Capital Market Liberalization

So I suppose we're going with capital market liberalization for our first discussion. I'll type up the explanation and example that Joseph E. Stiglitz gives in "Globalization and It's Discontent" and then hopefully someone will get the ball rolling on the discussion. Personally, I've had a lot of discussion and debate on this topic with various people so I don't want to monopolize the conversation from the get go with a monologue of my own thoughts on the matter so I hope that someone will start us off.

Capital market liberalization entails stripping away the regulations intended to control the flow of hot money in and out of the country-short term loans and contracts that are usually no more than bets on the exchange rate movements. This speculative money cannot be used to build factories or create jobs-companies don't make long-term investments using money that can be pulled out on a moments notice-and indeed, the risk that such hot money brings with it makes long-term investments in a developing country even less attractive. The adverse effects on growth are even greater. To manage the risks associated with these volatile capital flows, countries are routinely advised to set aside their reserves an amount equal to their short-term foreign-denominated loans.

To see what this implies, assume that a firm in a small developing country accepts a short-term loan for $100 million loan from an American bank, paying 18 percent interest. Prudential policy on the part of the country would require that it would ass $100 million to it's reserves. Typically reserves are hel in U.S. Treasury bills, which today pay around four percent. In effect, the country is simultaneously borrowing from the United States at 18 percent and lending to the United States at four percent. The country as a whole has no more resources available for investing. American banks may make a tidy profit and the United States as a whole gains $14 million a year in intrest. But it is hard to see how this allows the developing country to grow faster. Put this way, it clearly makes no sense. There is a further problem: a mismatch of incentives. With capital market liberalization, it is firms in a country's private sector that et to decide whether to borrow short-term funds from the American banks, but it is the government that must accomodate itself, adding to it's reserves if it wishes to maintain its prudential standing.

So this deals with the ability of advanced capitalist countries such as the US to make profits off of the development of poorer, underdeveloped countries. This scenario reminds me of the exploitation of proletarian nations by bourgiose nations. The bourgiose nation takes advantage of the dismal state of the proletarian nation and turns it to its own advantage by promoting minimal industrial growth for the proletarian nation while ensuring a return of the proletarian nations productivity that exceeds the investment of the bourgiose.

Well, it's more then just making profit off of a poor country but a way to keep them poor, both the people and the state itself. It also allows for western control over their industry. It's one of the most vile tools (neo)liberal tactics that has been used to concentrate wealth and keep those down staying down. Neo-imperialism/colonization(although I would call it economic terrorism) at it's best.

In fact, this topic is precisely covered by a book I feel all socialists should read - Confessions of an Economic Hitman, by John Perkins. It shows very clearly how the global financial institutions - the World Bank, the IMF, the WTO - manipulate their positions into convincing third-world states into taking out obviously unfavorable loans, basically indenturing them to first-world countries.

A question my non-socialist friends always ask on this topic is this: Why do poorer countries accept these obviously unfavorable conditions. Now, I'm not a knee-jerk anti-imperialist, the sort that sees the hand of capitalist imperialism everywhere. However, the answer to that question accurately mimics the fiscal behaviors of imperial rule - if one considers the developed world as the capital and core regions, and the third world as the periphery. It works like this: A fictional country, we'll call it Pooristan, had an anti-colonial revolution shortly after the Second World War. This revolution brought to power a seemingly patriotic and nationalist general as dictator. Fast forward thirty years - Pooristan is now an undeveloped nation with very little in terms of basic security or survival necessities for the majority of the population, yet is contains large of untapped mineral resources, McGuffininium.

A Western mining firm wants access to this McGuffinium, yet Pooristan has a strong anti-Western bent, with trade barriers, tariffs, etc. However, has Pooristan is ruled, like many if not most third-world countries, by a dictator or collection of oligarchs, his word is law. So the Western mining firm approaches the dictator and says 'Hey, we know you and your family have visa problems when trying to go to Western countries, so we'll take care of it. In exchange, we would like to start a joint venture with your state-owned mining company. We'll supply the expertise, take a moderate cut, and to finance the whole operation, we'll have the joint venture take out a loan from a friendly bank we know. Of course, our friendly bank would still require your government to hedge against the risk of this venture by taking out reserves equal to the amount of the loan, but in fact, we have a friendly hedge fund that will gladly sell your government US Treasury bills, which everyone knows are safe.'

The dictator replies, 'That sounds good to me, but I must insist that my brother-in-law and family members who run the state mining company get a 51% cut.'

The mining firm agrees, and the deal is set. Because of the dictatorship, the dictator can basically do what he pleases - he and his family and favourites get rich and access to Western luxuries and the mining firm gets bricks of cash. The people, however, are still broke, starving, and scared, and after a decade or so of co-operation with the Western mining firm, the dictator has made several other deals with other Western firms, which then leads to military co-operation with the West, and the dictator is generally regarded as a 'stabilising force' in that unstable region and a 'valued ally' of the West. Despite, of course, being a horribly repressive and cruel dictator.

Sound familiar? It is the exact situation that many African and Central Asian countries are in. Khazakstan, Mubarak before the Arab Spring, Saleh in Yemen, etc and so on. Notice that this cannot be done in absence of a corrupt government, but as long as the dictator remains in power and friendly towards the West, the system propagates itself.

Similarly, one could draw parallels with the Roman Imperium or Napolean's Europe - the provincial governors and kings grew terribly rich, the capital regions grew rich, while the periphery and frontiers remained excessively and often mind-crushingly poor. The best part is that the West only rarely has to exercise military action to maintain their control - allowing them to pretend that they're progressive and focused on human rights, since as long as the corrupt government exists, Pooristan's state resources can be used in whatever way the dictator and his cronies like. They will take the most horribly unfavorable loans and conditions the West offers them, since the dictator personally benefits regardless of what the situation of his state is. Ben Ali in Tunisia comes to mind. And barring an unforeseen revolution such as the Arab spring, he can be assured that the status quo is constant. After all, most dictators die asleep in their beds.