-Caveat Lector- ------- Forwarded Message Follows ------- -------------------------------------------------------------------------- -- -------- The Progressive Response 4 October 1999 Vol. 3, No. 35 Editor: Tom Barry -------------------------------------------------------------------------- -- -------- The Progressive Response (PR) is a weekly service of Foreign Policy in Focus (FPIF), a joint project of the Interhemispheric Resource Center and the Institute for Policy Studies. We encourage responses to the opinions expressed in PR. -------------------------------------------------------------------------- -- -------- Table of Contents *** REPAIRING THE GLOBAL FINANCIAL ARCHITECTURE: PAINTING OVER CRACKS VS. STRENGTHENING THE FOUNDATIONS *** By David Felix, Professor Emeritus at Washington University in St. Louis *** THE DRUG LORDS DEFEATED *** By Russell Mokhiber and Robert Weissman *** A DOMESTIC OPIC *** By Janice Shields -------------------------------------------------------------------------- -- -------- *** REPAIRING THE GLOBAL FINANCIAL ARCHITECTURE: PAINTING OVER CRACKS VS. STRENGTHENING THE FOUNDATIONS *** By David Felix, Professor Emeritus at Washington University in St. Louis (Editor's Note: Foreign Policy In Focus is pleased to release a new special report by David Felix, who authored the FPIF policy brief, "IMF Bailouts and Global Financial Flows," which is posted at http://www.foreignpolicy-infocus.org/briefs/vol3/v3n5fimf.html. Felix takes a back-to-the-future approach to the ever-present threat of contagion and economic downturn caused by unregulated capital flows. He suggests that policymakers concerned about this threat look back to the principles and structure of the Bretton Woods architecture of the mid-1940s. He labels his recommended package of reforms "Bretton Woods Light" because it updates the post-World War II architecture commensurate with today's changed economic and political environment. The FPIF Special Report, excerpts from which follow, serves as the overview essay for our new Financial Flows Packet, which includes nine related FPIF policy briefs. See the FPIF website http://www.foreignpolicy-infocus.org/papers/gfa/index.html for further details about the packet and to view the entire Special Report.) The lifting of controls on international capital movements over the past quarter-century has been paralleled by a succession of international financial crises--the current one being the most extensive and virulent to date. "By any standard," observes Gerald Corrigan of Goldman, Sachs and former president of the New York Federal Reserve Bank, "the frequency and consequences of these events are simply too great." There is now, therefore, general consensus that something needs to be done to reduce the incidence of such crises. In the jargon of financial bureaucrats, the "world's financial architecture" needs reforming. Beyond that, consensus fragments. The reform agenda of the International Monetary Fund (IMF)--and of the central bankers and finance ministers of most of the major industrial powers who dominate the IMF--would extend free capital mobility while at the same time trying to enable developing countries to handle volatile capital flows more effectively. The alternative approach--restraining the freedom of financial capital to move globally in order to reduce its power to deter countries from pursuing autonomous economic policies--is not on that agenda. But this alternative approach is evoking support among academic economists and grassroots groups in both developed and developing countries, and, since political feasibility is an essential requisite, it is infiltrating official circles. Because each approach requires collective action restricting national sovereignty, there will be tradeoffs between different types of freedom. To induce free but more stable capital flows, proposals on the IMF agenda would standardize tighter bank regulations and require each country to enforce them. Other schemes would increase the power of the IMF to oversee the economic policies and performances of developing countries and ensure that these countries provide accurate data to international investors, eschew capital controls, and avoid defaulting on their foreign debts. Propositions under the alternative approach call for coordinated measures--international tax and/or regulatory agreements--to minimize evasion and policy discordance. Proposals demanding a much greater surrender of national sovereignty have also been put forth: a global central bank, a uniform bankruptcy code enforced by international bankruptcy courts, and other ambitious institutional innovations of global reach. These ideas have didactic value by identifying distant possibilities, but they clearly lack a serious political constituency either among the power elite or the grassroots. Below is an attempt to draw from the two approaches--liberalizing or restraining capital--specific proposals that in combination would improve global welfare and also have some chance of being adopted. An Alternative Package of Architectural Reforms: Bretton Woods Light The components of the package outlined below have been circulating as separate reform proposals--some on the IMF and/or G-7 reform agendas, others struggling against Washington and IMF resistance. Combined they are an updating of the Bretton Woods architecture commensurate with today's changed economic and political environment. They would help restore some of the stable, equitable, economic growth of yesteryear, while adding institutional building blocks for erecting a genuinely integrated global economy in the future. The components are: 1. A target zone arrangement to limit exchange rate fluctuations between the Big Three currencies: the dollar, euro, and yen. 2. A uniform tax on global foreign exchange turnover, a.k.a. the Tobin tax. 3. Increasing capital requirements on interbank loans in the Basle Capital Accords. 4. Equalizing the prices of over-the-counter derivatives with those on the organized futures markets by imposing appropriate capital requirements on the derivative-issuing banks. 5. Curbing the tax and regulatory evasions of offshore havens. 6. Reauthorizing developing countries to impose capital controls as needed. Limiting fluctuations between the Big Three currencies is a looser version of the Bretton Woods exchange-rate regime, which relied on the fixed-dollar price of gold. This time the Big Three central banks would agree to intervene jointly in the foreign exchange market to keep fluctuations within chosen limits, and, with open capital markets, they would also have to subordinate other policies to this task. Moreover, the ease with which rampaging capital flows shattered the 1987 Louvre target zone agreement and the exchange rate mechanism (ERM) in 1992 makes it clear that curbing such rampaging is essential. A global Tobin tax would not only help perform this task but would also substantially reduce the subordination of other national policies required to sustain the target zone. The Tobin tax is a "market friendly" alternative to direct capital controls, since the tax leaves the screening out of hot money flows to the markets. Around 80% of the $1.5 trillion daily foreign exchange volume comprises legs of round-trip transactions spanning a week or less. Most relate to arbitraging and open speculation by banks, investment houses, hedge funds, etc., that are taking high-volume, short-term positions to exploit transitory, usually small, profit margins. A small tax would cut deeply into these margins and slash the return on capital. On the other hand, the tax bite on the profit margins from trade and foreign direct investment, which involve much longer round trips, would be minimal and would be offset by the reduced exchange risk and hedging costs that would result from stabilizing Big Three rates. The transaction tax revenue would increase official resources for intervening to stabilize exchange rates while providing more scope for national economies to implement full employment and other welfare goals without being sandbagged by anticipatory capital flight. As Nobel economist James Tobin noted when offering his tax proposal over two decades ago, it would slow the reaction speed of the globalizing financial markets, allowing time for welfare-oriented policies to manifest results. Increasing capital requirements on interbank loans in the Basle Capital Accords and on over-the-counter derivatives would further reduce financial rampaging. The interbank market has been the major channel for moving funds to conduct arbitraging and speculative gambits, and over-the-counter derivatives have been elements in risky strategies by hedge funds, which fuel contagion, that is a crisis in one country instigating capital flight from an array of countries. Higher capital requirements raise the costs of the financial leveraging underpinning the massive movement of funds for arbitraging and speculation. And curbing the abuse of offshore havens that evade taxes and regulations would, of course, facilitate the enforcement of the above four components. Finally, sanctioning capital controls by developing countries would reduce their vulnerability to capital flows that could otherwise overwhelm their thin financial markets. Article VI of the IMF's Articles of Agreement already authorizes capital controls, but this fundamental part of its charter has been honored only in the breach by the IMF. Instead, the IMF has been pressuring countries to avoid capital controls. The re-authorization of Article VI would call off the dogs. Obstacles to Implementation In combination, the six components of the alternative reform agenda reinforce each other's effectiveness. And although implementation raises technical issues requiring further study, the main obstacles are political. In the case of the target zone and the Tobin tax, the challenge is how to get these proposals on the official reform agenda for study. In the case of the other four components, which are already on the agenda, it's how to overcome, as Robert Blecker argues in Taming Global Finance, "the least common denominator approach that emphasizes financial interests and is unlikely to deviate substantially from the views of the U.S. Treasury." The adoption of this reform package depends on a buildup of political pressure sufficient to force finance ministers and central bankers, who currently monopolize the reform agenda, to put unemployment and income inequality ahead of facilitating trading opportunities and capital movements. That's made more difficult because the main media rely almost exclusively on spokesmen from financial houses to interpret global financial events, and those spokesmen understandably take the banker's point of view. The pressures for change are, however, mounting. At the G-7 meeting of finance ministers in March 1999, the French, German, and Japanese ministers tried to put the Big Three target zone proposal on the agenda. Washington quickly shot down this proposal. But with double-digit European unemployment and the deterioration of the Japanese economy persisting, the need to create a more propitious financial environment for expansionary policies becomes more compelling. Washington has gone to great lengths to keep the "market friendly" Tobin tax off the agenda. The U.S. squelched the attempt by the United Nations Development Program (UNDP) to promote international discussions of the feasibility and benefits of the Tobin tax. This didn't keep a Canadian coalition of NGOs, academics, and unions from obtaining a 2 to 1 vote for a House of Commons resolution in March 1999 urging the Canadian government to "enact a tax on financial transactions in concert with the international community." The finance minister has promised, accordingly, to introduce the Tobin tax proposal before the G-7. A French grassroots movement is demanding comparable action from the French government and has organized sister movements in other EU countries. There is no such grassroots activity in the U.S. as yet. Partly, this may reflect the fact that the U.S. economy has thus far benefited in various ways from the global crisis. These include seignorage profits. Over two-thirds of U.S. currency is held outside the United States. Some is drug money, but mainly it's the increasing use of the dollar as a store of value by middle-income households upset by the instability of their local currency. The difference between the face value of the bills and the minor cost of printing them, adds up to annual seignorage profits of about 0.5% of GDP. Another boon to the U.S. economy has been the flight to U.S. bonds by foreign investors, whose share of all private holdings of U.S. bonds rose from 21% at the beginning of 1995 to 38% at the end of 1998. In addition, developing countries, who in 1997 already held 55% of global official reserves--mainly U.S. treasury notes--though transacting only 25% of world trade, have been desperately trying to regain the confidence of the financial markets by increasing their dollar reserves. This has meant curtailing imports and emphasizing exports, which has severely depressed world prices for their chief exports: primary goods and labor-intensive manufactures. Thus the U.S. has been able to increase its foreign liabilities to cover its rapidly growing trade deficit without having to raise interest rates, as the rest of the world has to do, in order to get foreigners to hold its currency and securities. The dark side is that U.S. residents whose income and wealth derives from owning financial assets or who are employed in skilled jobs in the nontraded goods sector have garnered the lion's share of the benefits. In contrast, workers in the exporting and import-competing industries have lost high-paid jobs and have had to migrate to lower wage, service sector jobs. Feeling their profits squeezed by unusually low prices, agriculture, mining, steel, and other material producing industries with political clout are joining with labor in demanding import protection. Washington's attempt to ride both its high horses--free trade and free capital mobility--is becoming politically precarious. -------------------------------------------------------------------------- -- -------- *** THE DRUG LORDS DEFEATED *** By Russell Mokhiber and Robert Weissman (Editor's Note: Robert Weissman, author of the recent FPIF policy brief "AIDS and Developing Countries," provides this update by way of the Focus on the Corporation listserv. Weissman's brief is posted at http://www.foreignpolicy-infocus.org/briefs/vol4/v4n23aids.html) Sometimes, the multinationals lose. Last week, the United States government announced that it will stop bullying South Africa to abandon efforts to make essential medicines available to its population. Chalk up a win for public health--thousands of lives may be saved as a result of the new U.S. policy--and a loss for the pharmaceutical industry. The industry had relied on the U.S. Trade Representative to act as its proxy in pressuring South Africa to abandon policies that the drug companies believe to be contrary to their interests. As is almost always the case, this defeat of corporate interests is primarily attributable to one thing: citizen pressure. In this instance, the reversal of U.S. policy came as a direct result of a courageous and strategically savvy campaign conducted by AIDS activists. They forced the issue on to the national political scene and into the national media in June, when they interrupted Al Gore's announcement that he was running for president. Chanting "Gore's Greed Kills" and "AIDS drugs for Africa," the protesters dogged Gore at various other public events for a three-month period. Two million people die annually from AIDS-related causes, the overwhelming majority in the Third World, and the number is skyrocketing. Drug treatments that enable many people with AIDS in industrialized countries to survive are priced out of reach of all but a tiny number of HIV-positive people in the Third World. When South Africa and other Third World countries have sought to take measures to reduce the price of AIDS and other essential medicines, the U.S. government has threatened trade and other sanctions to block them. Apparently none of this was newsworthy for the major U.S. media. But the media did find that disruptions of Gore's speeches merited coverage, and so the vice president's staff quickly moved to make the protests stop. The protesters targeted Gore because he has co-chaired (along with current South African President Thabo Mbeki) the U.S.-South Africa binational commission, the vehicle through which the U.S. government applied its pressure on South Africa. They also picked Gore because they recognized that he was vulnerable to negative publicity. The result of the activist campaign was an announcement by the U.S. Trade Representative and the South African government that the U.S. government would cease pressuring South Africa on the issues of compulsory licensing and parallel imports. Compulsory licensing enables a government to authorize generic production of a product while it is still on patent, with royalties paid to the patent holder. Parallel imports involves imports of drugs retailed in one country for resale in another, so that the parallel importing country can benefit from lower prices elsewhere in the world. Through its Medicines Act, South Africa has sought to make use of these two tools. With as many as one in six South African adults HIV positive, AIDS drugs are a top candidate for compulsory licensing and parallel imports. Since compulsory licensing can drop the price of drugs by 75 percent or more, if South Africa is able to proceed with its plans (it still must resolve a domestic lawsuit challenging the law which was filed by dozens of multinational pharmaceutical companies), many people are likely to gain access to life-saving medicines who would otherwise go without. There apparently was no written agreement between the United States and South Africa, or if there was the two governments are refusing to release it, but it appears to represent a total U.S. capitulation. South Africa appears to have made no concessions, promising only to adhere to its obligations under the World Trade Organization (which permits compulsory licensing and parallel imports)--a commitment it had already made repeatedly. As important as it is, this access-to-medicines victory is only partial, even leaving aside broader questions about maintaining adequate health care systems in developing countries, say, or finding a cure for AIDS. The U.S. agreement applies only to South Africa. It still remains for the U.S. government to declare that other nations can employ compulsory licensing and parallel imports without fear of repercussion. And there remains the matter of whether the U.S. government will license the patent rights it holds to essential medicines to the World Health Organization, which could then disseminate low-priced versions of the medicines worldwide. AIDS activists plan to raise these issues at demonstrations in Washington, D.C. on October 6. But for now, they are entitled to take a couple days and savor a tremendous victory over the powerful pharmaceutical industry. (Russell Mokhiber is editor of the Washington, D.C.-based Corporate Crime Reporter. Robert Weissman is editor of the Washington, D.C.-based Multinational Monitor and co-director of Essential Action, a corporate accountability group. They are co-authors of Corporate Predators: The Hunt for MegaProfits and the Attack on Democracy (Monroe, Maine: Common Courage Press, 1999; http://www.corporatepredators.org)) Focus on the Corporation columns are posted at http://lists.essential.org/corp-focus. -------------------------------------------------------------------------- -- -------- *** A DOMESTIC OPIC *** By Janice Shields (Editor's Note: Janice Shields, author of the FPIF policy brief on the Overseas Private Investment Corporation, offers these recommendations for policymakers considering creating a government corporation to support private investment in poor communities in the United States. Her policy brief on OPIC, which is posted at http://www.foreignpolicy-infocus.org/briefs/vol4/v4n19opic.html, states that "private companies, not the federal government, should sell insurance and make loans and loan guarantees for overseas investments. Shields is coordinator of the Corporate Welfare Project and TaxWatch, projects of the Institute for Business Research.) Requirements that should be included in agreements that give businesses tax breaks for investments in low-income areas: 1. HIRE LOCALLY: Employers should hire from the local and neighboring communities. 2. HIRE LONG-TERM UNEMPLOYED: Emphasis should be placed on recruiting and hiring the long-term unemployed in the community. 3. JOB TENURE: In the past, when employers received tax breaks or other assistance for a specific amount of time per worker, the employers have kept the worker until that period of time expired, then fired the worker and hired a new one to start the tax break/other assistance cycle again with the new worker. Employers' hiring and firing practices should be closely monitored and if they are simply taking advantage of the tax break/other assistance to get bargain employees, the tax break/other assistance should be canceled. 4. JOB TRAINING: The job should provide workers with training in marketable and life skills (e.g., financial literacy). For example, if workers didn't graduate from high school, the employer should make arrangements for GED courses. Employers should provide tuition and scheduling assistance for workers to take college courses. (In the past, employers have taken advantage of the tax break or other assistance to get bargain employees, but not provided them with marketable skills.) 5. LIVING WAGES: Workers should be paid a living wage for that city or rural area, not just the minimum wage. 6. BENEFITS: Employees should be provided benefits such as medical, dental and life insurance and a portable retirement plan, at a minimum. 7. AFFORDABLE, QUALITY ON-SITE DAYCARE: Studies have shown that employees perform better if their children are in on-site daycare. This cuts down on the problems of finding daycare and transporting children and allows the parents to visit the children during the work day. 8. TRANSPORTATION: Besides daycare, another problem for low-income workers is transportation. To alleviate this, the employer should provide transportation to and from work. 9. LONG-TERM INVESTMENTS: Companies should be required to invest for the long-term. If they don't maintain the promised levels of production and employment for a predetermined number of years, they should be required to repay all tax breaks and other assistance they received, with interest. 10. LOCAL OWNERSHIP: Companies should permit workers and community residents to purchase shares in the company at a discount, similar to the executives' stock option plans. 11. COMPANY'S BANK: Companies should do business only with banks that have an excellent community reinvestment rating. 12. NO THREATS: Companies should not be permitted to make threats, such as claiming they will leave or not invest further, in order to get concessions from a community. 13. ENVIRONMENT: Investments must be environmentally-friendly, e.g., emissions from the plant must be clean. Companies should not just meet the absolute minimum environmental standards. 14. COMMUNITY REINVESTMENT: Companies should make investments in the community, such as building parks and playgrounds and providing educational programs and meeting rooms. 15. WORKERS' RIGHTS: Permit workers to form unions and bargain collectively. 16. PRODUCTS AND SERVICES: Companies should produce goods and services that have a positive impact on the community, e.g., can be purchased by the community, don't harm the environment, encourage skill development of workers, create value-added. -------------------------------------------------------------------------- -- -------- The Progressive Response aims to provide timely analysis and opinion about U.S. foreign policy issues. The content does not necessarily reflect the institutional positions of either the Interhemispheric Resource Center or the Institute for Policy Studies. 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