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Book Review
Persisting asymmetries
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A look at the global financial system from the point of view of the poor and developing countries
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S. L. Rao
CAPTURE AND EXCLUDE — Developing Economies and the Poor in Global Finance: Amiya Kumar Bagchi and Gary A. Dymski — Editors; Tulika Books, 35 A/1 (3rd Floor), Shah Pur Jat, New Delhi-110049. Rs. 625.
This book looks at the global financial system from the point of view of the poor and developing countries, and effect on people, and not merely economic logic. There are 16 essays by eminent authors from all over the world.
Amiya Kumar Bagchi states one theme — that real histories of the role of finance in the lives of people of developing countries have not been written. Direct tribute and debts transferred surpluses from the colonies to the imperial powers. The two phases of globalisation, from 1914 to 1973 and since 1973, saw high world trade growth and international capital mobility.
In the first period currencies of major financial and economic powers were fully convertible to gold, and the spread and maintenance of the gold standard were enabled by wars and colonial rule, and control of gold for financial domination. Class differences, nature of domestic markets, adult immigration, colonialism, imperialism and international economic and political inequality explain why capital did not flow from rich to poor countries. Both phases of globalisation had adverse impacts on farmers, and on small and tiny enterprises in poor countries. The other theme is that there is an unequal power linked to mechanisms for market disciplining with disparate impacts on rich and poor nations. The arguments in the other essays are summarised below.
The arguments
Autonomy of central banks is a myth. They manage the country’s currency, requiring the backing of the state. They must necessarily act in tandem with other agencies of the state. Central bank regulation by “activity regulation” (activities that banks can engage in), “solvency regulation” (or prudential regulation), and “liquidity control” (reserve requirements etc.), is primarily by controlling interest levels. But financial liberalisation has increasingly removed their ability to set ceilings on interest rates. Deregulation affects the ability of central banks to fulfil these functions.
International financial considerations have imposed ceilings on fiscal deficit to GDP. The central bank subordinates the interests of the people to those of finance capital and multilateral lending institutions. British banks in the colonial period facilitated a convenient method of surplus extraction from India, transferring India’s finances then consumed primarily by the agencies of the British state and the investment public in London, not in India’s interests or of the peasants who produced much of the surplus. In the present global financial architecture, the U.S. has absorbed over 70 per cent of the world savings, a one way capital flow that is absurd, reflecting the unjust financial architecture.
Restructuring
The surge in financial trading activities in the U.S. far exceeds output growth; production, manufacturing productivity, and real sector profits are negatively associated with financial activities, but positively with prices, employment, income inequality and consumer debts. The stock markets have played a limited role in encouraging innovation in the U.S. industry. Innovation came from oligopolistic competition, social conditions and the developmental role of government. Developing country firms would be better off in pursuing market share or growth within overall government policy.
Facilitating capital inflows soon demands restructuring the domestic financial structure, and subject to scrutiny by international financial interests. This restructuring weakens the ability of central banks in developing countries to regulate capital inflows and outflows. The rapid growth of secondary segment of stock markets has not had a positive impact on resource mobilisation from primary markets. Increasingly companies avoid the primary market in favour of private placements and overseas issues. Uncontrolled foreign fund inflows create a speculative environment where many companies use significant investible resources to finance speculative activities in stock markets and real estate. Some sort of restriction is required on FII inflows especially because a good part is suspected to be Indian funds on “round trips” via Mauritius to escape tax. Indian monetary policy has prevented appreciation of the real exchange rate of the rupee, despite capital inflows, but lack of coordination between monetary and fiscal policies has delayed corresponding investment and growth. A global regulatory authority is necessary in the U.N. to coordinate operation of financial markets across different countries.
Regulatory measures
Bagchi concludes that development financing as venture capital must resume; preferential credit for small farmers and industries must be strengthened; costly concessions to traders and investors in the stock market must cease; corporate resources must be preferably raised not from the stock market but through internal savings, bank credit and vendible debt instruments; policymakers must use the attractiveness of India as an investment destination to attract genuine Greenfield investments; and there should be no move to capital account convertibility.
The book justifiably criticises India for allowing unbridled entry to FIIs. We have not prevented round-tripping of Indian funds through Mauritius. Volatile short-term inflows into secondary markets are sucking India into the unstable international financial markets, ruled by speculation and in volumes unrelated to FDI or output. It may be too late to reverse the course but we can postpone capital account convertibility, regulate FII inflows, especially in anonymous Participatory Notes, and control the Mauritius route especially for Indians.
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