,’ ‘hedge funds’ and ‘global financial architecture,’ we have yet to understand and make people more aware of national public finance systems and architectures and how these are ultimately linked to the current regime of financial globalization or capital led free market economics.”   —Josepha (Gigi) Francisco, DAWN South East Asia “Gender in Tax Reform Campaign in the Philippines” Panel VIII: National Measures: Gender, Budget and Taxes, March 26

 

 

 

CIVIL SOCIETY, HUMAN RIGHTS AND ECONOMIC GOVERNANCE

 

Economic and political democracy were presented as indissociable by a number of speakers at the conference. The neoliberal project of “depoliticizing” the economy by rolling back the powers of the state, according to Manfred Bienefeld, simply “shifts the politics away from democratic debate.” Nicola Bullard from Focus on the Global South argued that it is not globalization that has undermined the state and democracy, but the willingness of states to abrogate their powers by signing transnational treaties and adopting policies that undermine the ability of citizens to hold governments accountable on economic and social policy.

 

The conference discussions made it clear that proposed policy tools such as capital controls are not absolute ends in themselves but only parts (however indispensable) of a much wider people centered development agenda. One participant cited the recent application of capital controls in an Asian country that did successfully stabilize the domestic financial system, but was allegedly part of a package focused on servicing the interests of the leadership’s close entourage. It was commented that “the policy flexibility such measures give to a government is only as good as the goals for which this flexibility is used.” In his concluding remarks, Walden Bello argued that the ultimate coherence of the “new political economy” will rest less on narrow efficiency considerations than on stated ethical priorities given to community solidarity and security. These priorities, he said, are unlikely to be imposed from above “in Keynesian technocratic style,” but through civil society struggles around the world.

 

It was suggested that government and civil society roles and responsibilities should be framed within a common understanding and pursuit of the realization of all human rights for all members of society. This would provide the most coherent existing ethical, political and legal basis for civil society groups to pursue what one participant described as the apparent conflicting objectives of effectively challenging the “authoritarian” roles and tendencies of governments, while simultaneously attempting to identify and strengthen the enabling and activist role of the state in the pursuit of social objectives.

 

In practical terms, a representative of the India based NGO Developing Initiatives for Social and Human Action (DISHA) said people’s participation in budget analysis is a powerful tool to identify and counter discriminatory practices of the state, based on facts and figures rather than mere allegation of human rights abuse. He said DISHA picks pro poor and anti poor actions by government expressed in terms of financial allocations and raises these in public and in the parliament. The combination of a strong popular base, along with the information base, he said, has proven an effective way to start changing the nature and quality of parliamentary debates on these issues.

 

Similar arguments were made for countering inequities in the way public revenue is raised (see Box 4).

 

Accountability to UN Human Rights and Environmental Treaties

Another suggested mobilizing strategy, which was already effectively used in the international NGO campaign against the MAI, is based on the fact that most governments that have created and manage international finance and trade institutions have also signed and ratified legally binding UN agreements in the field of human rights and environment. Consequently, they have a legal duty to ensure that the policies and rules they agree in the area of trade and finance do not contradict these UN treaties. Miloon Kothari said that following from this, international economic institutions do not have the right to violate, or force governments to violate, the principle of “non retrogression” of state parties to the International Covenant on Economic, Social and Cultural Rights. He said the principle of non retrogression means that state parties have a duty not to take measures that would cause a reversal of existing social achievements. On the contrary, they must continuously demonstrate “proactive steps towards the progressive realization of economic, social and cultural rights” (see also Box 5).

 

Box 5   “Existing human rights instruments offer the most precise and sensitive framework, obliging the state ‘first and foremost’ to promote the human rights of the vulnerable sections of society and not to take any retrogressive steps (through policies, programmes and laws) that would further dispossess these groups or marginalize other sectors. States have legal obligations to respect, promote and protect human rights, including the right to political participation and the right to an adequate standard of living. If they were to follow these (voluntarily accepted) obligations, then much of what passes as the global economic regime would be in violation of the human rights of all the residents of these states...   While the state's transformative role is being reasserted by civil society organizations and within parts of the UN system, it is also important to find ways and means to sustain and increase the spaces for human rights and development groups to collaborate with its more progressive elements. This is perhaps the most promising means by which to strengthen the state, both to stand up to the deleterious forces of globalization, and to take advantage of the positive social benefits that can accrue from interacting with global institutions, legitimized by reference to [human rights and socially oriented] international treaties, norms and standards.”   —Miloon Kothari, International NGO Committee on Human Rights in Trade and Investment   “Human Rights as a Framework for Mobilization” Plenary V: Strategies and Campaigns, March 26

 

In the case of the type of financial liberalization pursued in recent years, there were sufficient warnings of the high social and economic risks such policies were creating, including those sounded by UNCTAD in its 1990 Trade and Development Report. It was thus suggested that the “precautionary principle” pioneered in environmental law could equally apply to economic, social and cultural rights. The precautionary principle implies that if “scientific proof” cannot be entirely ascertained before a potential hazard actually occurs —by which time it is too late to prevent disaster—governments must avoid deliberately applying policies that sufficient analysis and study suggest could cause dramatic regression of existing social and economic achievements. It was argued that similar approaches could be developed and applied to testing the human rights consistency of trade, investment and other macro economic policies and rules.

 

 

 

CONCLUSION AND FOLLOW UP

 

“...Look at it this way. We have the numbers on our side, because there are far more losers than winners in the neo liberal game. We have ideas, whereas theirs are finally coming into question because of repeated crisis. What we lack, so far, is the organisation and the unity which in this age of advanced technology we can overcome. The threat is clearly transnational so the response must also be transnational. Solidarity no longer means aid, or not just aid, but finding the hidden synergies in each other's struggles so that our numerical force and the power of our ideas become overwhelming.”   —Susan George, author and campaigner, “A Short History of Neo liberalism: Twenty             Years of Elite Economics and Emerging Opportunities for Structural Change”                           Plenary I: Why Are We Having this Conference Now?, March 24

 

Participants felt this international conference broke new ground in providing a coherent and comprehensive civil society platform for people centred economic reform agendas. While differences of opinion on what is feasible or desirable was reflective of the richness and diversity of participants’ inputs, the meeting did shed considerable light on the major political economic challenges and opportunities facing the international community at the turn of the century.

 

Participants agreed they would carry forward the analyses, proposals and campaigning positions emanating from the conference into their respective networks, and into various complementary events and processes in the coming months, including:

·                    the series of international civil society events before and during the 18 20 June 1999 G 8 annual meeting, including the Jubilee 2000 Global Week of Action on Debt and the Alternative Economic Summit in Cologne (Germany), on 16 19 June 1999;

·                    the build up to the annual World Bank/IMF meeting in October 1999;

·                    the lead up to the third WTO ministerial conference to be held in Seattle (United States) from 30 November 3 December 1999 (see also NGLS Roundup, No. 39);

·                    preparations for, and planned civil society activities during, UNCTAD’s tenth quadrennial conference (UNCTAD X) to be held in Bangkok on 12 20 February 2000; and

·                    preparations for the UN five year reviews of the Social Summit and the Beijing Fourth World Conference on Women in mid 2000, as well as the late 2000 UN Millennium Assembly and Millennium NGO Forum.

 

In the concluding session on strategies and campaigns, several speakers stressed that, although international networking and participation in international events were crucial (for example, for campaign coordination purposes), the most critical political work must be carried out at the national level. It was emphasized that the political strength of the global civil society campaign against the MAI rested primarily on the active mobilization of grassroots citizen coalitions and the parliamentary debates that these generated at the national level.