Globalisation: From crisis to crisis by Matt Falloon Stabroek News February 4, 2001 The new financial instruments that we examined last week have contributed to the surge of hot-money flows, which now more than anything else characterizes the global financial architecture. These hot money flows are both highly speculative and extremely volatile. In many countries they have produced enormous swings in exchange rates, national reserves, and the prices of financial assets. For those who fear globalisation, these crises portend the eventual collapse of all capitalist markets worldwide Frequency The frequency of these crises is alarming. Over the last decade, there was in 1992/93 the crisis of the British pound and the European ERM. This was followed by the Mexican (tequila) crisis in 1994/95. Shortly thereafter, there was the South-East Asian crisis, of 1997. This spread to Russia in 1998, then onto Brazil and the US hedge funds in 1999. These crises have enveloped developing and developed countries alike, reflecting the deep integration of global financial markets that has already occurred. Costs Such crises have had enormous economic and social costs. For one, they have led to corporate instability. While firms find it easier to access foreign capital now, the funds they access are subject to quick reversal in bad times. This is particularly so for portfolio flows in the form of bank loans, bonds, or stocks. Crises have also created much market instability because of the large currency swings and huge movements in national foreign exchange reserves they generate. These have affected domestic price levels, government tax revenues and expenditures, employment, and incomes. Typically, the movement from financial crisis to fiscal, inflationary, employment, and income crisis has been swift. In recent crises two distinct behavioural patterns have emerged. First there is what is called the "herd instinct". This is the situation where investors overreact and behave like a herd of cattle triggered into a mad stampede. The other is the "contagion effect". This occurs as crises spreads rapidly from one location to another. This is much like a pandemic. These crises also signify the erosion of national control over macroeconomic management. Given the size of global financial instruments, not even the largest economy on earth, the United States, can isolate itself from, or even withstand successfully, the pressures of these financial movements. This confirms the awesome power over the global economy that is now being exercised by private economic agents motivated by little more than greed and gambling. Every financial crisis thus far has been followed by major reversals in the economies hardest hit. Thus it is estimated that the South-East Asian crisis reversed a decade of economic development and social improvement. Even though, by and large these economies have rebounded from the crisis earlier than was generally anticipated, their losses translate into real human tragedy. Research has shown that the poor and the marginalized have carried a disproportionate share of the costs of these financial crises. Nation state The overall impact of this enormous overhang of private hot money is that the scope for effective action by nation states in the global economy has been substantially diminished. This contrasts with the weakening influence the mass of the population in most countries is now able to exercise over their own elected governments. As liberalization proceeds and financial markets integrate more closely therefore, this undemocratic tendency can be expected to grow in importance. By constraining the scope for governmental action, financial globalisation has contributed to the widening gaps between poor and rich countries, and within all countries alike. Unlike the 1970s and 1980s when the order was reversed, governments are far more inclined to contain their populations and expand the space for capital. While this does not necessarily mean a return to the "dictatorships" of the 1970s, because democracy and good governance have emerged as major global public goods, it does suggest that democracy is becoming increasingly nominal! Tax havens One area where these developments play themselves out in the Caribbean is the link between globalisation and tax evasion. With capital so highly mobile, and national frontiers incapable of guarding or monitoring the movement of funds, tax evasion has become big business. Governments in rich and poor countries attribute a significant portion of this escalating tax evasion to the growth of tax havens. Some Caricom countries are among the world's leading off-shore financial centres and tax havens. Recently, in an unprecedented unilateral action, the developed countries through the OECD have created a Financial Action Task Force/Financial Stability Forum. This body then proceeded, without consultation with the countries affected, to "blacklist" off-shore financial centers for harmful tax practices, weak money laundering controls, weak supervisory systems, inadequate disclosure and information exchange. This action poses a clear and present danger to those centres in Caricom. While the Caricom response to this has been vocal and somewhat robust, the episode highlights the uneven way in which globalisation works. When threatened by its excesses, the developed countries seek to make a small developing region the scapegoat for their concerns. And, so it goes on and on - as it always has. Follow the goings-on in Guyana in Guyana Today