ISGN > Publications > GLOBALIZATION

A Case for Capital Controls¹

Patrick Bond, Associate Professor
University of the Witwatersrand
Graduate School of Public and Development Management
December 1999 (email: pbond@wn.apc.org)

ABSTRACT

In 1995, South Africa removed a decade-old financial rand exchange control mechanism. In 1998, Malaysia instituted even tougher controls on inflows and outflows of capital. South Africa has been subjected to two extremely destructive bouts of international financial volatility since 1995, while it is broadly recognised that Malaysia's capital-control experience was positive. Given the overall decline of "Washington Consensus" ideology, one of its main elements--liberalised financial markets--can now also be called into question. Thus there are strong historical, contemporary-comparative and theoretical grounds for the immediate reinstallation of exchange controls in South Africa.

The need for a rethink of South Africa's--and indeed the world economy's--approach to capital and exchange control issues is increasingly obvious. Post-apartheid South Africa has suffered two extremely serious outflows of capital (in early 1996 and mid-1998), not to mention a quarter-century of capital flight and economic turbulence associated with apartheid and the struggle to end it through financial sanctions, as well as more than a century and a half of periodic financial booms and busts (often associated with global processes)². In contributing to such a rethink, this article considers, firstly, the contemporary international debate; secondly, relevant experiences from other emerging-market economies; and thirdly, South Africa's particular conditions.

By way of an initial definition, exchange controls regulate the way the local currency relates to international currency markets; numerous rules prevent full "convertibility" (direct exchange) of the rand and many other currencies. Capital controls refer mainly to prohibitions against the export of capital by either residents or non-residents, but also to a variety of controls on financial and investment processes applied to residents and non-residents. In the wake of the lifting of the finrand in 1995, South Africa retains no capital export controls on non-residents imported funds and profit remittances. Residents have annual ceilings (R400 000, not including travel- and education-related funds) on export of their capital. Institutional investors are limited to investing 15 per cent of their portfolio abroad, and then only under conditions of asset-swaps with other investors. Certain other regulations (such as in relation to deposit accounts, and against foreign sales of locally-owned shares) have been retained on both currency exchange and capital investments for residents and non-residents.

The key rationale for exchange controls is that recent bouts of global financial turbulence have had devastating effects upon the South African economy. Over the course of a few weeks in mid-1998, for instance, more than R30 billion was effectively wasted by the Reserve Bank in unsuccessful attempts to defend the rand; interest rates were raised by 7 per cent (with a subsequent slowdown of the economy); and the value of the currency dropped by nearly 30 per cent. A previous currency crash, of roughly 30 per cent in nominal terms over several months, was set off by a Union Bank of Switzerland report in February 1996, in turn inspired by a false rumor that then-president Nelson Mandela was ill. These incidents caused substantial structural damage to the economy.³

South Africa is not alone, for such experiences coincide with a growing international critique of financial liberalisation, based not only on problems of volatility, but on the peculiar characteristics of financial markets that generate structural imperfections. Information and market certainty are regularly impaired by speculators or herd instincts; allocative efficiency is sacrificed; inappropriate policy discipline is imposed on states by financiers; there emerges a macroeconomic policy bias towards austerity; and aspects of equity and equal-credit opportunity (and in South Africa's case, ethical redress for apartheid-era wealth) are harmed in the process.

One purpose of this article is to explain why, notwithstanding the devastating experiences of South Africa and many other middle-income countries since 1995, efforts to establish international financial stability have not been successful, and why such efforts are not being pursued with the requisite vigour by global economic managers. In considering policy options that flow logically from this explanation, it is important to recall South Africa's own experience with dual exchange controls, the experiences of other countries (including Malaysia and even Zimbabwe) with more ambitious capital controls and financial transaction taxes, and the possibility of other regulatory interventions that will help direct financial capital to more appropriate investments than is presently the case.

To telegraph the argument in advance, the article makes three essential points about global and domestic financial management that South African authorities must now come to grips with. Although there is an urgent, universally-recognised need for stronger international financial regulation--and indeed for a new "global financial architecture"--the G-8 countries and multilateral financial institutions have done virtually nothing to this end, and appear ideologically opposed to taking the steps necessary for averting further meltdowns. This means, therefore, that any individual country's over reliance upon (and likewise vulnerability to the reversal of) hot-money inflows is not good public policy. Yet, most importantly, individual countries do indeed have options for exercising national sovereignty over investable resources in the face of international finance.

International Financial Volatility:
Roots, Symptoms and Global Antidotes

The volatility of the international financial system since the mid-1970s stems from profound changes in the incentive structure of investments (including a decline in manufacturing profits during the late 1960s and consequent switch by many major firms of productive reinvestment into financial assets); the rise of the information society (and economy); institutional factors associated with financial sector concentration and centralisation; the decaying power of nation-states; shortened investor time horizons; and heightened geographic mobility due in part to more rapid transport and communications and other revolutionary technological changes.

Several specific features are worth mentioning to provide a more detailed sense of how the fabric of contemporary international finance has been tearing at the edges. Dating to the early 1970s destruction of the Bretton Woods System of fixed exchange rates anchored by the US dollar, the world economy has witnessed upheavals not experienced since the 1930s. Once President Richard Nixon delinked the dollar from gold (as a result of excessive pressure on US reserves subsequent to US overseas investment and the Vietnam War)--an action that amounted to an $80 billion default on obligations made at Bretton Woods--the US dollar went into a steep decline. One result, during the 1970s, was a rise in the price of gold from $35/oz (1944-71) to $850/oz (1981).

But gold then fell in value (back down to just over $250 at its low point in mid-1999) as interest rates were raised to very high levels by the US Federal Reserve Board beginning in 1979, finally stabilising the US dollar and giving investors a better return on assets than they got by holding gold. Commodity prices in general suffered enormous downward pressure, losing more than 80 per cent of their value since peaking around 1973. At the same time, overinvestment in manufacturing began to result in growing gluts of products, particularly as East Asian products flooded global markets during the 1980s and 1990s.

Flowing from this underlying turbulence in the global economy, various surface-level financial bubbles began bursting in ever more spectacular ways: the Third World debt crisis (early 1980s for commercial lenders, but lasting through the present for countries and societies); energy finance shocks (mid 1980s); crashes of international stock (1987) and property (1991-93) markets; crises in nearly all the large emerging markets (1995-99); and even huge individual financial institution bankruptcies and soured investments which had powerful international ripples.⁴ The list of financial calamities is very likely to continue, for throughout 1999, the US economy grew increasingly vulnerable to substantial corrections on the basis of its unprecedented trade and debt imbalances, wildly excessive consumer borrowing, and huge stock market overvaluation.

It is to the emerging markets that we turn, however, for more specific consideration of what has gone wrong in global financial markets, and whether there are any proposals on the table that provide reasonable prospects for financial sustainability and efficiency. The emerging-markets crisis had erupted in Mexico (early 1995), but quickly moved to other countries in Latin America and then South Africa (early 1996 and mid-1998), Southeast Asia (1997-98), South Korea (early 1998), Russia (periodic but especially mid-1998), and Brazil and Ecuador (early 1999). The implications of the emerging markets crisis were articulated in a paper by South African Finance Minister Trevor Manuel, to Ottawa's North-South Institute at the time of the September 1998 Commonwealth Finance Ministers' Meeting:

It is interesting that at times like this Mr Keynes is again resurrected. There is a recognition that the standard prescription for macroeconomic stability and growth has not worked for everyone... As we attempt to find solutions a number of common themes are emerging: the need for capital regulation, improved supervision, greater transparency, reform of the Bretton Woods institutions, the need to shift away from the "Washington Consensus," to name a few.⁵

Washington Consensus policies include free trade, financial liberalisation and foreign investment incentives, business deregulation, low taxes, fiscal austerity and privatisation, high real interest rates, and flexible labour markets. South African macroeconomic policy has broadly operated within the spirit (and often the letter) of the Washington Consensus since the late 1980s.⁶

In recent years, as shown below, some countries have shifted macroeconomic policy away from (or otherwise resisted) Washington-sourced advice more easily than others, particularly in the area of capital regulation. But while responses to global economic turbulence have differed, there is growing evidence to suggest that in the context of a series of 1980s-90s financial bubbles, the common feature of the emerging markets crisis was that most middle-income countries had made themselves far too vulnerable to inflows of short-term portfolio investments ("hot money"). In turn, those portfolio investments were not directed into production in a sustainable manner, but instead were attracted by high returns in purely financial-speculative terms. This fundamental flaw is now widely acknowledged, even by leading practitioners.

In his recent book, The Crisis of Global Capitalism: The Open Society Endangered, George Soros asserts, "To put the matter simply, market forces, if they are given complete authority even in the purely economic and financial arena, produce chaos and could ultimately lead to the downfall of the global capitalist system."⁷ In another important article, Soros specifies what is wrong with financial market forces: "The private sector is ill-suited to allocate international credit. It provides either too little or too much. It does not have the information with which to form a balanced judgment. Moreover, it is not concerned with maintaining macroeconomic balance in the borrowing countries. Its goals are to maximize profit and minimize risk. This makes it move in a herd-like fashion in both directions. The excess always begins with overexpansion, and the correction is always associated with pain."⁸

Such sentiments are also expressed by Donald Gordon, the founder of Liberty Life. After losing enormously to speculators fleeing Liberty's $350 million "euro?convertible bond" issue (in the process crashing the insurance company's share value), Gordon remarked ruefully in 1999, "In the name of short?term gain for a few, these people have been allowed to undermine most of the emerging markets. In South Africa [permitting foreign speculation on local assets] was the financial equivalent of allowing hostile war boats free rein along our coast. It is a destructive activity that undermines the very core of our sovereignty.⁹

But the hostile war boats continue roaming at will. One reason is that the several most important global authorities--a "Wall Street-Treasury Complex," in the words of Columbia University's free-trade economist Jagdish Bagwati¹⁰ --insist that their admittedly ad hoc solutions have resolved the global crisis. They claim that since the first major emerging market bailout ($57 billion to Mexico in 1995), and in particular once the dangers of global financial meltdown and deflation peaked in August 1998 (when Russia defaulted on sovereign debt repayment obligations), a series of incremental steps have averted and even extinguished the most serious problems associated with financial volatility.¹¹

Yet contrary to the emollient views of Washington financial technocrats, many kinds of economic dangers remain. In June 1999, John Kenneth Galbraith advised an audience at the London School of Economics, "When you hear it being said that we've entered a new era of permanent prosperity with prices of financial instruments reflecting that happy fact, you should take cover. Let us not assume that the age of slump, recession, depression is past."¹² Evidence abounds of growing tensions, including in the highly-celebrated US economy (responsible for half the world's growth in 1998), such as vast, unprecedented trade and budget deficits, dramatically overindebted consumers and corporations, and a stock market more overvalued than in 1929. The rise of the gold price by 20 per cent (from $255/oz to more than $300/oz) in just two days in late September 1999 is another indicator of speculative panic and underlying fragility.

The volatility of global financial markets in part reflects the self-interest that international commercial banks, investment banks, and hedge funds have in churning, which generates profits through price movements as well as through trading commissions. Thus of the $1,5 trillion in daily currency market activity across the world, a tiny fraction is used for trade- or investment-related transactions. The entire volume of global trade in 1998--$6,5 trillion--could have been financed through merely 4,3 days worth of forex market turnover. The additional daily trade in "derivatives" (securities whose returns are based on movements in the price of other paper assets) was $973 billion in 1998. In contrast, the total official foreign reserves held by all central banks amounted to just $1,6 trillion.¹³ As expressed in the 1998 Annual Report of Standard Chartered--a bank founded in Port Elizabeth in 1857 but which disinvested from South Africa 130 years later--forex profits generated "outstanding" results: "We have built a world-class team and their ability to continue trading, during periods of high volatility in the foreign exchange markets, resulted in exceptional dealing profitability."¹⁴

One indication of an underlying concern with ongoing financial crises is a new IMF plan revealed by IMF Managing Director Michel Camdessus in March 1999, to unite foreign bankers so as to avoid fracturing their power in forthcoming bankruptcy negotiations with sovereign states. Camdessus spoke (behind-the-scenes to an Institute of International Bankers meeting in Washington) of the parallel need for "creditor councils" which discipline "individual `dissident' creditors" who catalyse "panic-stricken asset-destructive episodes" through too-zealous foreclosure actions.¹⁵

But there has been little or nothing done to prevent the asset destruction associated with international speculative runs on countries such as South Africa. For a brief period in 1998, it appeared that some preventative measures might emerge from social-democratic politicians in Germany, France, Italy and Japan. However, the March 1999 departure of Oskar Lafontaine¹⁶ represented a profound setback for this possibility. Likewise, the Japanese failed on several occasions to establish an Asian Monetary Fund, as a result of vetos by the US Treasury Department.¹⁷

Partly for political reasons related to the funding of congressional and presidential elections by financial institutions, and partly because financial markets have an inordinate power in their own right, it is apparent that Washington--the US Treasury Department, Federal Reserve, and multilateral financial agencies which suffer from Washington's veto clout--is reluctant to interfere with the prerogatives of major banks and other international creditors. Even the oft-suggested coordinated regulation of interest rates amongst the major powers is unlikely. Although Washington has conceded the need for greater transparency in international financial transactions, in a world of derivatives trading and private-private debt relationships, it is virtually impossible to track flows of funds and to establish an accurate picture of a given country's external assets and liabilities.

The only substantial step toward financial security taken by Washington since 1998, a global bail-out fund for emerging market countries which agree to pay a substantial interest premium for short-term credit, is conceptually no different from the existing ad hoc mechanisms that poured $57 billion into Mexico in 1995 and more than $200 billion into Southeast Asia, Russia and Latin America in 1997-99. These bail-outs simply do not prevent the conditions that caused the crises from reemerging. There are no changes anticipated in the corresponding credit "conditionality"--essentially amounting to austerity as the basis for macroeconomic policy--required by the IMF. And the bail-out loans disproportionately support foreign bankers (allowing them hard currency escape routes), while the bulk of the pain associated with austerity is felt by low- and middle-income emerging-market citizens.¹⁸

The lack of a sufficient international political will for, instead, a more durable antidote--such as a revival of what has been termed "global Keynesianism"--is disturbing. As noted earlier, Finance Minister Manuel invoked the name of John Maynard Keynes, the great British scholar and policy advisor, in suggesting a need to rethink global economic management. In his 1936 General Theory, Keynes devised a philosophically-grounded analysis--based on the disjuncture between savings and investment that recurs periodically under capitalism--and a remedy to Depression-ridden capitalism that in turn, from the early 1940s, revolutionised economic thinking for a period of more than three, relatively high-growth, relatively less unequal decades.

That remedy is considered to lie in fiscal expansion, but just as crucial, for Keynes, was controlling flows of financial capital. Keynes insisted that a footloose flow of capital "assumes that it is right and desirable to have an equalisation of interest rates in all parts of the world. In my view the whole management of the domestic economy depends upon being free to have the appropriate interest rate without reference to the rates prevailing in the rest of the world. Capital controls is a corollary to this."¹⁹

Thanks largely to Keynes (arguing in 1944 against the American negotiating team at Bretton Woods), the IMF Articles of Agreement still allow member countries to "exercise such controls as are necessary to regulate international capital movements." This matter we take up again in the next section, but it is worth noting that the US Treasury Department has led a formidable attack on this provision, and has attempted to change the IMF Articles of Agreement to ensure that all member states agree to full financial liberalisation. Indeed, Washington continues to ward off any systematic protections against the dangers of financial speculation and contagion, notwithstanding a series of calls by respected economists for crucial technical interventions.

Perhaps the best-known remedy for global crisis contagion--endorsed in March 1999 by a two-thirds majority in the Canadian parliament--would be a "Tobin Tax" (bearing the name of Nobel Prize laureate James Tobin) of 0,05-0,50 per cent on cross-border financial transactions, imposed by the major countries.²⁰ To concerns that money would flee those major countries for off-shore centres (Bahama, Jersey, Guernsey, the Cayman Islands, Panama, etc), Tobin Tax advocates insist that any funds flowing to or from such sites could be penalised by concerted G-8 country action.²¹ To concerns that the rise of derivatives trade and other financial innovations would make a Tobin Tax difficult to apply,²² advocates suggest taxing profits or losses (through a "contract for differences" payment mechanism) realised as a result of movements of the exchange rate relative to the notional principal amounts traded. To this end, Hazel Henderson argues that currency "bear raids" can, with present-day technology, be prevented through regulation of electronic funds transfers (and a transparent transaction reporting system).²³ In sum, logistical hurdles to the Tobin Tax can, indeed, be overcome; establishing the European Union's common currency was a far more difficult technical exercise, but was accomplished with few problems because there was sufficient political will. (It is, however, widely recognised that a Tobin Tax is simply defensive, and that other investment measures are needed to assure a more appropriate flow of finance to areas of potential economic--not merely speculative--return.)

Like the Tobin Tax, other proposals for international financial regulation--ideally, coordinated by a United Nations system agency--have gone unheeded. Sir John Eatwell and Lance Taylor have advocated the establishment of a World Financial Authority.²⁴ Post-Keynesian economist Paul Davidson proposed an international clearing union providing for capital controls.²⁵ The leading economist of the UN Conference on Trade and Development (UNCTAD), Yilmaz Akyuz, has made similar calls.²⁶ Other far-sighted US economists--Jane D'Arista, James Galbraith, William Darity and Dean Baker of the Financial Markets Center in Washington--have suggested a new international public bank and regulatory framework.²⁷

In addition, UNCTAD suggests extending to the international scale some form of national bankruptcy procedure (along the lines of the US Bankruptcy Code Chapters 9 and 11), in view not only of further currency crashes that compel interest rate increases that in turn bankrupt many local borrowers, but also due to a legitimate fear of continuing sovereign defaults (like Russia's of August 1998, as well as South Africa's standstill of September 1985). Instead of shutting down municipalities, companies or bankrupting consumers who have liquidity problems, such procedures attempt to resolve the problems through restructuring workouts. This makes them relevant to foreign debt negotiations. In its 1998 Trade and Development Report, UNCTAD proposes the establishment of an independent panel to determine when a country under attack by speculators can be permitted to impose exchange or capital controls (including debt standstills), consistent with the IMF's article VIII, section 2(b). Fears remain, however, that if such a panel is influenced by the IMF, serious conflicts of interest would arise given that the IMF itself is typically a central creditor in all such cases; the question of whether the UN system could generate such a panel again can only be answered by way of a dramatic shift in power balances and an increase in political will.²⁸

Proposals for national and supranational interventions against cross-border financial flows are not terribly controversial in the economics profession, given the damage done by financial liberalisation in recent years. To a lesser degree, such intervention has been endorsed by the three leading Washington economists: Lawrence Summers, Stanley Fischer and Joseph Stiglitz. Most notably, Summers (presently US Treasury Secretary) coauthored an article a decade ago recommending a tax on global financial speculation.²⁹ IMF Deputy Managing Director Fischer argued as recently as 1991 that "domestic firms should not be given unrestricted access to foreign borrowing, particularly non-equity financing."³⁰ Likewise, Stiglitz--until recently World Bank Chief Economist and founder of the "Post-Washington Consensus" school of "information-theoretic economics"³¹ --once advocated a tax-based approach to cooling hot money.³²

However, there is a vast distance between obscure articles destined for audiences of economists, and the professional requirements associated with maintaining Washington's financial interests. Given the enormous hostility of Wall Street, the City of London and other European financial centres, the prospect of any global regulatory agency emerging to gain control of financial flows in the manner that Keynes envisaged, is remote. Hence it is the nation-state that must intervene to assure domestic financial security, in an increasingly dangerous world in which global financial management is simply inadequate. Several international precedents deserve our consideration.

Domestic Financial Security:
Other Exchange Control Experiences

There have been capital and exchange controls as long as there have been forms of money and states. These have included controls on foreign and local expatriation of investment income, controls on domestic ownership of foreign assets and vice versa, controls on currency convertibility, and restrictions on financial flows related to local branches of foreign banks.³³ Virtually all countries have used capital controls, and even since the 1980s, studies have shown that these controls effectively prevented capital flight during financial crises,³⁴ in the process dampening local financial volatility and allowing interest rates to be kept at relatively lower levels.³⁵ For example, responding to excessive financial inflows during the 1960s, Germany, the Netherlands and Switzerland imposed limits on non-residents' purchase of local debt securities and on their bank deposits.³⁶

    Most countries maintained exchange controls during the 1970s, and as late as 1990, 35 countries still had controls. The five most frequently-adopted types of capital controls in developing countries in the post-war era were as follows:³⁷

But beginning in the 1970s, as international banking expanded and as the Washington Consensus gradually achieved hegemony, many controls were rolled back by policy makers, often under pressure from international financial institutions. By the 1990s, the key forces insisting on the deregulation of capital and exchange controls were the International Monetary Fund and U.S. Treasury Department. Following the Mexican peso crisis of 1994-95, the IMF admitted that controls on incoming hot money would have been appropriate, but by 1997, U.S. policy-makers had stepped up pressure on all countries, through the IMF, to liberalise their capital accounts.

However, in August 1998, Massachusetts Institute of Technology economist Paul Krugman stunned the economics profession and policy-makers more generally when he told a seminar in Singapore of his switch from advocating classical Washington Consensus crisis-management techniques of high interest rates and austerity ("Plan A"), to the "radical" notion of exchange and capital controls. "We tried Plan A," he told CNBC television.

But it didn't work. Then what do you do? It's hard for the IMF and the US Treasury to admit it was wrong and to do something different. But the time has come... We cannot cut interest rates because the currency may fall and we can't get more IMF funds because the IMF didn't have enough. The only possibility I see is imposing capital controls... It's a dirty word, capital controls, but we need them to get out of the bind.³⁸

What Krugman was expressing was the dilemma of the so-called "impossible trinity" of macroeconomics.³⁹ Of three free-market ("open macroeconomic") objectives--a fixed exchange rate (pegged to a strong currency, potentially through a Currency Board)⁴⁰, full capital mobility, and monetary policy independence--only two (any combination of pairs) can ever be sustained. Amongst East Asian countries, the conditions of free capital mobility meant that when the crisis began to unfold, either or both monetary policy independence (especially relatively low interest rates) and currency values were sacrificed. Krugman argued that in order to restore economic growth to a region suffering its worst depression in living memory, domestic interest rates would have to come down. To gain the "policy freedom" to recover, imposing exchange controls would be necessary. Without exchange controls, wrote Krugman, "the region's economic policy has become hostage to skittish investors... `Plan B' is a solution so unfashionable, so stigmatised, that hardly anyone has dared to suggest it. The unsayable words are exchange controls." As practiced throughout modern economic history by many countries, their implementation assured both currency-price certainty and affordable interest rates.⁴¹

Hence the relevance of Keynes' remark (cited above), that "the whole management of the domestic economy depends upon being free to have the appropriate interest rate without reference to the rates prevailing in the rest of the world." Unfortunately, as discussed below, South Africa has suffered a distinct loss of macroeconomic managerial control because of the need to maintain an emerging-markets interest rate premium, and even with such a premium (and dramatic increases in already-unprecedented real interest rates from time to time) so as to attract foreign finance, speculators regularly make bear raids on the rand.

Preventing such loss of macroeconomic control was one reason behind Malaysia's imposition of direct exchange controls in September 1998, but other ambiguities associated with corruption and "cronyism" also provide lessons for South Africa. On 1 September, 1998, following a decline in GDP growth of 7,7 per cent in 1997 to -6,7 per cent in 1998, and a 77 per cent crash of the stock market from a February 1997 peak to the August 1998 trough, Malaysian prime minister Mahathir Mohamad applied strong restrictions to trading of the Malaysian currency, the ringgit. The capital controls included measures aimed at halting international trade in the ringgit and at forcing the immediate repatriation of foreign-held ringgits; a currency-peg against the US dollar; the prohibition of secondary-market stock trading and of share sales by non-residents prior to one year of ownership; and foreign exchange restrictions relating to trade, investment, domestic credit and travel/education. Continuing convertibility of the ringgit was permitted for export receipts and import payments, inward foreign direct investment, and repatriation of profits by non-residents.⁴² Even prior to September 1998, Malaysia had prohibited its local firms from borrowing abroad unless they could demonstrate that they could earn sufficient foreign exchange to service the foreign loans. This provided partial insulation, and avoided the buildup of large foreign liabilities or hidden state subsidies through mechanisms such as a central bank forward cover book.⁴³

Notwithstanding initial hostility from the IMF and speculative financial funds, Mahathir's capital controls were widely praised,⁴⁴ at least for having accomplished a more effective stabilisation of Malaysia's economy than witnessed elsewhere in the region. As the Asian Wall Street Journal commented, "the failure of IMF orthodoxy to arrest the contagion sweeping through Asia has made ideas like capital controls intellectually respectable again. Policy makers can't help but notice that China and Taiwan both have capital controls and neither has succumbed to the region's contagion."⁴⁵ The September 1998 UNCTAD 1998 Trade and Development Report (which was drafted in July) described capital controls as "an indispensable part of their armoury of measures for the purpose of protection against international financial instability." In mid-1999, pointed out Joseph Stiglitz in a World Bank report, it was evident that the restrictions had not harmed Malaysia's growth or investment prospects: "There was no adverse effect on direct foreign investment... there may even have been a slight upsurge at some point."⁴⁶ When introducing the 1999 World Development Report in September 1999, Stiglitz added, "There has been a fundamental change in mindset on the issue of short?term capital flows and these kind of interventions--a change in the mind set that began two years ago... in the context of Malaysia and the quick recovery in Malaysia, the fact that the adverse effects that were predicted--some might say that some people wished upon Malaysia--did not occur is also and important lesson."⁴⁷

But to fully understand the background to and application of the controls requires a nuanced view. During the mid and late 1980s, Malaysian officials believed they could break the impossible trinity. The Mahathir regime liberalised Malaysian financial markets and pegged the ringgit to the US dollar. With currency inflows increasing, the central bank began engaging in foreign currency speculation, until $8 billion in national assets were lost during the September 1992 crash of the British pound. The system deteriorated further from 1995, when the dollar rose in value against the yen, rendering Malaysian exports less competitive. The full brunt of crisis hit in 1998, when the debt of many corporations could not be serviced. Non-performing bank loans soared, but in crucial cases such as the ruling party-linked Renong conglomerate and the Bank Bumiputera, clear government favouritism allowed enterprises to continue operating which elsewhere in the region would have been shut down under IMF pressure. In short, insists Jomo K.S., a University of Malaya economist, "For the Malaysian authorities, capital controls have been part of a package focussed on saving their friends, usually at the public expense."⁴⁸ Mahathir promised that in September 1999, Malaysia would withdraw the currency controls. Given the ongoing problem of cronyism, fear of a dramatic exit from the country persuaded Mahathir to sanction earlier (February 1999) withdrawals of stock exchange investments, but only if a tax was paid.

Residual exchange controls that allowed other East Asian countries--notably China and Taiwan--to avoid the recent crisis are worth considering, as are measures adopted by Chile to slow hot money flows. So too is the experience from neighbouring Zimbabwe (during the Rhodesian era) in which exchange controls facilitated a spectacular recovery from an early 1960s economic crisis. These examples are considered in turn.

Chile, for instance, attracted excessive capital inflows and responded during the early 1990s with reserve requirements of 30 per cent for a one-year period, which represented both an interest-free source of funds for the government, and a penalty tax in the event of early departure; Chile hence coined the phrase "speed bump" as applied to hot money inflows. But notwithstanding the speed bump, excessive short-term capital flowed in during 1995-96. Economic Policy Institute analyst Robert Blecker concluded that "Small countries like Chile may find it simply impossible to control the huge tides of funds that may wash onto their shores or back out to sea. The Chilean experience thus points out the need to consider other, tougher restrictions on capital flows and foreign exchange... Speed bumps are part of the solution."⁴⁹ Showing the importance of expanding upon the Chilean controls, the government in 1998 was forced to revoke capital-inflow restrictions, for the reason that excessive financial liberalisation over the previous year had resulted in its domestic institutions placing large investments in neighbouring countries' financial markets in search of higher returns, compelling the Chilean authorities to attract greater inflows and hence to drop their controls. The lesson is that it is hard to keep a foot on the brake against hot money inflows, when financiers are pushing on the capital outflow accelerator.

A similar tax-based strategy against foreign capital inflow was adopted by Brazil in 1994, in the form of levies on Brazilian-based foreign-currency bonds issued abroad, on non-resident investment in the stock market, and on non-resident purchases of domestic fixed-income investments (regrettably, once liberalised, Brazil's financial markets became particularly vulnerable to foreign speculation and its enormous $75 billion foreign reserve pool came under severe attack in 1998-99). A year later, the Czech Republic imposed a tax of 0.25 per cent on foreign exchange transactions with banks, and limited its banks and companies ability to borrow from foreign sources.
A variety of other exchange and capital controls exist in China, Hong Kong, Taiwan and India, which were remarkably effective in preventing contagion of the East Asian crisis. For example, fears that China would follow other countries in devaluing its currency, hence raising the spectre of massive overtrading and ultimate deflation, only receded because of China's strong currency controls. Hong Kong's new Chinese rulers intervened in September 1998 with a reported $14 billion to defend the Hang Seng index against short-selling speculators (who were attacking both stock market value and the currency). In the same month, Taiwanese authorities announced harsh actions against Soros-managed hedge funds which used six local securities firms as proxy accounts. And just days later, UNCTAD's 1998 Report on Trade and Development endorsed a variety of similar capital inflow restrictions: licensing; ceilings on foreign equity participation in local firms; official permission for international equity issues; differential regulations applying to local and foreign firms regarding establishment and permissible operations and various kinds of two-tier markets; a special reserve requirement for liabilities to non-residents; forbidding banks to pay interest on deposits of non-residents or even requiring a commission on such deposits; taxing foreign borrowing (to eliminate the margin between local and foreign interest rates); and requiring firms to deposit cash at the central bank amounting to a proportion of their external borrowing.

But just as important are controls on capital outflows, which can include limits on outward transactions for direct and portfolio equity investment by residents as well as foreigners. Technically, such controls amount to specifying when repatriation is allowed, and phasing the outflow according to a country's hard currency requirements. Restrictions can be placed on resident ownership of foreign financial assets (such as bank accounts and stock market shares). Dual currency systems (such as the finrand) can make foreign investment by residents more expensive by compelling expatriation via a second-tier currency. A central bank and finance ministry can restrict currency convertibility. In addition to Malaysia, countries that have successfully adopted controls on outward flows include Colombia, India, Malaysia, Sri Lanka, Taiwan, Thailand, and Zimbabwe. But in many cases, these amounted to crisis prevention. What must still be considered is the use of exchange and capital controls as a means of contributing to economic growth.

A final example of the use of exchange and capital controls not merely as a response to conditions of financial volatility or as a disincentive to speculators, but as a strategy for insulating an economy so as to achieve inward-oriented capital accumulation, comes from Zimbabwe during the Rhodesian settler-colonial period prior to independence: the Unilateral Declaration of Independence (UDI).⁵⁰ UDI was declared by Ian Smith in November 1965, and represented not only a political rebellion against British decolonisation policy by a small (200 000-strong) white community, fearful of democracy and anxious to maintain a hold over racially-inscribed privileges. Such a lesson would be irrelevant for contemporary South Africa.

Instead, UDI also represented an attempt by central bank and finance ministry personnel to deal with capital outflow in the context of sustained economic stagnation. The local economy had slumped beginning in the early 1960s partly due to overinvestment and partly to uncertainty associated with the demise of the Central African Federation (as Zambia and Malawi won their independence). Although Rhodesian capital controls were already fairly tight, they had to be strengthened in 1961 and 1963 to prevent the transfer of resident funds through the main London-headquartered banks. But it was only in November 1965 that full exchange and capital controls were applied (including prohibitions on profit repatriations and blocks on non-resident funds deposited in Rhodesia), along with a standstill on repayment of Rhodesian foreign debt to Britain, the World Bank and other creditors. These actions generated what economist Ann Seidman has termed a "hothouse" effect, leading to dramatic economic restructuring and growth for nearly a decade.⁵¹ In a disaggregation of the causes of Rhodesia's dramatic growth, which averaged 9,5 per cent from 1966-74, Confederation of Zimbabwe Industries former chief economist Roger Riddell concluded that 61 per cent of the manufacturing sector's UDI expansion could be attributed to domestic demand (as against 30 per cent in sanctions-related import-substitution, and 9 per cent in export growth).⁵² As economist John Handford confirmed, "The directors of the national economy were already using their main weapon: bottling up capital by severe exchange control restrictions."⁵³ The capital was then directed into areas of the economy where linkages could still be fruitfully developed, leading to Rhodesia's increasing self-sufficiency. This virtuous cycle eventually ran out, particularly when overinvestment in heavy industry combined with unique 1970s factors (the liberation war, imported inflation, oil shortages, etc). But until that time, Duncan Clarke concluded in an UNCTAD study, "The controls worked, [and] widened the base of the institutions, led to diversification within them, increased inter-sectoral linkages and flows, and strengthened the financial sector's structure."⁵⁴

Likewise, the South African financial system in the early 21st century requires rapid diversification and developmental linkages so as to permit a more balanced form of economic growth, as opposed to the resource skews and international vulnerabilities associated with late 20th-century financial liberalisation.

Options for South Africa⁵⁵

The previous pages have documented how international financial markets continue to spin out of control; how global economic management has failed to cope with the situation; and how some countries have invoked a combination of capital and exchange controls--some directly, some through taxation--both to avoid contagion of financial crisis and to promote economic growth.

What are the implications for South Africa? Does South Africa need to worry about further international financial turbulence? Are there ways in which South Africa can protect its foreign currency reserves against speculator bear-raids? Are there opportunities for strengthening South Africa's capacity to deal with currency crisis even before it hits?⁵⁶

In this section, we consider the economic characteristics of international financial vulnerability. But a strong case could be made, on moral grounds, that since the main holders of South African wealth--who are overwhelmingly white men--derived that wealth through morally-odious and economically-irrational apartheid advantage, there is no ethical basis for their now departing South Africa with such wealth given that their apartheid advantage is eroding. But whatever moral stance is adopted, contemporary South African economic vulnerability is also a problem worthy of note. Although South Africa has had its own complex history of dramatic financial bubbles and bursts dating to the early 19th century, stability and domestic financial security was largely achieved during the long post-war era of highly-regulated global financial markets. Recall that even during the late 1980s and early 1990s, Pretoria achieved a surprising degree of domestic financial security, in spite of extremely effective anti-apartheid financial sanctions imposed by most western governments and bank at the bequest of the liberation movement. Beginning in September 1985, in the context of a hot-money withdrawal (most western banks canceled short-term credit lines), the Reserve Bank and Finance Ministry asserted sovereignty over financial flows through a combination of a foreign debt repayment "standstill" (followed by renegotiations every three or so years) and the introduction of a dual exchange rate system. Once the $13 billion in short-term debt due in 1985 had been renegotiated, the "financial rand" became Pretoria's primary tool to control capital outflows.

The finrand was aimed not at foreign companies which wanted to repatriate either profits or capital investment, but rather at owners of financial assets. The controls substantially slowed financial capital flight, by serving as a form of tax on outflows; the premium ranged from 10 per cent to 40 per cent, depending upon exchange rates and political circumstances. However, it must be acknowledged that, as in the case of Malaysia's 1998-99 capital controls, an element of cronyism and corruption was evident. The Reserve Bank was investigated periodically for involvement in illegal currency "round-tripping" (by which financial rands were purchased at a discount by local financiers and converted into higher-value commercial rands). Amongst its many questionably-close relations with Afrikaans banks, the Witwatersrand Attorney General discovered that virtually all major (R300 million and above) forex transactions approved by the Bank during the late 1980s were tainted. The Reserve Bank's Durban branch manager, for example, was taken to court for $1 billion in irregular forex transactions.

Ironically, in March 1995, just a few weeks after the Mexican crisis broke, then-finance minister Chris Liebenberg--who served as chair of Nedbank prior to and following his government posting--announced that the finrand mechanism would be retired and that the rand would become a convertible currency with the exception of light controls on residents' capital outflows and the retention of prohibitions on institutions' overseas investments. As a result of the finrand's demise, South Africa proceeded to attract a vast amount of hot money during 1995. Half of the Johannesburg Stock Exchange's trades in 1995 were traced to foreign finance, leading to a rise in the monthly average share turnover from R5 billion to R10 billion within a year of the relaxation of exchange controls. (The stock market all-share index, correlated at 100 in 1960, rose from 5 000 in early 1995 to 7 000 a year later.) Likewise, there was a substantial increase in net purchases of South African bonds from the second quarter of 1995 through the first quarter of 1996. An unprecedented R5 billion in non-resident bond and JSE share purchases were made in the first few weeks of 1996.

Then, even more rapidly, money flooded out, with February 1996 witnessing huge net non-resident sales of South African bonds. The Reserve Bank's reserves fell from nearly R16 billion to under R11 billion from year-end 1995 to mid-1996, representing a drop in import cover from two months' worth of hard currency for imports, to less than one. The value of the rand slid from R3,6 to the $ in January 1996 to R4,4/$ in March, to R4,7/$ in December. In order to stem the outflow, interest rates were raised dramatically over a few weeks in early 1996. The 3-month bankers' acceptance rate rose from 14 per cent in March to 16,5 per cent in May 1996. In real (after-inflation) terms, the prime rate (the interest rate paid by leading firms) rose from 12 per cent to nearly 15 per cent, a level only once surpassed in modern South African history: in mid-1998.

Likewise the outflow associated with the 1998 emerging-markets crisis drove the rand down by more than 30 per cent over a few weeks (from R5,1/$ in May to R6,7/$ at its low point in July, before it stabilised at R6,2/$ in subsequent months). Unlike 1996, this initially affected the JSE, whose all-share index dropped nearly 40  from its April 1998 height of 8 200, to a low of less than 5 000 in August. In addition, net bond purchases switched from an inflow of nearly R10 billion in the first quarter of 1998 to an outflow of nearly R16 billion in the third quarter. This was the key factor in the drop in Reserve Bank foreign reserves from an import cover of more than 3 months to just over 2 months from April-September 1998. To attract funds back to South Africa, the Reserve Bank's repurchase (repo) rate was raised from 14,8 per cent in April to 21,8 per cent in August. Likewise the rate on 3-month bankers' acceptances soared from 13,75 per cent in April to 21,5 per cent in August. In real (after-inflation) terms, the prime rate rose from 13 per cent in April to 18 per cent in August, the highest level ever recorded.

Notably, although foreign speculation played a role, particularly in view of Russian-caused global turbulence in mid-1999, South Africa's own banks were notably very active in betting against the rand, and recorded large foreign-exchange account profits as a result. (This was not sufficient, in the case of one bank, however, to offset its £50 million loan to Russia, which after the August 1998 default, required repatriation of rands to a London subsidiary to cover the loss--in de facto contravention of exchange controls, hence requiring inexplicable Finance Ministry approval.) The role played by Johannesburg banks in international currency speculation requires much greater supervisory oversight by the Reserve Bank, particularly given the spectacular growth in trading by two of South Africa's three largest banks, which rose from 96th and 111th most active forex-trading banks in the world in 1998, to 65th and 78th in 1999.⁵⁷

During the first half of 1999, the prime rate fell in real terms back to around 12 per cent, but this remained an enormous premium compared to the main capital-exporting countries (in May 1999): the United States (5,7 per cent); Britain (5,0 per cent); the Euro-11 (3,3 per cent); and Japan (1,9 per cent). With South African inflation down to its lowest levels since the early 1970s (thanks mainly to a drastic fall in consumer demand in 1998), the real effective exchange rate firmed (it was down slightly against the dollar and yen), giving foreign investors an extremely high rate of return during the first half of 1999. Against the euro, the rand appreciated 9,4 per cent; and against the pound, the rand was up 1,1 per cent.

Yet while in mid-1999, economic relief appeared momentarily (aside from dramatic job cuts in mining and parastatal companies), the vicious cycle associated with financial liberalisation threatened to return. The impossible trinity meant that either the rand's value would have to be allowed to fall, interest rates would have to be kept at extraordinarily high levels (i.e., monetary independence would have to be surrendered, for example, through a Currency Board arrangement), or some change would have to be made to capital convertibility.

The power of the Washington Consensus has to date prevented the latter option. Yet the continuing cycle of economic turbulence associated with financial liberalisation suggests a rethink is in order. The rationale for South Africa's financial liberalisation has, after all, been two-fold: to attract short-term portfolio capital so as to maintain support to the balance of payments, and to demonstrate to potential longer-term foreign direct investors that the South African government has sufficient self-confidence in its prospects that capital is allowed to move freely. Both rationales deserve reconsideration at this stage.

Firstly, there are other ways of assuring balance-of-payments stability, including Malaysian-style capital controls; an indirect finrand-type dual exchange system; other modes of taxation to prevent capital outflows; more direct controls on imports (especially luxury goods, which until 1996 were taxed fairly heavily); and renegotiation of payments on apartheid-era foreign debt (mainly taken on by private borrowers, but guaranteed by the government).⁵⁸

Secondly, the effect of financial liberalisation on Foreign Direct Investment (FDI) has not been impressive. As a psychological tactic, it may have had merit in theory. But the practice of FDI has not met expectations. Virtually all FDI into South Africa has been of the merger/acquisition variety, instead of into greenfield projects entailing the import and establishment of new plant, equipment and job opportunities. Moreover, since the finrand was lifted in 1995, more than R10 billion more has been exported through South African firms' direct investment out of the country, than new FDI into South Africa.⁵⁹

In addition, portfolio investment by South African financial institutions since 1990 has included the growing operations of the major banks in offshore financial centres (Cayman Islands, Bahamas, Panama, Jersey, Guernsey, Isle of Man, Isle of Wright, etc) and questionable South African bank loans to Russia and Brazil. The listing of several large companies on foreign stock markets was meant to bolster the foreign reserves through remittances to local shareholders. But they also represent a future flow of capital appreciation and dividends to non-residents, and the recipients of the sales receipts of local shares are amongst those South Africans most likely to emigrate, demanding expatriation of their funds.

In sum, the strategy of attracting foreign investment through financial liberalisation has not worked well where it is most needed: long-term greenfields FDI in productive sectors of the economy; and it has worked perversely so as to undermine South Africa's domestic financial security by subjecting local markets to global turbulence.

The failure of South Africa's financial liberalisation could have been anticipated as a function of one other relatively unique factor. Unlike most countries, which guard against hidden subsidies to corporate borrowers seeking foreign loans, the South African Reserve Bank has developed (since the late 1980s) an ill-advised "forward cover book." This technique of risk-sharing effectively guarantees South African corporate borrowers against any exchange-rate premium on their foreign loans. Over time the forward cover book has ebbed and flowed, but it still exceeds $20 billion. It represents a well-recognised invitation for speculators to sell South African assets short, on grounds that the enormous liability ensures the country's vulnerability--in the absence of exchange controls.

Thus, after several years of financial turbulence, there are no defensible rationales for South Africa's experiment in financial liberalisation. At one level, the periodic crises reflect a deep-seated tendency within capitalism to displace pressures towards over accumulation crisis into both untenable financial and geographical outlets.⁶⁰ But systemic reforms are still feasible, as demonstrated during a previous stage of global bank regulatory activism, following the 1929-33 global financial panic. Possibly the only real argument against South Africa not just reversing recent liberalisation but going further to establish proactive, development capital and exchange controls, is the unintended adverse consequence of punishment by foreign financial markets. In short, would South Africa be able to get away with interventionist measures aimed at restoring domestic financial security--or would a cartel of international financial institutions intervene to impose sanctions (credit boycotts, etc)?⁶¹

The case of Russia's August 1998 default is instructive, for the anticipated negative impact on access to trade financing was not affected and Russia was given repeated new international loans so as to roll over some (though not all) of the debt still coming due in 1999. Neither was Malaysia cut off from international finance (required to facilitate trade and investment) following its September 1998 imposition of exchange controls, and indeed, following a short-term decline in its international credit rating it quickly reestablished itself with LIBOR interest rates comparable to similar Southeast Asian countries. Similarly, apartheid-era South Africa was not denied short-term trade finance following its 1985 debt standstill.

The variety of measures utilised by developing countries to control capital and exchange movements have already been noted; the need to reimpose these has been widely acknowledged, with UNCTAD specifically mandating several types of controls. With the historically-successful experiences--in contrast to the failures of liberalisation in recent years--and the growing acceptance even within the IMF of certain kinds of controls, the danger of retribution from international financial markets has waned.

Capital and exchange controls applied by numerous countries in the past have included controls on foreign and local expatriation of investment income, controls on domestic ownership of foreign assets and vice versa, controls on currency convertibility, and restrictions on financial flows related to foreign banking offices. The most important such controls, given South Africa's particular conditions at the turn of the century, include what I view as seven essential elements of a revised strategy for domestic financial security:

• halting further financial liberalisation and reconsidering those aspects of recent liberalisation which are economically and morally questionable;
• imposing feasible (Malaysia-style) capital and exchange controls at the earliest opportunity, and certainly prior to a renewed state of financial turmoil and crisis when they might become vitally necessary;
• restoring confidence in the Reserve Bank, as a crucial logistical vehicle for exchange controls, at a time of new Bank leadership and systems;
• distinguishing between future inflows of hot money (which should be actively discouraged) and future production-oriented FDI (which, in contrast to existing merger/acquisition FDI, should be encouraged);
• revisiting the structure of the current and capital accounts, including imports and the inherited apartheid-era foreign liability structure;
• lowering interest rates; and
• redirecting financial resources into productive purposes, including meeting human needs, away from largely speculative and unproductive outlets.

If a coherent case is made for exchange and capital controls (as has been done for South Africa by many leading economists and UNCTAD), and if the moral weight of South Africa's democratic leadership and the support of numerous international allies are added, there is no reason that South Africa could not take a bold global leadership position on restoring domestic financial security--as it has in general areas of human rights and world peace, or more specific areas, such as universal affordable access to pharmaceutical products to stave off the HIV/AIDS crisis.

This article has argued, firstly, that there is a growing likelihood that South Africa's international innovation and leadership will be required. The present international system is mired in crisis; there are no real prospects for global regulation on the immediate or medium-term horizon; crisis-response mechanisms are ineffectual in restoring the conditions for long-term stability and prosperity; the threat of U.S. economic imbalances remains severe; and the vast volume of private hot-money flows is not receding (notwithstanding a temporary 1997-98 decline).

Secondly, the article has shown that these conditions have had a substantial adverse impact on South Africa's own prospects. The two major post-1994 currency crises have been handled poorly by the prior Reserve Bank management; vulnerability to future crises has increased; interest rates have been demonstrably higher, in turn catalysing recessionary conditions; costs of imported inflation and foreign debt repayment have increased; vast amounts of scarce reserves have been wasted; and government has lost an opportunity to question the moral implications of allowing those who benefitted from apartheid to take their wealth offshore.

Thirdly, the article has recommended a variety of currency- and exchange-control options that could be implemented, not only to resolve the growing vulnerability South Africa faces in international financial markets, but to restore domestic growth, equity and security.

But the only sure way forward is for labour and social movement activists to more forcefully turn their attention to capital controls. Precedents exist (Afrikaner nationalists, the exiled ANC and anti-apartheid solidarity activists, and black township activists have periodically protested the socio-economic injustice associated with excessive financial power and liquidity throughout South African history)⁶², and the Jubilee 2000 movement has turned from merely advocating debt relief to taking up more general financial reforms⁶³. It is probably only a matter of time before a critical mass of capital-control advocates persuade Pretoria to reverse the misguided trajectory of financial liberalisation.

NOTES

1. This paper was commissioned by the Nedlac Labour Caucus in September 1999. Acknowledgements are due to many colleagues in South African labour and social movements, and internationally, who assisted in fine-tuning the argumentation. Any flaws are the author's responsibility alone.

2. For an historical review of similar patterns, see P.Bond, `A History of Finance and Uneven Geographical Development in South Africa,' South African Geographical Journal, 80, 1, 1998, pp.23-32; for more on the contemporary global context, see P.Bond, `Global Economic Crisis: A View from South Africa,' Journal of World-Systems Research, 5, 2, 1999, pp.330-361.

3. Several aspects deserve mention. Even if based on irrational sentiment unrelated to underlying economic strength, macroeconomic policies or currency valuation, rapid changes in South Africa's international financial standing do affect domestic economic prospects, for they signal instability to potential local and foreign investors. Interest rate increases are invariably associated with defending the value of the currency, and were responsible for downturns in real economic growth in both 1996 and 1998. Given South Africa's relatively open trading position, currency crises have the potential to immediately import inflation. The dramatic declines in currency valuation throw off investment and trade planning, especially where vital imports are concerned. Financial stability is also endangered in the event that South African banks have borrowed short-term on the basis of currency assumptions (as happened, at great cost to the country's largest bank, in 1996). Servicing South Africa's substantial hard-currency-denominated foreign debt (of roughly $25 billion) becomes increasingly expensive, the more the rand declines against hard currencies. The South African Reserve Bank's forward cover book--which guarantees domestic borrowers against foreign exchange depreciation risk--is also adversely affected, which in turn makes South Africa yet more vulnerable to foreign financial speculation. And South Africa's already reduced national macroeconomic policy autonomy wanes further, the more vulnerable the country becomes to international financial flows, for pressure rises for the Finance Ministry and Reserve Bank to intensify bias against inflation even where that ensures rising unemployment.

4. Late-1990s examples of such disastrous financial-speculative gambles in derivatives, exotic stock market positions, currency trading, and bad bets on commodity futures and interest rate futures include Long-Term Capital Management ($3.5 billion)(1998), Sumitomo/London Metal Exchange (£1.6 billion)(1996), I.G.Metallgessellschaft ($2.2 billion)(1994), Kashima Oil ($1.57 billion)(1994), Orange County, California ($1.5 billion)(1994), Barings Bank (£900 million)(1995), the Belgian government ($1 billion)(1997), and Union Bank of Switzerland ($690 million)(1998).

5. Mail and Guardian, 16 October 1998.

6. The late-apartheid government began adopting liberalisation policies with the advice and support of the International Monetary Fund during the late 1980s, and in 1993 issued the Normative Economic Model to codify these policies. The post-apartheid South African government has followed Washington Consensus advice, notwithstanding enormous costs to local development, job creation and income distribution. By all accounts, the Growth, Employment and Redistribution (Gear) policy, adopted in June 1996, is closely modelled on Washington Consensus policies. As everywhere, by late 1998 these policies were seen as increasingly inappropriate, for only the policy targets for the budget deficit/GDP ratio and inflation were achieved. For the three-year period 1996-98, virtually all Gear's other targets were missed (for details, see National Institute for Economic Policy, NGQO!: An Economic Bulletin, 1, 1, http:\\www.niep.org.za\, pp.1-3).

7. G.Soros, The Crisis of Global Capitalism: The Open Society Endangered, New York, Public Affairs, 1998.

8. G.Soros, `Avoiding a Global Breakdown,' Financial Times, 31 December 1997.

9. Sunday Independent, 16 May 1999.

10. J.Bhagwati, `The Capital Myth: The Difference between Trade in Widgets and Trade in Dollars,' Foreign Affairs, 77, 3, May/June 1998.

11. See papers or articles by R.Rubin, `Strengthening the Architecture of the International Financial System,' Remarks to the Brookings Institution, Washington, DC, 14 April 1998; by L.Summers, `The Global Economic Situation and What it Means for the United States,' Remarks to the National Governors' Association, Milwaukee, Wisconsin, 4 August 1998; by S.Fischer, `IMF--The Right Stuff,' Financial Times, 17 December 1997, `In Defence of the IMF: Specialized Tools for a Specialized Task,' Foreign Affairs, July-August 1998, and `On the Need for an International Lender of Last Resort,' IMF Mimeo, Washington, DC, 3 January 1999; and by M.Camdessus, `The IMF and its Programs in Asia,' Remarks to the Council on Foreign Relations, New York, 6 February 1998. (See also Organisation for Economic Cooperation and Development, Report of the Working Group on International Financial Crises, Paris, 1998.)

In 1998-99, the following policy measures prevented (perhaps only temporarily) a global crisis on the scale of the early 1930s series of international financial panics:
o the successful public-private bailout of the Long Term Capital Management hedgefund in September 1998;
o slightly looser Federal Reserve monetary policy adopted in September-October 1998;
o a new $90 billion International Monetary Fund (IMF) Contingent Credit Line announced in October 1998 and formalised in May 1999;
o the convening of key countries in a Forum on Financial Stability;
o the lack of financial contagion (contrary to expectations) in the wake of Brazil's January 1999 currency meltdown;
o the long-awaited revival (however infirm) of the Japanese economy;
o new plans for somewhat more transparent budgetary and exchange rate systems in emerging markets;
o a decision at the G-8 Cologne meeting in June 1999 to sell 10 per cent of the IMF's gold to fund partial debt relief for the poorest Third World countries;
o statements by Britain's Gordon Brown--in his role as head of the IMF Interim Committee--indicating a desire to step up the IMF's existing capacities in areas of financial supervision and regulation;
o the September 1999 assembly of a "G20" group--led by Canadian finance minister Paul Martin and including South African Finance Minister Manuel--that includes many major emerging-market finance ministers, to discuss further reform of global finance and other crisis-avoidance techniques; and
o the proposal by President Bill Clinton, at the 1999 World Bank/IMF meetings, to write off 100 per cent of debt owed the US by the world's 36-poorest countries, adding to momentum towards a millennial "gift," to avoid the extraordinary marginalisation of the "Fourth World" observed in countless recent reports.

12. Associated Press, 29 June 1999.

13. Bank for International Settlements, Central Bank Survey of Foreign Exchange and Derivative Market Activity, 1998, Basle, Switzerland, 1999.

14. Standard Chartered Bank, Annual Report 1998, London, 1999, p.7.

15. M.Camdessus, `Capital Flows, Crises and the Private Sector,' Remarks to the Institute of International Bankers, Washington, DC, 1 March 1999, p.9.

16. See O.Lafontaine and C.Mueller, Keine Angst vor der Globalisierung: Worhlstand und Arbeit fuer Alle, Bonn, Dietz Verlag, 1998.

17. See H.Hitoshi, `The Asian Monetary Fund and the Miyazawa Initiative,' Paper presented to Conference on `Economic Sovereignty in a Globalising World,' Bangkok, 24 March 1999.

18. This latter point is made by J.Stiglitz, `Towards a New Paradigm for Development: Strategies, Policies, and Processes,' Prebisch Lecture, UN Conference on Trade and Development, Geneva, 19 October 1998.

19. D.Moggeridge, Ed, The Collected Works of J. M. Keynes, Vol.25, London, Macmillan, p.149.

20. J.Tobin, `A Proposal for International Monetary Reform,' The Eastern Economic Journal, 4, July/October 1978; B.Eichengreen, J.Tobin and C. Wyplosz, `Two Cases for Sand in the Wheels of International Finance,' Economic Journal, 105, 1995; and J.Tobin, in M. ul Haq, I. Kaul and I. Grunberg (eds), The Tobin Tax: Coping with Financial Volatility, New York, Oxford University Press, 1996. See also D.Felix, `Financial Globalization vs. Free Trade: The Case for the Tobin Tax,' Geneva, United Nations Conference on Trade and Development Discussion Paper 108, 1995.

21 . In 1990, the Bank for International Settlements Committee on Interbank Netting Schemes of the Central Banks of the Group of Ten Countries agreed on the "Lamfalussy Minimum Standards" for regulation of such flows, for example, by taxing transactions that are registered through the Society for Worldwide Interbank Financial Telecommunications (SWIFT, the primary commercial bank clearing mechanism), which now incorporates netting done through the Exchange Clearing House Organization and Multinet International Bank. See Bank for International Settlements, `The Lamfalussy Report: Report of the Committee on Interbank Netting Schemes of the Central Banks of the Group of Ten Countries,' Basle, 1990.

22. P.Garber and M.Taylor, `Sand in the Wheels of Foreign Exchange Markets: A Sceptical Note,' The Economic Journal, 105, 1995; P.Garber, `Derivatives in International Capital Flow,' National Bureau of Economic Research Working Paper No. 6623, New York, 1998.

23. H.Henderson, Building a Win-Win World, San Francisco, Berrett-Koehler, 1996.

24. J.Eatwell and L.Taylor, `International Capital Markets and the Future of Economic Policy,' CEPA Working Paper Series III, Working Paper 9, New School for Social Research, New York, September 1998.

25. P.Davidson, `Are Grains of Sand in the Wheels of International Finance Sufficient to do the Job when Boulders are often Required?,' The Economic Journal, 107, 1997, and `The Case for Regulating International Capital Flows,' Paper presented at the Social Market Foundation Seminar on Regulation of Capital Movements, 17 November 1998.

26. Y.Akyuz, `Taming International Finance,' in J.Michie and J.G.Smith (Eds), Managing the Global Economy, Oxford, Oxford University Press, 1995 and `The East Asian Financial Crisis: Back to the Future,' in Jomo K.S. (Ed), Tigers in Trouble, London, Zed, 1998.

27. See http:\\www.fmcenter.org.

28. Reflecting the concern amongst some Northern parliamentarians that existing financial regulatory measures at national and international scales are insufficient, a motion tabled in the German Bundestag in May 1999 called upon the government to:
take steps to curb short-term speculation on the financial markets, inter alia through introducing a currency exchange transactions tax (Tobin Tax)... introducing special compulsory minimum reserves for non-project-specific bank credits, i.e. for bank loans which are not earmarked for specific purposes (e.g. the purchase of consumer goods, investments, trade finance etc.)... imposing a charge on non-interest-bearing or low-interest cash deposits when importing or exporting capital... enhanc[ing] transparency by ensuring that off-balance sheet transactions (especially with derivatives) are identified and included in risk calculations; tighten[ing] the capital regulations for banks and extend them to all types of financial institution... introduc[ing] compulsory insurance for international loans, so that private risks are insured on a private basis and losses are no longer passed on to the tax payer, as is the current practice... [and] abolish[ing] offshore finance centres, or penaliz[ing] banks and financial institutions which do business with these offshore centres.
PDS Parliamentary Group, `A social and democratic world economic system in place of neo-liberal globalization,' Printed paper 14/954, German Bundestag, Bonn, 4 May 1999.

29. L.Summers, `When Financial Markets Work Too Well: A Cautious Case for a Securities Transactions Tax,' Journal of Financial Services 3, 1989.

30. S.Fischer, Issues in International Economic Integration, Bangkok, 1991, p.20.

31. J.Stiglitz, `More Instruments and Broader Goals: Moving Toward a Post-Washington Consensus,' WIDER Annual Lecture, Helsinki, 7 January 1998.

32. J.Stiglitz, `Using Tax Policy to Curb Speculative Short-Term Trading,' Journal of Financial Services, 3, 1989.

33. For more information, see R.Blecker, Taming Global Finance: A Better Architecture for Growth and Equity, Washington, Economic Policy Institute, 1999.

34. M.Pastor, Capital Flight and the Latin American Debt Crisis, Washington, Economic Policy Institute, 1989.

35. D.Rodrik, `Who Needs Capital-Account Convertibility?,' in Peter Kenen (Ed), Princeton Essays in International Finance, Princeton, Princeton University Press; and V.Grilli and G.M.Milesi-Ferrati, `Economic Effects and Structural Determinants of Capital Flows,' IMF Staff Papers, 42, 3, 1995.

36. F.S.Sta.Ana III, `Why Tax Portfolio Investments?,' Paper presented to Conference on `Economic Sovereignty in a Globalising World,' Bangkok, 24 March 1999.

37. P.Quirk et al, Capital Account Convertibility: Review of Experience and Implications for IMF Policies, IMF Occasional Paper 131, Washington, DC, International Monetary Fund, 1995.

38. CNBC report, `Asia in Crisis,' 29 August 1998. In a subsequent article in Fortune magazine, Krugman elaborated:
In short, Plan B involves giving up for a time the business of trying to regain the confidence of international investors and forcibly breaking the link between domestic interest rates and the exchange rate. The policy freedom Asia needs to rebuild its economies would clearly come at a price, but as the slump gets ever deeper, that price is starting to look more and more worth paying.
P.Krugman, `Saving Asia: It's Time to get RADICAL,' Fortune, 7 September 1998.

39. The impossible trinity is explained in the Mundell-Fleming Model. See J.M.Flemming, `Domestic Financial Policies under Fixed and under Flexible Exchange Rates,' International Monetary Fund Staff Papers, 9, 1962; and R.Mundell, `Capital Mobility and Stabilization Policy under Fixed and Flexible Exchange Rates,' Canadian Journal of Economics and Political Science, 29, 459-468, 1963.

40. A Currency Board system rigidly correlates money supply and domestic interest rates to a country's foreign reserves.

41. As Krugman explained,
Exporters were required to sell their foreign-currency earnings to the government at a fixed exchange rate; that currency would in turn be sold at the same rate for approved payments to foreigners, basically for imports and debt service. Whilst some countries tried to make other foreign-exchange transactions illegal, other countries allowed a parallel market. Either way, once the system was in place, a country didn't have to worry that cutting interest rates would cause the currency to plunge. Maybe the parallel exchange rate would sink, but that wouldn't affect the prices of imports or the balance sheets of companies and banks.
P.Krugman, `Saving Asia: It's Time to get RADICAL,' Fortune, 7 September 1998.

42. M.Khor, `Why Capital Controls and International Debt Restructuring Mechanisms are Necessary to Prevent and Manage Financial Crises,' Paper presented to Conference on `Economic Sovereignty in a Globalising World,' Bangkok, 24 March 1999.

43. A similar provision in relation to government development-related debt exists in Chapter Six of the South African Reconstruction and Development Programme, was endorsed by Business Day and Finance Week in 1994, but was not implemented in practice. For a discussion, see P.Bond, Elite Transition: From Apartheid to Neoliberalism in South Africa, London, Pluto Press, 2000, Chapter One.

44. As Khor (op cit) notes,
Business groups, consumer groups and trade unions in the country supported the measures and the local stock market went up. Foreign investors in the country, through the International Chamber of Commerce, also expressed support. The Financial Times, which represents an independent and conservative opinion within the financial establishment, gave guarded support, stating that there was an argument for temporary capital controls in time of crisis. An editorial noted that some economists argued that controls on short-term capital should be a standard part of policy for emerging markets to avoid destabilising capital inflows and outflows that were at the heart of the Asian crisis.

45. Asian Wall Street Journal, `Acceptance of Capital Curbs is Spreading,' 2 September 1998.

46. Agence France Press, 23 June 1999.

47. Associated Press, 16 September 1999.

48. Jomo K.S., `Capital Controls: Jury Still Out,' Paper presented to Conference on `Economic Sovereignty in a Globalising World,' Bangkok, 24 March 1999.
Likewise, as discussed below, South Africa witnessed a great deal of cronyism and outright corruption during the 1985-95 period of dual currency controls. A lesson is that exchange controls without corruption controls will not resolve the underlying economic development challenge of achieving growth and equity.
49. Blecker, op cit, p.101.

50. The UDI economy is dissected in P.Bond, Uneven Zimbabwe: A Study of Finance, Development and Underdevelopment, Trenton, Africa World Press, 1998, Chapter Five.

51 . A.Seidman, Money, Banking and Public Finance in Africa, London, Zed Press, pp.64-67.

52. R.Riddell, `Zimbabwe,' in R.Riddell (ed), Manufacturing Africa, London, Overseas Development Institute, pp.340,344.

53. J.Handford, Portrait of an Economy under Sanctions, 1965-75, Salisbury, Mercury Press, 1976, p.16.

54. D.Clarke, `The Monetary, Banking and Financial System in Zimbabwe,' in UNCTAD, Zimbabwe: Towards a New Order, Volume 1, Geneva, p.325.

55. All data below are from the Industrial Development Corporation, `Core Economic Indicators,' Sandton, Third Quarter 1999.

56. A parallel power struggle played out in the area of pharmaceutical product pricing in 1999, and thanks to activist pressure South Africa won a great deal of space notwithstanding what the US State Department called its "full court press." See P.Bond, `Globalization, Pharmaceutical Pricing and South African Health Policy: Managing Confrontation with US Firms and Politicians,' International Journal of Health Services, 29, 4, 1999, pp.765-792.

57. H.Hayward, The Global Gamblers: British Banks and the Foreign Exchange Game, London, War on Want, 1999, pp.15-16.

58. For more information on this latter point, see the various documents produced by the Jubilee 2000 South Africa campaign and the Alternative Information and Development Centre, at http:\\aidc.org.za.
The basic point made by Jubilee 2000 is that democratic South Africa was saddled with approximately $20 billion in foreign debt in 1994. That debt should have been considered "odious," which in international law--as first established by the United States in relation to Cuba's odious colonial-era debt to Spain--connotes a status associated with illegality. A case could easily be made that foreign lenders to South Africa have liability, particularly given calls for financial sanctions dating to the 1960s (by the ANC leader Albert Luthuli and US civil rights leader Martin Luther King, Jr). Efforts by the ANC to impose sanctions intensified during the 1980s, and these included demands that no credits to South African parastatals or private-sector borrowers be advanced, for the Reserve Bank used the proceeds of such credit for the apartheid state's hard-currency requirements. Likewise, when in September 1985 the standstill arrangement was imposed, the apartheid state compelled local private sector borrowers to consolidate their foreign debt into a $13 billion standstill net. Hence notwithstanding the fact that private sector borrowers continue to repay apartheid-era foreign debt, the South African state guaranteed such debt repayment (partially through its forward cover arrangements). Hence apartheid-era foreign lenders to South African private sector borrowers were complicit in maintaining funding flows to the state, and vice versa; the Jubilee 2000 movement has demanded that such funding flows continue to originate from private sector borrowers, but instead of repaying the complicit foreign lenders, the money should be repaid to the victims of apartheid, through a democratically-established and -managed reconstruction fund.

59. Foreign Direct Investment is measured as foreign equity purchases of 10 per cent of a company's voting rights. Notwithstanding the large (30 per cent) sale of Telkom to a US-Malaysian consortium in 1997, 1990s FDI inflows have been substantially less than the direct investment abroad of South African firms (mainly mining houses). In 1994, for example, FDI was recorded at R1,1 billion, with SA outward investment R4,2 billion. In 1995, both increased: FDI to R4,2 billion but outward SA investment to R9,0 billion. In 1996, FDI was R3,5 billion and outward SA investment was R4,2 billion. In 1997, FDI rose on the basis mainly of the Telkom and Sun Air privatisations to R17,6 billion and outward SA investment rose to R10,6 billion. In 1998, FDI fell dramatically, to R3,1 billion, while outward SA investment fell slightly, to R9,6 billion. In the first quarter of 1999, FDI was R2,0 billion and outward SA investment was R4,3 billion. In nominal terms, the 1994-99 direct investment flow, therefore, included R31,5 billion FDI and R41,9 billion in outward SA investment, for a net negative R10,4 billion.

60. Drawing in part from D.Harvey, The Limits to Capital, Chicago, University of Chicago Press, 1982, my arguments about the inexorability of the process are published in P.Bond, `Finance Capital,' and `Uneven Development,' in P.O'Hara (Ed), Encyclopaedia of Political Economy, London, Routledge, 1999, pp.345-347 and pp.1198-1200; and P.Bond, `Debt Default' and `Financial Panics and Crises,' forthcoming in M. Gera-Price (Ed), Encyclopaedia of International Political Economy, London, Routledge, 2000.

61. The most recent example of this kind of pressure, as reported by the Singapore Business Times (14 June 1999), involved a visit to Indonesia by IMF official Stanley Fischer:
A policy stand-off is developing between the International Monetary Fund and the Indonesian Democratic Party of Struggle (PDI-P) which has emerged as a strong political force following its strong early lead in the just-concluded general election. The issue is the PDI-P's plan to introduce Malaysian-style currency and foreign exchange controls, which was a key campaign platform for the party led by Megawati Sukarnoputri. Unless the PDI-P backs down and swings more firmly towards a pro-market policy which the IMF is comfortable with, the stand-off will sharpen... But even before preliminary results of the polls came in, the IMF, through its Jakarta-based representative, Kadhim al-Eyd, has expressed concern over the PDI-P's plan for currency controls... The sentiment emerged during private talks last Friday between Mr Kadhim and a noted local economist, Hartoyo Wignyowiyoto... Dr Hartoyo believes the IMF wants to avoid being blamed again should the IMF programme fail under a new government. Following the fall of Mr Suharto, the Fund has come under fire from many local as well as foreign economists for contributing to the economic mess in Indonesia with its strict conditions for loans.

62. P.Bond, `Money, Power and Social Movements: The Contested Geography of Finance in Southern Africa,' in S.Corbridge, R.Martin and N.Thrift (Eds), Money, Power and Space, Basil Blackwell, Oxford, 1994, pp.384-405.

63. P.Bond, `Jubilee as Social-Movement Model,' Focus on Trade #39, Bangkok, October 1999; reprinted in Sunday World, 14 November 1999.