CAPITAL CONTROLS: WHAT'S REQUIRED?
Many proposals for financial reform have been floated in the aftermath of the Asian crisis. Even conservatives admit that the global financial system is too fragile, but their proposals are generally limited to demanding greater financial disclosure by the "emerging" economies, and greater oversight powers for bodies such as the International Monetary Fund. This shifts the blame for the crisis to its true victims — the developing economies which were hammered by the sudden about-face of Western investors — when the true problem lies with the unregulated and self-interested actions of those investors in the first place. Given how badly the IMF handled the 1998 crisis (imposing high interest rates and spending cutbacks on hard- pressed economies which needed exactly the opposite), it is hard to believe that even more powerful international regulators would prevent the outbreak of future chaos.
The measure most favoured by progressive critics of the financial system has been the so-called Tobin tax. It would impose a very small tax (perhaps 0.1 percent) on all international transactions, thereby discouraging those transactions aimed at profiting from very small changes in exchange rates or stock markets. A Tobin tax would be a step in the right direction (despite problems inherent in trying to implement it internationally), and would collect billions of dollars in new revenue from the financiers who have wreaked such havoc. But the actual usefulness of a Tobin tax in controlling the sorts of financial crisis we have witnessed should not be overstated.
The Tobin tax accepts the structures of the current financial system as given, and merely hopes to guide those structures (through a small tax) to more efficient outcomes. Hence a Tobin tax would have made no difference in the 1997-98 global crisis: the swings in asset prices, and the size of the gains and losses that motivated investor actions, were hundreds of times greater than the "disincentive" of paying a small Tobin tax.
Recent instability demands more far-reaching measures. The core problem arises from individual efforts to profit from swings in asset prices. To resolve the instability, the very system of private portfolio investment must be reigned in — and the role of private banks in amplifying the mood swings of financiers must be addressed. We need:
- Limits on international portfolio investment: foreign investment should occur through real assets (direct investments in real businesses) that can't pack up and leave on a moment's notice.
- Tighter oversight on the banking system: moderate the boom-and-bust cycle of private lending with pro-active reserve requirements, and use public lending institutions to smooth the banking cycle.
- Social investment and social pools of capital: use public funds rather than stock markets to finance social programs (like pensions), and use public investment banks to pump capital into real growth and job- creation projects.
Louis Proyect (http://www.panix.com/~lnp3/marxism.html)