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To: sangkancil@malaysia.net
Date: Sun, 09 Nov 1997 09:27:33
Subject: [sangkancil] Nations, Economists Debate Ways To Stem Sudden Flight of Capital (fwd)
From: pillai@mgg.pc.my (M.G.G. Pillai)
Reply-to: pillai@mgg.pc.my (M.G.G. Pillai)
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From: dfiddle@mn.uswest.net (Dennis L. Fiddle)
Date: 08 Nov 97
Originally Posted On: alt.culture.indonesia
[wsj.com]
November 7, 1997
Nations, Economists Debate Ways [Image]
To Stem Sudden Flight of Capital -----
By MICHAEL M. PHILLIPS [Image]
Staff Reporter of THE WALL STREET JOURNAL
Can anything be done to slow the lightning-fast
movement of capital across international borders?
The Southeast Asian currency crisis has brought
that question back to the surface, as economists
enter into a heated debate over the best way to
throw sand in the wheels of the international
financial system.
Most countries welcome and even encourage foreign
direct investment in factories and businesses,
which represent longlasting commitments. But some
have become leery of financial investments such as
bank deposits, short-term debt securities, stocks
and bonds, which can pull out of a developing
country with the push of a computer button,
creating economic havoc and chaos. That is what
happened in Italy and the United Kingdom in
1992-93, in Mexico in 1994-95, and this year in
Thailand, Malaysia and elsewhere in Asia.
Earlier this week, the leaders of Malaysia,
Indonesia and 13 other developing countries met in
Kuala Lumpur for their annual summit. Amid the
fallout from the Southeast Asian financial crisis,
they registered "deep concern" about the workings
of international currency markets and called for
regulation of capital flows. "A world trading
system cannot rely entirely on market forces," said
Malaysian Prime Minister Mahathir Mohamad, who has
called for a ban on currency trading. "Since the
beginning of time, market forces by themselves have
been exploitative," he said.
Most economists, however, oppose restrictions on
capital movements. They argue that the market is
the best tool for determining how money should be
invested. Global capital markets provide needy
countries with funds to grow, while allowing
foreign investors to diversify their portfolios. If
capital is allowed to flow freely, they say,
markets will reward countries that pursue sound
economic policies and pressure the rest to do the
same.
But every few years, when panic and fear hit the
foreign-exchange markets, those who favor
restricting capital are called upon to present
their ideas. Here are two ideas that are getting
the most attention:
THE TOBIN TAX. Twenty-five years ago, Yale
economist James Tobin introduced the idea of
imposing a tax on foreign-exchange transactions as
a way to slow the movement of capital and prevent
vertiginous currency-market swings. Investors who
can't swiftly change from one currency to another
are less inclined to make short-term investments
abroad; they are too nervous about being trapped in
the foreign currency. Furthermore, speculators can
help drive an overvalued currency into a free fall
-- as happened in Mexico and Thailand -- and prompt
foreign portfolio investors to pull out before
their returns depreciate. Controlling currency
markets can therefore act as a brake on capital
flows.
Prof. Tobin, who later won the economics Nobel
prize for other work, wanted to give market
participants an incentive to look at long-term
economic trends -- not short-term hunches -- when
buying and selling foreign exchange and securities.
Traders must pay a small amount -- say, 0.1% -- for
every transaction, so they won't buy or sell unless
expected returns justify the additional expense.
Fewer transactions mean less volatility and a
thicker buffer between interest rates and currency
movements, the argument goes.
Prof. Tobin's proposal received virtually no
attention from academic economists or policy makers
until last year, when the United Nations
Development Program sponsored a conference on the
tax.
There are several controversial aspects of the
Tobin tax. One is that it would require all major
currency-trading countries -- and perhaps all
countries -- to apply the tax at the same time.
Otherwise, traders could simply shift operations to
tax-free countries.
Another key issue is what to do with the revenues
such a tax would produce, which Prof. Tobin
estimates could reach $100 billion a year for a tax
of 0.1% or 0.2%. Some have mentioned it as a
possible financing source for the U.N. But that
notion drew heavy flak from U.S. conservatives, who
labeled it a "U.N. tax."
A couple of countries have tried Tobin-like taxes.
Brazil imposes a tax on the foreign purchases of
stocks and bonds. The Czech Republic tried a
unilateral fee on foreign-exchange transactions
with banks. Isolating the results is difficult, but
in neither case was there a discernible effect on
the volume of capital inflows.
Overall, however, the prospects for a world-wide
Tobin tax seem remote at a time when both taxes and
market intervention are anathema in many countries.
"I don't think it has much of a chance," admits
Prof. Tobin. "It has a certain popularity every
time something goes wrong in the exchange markets,
but it dies out fairly quickly."
CAPITAL CONTROLS. Right now, the tide of history is
moving in favor of more liberal capital markets,
not more restrictions. The U.S. supports unfettered
flows. The International Monetary Fund is
encouraging member states to guarantee currency
convertibility not just for trade purposes, but
also for financial flows.
But controls, their backers argue, are justified
when the recipient country can't use foreign
capital efficiently. Thailand, for example, allowed
financial institutions to take out fast-maturing
foreign loans. But Thai regulators didn't prevent
banks from investing those funds in risky
real-estate ventures, and now many Thai banks are
insolvent. Had the Thai authorities prevented the
banks from taking out short-term foreign loans, the
situation might have been quite different.
"In many areas the liberalization of financial
markets has gotten ahead of the incentive structure
and capacity to regulate these markets, which is
why people keep coming back to the capital
controls," says World Bank economic adviser Amar
Bhattacharya.
There's a wide range of capital controls that can
be used, including licensing requirements on the
movement of money across borders. But regulating
the outflow of hot money is considered more
difficult than controlling its inflow, and Chile's
relative immunity to the continent-wide spillover
from the Mexican peso crisis has made its inflow
controls the most popular model. In Chile, local
firms that borrow abroad must keep 30% of that loan
on deposit at the central bank -- without interest
-- for a year, even if the loan is for a shorter
duration. That raises the cost of short-term
foreign capital and encourages firms to borrow only
for long-term purposes. Colombia is another
adherent of the Chilean approach.
In another case, Malaysia, facing a surge in
short-term capital, temporarily barred the sale of
short-term assets to foreigners in 1994 to make
sure it wouldn't face a sudden outflow of capital
as well. The policy did indeed precipitate a sudden
reduction in inflows.
Inflow controls may indeed persuade foreigners to
swap short-term investments for longer-term deals,
says economist Carmen M. Reinhart of the University
of Maryland. "These measures can shift the
composition, but have not had a significant impact
on the overall volume of capital inflows that you
get," she says. For many countries, that is exactly
the goal.
Investors, however, find clever ways to restructure
short-term deals to get around the law. Besides,
even Chilean-style restrictions aren't likely to
protect a country against all speculative attacks
if its other economic policies are imprudent.
"Maybe other countries will adopt the same thing
Chile has, but that's not going to defend them
against really outrageous deviations from tenable
market exchange rates," says Prof. Tobin.
[Toolbar]
Copyright _ 1997 Dow Jones & Company, Inc. All Rights
Reserved.
source: http://www.wsj.com
-- dfiddle@mn.uswest.net (Dennis L. Fiddle)All news and information postings are in the public interest. The opinions expressed in the postings are those of the author and do not necessarily reflect the opinion of the sender.
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