Make Short-Term Capital Flows More Costly
World-wide financial crises--such as the one that began in Asia in October and the bailout by the International Monetary Fund (IMF) of Mexico three years ago--will recur until the G-7 nations throw "sand in the gears" of globalized financial markets.
So says Dr. David Felix, an economist at Washington University in St. Louis, in two papers he wrote well before the latest crisis.
"There is a pressing need," he says, "to make international short-term capital flows more costly."
He advocates the proposed Tobin Tax, first articulated in the 1970s by economist James Tobin, which would have the governments of the major financial centers agree on a uniform tax on foreign exchange transactions.
Dr. Felix, in his papers, examines links between financial globalization and economic growth. He says financial globalization has done little reallocating of real resources around the world and actually has slowed economic growth.
Dr. Felix says that stable paper currency exchange rates are essential for international trade and long-term foreign investment. Without some sort of controls on capital markets, speculation in currencies will take place, destabilizing trade and investment.
He calls a tax on private foreign exchange transactions "the least intrusive way" of slowing the reaction speed of global financial markets and rolling back the volume of foreign exchange trades.
Slowing the speed of international financial markets is needed, he says, because prices in goods and labor markets move more slowly than do prices in currency markets. Currency speculators, for example, can move the price of money much faster than can a manufacturer on his product or an employer on the salaries he or she pays employees.
"This imbalance of adjustment speeds has too great a potential for destabilizing trade, investment, and employment decisions to be given free rein," says Felix. "It deters governments from pursuing full employment and other socially beneficial policies with long-term payoffs out of fear of more immediate capital flight."
Dr. Felix disagrees with current economic orthodoxies which hold that the free mobility of capital internationally is compatible with free trade and stable monetary exchange rates.
"Current proposals to stabilize exchange rates and promote free trade without curbing international capital mobility are exercises in squaring the circle," he says. "Even worse, the successive government bailouts of international financial markets from the crises to which they have become increasingly prone have been raising moral hazard risks."
He believes the IMF's "bailout the financial markets" approach ensures more "financial cowboying" and new crises as creditors from powerful nations pressure the IMF to save them whenever they are faced with losses from a panic situation.
He concedes that his is a contrarian approach, hearkening back to some of the tenets of the Bretton Woods economic agreement among nations enacted after World War II. That pact was made keeping in mind how currency speculation contributed to the breakdown of multilateral trade in the 1930s.
Bretton Woods now has been replaced by the New Classical Macroeconomics model which, in general, argues that floating monetary exchange rates and free mobility of capital lead to a more efficient international monetary system.
Dr. Felix outlines his views in "On Drawing General Policy from Recent Latin American Currency Crises," a paper written last year that will be published in the January 1998 issue of The Journal of Post Keynesian Economics, and in "Financial Globalization Versus Free Trade: The Case for the Tobin Tax," a paper in the United Nations Conference on Trade and Development Review 1996.
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Editors and Reporters: When you plan stories about financial crises such as the current one in Korea and other parts of Asia, please feel free to contact Dr. Felix at 314-863-3138 (home), 314-935-5639 (office) or at [email protected] via e-mail. For copies of his papers, please contact Steve Infanti at Dick Jones Communications at 814-867-1963
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