SANE Views

Vol.3 No.13, 24 April 2003

How to Control Destructive Capital Movement

By Margaret Legum

This article begins a series defining new macroeconomic policies that could address the results of the Neo-liberal Global Market paradigm- agreed by most people as undermining livelihoods and the future of the Planet. It follows our recent article praising South Africa's Finance Minister Manuel's skill in trying every stratagem within that paradigm - but without success in addressing excruciating poverty.

'There is no escape from the wider issues of morality; and if we ignore them history suggests that they will return in the form of anger, resentment and a burning sense of injustice.' Thus Chief Rabbi Jonathan Sachs, in his book The Dignity of Difference. And de Tocqueville: 'Almost every revolution which has changed the shape of nations has been made to destroy or consolidate inequality'. The New Economic paradigm is rooted in the moral values of human equality and sustainability, which are contradicted by the present system.

We are facing a dangerous condition of international mass inequality likely to lead to gross political and social instability as well as human suffering. Joseph Stiglitz' experience at the World Bank reveals that in the last decade alone the number of people living in poverty rose by 100 million, even as the world economy grew. The Human Development Report of the UN Development Programme says the assets of the top 3 billionaires are more than the combined assets of 600 million people in the poorest countries.

Africa has experienced the worst. In 2000 the real income of Africans was 10% below what it had been in 1980. Capital has been flowing out of Africa to the developed world, despite aid - and over and above debt repayments. Over 50 countries, almost all in Africa, depend on 3 or less commodities for over half their export earnings; and the average price of those commodities has fallen steadily. Their poverty is a direct result of their continuing vulnerability to unregulated trade and capital movements.

Within South Africa the inequality trend is the same. The average African household lost 19% of its income in 10 years; while the average White household has risen by 15%. The official rate of joblessness grew from 16% to 30%. And while more poor people have access to electricity, water and housing, over half have been subject to subsequent disconnection and dispossession for non-payment. At the same time profit took more of the GDP than labour in the last quarter of 2002, according to Tradex economist Mike Schussler.

It is clear that the inexorable trend to inequality of access to income is at the root of the danger. It will lead equally inexorably to national and global instability, terrorism, refugee migration and burgeoning crime. And even if we were somehow able to give equal access to poor people, the Planet could not stand the consequent resource use. If the poor copied the rich's 'quick and dirty' route to wealth, we would need eight Planets to accommodate them: the Earth's carrying capacity would be 4 times exceeded by 2050. We cannot realistically have poverty alleviation without wealth alleviation.

So how do we eliminate the flow of wealth from the poor to the rich? The clue lies in the experience of countries that have done relatively well under the present paradigm. They include India, China and Malaysia, who have refused to follow the injunctions of the powerful international financial institutions to allow capital to flow in and out of their countries without regard to the effect on their countries. They have controlled the movement of capital by regulation.

This is vital for two reasons. First, capital that can come and go is in a position to demand of elected governments policies that suit capital at the expense of labour and the natural environment. By limiting the rights of labour and unions and giving capital the lion's share of productive activity, those policies lead to inequality because capital can go where its profits are largest. It also undermines democracy, because a vote is less important than the threats of capital. Second, the present system encourages speculation in the currency and bond markets: capital can cream profits overnight, leaving no local investment, but only instability.

Governments like ours must reintroduce capital controls. Fears that this will limit foreign direct investment are contradicted by the experience of government that have done so. Investment capital is attracted by stability, and all of the countries that control capital lose only speculative capital - greatly to their advantage. Economies that have suffered most severely under the present regime - Eastern Europe, South America, Africa and the 'Asian Tigers' - have all been obedient to the injunction to allow capital freedom to come and go. Capital controls are not a new idea. They were part of the normal tools available to governments to promote their own economies.

And there are new methods as well. Our government should press for the global introduction of a Tobin Tax, which is a tax on all currency transactions. It is official Canadian policy and widely supported in Europe. It would reduce speculation, by limiting profits on such transactions. It would reduce the gross engorgement of the financial economy at the expense of the real economy of goods and services. It would begin to bring capital back down to earth where it is invested in production.

Finally, a new idea that has its roots in an old one. South Africa should revisit the Financial Rand - ignoring the unpleasant associations with the apartheid regime. We could have two different rates at which our currency is traded. One would be for the current account - buying and selling goods and services overseas. It would reflect only the prices at which we trade real things. The other would relate to capital flows, reflecting foreigners' investment here and our investment abroad. Keeping them separate would have two benefits: 1) It would protect our real economy from the vagaries of foreigner's ideas about our 'value'; and 2) Our exporters would be free of the effects of unrelated factors that now influence our currency value.

All these new ideas - and the old one of capital controls - obviously need study and careful implementation. That is a small price to pay for ending the blackmail to which our government, like many others, is subjected by footloose speculative capital flows.