Global Policy Forum

By Ellen Frank*

Ellen Frank explains why reform of the world financial system is in the interests even of the globalizers.

International financial markets, as any self-respecting critic of globalization can tell you, move some $1.5 trillion round the world on a daily basis – $10 trillion a week, $45 trillion a month, $550 trillion a year; an amount 10 times greater than total world income and 25 times greater than total world trade. As this sea of cash sloshes from shore to shore, it generates heavy surf for the major countries and tsunamis in lesser economies. For the G7 nations, the financial markets are a source of continual instability as exchange rates and asset prices bounce back and forth, threatening profits, wealth and living standards. For hundreds of other nations, the financial seas carry threats of mounting debt, capital flight and currency collapse.

The deregulation of global financial flows – by which national governments lifted restrictions on cross-border borrowing and lending and allowed exchange rates to be mostly set by the market – began in the 1960s with the US, Britain and Canada, not surprisingly, taking the lead. European economies deregulated in the 1970s and 1980s, Asia and the larger ‘emerging markets' in the 1990s. Financial deregulation served the broader purposes of international businesses as they sought markets, materials and workers abroad. It allowed businesses to borrow abroad in foreign currencies, enabled firms to repatriate foreign earnings with few restrictions, simplified accounting practices for globally minded businesses. Of course, wherever money is moving about, speculators soon step in, looking to make money on the movement of money itself. By the 1970s, the trickle of international monetary flows had become a river. By the 1980s the river had become a sea and in the 1990s the sea became a flood. By the turn of the 21st century, the sheer size and scope of the financial markets and the havoc they wrought in Asia, Africa and South America seemed to epitomize the problems of corporate-led economic globalization.

But if the international financial markets are a symbol of globalization, they are also globalization's bane, perhaps even its Achilles' heel. If by globalization we mean the determined efforts of international businesses to build markets and production networks that are truly global in scope, then the current monetary system is in many ways an endless headache whose costs are rapidly outstripping its benefits.

When a wave of financial crises struck in 1997, US, Japanese and European banks stood to lose over $100 billion dollars in bad loans to Asia. The IMF stepped in, reorganized the debt, pressured the affected governments to take over the foreign-currency obligations of their private businesses, oversaw the economic ‘restructuring' required to ensure repayment and unleashed torrents of criticism and recrimination. The bailouts, progressive critics contended, turned previously debt-free nations like Korea overnight into wards of the international financial institutions, driven to sell resources and assets at deep discounts to Western corporations in order to service unjust debts. In the ensuing few years, a number of South American economies suffered a similar plight. Brazil, the world's ninth-largest economy, lost most of its foreign-exchange reserves to speculators and piled on more debt as part of an IMF agreement. A number of governments, including New Zealand, Argentina and Ecuador, announced plans to ‘dollarize' or ‘euroize' their economies, to avoid the ceaseless attacks of financial speculators and damaging volatility in exchange rates. The parallels with European colonialism seemed self-evident – destroying a colony's monetary system and installing the colonizer's currency in its stead was a hallmark of imperialism, a practice that allowed the French to strip Algeria and the British to plunder India, exchanging resources for francs and sterling printed on the imperial press. Debt and currency crisis were the post-modern version of imperialism, serving the long-term interests of the G7 economies and relegating developing countries forever to the periphery of the global economy.

But globalization today is driven less by the imperatives of nation-building than by the imperatives of corporation-building. National governments, to be sure, press the case and pave the way, but the beneficiaries and promoters of globalization are international businesses positioning themselves in a world market.

Money scrambles around the globe in quest of the banker's holy grail – sound money of stable value – while undermining every attempt by cash-strapped governments to provide the very stability the wealthy crave. Governments of developing countries try to peg their currencies, only to have the peg undone by capital flight. They offer to dollarize or euroize, only to find themselves so short of dollars that they are forced to cut off growth. They raise interest rates to extraordinary levels to protect investors against currency losses, only to topple their economies and the source of investor profits.

IMF bailouts provide a brief respite for international investors but they are, even from the perspective of the wealthy, a short-term solution at best. Not only are bailouts a public-relations disaster, they leave countries with more debt and fewer options.

The current crisis in Argentina testifies to the fact that the globalizers are fresh out of ideas on how to resolve this mess. There is simply no policy or set of policies that would allow Argentina to make payments on a $132-billion foreign debt, maintain enough dollar reserves to satisfy investors as to the stability of its pesos, and promote sufficient internal growth and stability to make doing business worthwhile. The Argentinas of the world economy are in an awful bind and that bind is not good for business.

In the immediate wake of the Asian financial crisis, many officials called for a new international financial ‘architecture'. It was fairly clear that the crises were due not to the shortcomings of specific governments, but were systemic failures of the financial markets that required multilateral solutions. A global economy requires a global monetary system and that requires a public body of some sort to regulate it. The question is: what sort of system is required and who should run it?

Progressive NGOs and officials in developing countries have their own ideas – some sort of democratically managed central bank or payments institution that could settle debts between sovereign states, help countries manage exchange rates and institute widespread debt cancellation. Such an institution would certainly stabilize the world financial system. To work, it would almost certainly give governments of smaller countries enhanced powers to re-regulate cross-border money flows without going begging to the IMF or to international investors.

The G7 governments and their corporate sponsors have kept their own counsel. This is not because they are satisfied with the status quo. All these little individual countries – all with their own currencies and crises – are an impediment to building an economy of genuinely global businesses. Money doesn't travel very well, when all is said and done. But the sort of reform they desire would provide greater stability without removing the privileges, perquisites and lack of accountability of the current system. Their ideal, I suspect, would be a global currency issued by an institution akin to the European Central Bank, but less democratic and with Alan Greenspan, rather than Wim Duisenberg, at the helm – someone more seasoned at managing the occasional crisis and bailing out the banks.

Unfortunately for the corporate globalizers, they have overplayed their hand too often to float such a proposal. Even if the proposal is concocted in secrecy, they risk the embarrassment of leaked documents creating another public-relations disaster like the Multilateral Agreement on Investment. That was run into the sand by concerted worldwide resistance that even predated the protests on the streets of Seattle. The globalizers are being watched, and they know it.

About the Author: Ellen Frank teaches at Emmanuel College in Boston, US, and is a contributing editor to Dollars and Sense.

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