IV
If the rates of return in
the two regions are identical, then finance, whether originating in
the advanced or backward capitalist countries, would tend to move to
the former, which constitutes the bastion of capitalism. Therefore,
when an underdeveloped country gets caught in the vortex of globalised
finance, it has to ensure that this "natural" tendency of
finance to flow to the metropolis is kept in check through the counteracting
offer of a higher rate of return in its domestic economy; and it does
this by jacking up its domestic "real" rates of interest.
In other words, the sheer fact of an underdeveloped economy getting
opened to free (or even relatively free) financial flows necessitates
an increase in the real interest rates even to keep capital movements
exactly as they were prior to the opening up. The higher cost of borrowing
discourages productive investment and reduces the level of aggregate
demand through this channel; it also undermines the viability of small
units which cannot afford to pay high rates of interest on the credit
needed to carry on their day-to-day production. It thus has a contractionary
effect on the economy both from the demand and supply sides.
What is more, it accentuates
the fiscal crisis of the State by raising the cost of servicing government
debt. The magnitude of interest payments in the government budget shows
a steep increase. This increase cannot be met through higher taxes;
on the contrary, a "liberalised" regime of the sort favoured
by international finance capital is characterised simultaneously by
a lowering of the tax-GDP ratio. The government in such a regime has
to forego substantial revenue through a reduction of import duties,
and, since raising excise duties in a situation where import duties
are being lowered, is both stupid (as it deliberately discriminates
against domestic producers and in favour of foreign producers) and untenable,
there is a relative reduction in overall indirect tax revenue. Since
any increase in corporate taxes would frighten off speculators (apart
from keeping off direct foreign investment whose enticement becomes
the overriding objective of a "liberalised" economy), this
too is eschewed; indeed there is a reduction in such tax rates to boost
the "confidence of investors". And since personal income tax
rates cannot move in a manner totally opposed to that of corporate income
tax rates, the overall tax-GDP ratio goes down precisely when the government's
interest payment obligations mount. The consequence is an accentuated
fiscal crisis, because of which government investment, social expenditure
(including subsidies to the poor), and development expenditure get curtailed.
This contributes further to a contraction of the economy, apart from
producing a crisis of infrastructure (which becomes a further excuse
for emphasising the need to entice direct foreign investment), and accentuating
poverty. Opening up an underdeveloped economy to the unfettered movement
of finance therefore has the effect of enforcing a contraction of the
economy.
We do not have to go far for
a confirmation of this [1]
. In India itself, even though the process of
financial liberalisation is not complete, the 1990s have seen a sharp
increase in the real rates of interest, which at present are way above
the rates prevailing in the metropolis. While the real rate of interest
in the advanced capitalist countries today is close to zero percent,
in India it is about 9 percent. The substantial increase in the interest
burden of the government, the reduction that has taken place simultaneously
in the tax-GDP ratio, and the accentuated fiscal crisis of the State,
resulting in reduced public investment, reduced development expenditure
and increased rural poverty, are all visible phenomena in our own country.
But contraction of this kind
is not the only consequence of financial liberalisation. A higher domestic
interest rate, we have seen, becomes necessary in a backward country
merely to neutralise the pull of the metropolis. Despite this overall
neutralisation however there would still be bursts of movement of finance
into and out of the country.Consider the situation when finance flows
in. This would, other things remaining unchanged, lead to an appreciation
of the exchange rate, which would result in a de-industrialisation of
the economy by making imports cheaper. The burst of inflow of finance
in other words would have led to an increase in the country's short-term
debt, incurred ironically for financing its own deindustrialisation.
On the other hand when finance flows out, since any depreciation of
the exchange rate would exacerbate inflation and give rise to expectations
of further depreciation, inducements have to be quickly created for
finance not to flow out, and this often entails an IMF bail-out package
with conditionalities such as denationalisation of the country's assets.
Quite apart from the overall contractionary effects therefore, the country
loses out both when there are financial inflows and when there are financial
outflows, both on the swings and on the roundabouts.
Of course when finance flows
in, the government may prevent the exchange rate from appreciating,
and may instead add to reserves. If these reserves are simply accumulated,
then this may provide some cushion in a period of outflow; but if these
reserves are used for adding to consumption (which typically would be
of the rich) through larger imports then again there would be no cushion
when an outflow occurs. The same would be the case if the reserves are
used for the more worthwhile purpose of increasing investment. The country
in such a case would be borrowing short-term funds to make long-term
investments, and would be borrowing in foreign exchange to invest in
assets that do not necessarily earn any, both of which are factors contributing
to the economy's vulnerability. This last scenario is what was enacted
in East Asia where banks, under newly-liberalised financial regimes
in the 1990s, borrowed abroad to finance investment in the non-exchange
earning sector. A crisis had to be a necessary fall-out. The crucial
element underlying the East Asian crisis in other words was not the
so-called "crony capitalism" characteristic of those economies
(as if capitalism elsewhere is free of "cronyism"), but the
liberalisation of the financial sector. It is this which constituted
the fundamental shift in the East Asian setting, and underlay the crisis
[2]
.
In several Latin American
countries during the last decade, for improving "investors' confidence"
and preventing panic outflows, governments have committed themselves
to maintaining the exchange rate visavis the US dollar, occasionally
even bringing in legislation to this effect. But since at these exchange
rates imports have outcompeted domestic production, the country has
had to borrow from abroad to finance its own de-industrialisation; and
what is more, for being able to continue borrowing, higher and higher
interest rates have to be offered, which inevitably stifles domestic
production and destroys the finances of the government
[3] . In short, the point is not what particular policy a government
should follow in a regime of financial liberalisation; the point is
financial liberalisation itself. The real trap lies not in the meachanism
for promoting "investor confidence", but in having to promote
"investor confidence" at all. And international finance capital
in its new incarnation relentlessly pursues, no doubt with local support,
the task of pushing every third world country into this trap. Once such
a country gets caught in the vortex of international financial flows,
no matter what particular policy it pursues, the tendency is for a progressive
atrophy of its sphere of production, and a progressive denationalisation
of its domestic assets. This fact constitutes the second implication
of the emergence of the new kind of international finance capital.
