At last the gurus of globalisation and the free market have woken up to the fact that some regulation is needed in world capital markets. Unfortunately, it has taken a great deal of pain before they have come to this conclusion. People in less well off countries like Indonesia and the Philippines have been hard hit in the past year by the fall-out from large movements of capital on financial markets. The steady economic gains made in South-East Asia over the past decade have been laid waste.
Now, at least in Australia, there is recognition that some sort of international regulation in financial markets. Three obvious things appear to have reached the consciousness of leading people in government and financial institutions. The first is that capital is extremely mobile, unlike goods and services which are far harder to move from one country to another. Secondly, that the leverage gain by hedge funds and other institutions puts them in command of larger amounts of capital than available to some nation states. And thirdly, that this in turn can threaten a whole currency which in turn can threaten other currencies and, indeed, the whole global financial system.
There is a circle of paradox here. Market theorists were so committed to markets and free trade they would not brook any regulation of international commerce. But by failing to recognise that capital was different from goods and services, they allowed it to go unregulated, which in turn led to a financial crisis that did more to jeopardise free trade than permitting some regulation.
Prime Minister John Howard set up a task force on international financial reform which reported last week (mon dec 21). It argued that the hedge funds should be regulated in some way. It has supported a suggestion by the G-22 nations to establish a Financial Sector Policy Forum. Mr Howard intends to send copies of the report to world leaders.
The task force hopes that some new method of regulating international capital flows, particularly hot, short-term flows can be devised. This will be a difficult task. Some method will have to be devised so that development investment can be distinguished and excluded from short-term speculative capital transfers which aim to make quick profit from currency rises and falls that have themselves been created by the profiteers capital movement.
It will need the support and participation of all the world’s major economies. Perhaps one of the best methods to put a disincentive on speculative movements of capital would be to put a small transaction tax on it. But as we have seen in with the Australian states, it is too easy for one country (or state) to offer tax holidays. Unless such a tax were universal, it would not work very well.
The task force suggested that the International Monetary Fund and the World Bank act in closer co-ordination and be given the wherewithal to act more quickly and flexibly to impending financial disasters. It called for new short-term funding facilities for the IMF and World Bank. Some observers, however, feel that the IMF and the World Bank are part of the problem, rather than part of the solution. They point out that the vigorous pursuit of tradable commodities in third world countries may well bring greater profit to corporations from the developed world, but do little to help the people on the ground in poorer countries.
Overall, however, it is good to see greater recognition of the self-destructive danger of unregulated capital transfers and the need to do something about it before it undermines the obvious benefits of free trade in goods and services.