Economy & Trade, Global, Global Geopolitics, Headlines, Latin America & the Caribbean

FINANCE: One Day of Capital Flows Equals Four Months of Trade

Estrella Gutierrez

CARACAS, Sep 25 1998 (IPS) - Capital flows move 1.3 trillion dollars in one day, equivalent to a full quarter’s turnover by the global trade in goods and services – which gives an idea of the virtual economy’s supremacy over the real economy, the Latin American Economic System (SELA) pointed out Friday in Venezuela.

Carlos Moneta, the permanent secretary of SELA, explained that Latin American, Japanese and U.S. experts and government officials from the regional body’s 28 member states concluded in a series of meetings over the past two weeks that only concerted global action could overcome the impact of that phenomenon.

SELA sponsored two gatherings in Lima and one in Buenos Aires to reflect on the global financial situation and the impact on Latin America and the Caribbean of the crisis which broke out in July 1997 in Asia and spread to Russia last month.

Moneta told a press briefing at SELA headquarters in Caracas that it was still difficult to absorb the significance of the explosive growth of capital markets, within a financial system that is ahead of all others in terms of globalisation.

Capital markets grew 12-fold in the first half of the decade, which means any negative movement in that arena has an impact on the so-called real economy, largely due to the characteristics of the enormous volumes moved.

Moneta, of Argentine nationality, said another element that characterised capital markets was concentration. Around 91 percent of global capital reserves is in the hands of 22 countries of the industrialised North and 18 nations of the developing South.

Moreover, the structure of a financial system overwhelmed by change does not contribute to generating a distribution of capital and liquidity that responds to global needs, partly due to the concentration and partly due to the failure of multilateral lending institutions to play their regulatory role.

That is exacerbated by the unequal access to capital. Industrialised countries have privileged access to credit and important currencies, which gives rise to assymetry.

The result is that a sound economy – as Latin American countries sought to achieve at a high social cost since the 1980s debt crisis and even more so in the wake of the late 1994 Mexican peso debacle – is a necessary but not sufficient condition for warding off the impact of the recurrent market crises.

“The financial markets have a great capacity to modify national policies,” commented Moneta, who explained that another conclusion to come out of the recent meetings was that this element casts doubt on the predominant thinking in the region that what is needed is to cast open markets as far as possible.

The macroeconomic gains of such policies, “achieved with major social costs and after years of efforts, are lost in months, weeks or even days” due to variables over which they have no control, he underlined.

“A transfer of power from national governments to financial markets has taken place, which erodes their response capacity, and hinders national development policies.”

Another element of the new reality is that governments are no longer responsible for the crises, although that view still predominates in the industrialised world. Moneta pointed out that it was the private sector that received the loans in Asia, and that although there is reluctance to admit it, a new sense of “shared responsibility” has emerged.

The paradigm that the market is the most efficient system for assigning resources has been called into question, which provides an additional reason for the establishment of rules designed to achieve greater transparency, equity and participation by all actors, he argued.

Moneta said the current system is comprised of a kind of “Economic Security Council” made up of the Group of Seven most industrialised countries, multilateral financial institutions and new actors.

The new actors play a decisive role, he stressed, and are not controlled by the financial system. Among them he included investment banks and the “transnationalised” private banking system, as well as credit-rating agencies.

He also mentioned pension funds – which thanks to their enormous size determine the fate of the capital markets of any country – insurance companies, and the market of acquisitions and mergers.

“On the other hand, we found no participation by developing countries,” he said, indicating that the forum that could link all countries, the United Nations, was seriously limited in its ability to touch on economic issues.

Such conditions no longer only affect the developing world but directly hurt economies of the industrialised North and give rise to global storms, due to elements like assymetries, the so-called contagion effect and the lack of knowledge about and differentiated treatment of emerging markets.

The artificial link between the Russian crisis and Latin America was an example of that phenomenon, Moneta remarked. “Even though it was in better conditions than in 1994 and 1995, the region was hit hard by what occurred in a country with which it has no objective links to justify contagion.”

Investors, meanwhile, never lose out, because the entire system is set up to defend them, he maintained.

Moneta said the recent SELA gatherings reaffirmed that what is in crisis is the international financial system itself, and that “its restructuring must be undertaken, with the necessary care.” He pointed out that U.S. President Bill Clinton and others had already set forth several ideas.

Until that occurs, speculative attacks will become increasingly strong and more frequent, with a more widespread impact, because the crisis “has totally overrun the financial system” and the new actors have no control, he argued.

While he did not go into details on the needed reforms, Moneta referred to hurricane Georges sweeping the Caribbean and the eastern U.S. seaboard, likening capital to a cyclone or hurricane, which humanity has learned to prevent and pick up after, and whose damages it has learned to minimise.

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