NEWS July 6th 2001
Taming Global Financial Flows – A Citizen’s Guide
by Kavaljit Singh

Ever since the breakdown of the Bretton Woods system of fixed exchange rates in 1970s there has been an explosive increase in global financial flows. Today, $1.49 trillion is traded on the foreign exchange markets alone every day. The growth of financial markets has accelerated away from the real economy. The global stock of financial assets (shares, bonds, bank deposits and cash) has increased more than twice as fast as the GDP of rich economies since 1980.

Kavaljit Singh tries to explain how this works, how it affects the world and why we should do something about it.. Taming Global Financial Flows is designed as a follow up to The Globalisation of Finance – A Citizen’s Guide (see review here).

The first part of the book describes how the global financial liberation has developed. He deals with the history, the present state and systematically dismantles the arguments for financial liberation using relevant case studies. The book continues to outline examples of capital control and how effective they have been (Chile is taken as an in-depth example). The last part of the book is an urge to people’s movements to not shrink away from this complex issue but to tackle it with international campaigns, such as the demand for a Tobin tax.

In the first part of the book, Singh attributes the increase in global financial flows is to:
• Global financial liberalization (important part of the structural adjustment programmes)
• Over capacity and over production
• Higher interest rates in the developing countries
• Technological advances

These factors have lead to the domination of finance capital over the real economy, which has several negative effects. Firstly, by providing economic incentives to gamble and speculate on financial instruments, the finance capital markets divert funds from long-term productive investments. Secondly, they encourages banks and financial institutions to maintain a regime of higher real interest rates, which significantly reduces the ability of productive industries and enterprises to access credit. Thirdly, finance capital (because of its speculative nature) brings uncertainty and volatility in interest and exchange rates. Lastly, it undermines efforts by governments to support full employment and reduce inequality.

Singh goes on to outline the key features and recent developments of global financial capital

• foreign Exchange trading (Most forex trades are now related to financial transactions rather than merchandise trade).
• the emergence of securities (general name for stocks).
• the complexity of big banks, making the task of managing them risk more difficult.
• financial derivatives are now a source of systematic risks (derivatives are financial contracts whose value is based on upon the value of underlying financial assets such as stocks, bonds, mortgages or foreign exchange).
• offshore financial centres put financial transactions beyond control.
These factors, together with asymmetric information, herd behaviour, self-fulfilling panic and market failures, make today’s global markets prone to collapse. And as Singh shows with numerous examples, this hits the poor the hardest. The logical way out of this would seem to control these forces (or indeed dismantle the markets, though Singh declines to go so far).

Neo-liberals refer to any such attempts to control the market as ‘financial repression’ (a term coined by Ronald McKinnon and Edward Shaw in 1973). However, there is little empirical evidence to support their contempt. South Korea and Japan enjoyed rapid economic growth and financial stability under a regime of ‘financial repression’. Empirical studies have reported the effectiveness of capital controls in controlling capital flight, curbing volatile capital flows and protecting the domestic economy from negative external developments.

The book is extremely well argued and the multitude of case studies makes it even more convincing. Difficult concepts and important events are explained in separate boxes and the extensive index, all to make it easier to understand and follow. But even though Singh has gone through a notable effort to make this a ‘Citizen’s Guide’, the text is in places very hard to follow if you are not used to complex economic concepts. The book gives the impression that Singh thinks the problems of capitalism can be solved by controlling the international flows of financial resources, perhaps because he doesn’t want to put off those of us who still think that capitalism can be reformed. That said, this book is essential reading for those wanting to understand the global financial system. It will give you the arguments and facts you need when campaigning on these important issues.

All figures and examples mentioned above are taken from Taming Global Financial Flows – A Citizen’s Guide by Kavaljit Singh. Zed Books, 2001.