by NOAM CHOMSKY
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Liberalising the movements of capital worldwide has proved a powerful weapon against democracy and the social contract, much as was anticipated by the framers of the (Bretton Woods) international economic order in the 1940s. Unregulated capital flow can be used very effectively to undermine attempts by individual governments to introduce progressive measures. For instance, any country trying to stimulate its economy or increase its health spending is likely to find this deviant behaviour instantly punished by a flight of capital.
This capital mobility since the Bretton Woods system was essentially dismantled from the early 1970s has led to what some economists have called a "Virtual Senate" of financial capital that is able to decide social and economic policy just because they can shift funds around. The volume of transactions on world finance markets has grown to the point where it is now estimated in the range of $1,500 billion a day. It has also changed in character: whereas 30 years ago about 90% of foreign exchange transactions was related to the real economy (trade and long term investment), by now well over 90% of a vastly greater sum consists of short-term flows, about 80% less than a week in duration, often much shorter, speculating against currencies or exchange rate fluctuations. Markets have become increasingly volatile and less and less predictable and financial crises are occurring with increasing regularity.
A small tax on short-term speculation was proposed in the early 1970s by James Tobin, Nobel prize-winner for economics. It was conceived as a way of introducing "grains of sand" into the cogs of the speculative process and encouraging long-term productive investment (1). It was not until the 1970s and 1980s that major economies abandoned capital controls. South Korea was compelled to drop them in the early 1990s, widely regarded as a factor in the current crisis. Some countries - Chile, for example - still impose controls to penalise short-term investment.
The Tobin tax has been on the agenda for nearly a quarter of a century now, but the world's major financial institutions simply don't want the Tobin tax and other such ideas to be considered. They have profited enormously from the recent arrangements - even if it means a slowdown in the real economy and major crises. Though they are potential beneficiaries of such a measure, manufacturers and industrialists have also generally opposed it. Presumably they are not unhappy about the way in which financial liberalisation counteracts social policies and exercises a downward pressure on labour costs. So it is no surprise that a major book about the Tobin tax (2) published two years ago was boycotted by the press, under pressure from international bodies and financial circles - notably American, including, it has been reported, the Clinton administration.
Concealing alternative economic measures becomes necessary because public opinion is strongly opposed to policies of "free trade" - a misleading concept, when we take a closer look - and financial liberalisation. In autumn 1997 the Clinton administration was obliged to back down on attempts to secure Congressional agreement for renewal of the so-called "fast track" procedure for negotiating trade agreements (3). Politicians had come under substantial popular pressure from trade unions and other constituencies, and the White House realised it would be impossible to obtain majority support.
Also underway at the time were preparations for the Multilateral Agreement on Investment (MAI) which has been under negotiation behind closed doors since 1995 within the Organisation for Economic Cooperation and Development (OECD). The mobilisation of citizens' movements, particularly in Canada, finally was able to break the "veil of secrecy", as it was described by the former Chief Justice of the Australian High Court when the barriers were broken early this year. It has delayed and may now have contributed to undermining the project (4).
However, that's not the end of it: negotiations are certain to resume in one way or another, perhaps within the World Trade Organisation (WTO), but more probably still farther away from the public gaze. One idea advanced by supporters of financial liberalisation is that the Articles of the International Monetary Fund (IMF) should be changed to incorporate something like MAI principles as conditions for credits. The "advantage" of such a solution is that the IMF operates out of sight and is unaccountable to the public.
(This article is a transcript of an interview in April 1998 edited by Normand Baillargeon, who is also responsible for the footnotes.)
* Professor at the Massachusetts Institute of Technology (MIT), Boston, USA.