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Book Reviews
Kavaljit Singh - The Globalisation of Finance: a Citizen's Guide
Zed Books (London), £12.95, ISBN 1-85649-692-9
Reviewed by Greg Muttitt
I've long been looking for a genuinely accessible explanation of how the global financial system works. Singh's book makes a good attempt, and is certainly one of the best guides available.
The book is centred around the stories of the financial crises of the 1990s. Between 1990 and 1993, over $90 billion flowed into Mexico, largely because interest rates in the USA and other rich countries were low. Over two thirds of this was portfolio investment (PI) - the purchase of stocks, bonds and other financial investments. In contrast to foreign direct investment (FDI), which is investment in real physical capital, such as factories or equipment, PI can be moved in and out of a country rapidly. This ‘hot money’ thus came in to pick up large, short-term profit. As a result of all this money coming in, the Mexican economy grew massively, and the country used these PI inflows to finance imports. However, in 1994 US interest rates started to rise, while investors started to see Mexico as increasingly risky, due to political conditions. As a result, the peso came to be over-valued - and when the Mexican government finally devalued the currency in December 1994, the money fled the country as quickly as it had come, and $5 billion left within just two days. Three months later, the peso had lost 50% of its value against the dollar, the Mexican stock market had halved its value, and the economy was in tatters.
Just over two years later, Thailand faced a massive speculative attack, following the failure of many of the country’s financial companies. When the Thai baht was floated in July 1997, it immediately lost 20% of its value, and the crisis quickly spread to other countries in Southeast Asia - Indonesia, Malaysia, Philippines and South Korea. Like in Mexico, investment inflows into Thailand had been increasingly based on PI rather than FDI throughout the 1990s. Much of this investment was channelled into Thailand’s banks, and the foreign borrowings of commercial banks increased from $5 billion to $46 billion between 1992 and 1996. When the resulting property speculation bubble burst in late 1996 and early 1997 many of Thailand’s finance companies found themselves seriously over-exposed. It was this that caused investors to lose confidence, and a speculative attack on the currency left the government with no choice but to devalue.
Of course, the cause of the crises is only one half of the story. Singh goes on to give a good analysis of the effects of the crises, and of the subsequent bailout programmes. In both Mexico and Southeast Asia, the impact of the currency crisis was felt most by the poorest - in particular through job losses and wage cuts. In Mexico, in the first two months of 1995, at least 750,000 people lost their jobs. Furthermore, the financial bailouts by the IMF and by G7 governments came with harsh austerity conditions, slashing public spending and increasing taxes. Meanwhile the bailout cash largely went to the institutions which actually caused the crises - the financiers and speculators - through requirements that the governments ensure those speculators got their money back. Much of the IMF recovery package to South Korea, for example, was designed by merchant bank JP Morgan, and in formulating its position on the support package, the US Federal Reserve consulted extensively with Chase, BankAmerica, Citicorp and other commercial banks.
These crises presented what could have been potentially fatal challenges to the global financial system. Both Mexico and the Southeast Asian ‘tigers’ were economies that had been held up by the liberalisers as examples for other countries to follow. It is for this reason that the IMF and the G7 governments felt that the speculators had to be rescued. US Treasury Secretary Robert Rubin told the House Banking Committee in early 1995 that "Mexico has been, in several ways, a prototype for countries that are striving to put inward-looking, state-controlled models of economic development behind them. A new prosperity based on open markets, a welcome-mat for investment and privatisation is beginning to emerge. But Mexico’s financial crisis shows that these emerging markets are still vulnerable to financial shocks. Helping Mexico through its current difficulties can keep alive the promise of market-oriented reform - the key to growth and stability over the longer term for all of us."
As well as propping up a failing system, the Asian crisis was turned to the advantage of corporations and financial interests. Despite short-term losses in consumer markets and the financial collapse of various projects, in the long term transnational corporations have benefited greatly. For a start, companies, land and infrastructure have been easy to buy because of the devalued currencies. This process has been helped by IMF conditions requiring privatisation of state assets and liberalisation of foreign investment, and by the keenness of the Asian governments to attract new investment. In addition the massive loss of jobs has created big downward pressures on wages.
However while the book is strong on the roles of the IMF, the countries’ central banks and Western governments, it could have said more about the private-sector side of finance. I felt it didn’t quite fulfil its back cover promise of being "a citizen’s guide to what is happening in the rapidly changing virtual reality of big money: who the players are (Fidelity Investments, Mercury Asset Management and the other huge mutual fund managers), and the complex world of financial derivatives they trade in".
The overall structure of the book is excellent, breaking the narrative with explanatory boxes. The book is presented in three parts - an introduction to global finance; the stories of the recent financial crises; and policy implications and interventions. It is the middle section that is really useful. In general Singh presents his stories in a reasonably understandable way, although he does sometimes use concepts he hasn't introduced properly, and at times the book is a struggle to follow. Given that this book calls itself "A citizen’s guide", I had hoped it wouldn’t assume, for example, that the reader automatically knows what a ‘Euro-convertible debenture’ is. The referencing of the book is unfortunately very intermittent and haphazard, and the index could have been fuller. And while there are several useful small glossaries throughout the book, a full glossary at the end would have been helpful.
The book is a slightly schizophrenic balance between the layman’s guide to how the system works and the radical critique of it. Sometimes concepts are presented in what is almost the language of the Economist - and it is not clear whether Singh is critical of those elements of the financial system or not. There is also a problem common to most critiques of speculation - in that by attacking short-term portfolio investments and hot-money flows, there is a risk of indirectly letting longer-term FDI (by transnational corporations) off the hook. While short-term currency speculation can indeed devastate the lives of thousands within days, it is important not to forget that longer-term exploitation by transnationals is equally capable of creating poverty and dependence and destroying local economies and the environment. For example, in praising capital controls in Chile, Singh notes that the country’s resulting economic fundamentals were strong, and as proof he notes that ratings agency Standard & Poors gave Chile an ‘A-’ in 1995. What this means is that it is a good place for transnationals to invest. Singh is right to praise capital controls (they are certainly preferable to financial liberalisation), but an invitation to TNCs to march in should not come into it.
Singh finishes with a chapter on how to take action against financial globalisation. The directory of resources for action is a good guide to some of the best global activists in this area, although it would have benefited from the inclusion of website addresses. Almost all are either American or Asian, as these regions are where this kind of activism is strongest. And finally, if you read this book don’t miss two real gems in the annexes: Thailand’s letter of intent to the IMF asking for a rescue loan, and the text of the IMF’s arrangement with Korea.
All in all, this is a very useful book, and a good attempt to achieve a difficult task. If you’re campaigning against corporations, you should read it.
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Eric Toussaint - Your Money or Your Life: the Tyranny of Global Finance
Pluto Press (London), £17.99, ISBN 0-7453-1412-0
Reviewed by Greg Muttitt
I was originally attracted to this book by its eye-catching title. It presents a structural critique of North-South financial relations. Consider for example that between 1971 and 1980, Third World debt rose from $70 bn to $567 bn. Over the following 12 years, countries of the South made $1,700 bn in debt payments (three times more than their 1980 debt), and ended up three times more in debt. By 1995, Third World debt had hit $1,940 bn. It is this state of eternal indebtedness which allows the World Bank, the IMF, and rich country governments to dictate the policies of the poor countries to suit the largest corporations, with devastating consequences.
Toussaint is effective at explaining the full extent of this stitch-up. Whereas many writers focus on the resultant immediate suffering, he looks especially at the destruction of local economies and the transfer of complete control over markets and production to multinationals. This is how it happens: on the one hand, the costs of domestic producers are pushed up by price liberalisation (like the removal of subsidies and price controls) combined with currency devaluation. Trade and banking are then liberalised – opened up to foreign firms, which out-compete local companies with subsidised or surplus products. State assets and companies are then privatised – and they too are handed over to transnational companies. The result? Production becomes largely owned by the transnationals. Most of the jobs are with those transnationals, and the nation is so dependent on them that it thereafter does whatever they tell it to.
One real find in this book is an excerpt from an OECD guide for Third World governments on how to politically survive structural adjustment - avoiding the social unrest generally caused by the starvation of a population. It advises that: "Teachers’ strikes are of no direct concern to the government, but can be indirectly dangerous in as much as they give young people the time and opportunity to demonstrate". And "it is more difficult to implement a programme that equally affects all groups… It is easier to make some groups bear the brunt of the adjustment while sparing others, on whom the government can count for support… Of course, it is not advisable to eliminate bonuses to the army and police during difficult times when their services may be called upon".
Toussaint also gives a good account of the development of the World Bank, and in particular the chronology at the end of the book is useful in bringing together in one place a catalogue of the Bank’s disastrous loans and policies over its 55-year history.
While public sector debt is the main focus of the book, it also looks at globalisation and corporate power. We often hear the statistic that debt repayments from South to North dwarf aid payments in the other direction. This book provides the private sector parallel to that. Foreign direct investment in sub-Saharan Africa in 1995 was just half the level of outward profit repatriation by multinationals. And there are other interesting snippets – such as Elf president Loic Le Floc-Prigent’s comment that "share prices are a measure of a company’s virtue", just a few years before he was arrested for embezzlement.
Yet interesting snippets are the best a reader is really likely to get from this book. It tries to cover too wide an area, and fails to tie together the different strands of globalisation, debt and neo-liberalism. There is little major content or analysis that is genuinely new. In some ways, it serves as a compendium more than an essay in its own right, as Toussaint often cites someone else’s point but fails to justify or explain it himself. I never really got a FEEL for what he was describing, more just a list of statistics and quotes. For example, a potentially interesting point about increasing financialisation of corporations over recent years was unclear as to whether it referred to a company’s: (i) effective shareholder-type relationship with its subsidiaries; (ii) increased emphasis on dealings with its shareholders; (iii) investment of surplus profits in financial markets and products; or (iv) speculation with its cash reserves.
With no real clear structure, it’s a little unclear what the core aims of the book are, and often it feels like it just cobbles together chapters on various elements of the subject. The majority of the book is about the World Bank and the IMF. While it does relate these to transnational corporations quite well, it would have been nice to have seen more on private sector finance.
The bibliography is quite a good guide to development literature (albeit mostly French-language); yet some of the most interesting statistics just aren’t referenced – such as the claim that a third of world trade occurs within individual companies, or the IMF’s estimates of capital flight.
It’s the kind of book you want someone else to read for you to point out the interesting bits and avoid you having to trawl through the rest. Read the chapter on transfer of wealth from South to North, as it’s good to see it all in one place: debt repayment, discriminatory interest rates, terms of trade, profit repatriation, corporate control, capital flight, privatisation, perverted official development assistance etc. Read the chapters on financial globalisation, the World Bank, and the two phases of structural adjustment. Probably don’t bother with the others.
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