*{http://www.attac.org/fra/toil/doc/forum.htm 16 aout 2002 The economy of production and the regulation of finance -------------------------------------------------------------------------------- Forum for Utvikling og Miljø (ForUM) Dr. Suzanne de Brunhoff Centre National de la Recherche Scientifique, Paris and member of the Scientific Council of ATTAC Vidar Rekve } A complex interdependence exists between capitalist production and finance. The two spheres are structurally linked to each other but during the history of capitalism their interrelation has been subject to continuous modifications, with differences between countries and differences related to changes in the overall economic climate. The capitalist economy of production is entirely dependent on the financial sphere. Entrepreneurs need money for investment and to pay the wages of production workers and the cost of marketing, research, etc. These financial resources are provided by credit institutions or bonds and/or through the issue of shares by public limited companies. The financing preferred is determined by the capital structure of the enterprises and the financing mode prevailing in the different countries. Correspondingly, finance, whatever shape it takes, is entirely dependent on the economy of production where economic value is created and basic yields ensure revenues for the financial sector: interest, dividends, commissions and gains from speculation in the securities market. This financial income is sometimes considered to be a "rent" derived by those who possess funds from the basic revenues of economic activity: profits and wages. *partie=titre Instability and crises *partie=nil Each of the two capitalist spheres has its own forms of instability: the economic cycle (growth/recession and unemployment), financial movements changing with rising and falling stock and bond markets, interest rates, and national currencies. Such fluctuations are inevitable. Their interrelation is most clearly seen in times of crisis, whether minor or major: stagnation, recessions, and depressions. In 1997 and 1998, the world witnessed what was perceived as the first crisis of the "globalisation" of finance. The monetary and financial crisis that erupted in Thailand and spread to the rest of Southeast Asia and later to Russia and Brazil led to economic recession in those countries. The shock wave was also felt on the western stock exchanges, but only for a short time and there was no immediate effect on growth and employment. The crisis thus exposed a double disconnection: one between rich western countries and economically weaker countries and another, within the rich countries, between the financial sphere and the productive sphere. However, western leaders feared a global and "systemic" financial crisis which would be accompanied by an international economic crisis. Overproduction in certain economic sectors such as automobiles and semiconductors and falling wholesale and raw material prices created fears of a general crisis of deflation. The fight for markets and profits has turned into hyper-competition leading to enormous corporate concentration. *partie=titre The increasing role of finance *partie=nil The chronic instability of capitalism has in fact been aggravated by two processes that have been developing since the 1980s in response to the profits crisis of the 1970s. The first process is that of the substantially greater importance of finance in the ways capital is accumulated and restructured. Fiercer economic competition is one important explanation for today’s strong capital concentration through mergers and acquisitions, involving hundreds of billions of dollars in the financial markets. Thus giant banks have been created, particularly in the USA, whose operations have become much more opaque and uncontrollable, which increases the risks posed to the whole system. On the other hand, the deregulation of finance by governments has given those who possess funds the possibility to move around their money to maximize short-term profits, regardless of any economic consequences. This situation is accompanied by speculation and herd behaviour with crazes and panics, such as the 1997 panic that knocked out Asian currencies and stock exchanges and shook international finance. *partie=titre The profitability regime *partie=nil The second process, linked to the one mentioned above, is that of the new dictatorship of the return on non-debt equity. Shareholders demand that this return should be very high, in fact up to 15 per cent. Since the economic growth of developed capitalist countries does not exceed three per cent on average, the distribution of its product is strongly and adversely affected by this demand for a high return on capital. For companies’ profits to be maximized as required, wages and labour will have to be treated as adjustment variables in the companies’ restructuration of capital under the new profitability regime. The income gap between rich and poor countries and, within the rich countries themselves, between investment income and the wages of production workers and other employees, has widened considerably everywhere. There is a power struggle which is today extremely imbalanced in favour of capital, to the detriment of labour and the needs of people. The demand for high financial returns, the concentration of financial income in the hands of a minority, and the freedom of movement of finance are today the most visible anti-social excesses of the international restructuration of capital and of a neoliberal ideology that justifies all kinds of deregulation by the rationality of markets. *partie=titre Consolidation of the international financial system *partie=nil Below is a presentation of some of the proposals which were created out of fears of a global "systemic crisis" during and after the crisis of 1997-1998. No serious reform has yet been implemented. At the beginning of 1999, there was general agreement among experts and governments on the need for better application of traditional prudential rules in respect of the transparency of banking operations and for enhanced assessment of credit risks associated with borrowers of varying quality. But most banks are clinging to their autonomy of decision and their own models for risk calculation, indeed to what they perceive as some kind of right to opaque operations. The creation of giant banks is another step in the same direction. The result: While restrictive measures are lacking, it is hoped that financial players will opt for self-regulation, even though the prevailing hyper-competition forces them to take ever-greater risks. *partie=titre Reforming key institutions *partie=nil To get a better grasp of the realities of international finance, it was decided to enlarge the Group of Seven (G7), the seven leading industrial nations, by creating an ad hoc group of 20 nations including China and India in particular. This had already been done on some occasions in the past without leading to more equitable power sharing between rich and economically weaker countries where decision-making is concerned. Nor did it reduce financial instability. In 1997-1998 there was much talk of a reform of the International Monetary Fund (IMF), which handled the crisis badly and was largely discredited. The IMF turned out to be incapable of understanding the risk of regional and international contagion of the monetary and financial crisis that first emerged in Thailand. In its usual fashion it demanded the merciless application of restrictive measures as a condition for lending, which aggravated the credit crisis and the economic risk of a recession. Thus the IMF initially shifted the burden of the financial panic on to the countries in difficulty, which resulted in massive outflows of capital, the depreciation of dollar-pegged regional currencies, and stock-exchange crashes. In spite of its many failings, the IMF has not undergone any reform in 1999. The big western powers that are the most influential in shaping IMF policies have never publicly criticized the Fund. *partie=titre Exchange rate strategies *partie=nil What has become of the idea of an international monetary reform, which might have been envisaged after the initial Asian currency depreciations caused by speculation? Most experts propose two paths: one should either encourage floating exchange rates for all currencies, in which case the exchange rates will be determined by the markets, or establish currency boards, i.e. a regime under which a weak currency is totally dependent on a reference currency, where the issue is limited to one unit of the national currency per unit of dollar (or euro) of the country’s foreign exchange reserves. The second proposal disregards the experience of the currency board in Argentina, a system whereby the peso was linked to the dollar. That system failed and today Argentinian leaders call for the dollar to become the national currency. As for the first of the above proposals, i.e. floating exchange rates across the board, this does not take account of the international monetary structure, a hierarchical system with three dominant currencies forming the centre (the dollar, the yen, and the euro, the successor to the DM). Nor does it take account of the instability of the exchange rates between the three dominant currencies themselves. To reduce the risk of an excessive instability between the dollar, the yen, and the euro caused by the competition between the three which is developing despite a persistent dollar hegemony, Japan and European countries have proposed the creation of exchange target zones between the three currencies. In these zones, a floor and a ceiling would be defined for exchange-rate variations and variations beyond these limits would lead to consultations between the monetary authorities and their concerted intervention. This monetary stabilization measure has been rejected by the USA. *partie=titre The awakening of popular opinion *partie=nil Over the past few years, we have seen the emergence of a many-faceted and multiple-goal international movement of protest against the neoliberal excesses of the new global order and their dangerous implications for people all over the world. An opinion poll that was conducted in 20 countries by The Economist (2 January 1999) on the need to re-establish capital controls showed that 49 per cent of the middle-class citizens polled were in favour, while 37 per cent were against and 14 per cent were uncertain. Known as a staunch defender of free markets, the English magazine nevertheless concluded that the results of the poll merited some reflection. For reasons of space, it is impossible to enumerate all the important stands that have been taken, such as the successful protest against an agreement (the MAI) that would mean a complete liberalization of foreign investment. (The MAI negotiations foundered in 1998 and were postponed.) Only two manifestations of antiliberal sentiment will be presented in some detail below. Their nature is different, but they are both interesting in a financial stabilization context. *partie=titre The Malaysian case *partie=nil The first concerns the action taken by Malaysia, one of the Asian emerging-market economies, in the crisis of 1997-1998. On 1 September 1998 the Malaysian government imposed an official exchange control and outlawed the repatriation of foreign capital. These measures were relaxed in February 1999 but a time-graduated tax (reduced from 30 to zero per cent after one year) on the principal of foreign capital was maintained. The goal of the Malaysian government was to penalize the immediate withdrawal of capital by players searching for maximum short-term profit without caring about the effects of this practice on the country’s economy. Certain countries such as Chile (from 1991 to 1997) had already used this type of measure. The actions taken by Malaysia, however, were initially stigmatized by the "international financial community". Here was an emerging economy that was openly trying to escape the reforms advocated by the IMF by imposing restrictions on the free movement of capital! Later there was a change of opinion among western experts as it became clear that Malaysia had succeeded in stabilizing its economy in the shorter term. A discussion was then reopened by the IMF on the validity of capital account controls in developing and emerging economies. This experience is both limited and important. It is impossible to judge the action taken by the Malaysian government without knowing the trials and tribulations of the peoples of Malaysia. On the other hand, the measures show that the official resistance of an emerging economy to the international financial instability is indeed possible. In fact, exchange and capital controls were also introduced in other countries during the Asian crisis, particularly in Taiwan, although informally, while the Malaysian measures were openly promulgated. That is why the Malaysian case is the more interesting. Still, the case remains a paradox. It was an anti-neoliberal and nationalistic protest, not a demonstration of anti-capitalism. *partie=titre The Tobin tax *partie=nil A second measure of an anti-neoliberal nature is currently enjoying the support of a sizeable popular movement in many countries in Europe and Latin America and in Canada. This measure is known as the Tobin tax, which is a tax on currency transactions proposed as a means of "throwing sand in the wheels of currency speculation". Such speculation adversely affects the autonomy of the national economic policies for growth and income distribution. Being incapable of self-regulation, the markets are susceptible to exchange-rate variations that are irrational and dangerous to national currencies and economies. Contrary to what has been claimed by the American economist Milton Friedman, currency speculation is, according to James Tobin, an American economist who was awarded the Nobel prize in economics in 1981, a source of financial instability and economic destabilization. *partie=titre Currency speculation on the increase *partie=nil The deregulation of finance in the wake of the Bretton Woods collapse in the 1970s opened vast opportunities for currency speculation, with serious negative effects on the fundamentals, i.e. the long-term economic indicators. This applies to both the developed capitalist countries and the developing and emerging economies. The big international banks were the first to take advantage of this since 80 per cent of all currency transactions are inter-bank transactions and roughly 20 per cent are performed at the demand of non-bank clients. The total volume of currency transactions has increased considerably compared to the volume of trade in goods and services. For every dollar of international trade in 1980, nine dollars were at work in the foreign-exchange markets. In 1998, the gap had widened to a 1:60 ratio. Note that we are talking about gross financial flows, not balances or profits in the foreign-exchange markets, and that the increasing flows may partly be attributed to the use of new portfolio management techniques. However, foreign-exchange trading has generated enormous profits (and sometimes considerable losses) for the big international banks and private operators that are the principal players, with no economic benefits to the real economy. *partie=titre Principle of the Tobin tax *partie=nil The principal aim of the Tobin tax is to reduce short-term currency speculation by making it a costly business, i.e. by making speculators pay at the source. All currencies will be covered by the Tobin tax scheme, including the big ones such as the dollar, the yen and the euro. Likewise, all operators will have to pay, including the big international banks with roots in the rich capitalist countries. It is therefore not just a question of protecting the developing and emerging economies but also of challenging any kind of currency speculation anywhere. That is the most interesting aspect of the Tobin tax: initiating a new logic, in opposition to pure financial logic, by limiting the volume of the international flow of speculative capital. The principle of this tax is as follows: A uniform international tax of for instance 0.05 per cent is levied on each transaction in the foreign-exchange markets, in the spot as well as the forward markets, including trade in derivatives. Depending on the frequency of operations in which one currency is converted into another, an operator seeking short-term profit by circulating money will be taxed more heavily than others. Thus a filtration of the speculative currency transactions which cause continuous exchange-rate fluctuations would be possible, separating them from real-economy transactions associated with international trade and investment, which are transactions of a medium or long-term nature. The revenues from a modest 0.05 per cent tax could amount to 150 billion dollars a year and might be used to aid the poorest developing countries in particular. According to James Tobin, the tax on foreign-exchange transactions should be permanent and universal. It should first be implemented by the G7 countries and by other important financial centres, such as Singapore and Switzerland. *partie=titre Limitations of the Tobin tax *partie=nil What about the economic limitations of the Tobin tax? Many economists have pointed to the fact that in the event of massive speculative attacks on a currency triggering a devastating capital flight, a Tobin tax of 0.05 per cent (or even higher) will be of no use. The Mexican peso crisis of 1994-1995, during which the peso fell 60 per cent against the dollar, is cited as a case in point. In the Mexican crisis, a Tobin tax of 23 per cent (certainly not 0.05!) would have been necessary to block speculative attacks.Our response to this problem is that in an emergency such as the Mexican one the Tobin tax must be accompanied by certain exceptional capital control measures or by permanent measures such as the ones implemented by India and Taiwan, less affected by the crisis than other Asian countries and farther away from the USA than Mexico. However, this does by no means weaken the stabilizing role of the Tobin tax if it is true that currency speculation is fuelled by free capital movements, a freedom which has been accepted by governments ever since the financial sector was liberalized. Western governments and experts who have been forced by public opinion to discuss the "feasibility" of the Tobin tax have presented many arguments against it. In France, Dominique Strauss-Kahn, until recently the country’s finance minister and strongly opposed to such a tax, has used different arguments on various occasions: 1) speculation may be a stabilizing factor, and 2) the flows of financial transactions associated with foreign-exchange trading cannot be controlled by France alone. There is an answer to each of these arguments. Firstly, "the stabilizing effects of speculation": The excesses of the speculative attacks in 1997 and 1998 demonstrated the extent to which transboundary speculation shakes the foundations of the international financial system and shifts the burden of the economic risks inherent in speculation on to the most vulnerable populations. Foreign-exchange operations and the banks’ profits from such operations being posted, it is possible to know and control, if necessary, all taxable transactions. *partie=titre Political aspects *partie=nil On the other hand, it is a fact that France (or any other European Union member) cannot, for both technical and political reasons, adopt the Tobin tax now that the single European currency, the euro, has been introduced. However, the French central bank is still, for the time being at least, charged with the task of supervising French banks, while the conditions under which the future exchange rate of the euro is determined, against the dollar in particular, will be decided by both the European Central Bank and the finance ministers of the member countries. The problem is therefore a political one. Will France campaign for the Tobin tax? Is euroland willing to challenge the likely refusal of the USA and the United Kingdom and capable of creating a "Tobinland" together with other countries who wish to join? That depends to a great extent on the strength of the popular movement of protest against financial speculation and its capability of joining forces with various social movements opposed to the new international order or, rather, disorder. *{ Conclusion } Some leftists who are critical of the Tobin tax and other measures against financial speculation claim that it is capitalism itself that must be challenged and not merely finance and its players. That debate falls outside the scope of this article. Let us only conclude that finance is today the visible tip of the iceberg of capital’s brutal domination, and the challenges to its instability and the willingness to make speculators pay are positive signs of the current state of public opinion. It is certainly a paradox that the modest Tobin tax has become such a symbol of the desire to impose restrictions on the freedom of capital movements, considered to be harmful to the autonomy of economic policies for growth and for a less unequal distribution of income. But the idea of introducing a Tobin tax has already contributed to the crystallization of growing discontent with the new global order under construction since the 1980s, an order working against the interests of workers and poor people. The successful implementation of the Tobin tax would be of great political significance as a means of mitigating the worst effects of today’s capitalism.