> On Dec 1, 2008, at 7:24 AM, Patrick Bond wrote:
>> You lads haven't run across the underlying evil below all this financial froth? (Overaccumulation of capital.)
> Patrick, you always offer that as the one-size-fits-all explanation of the last four decades of economic history.
Doug, a 'one size fits all explanation' doesn't belong in political economy. What does belong in any poli-econ theorising, however, is a sense of where the laws of motion of the capitalist system are driving micro and macro economies. Laws of motion are not 'one size', but they are peculiar to commodity production, distribution, exchange and financing under capitalism. Do you have a problem with a deep theoretical process?
> I've got several problems with it. It treats "capital" as some unitary, easily measurable thing, like a yard of wool or quart of milk, when of course it isn't.
Which brand of Marxian poli econ does that? I don't know of any. 'Capital' is a social relation, one that generates a tendency to overaccumulation.
> It includes about four or five complete U.S. business cycles, several of which have brought about major structural transformations.
For you, it's a structural transformation; for others it's more intensive relative and absolute surplus extraction, by way of a spatio-temporal fix or recourse to accumulation by dispossession. Indeed, because Keynesian capitalism failed to transform and instead adopted neoliberal fixes, the crisis tendencies were never properly resolved during the business cycle downturns, and instead the crises were managed and displaced... temporarily (as I've been trying to persuade you for about 20 years - and this year should have been persuasive, comrade!)
> Some of those have been periods of high investment (e.g., the late 1990s)
We never agreed on whether the 'high investment' (largely in software that proved too faddish or relatively useless) contributed to more effective extraction of surplus value; my sense is that it didn't and hence the prevailing overinvestment problem remained sufficiently serious that corporations turned increasingly to financial/speculative activities for their profits (ultimately self-defeating as this was).
> and others of low investment (the early 2000s). Within these cycles, there have been major sectoral and regional devalorizations of capital - the basic manufacturing/Rust Belt ravaging of the 1980s, the tech bust that hit the Silicon Valley) in the early 2000s. Broadening beyond the U.S, there have been major devalorizations in Latin America, Eastern Europe, and East Asia (first Japan, then the first generation of Tigers).
And Africa, too; few countries are generating real per capita GDP levels higher today than at independence.
I'm glad you're turning to the valorisation/devalorisation framework. But as you know, these were partial, not the kind of full-fledged 1929-45 devalorisation required to clear away all the economic deadwood and restart capital accumulation.
> There have also been major investment booms, as in China.
Yes, in addition to financial profiteering, the amplification of uneven development has been a major contributing force to the problems caused ultimately by overaccumulation.
> This explanation reminds me of the extraordinary (not in a good sense) presentation I heard after the Asian crisis of 1997-8 by Paul Mattick Jr, in which he sought to explain the melodrama by "abstracting" from state, financial markets, and regional specificities, focusing instead on the underlying fundamentals of FROP, OCC, and overaccumulation. Therefore not a word on why the crisis happened when and where it did, or how Malaysia managed to avoid the worst of it via capital controls.
Though Paul Sr was a great economist I don't know anything about Paul Jr.
However, some of us have been locating the crisis in various state activities, financial markets and regional dynamics. (And some of us have been denying there's a problem, or locating the problem only as a 2007 financial crisis, as does comrade Leo.)
As you know from debate list, we're all very interested in Malaysia's experience. Here's more from a 2003 book I did (Against Global Apartheid, Zed Books):
***
Malaysia’s ambiguous capital controls.
On 1 September, 1998, Malaysian prime minister Mahathir bin Mohamad applied strong restrictions to trading of the Malaysian currency, the ringgit. The measures followed a decline in 1997 GDP growth of 7.7% to a depressionary -6.7% in 1998, and a 77% crash of the stock market from its peak in February 1997 through August 1998. The controls included the following:[i]
• Measures to reduce and eliminate international trade in the ringgit, by bringing back to the country ringgit-denominated financial assets such as cash and savings deposits via the non-recognition or non-acceptance of such assets in the country after a one-month dateline. (Permission will however be given under certain conditions).
• The official fixing of the ringgit at 3,80 to the US dollar, thus removing or greatly reducing the role of market forces in determining the day-to-day level of the local currency (the ringgit’s value in relation to currencies other than the dollar will still fluctuate according to their own rates against the dollar). This measure largely removes uncertainties regarding the future level of the ringgit.
• Measures relating to the local stock market, including the closure of secondary markets so that trade can be done only via the Kuala Lumpur Stock Exchange (this is to prevent speculation or manipulation from outside the country); and the measure that non-residents purchasing local shares have to retain the shares or the proceeds from sale for a year from the purchase date (this is to reduce foreign speculative short-term trade in local shares).
• Several other foreign exchange restrictions related to trade, investment, domestic credit and travel/education.[ii]
• Continuing convertibility to foreign currencies for purposes of trade (export receipts and import payments), inward foreign direct investment, and repatriation of profit by non-residents.
Even before the September 1998 controls, Malaysia had wisely prohibited its local firms from borrowing abroad unless they could demonstrate that they could earn sufficient foreign exchange to service the foreign loans. This provided partial insulation, and avoided the buildup of large foreign liabilities or hidden state subsidies through mechanisms such as a central bank forward cover book. (A similar provision in relation to government development-related debt exists in Chapter 6 of the South African Reconstruction and Development Programme, was endorsed by Business Day and Finance Week in 1994, but was not implemented in practice.)
Notwithstanding initial hostility from the IMF and speculative financial funds, Mahathir’s capital controls were widely praised,[iii] at least for having accomplished a more effective stabilisation of Malaysia’s economy than witnessed elsewhere in the region. As the Asian Wall Street Journal commented, ‘the failure of IMF orthodoxy to arrest the contagion sweeping through Asia has made ideas like capital controls intellectually respectable again. Policy makers can’t help but notice that China and Taiwan both have capital controls and neither has succumbed to the region’s contagion.’[iv]
The September 1998 Unctad 1998 Trade and Development Report (which was drafted in July) described capital controls as ‘an indispensable part of their armoury of measures for the purpose of protection against international financial instability.’ In mid-1999, Joseph Stiglitz pointed out in a World Bank report that it was evident Malaysia’s restrictions had not harmed growth or investment prospects: ‘There was no adverse effect on direct foreign investment... there may even have been a slight upsurge at some point.’[v] When introducing the 1999 World Development Report in September 1999, Stiglitz added, ‘There has been a fundamental change in mindset on the issue of short‑term capital flows and these kind of interventions--a change in the mind set that began two years ago... in the context of Malaysia and the quick recovery in Malaysia, the fact that the adverse effects that were predicted--some might say that some people wished upon Malaysia--did not occur is also and important lesson.’[vi]
But to fully understand the background to and application of the controls requires a nuanced view. During the mid and late 1980s, Malaysian officials believed they could break the impossible trinity. The Mahathir regime liberalised Malaysian financial markets and pegged the ringgit to the US dollar. With currency inflows increasing, the central bank began engaging in foreign currency speculation, until $8 billion in national assets were lost during the September 1992 crash of the British pound. The system deteriorated further from 1995, when the dollar rose in value against the yen, rendering Malaysian exports less competitive. The full brunt of crisis hit in 1998, when the debt of many corporations could not be serviced. Non-performing bank loans soared, but in crucial cases such as the ruling party-linked Renong conglomerate and the Bank Bumiputera, clear government favouritism allowed enterprises to continue operating which elsewhere in the region would have been shut down under IMF pressure.
In short, insists Jomo K.S., a University of Malaya economist, ‘For the Malaysian authorities, capital controls have been part of a package focussed on saving their friends, usually at the public expense.’[vii] Likewise, as discussed below, South Africa witnessed a great deal of cronyism and outright corruption during the 1985-95 period of dual currency controls. A lesson is that exchange controls without corruption controls will not resolve the underlying economic development challenge of achieving growth and equity.[viii]
Thus although it is clear that capital controls did no damage per se, the more important questions are, according to Jomo,
Will capital controls be used in the interests of workers, consumers
or the national public interest? Or are they mainly being used to
save the politically well-connected? It is also important to know
whether controls are meant to avert crisis or to assist recovery. In
its 1998 Trade and Development Report, the United Nations Conference
on Trade and Development recommended capital controls as means to
avoid financial crises. Almost as if endorsing the Malaysian
measures, MIT Professor Paul Krugman recommended such measures in
early September 1998 to create a window of opportunity to facilitate
economic recovery--which is another purpose, though the
considerations are not altogether different.[ix]
NOTES
[i]. Recounted in Martin Khor (1999), ‘Why capital controls and international debt restructuring mechanisms are necessary to prevent and manage financial crises,’ Paper presented to Conference on ‘Economic Sovereignty in a Globalizing World,’ Bangkok, 24 March.
[ii]. Resident travellers are allowed to import ringgit notes up to RM1,000 only and any amount of foreign currencies, and to export only up to RM1,000 and foreign currencies only up to RM10 000 equivalent. Except for payments for imports of goods and services, residents are freely allowed to make payments to non-residents only up to RM10,000 or its equivalent in foreign currency (previously the limit was set at RM100,000). Investments in any form abroad by residents and payments under a guarantee for non-trade purposes require approval. Prescribed manner of payment for exports will be in foreign currency only (previously it was allowed to be in foreign currency or ringgit from an External Account). Domestic credit facilities to non-resident correspondent banks and non-resident stockbroking companies are no longer allowed (previously domestic credit up to RM5 million was allowed). Residents require prior approval to make payments to non-residents for purposes of investing abroad for amounts exceeding RM10,000 equivalent in foreign exchange. Residents are not allowed to obtain ringgit credit facilities from non-residents. Measures imposing conditions on the operations and transfers of funds in external accounts. Transfers between External Accounts require prior approval for any amount (previously freely allowed); transfers from external accounts to resident accounts will require approval after 30 September; sources of funding external accounts are limited to proceeds from sale of ringgit instruments and other assets in Malaysia, salaries, interest and dividend and sale of foreign currency.
[iii]. As Khor notes,
Business groups, consumer groups and trade unions in the country supported the measures and the local stock market went up. Foreign investors in the country, through the International Chamber of Commerce, also expressed support. The Financial Times, which represents an independent and conservative opinion within the financial establishment, gave guarded support, stating that there was an argument for temporary capital controls in time of crisis. An editorial noted that some economists argued that controls on short-term capital should be a standard part of policy for emerging markets to avoid destabilising capital inflows and outflows that were at the heart of the Asian crisis. (‘Why Capital Controls and International Debt Restructuring Mechanisms are Necessary to Prevent and Manage Financial Crises’)
[iv]. Asian Wall Street Journal (1998), ‘Acceptance of Capital Curbs is Spreading,’ 2 September.
[v]. Agence France Press, 23 June 1999.
[vi]. Associated Press, 16 September 1999.
[vii]. Jomo K.S. (1999), ‘Capital Controls: Jury Still Out,’ Paper presented to Conference on ‘Economic Sovereignty in a Globalizing World,’ Bangkok, 24 March.
[viii]. Mahathir promised that in September 1999, Malaysia would withdraw the currency controls. Given the ongoing problem of cronyism, fear of a dramatic exit from the country persuaded Mahathir to sanction earlier (February 1999) withdrawals of stock exchange investments, but only if a tax was paid.
[ix]. Jomo, ‘Capital Controls: Jury Still Out.’