Even though the Financial Action Task Force (FATF) might be imposing sanctions on us for not complying with their directives on controlling our financial flows that might possibly be used for money laundering or the financing of terrorism, we are really in the backwaters of world finance when it comes to “real” money. And at this time it might just be a blessing.
With the financial system of most countries liberalised during the last three decades, under the ministrations of the International Monetary Fund (IMF) and its “Washington Consensus” free market fundamentalist approach, capital amounting to billions, and conceivably trillions, can now move quite seamlessly and at the click of a computer mouse between countries. The theory, of course, is that this is a good thing, since the money would be seeking greater yields and the latter would be a consequence of better economic performances.
That was the theory. In practice, it bumped up against the urge to make profits through speculation and the attendant “animal spirits”, as John Maynard Keynes called it. In the 1990s, for instance, vast sums of money from western banks flowed into the booming economies of Far East Asia, including Malaysia, Korea and Thailand, etc.
The economies boomed even more vigorously and everybody was happy. Until, that is, it appeared to some that the boom might be slowing down. The money suddenly changed direction and there was nothing most of the countries could do about it, since capital controls had been abandoned under the liberalisation mantra. The IMF, presumably formed to prevent the kind of meltdown that occurred, refused to intervene and a collapse ensued.
While some countries in that region did in fact take an oath not to depend on the IMF, but to rather accumulate enough reserves to see them through bad patches, they and the rest of the liberalised world did not give enough weight to the effect policies of the U.S., which effectively issues the world’s reserve currency, can have.
These policies, designed to steady its own economy, inevitably have repercussions on other economies. The EU is another strong determinant of financial flows that could cause boom or bust financial flows. This is especially true in those countries that have been dubbed “Emerging Economies” (EM) – such as China, India, Brazil, etc.
After the financial meltdown in the U.S. and the EU in 2008, they both followed an “easy money” policy – especially the U.S. that in effect pumped vast amounts of money into the financial system. This policy of the U.S. Fed was known as “Quantitative Easing” (QE). This policy had two interrelated effects: it forced interest rates to the floor – effectively below zero in some instances – and so encouraged investments abroad into the emerging markets. All would have been well if the money had been directed into concrete productive investments, but as in the the previous East Asian fiasco, much of it was speculative.
After a bit of clearing of its institutional throat, which sent strong signals that financial volatility was a certainty through manipulation of QE, the Fed in late 2013, declared it would “taper” or decrease the easy money QE policy. And in the last six weeks we have had what amounts to a repetition of the East Asian crisis in the EM. Cumulative outflows totalled $33.3 billion over the past 15 weeks, with China (-US$1.14 billion), India (-US$0.64 billion), Brazil (-US0.63 billion) and Russia (-US$0.60 billion) reporting the largest outflows just last week.
While there has been a great deal of talk of the BRICS economies and other EMs “stumbling” recently, the role of the Fed with its “QE taper” has not received the attention it deserves as a partial cause of that weakness.
The lesson for us in Guyana, for the day when our financial markets might attract “hot money”, is that we cannot ignore the need to have a judicious amount of capital controls. Even the IMF concedes this today.
