The Free Flow of Money
Henwood, Doug
Countries that commit themselves to a policy of free capital flows must realize that they've put themselves at the mercy of these often whimsical, unaccountable forces. As the twentieth...
...Finally, the stock market boom was much more violent in Latin America-a bubble waiting to burst, as the Mexican collapse revealed...
...As usual, the tightness of money is relative...
...The current nized into nations, each with its own curren- account measures dealings in the present: imports and cy and central bank...
...Banks made loans and kept them on their books until they were repaid...
...direct investment abroad in 1994, in million dollars...
...1995...
...And who are the international holders...
...The United States engineered a temporary departure from monetary stringency, giving Mexico a total of $50 billion in emergency loan guarantees...
...The financial panic and the harsh terms of the bailout have already resulted in nothing less than a full-blown depression, one whose end is hard to foresee...
...75 (August, 1995), pp...
...166, 168...
...FDI...
...The current and capital accounts are, in a sense, mirror images of each other...
...But the moment the devaluation was announced on December 20, 1994, panicky investors, worried that their investments in Mexican stocks and bonds were eroding in value, pulled their money out of the country...
...Since 1984, when it helped create the Korea Fund, the International Finance Corporation (IFC)-the World Bank's inhouse investment bank-has been eagerly promoting the development of "country" funds, which package together baskets of stocks for easy sale to foreign investors...
...There are differences, of course...
...As of the early 1990s, there were 37,000 transnational corporations, two-thirds based in the First World, holding a total of $2 trillion in foreign direct investment...
...Why would what seems like the equivalent of money falling from the sky be a problem...
...Latin America also relied more heavily on volatile portfolio inflows than on FDI...
...Such theory dominated financial economics in the 1970s and the early part of the 1980s, but it's taken serious blows from economists like Robert Shiller...
...Of course, there's plenty of vicious repression of labor and exploitation of women in Korea...
...Under the Brady debt-restructuring plan established in 1989, Latin American bank loans were transformed into bonds...
...As the Bank for International Settlements (BIS) put it, "In this sense, the foreign capital going to Asia has been 'invested' in real assets...
...Mexico--hardly a country where labor and nature have flourished, or egalitarian relations between the sexes prevailed either-has followed all the orthodox economic prescriptions...
...But when they plow en masse into and economic colonization...
...I review efficient market theory and its dethronement in Wall Street (forthcoming from Verso...
...That follows upon the 1980s depression, itself caused by a bursting of the bank-lending bubble...
...direct investment...
...Privatizations of state enterprises have thrown that they numb the minds of peo- heaps of new shares onto Latin America's financial markets...
...lishment of new businesses or the acquisition of existing ones, while portfolio investment is the acquisition of financial assets such as stocks and bonds...
...Debts owed to banks were transformed into bonds, which can be easily traded in the financial markets...
...Nevertheless, it's clear that U.S...
...88-116...
...Mutual funds are sold mainly to well-off individuals, with institutional investors holding a much smaller share...
...Again, a comparison with Asia is revealing...
...The peso, however, lost less than half that much against the dollar, suggesting that the Bank of Mexico spent its reserves supporting the currency...
...Since global product is about four times the finance trade, but inventive bankers also used currency U.S...
...Trade is probably more easily comprehensible than finance...
...Over the whole time period, Korea consistently outinvested Mexico...
...Washington: IMF for the Per Jacobssen Foundation, 1994), pp...
...As the case of Mexico suggests, the integration that comes with FDI is often accompanied by vast portfolio flows...
...One percent of transnational corporations own half of the total stock of foreign assets, and the largest 100 alone hold 14% of the total...
...The obvious corollary of the concentration of investment flows is that most countries are left starving for capital...
...An active market in trading so-called Brady bonds quickly developed in the region in the early 1990s...
...This FDI is highly concentrated...
...People also sometimes think of flows of money as somehow extraneous to the real business of trade-but, under capitalism, people produce and trade for the purpose of augmenting their stash of money...
...semiconductor stocks and into con- the intimate involvement of state, financial markets, sumer nondurables...
...FDI in the developing countries of the Western Hemisphere...
...Central banks can be quite generous in a pinch-under the right circumstances, of course, such as an approaching presidential transition...
...a country running a surplus on its current account has to park it somewhere, typically in assets abroad...
...This upward pressure on prices can drive up domestic inflation, and the pressure on the currency can price exports out of global markets...
...bailout package, Mexico's foreign-exchange reserves had dropped to $2 billion from $26 billion-meaning over $20 billion was squandered maintaining the peso's comforting but falsely high value throughout 1994, and trying to contain the damage after it broke...
...Finally, the peso crisis of 1994-95 revealed the splendid contradictions in the acclaimed model...
...Foreign investment was deemed acceptable only if it fit in with national economic plans...
...By convention, income on investeconomy is through the financial markets-through, ments, such as dividends and interest, appears in the N REPORT ON THE AMERICAS 12REPORT ON TRANSNATIONAL INVESTMENT current account, since this is the income "earned" from the services of capital assets like stocks and bonds...
...The microeconomic elements are well known: trade liberalization, deregulation and privatization in the domestic market, freer financial markets and the dismantling of controls on inward foreign investment...
...merchandise trade balance for 1994 (full year) and 1995 (first half, at annualized rate), and the share of total trade (imports plus exports) in 1994...
...For a review of the official sales pitch for the bailout see Doug Henwood, "The Contract With Mexico," Left Business Observer, No...
...4 etween 1990 and 1994, $524 billion in capitalforeign direct investment and portfolio investment combined-flowed into what are optimistically called the developing countries, feeding the emerging-market boom...
...Since the borrowed funds have gone mainly to pay off old debts, Mexico will emerge from its bailout in deeper hock than before...
...3. International Monetary Fund, International Capital Markets: Developments, Prospects, and Policy Issues (August, 1995), pp...
...By contrast, a country running a deficit has to rely on an inflow of foreign capital to pay its bills...
...In a situation of equilibrium nominal wages, exchange rate appreciation will result in too high a wage level...
...Next are Brazil and Mexico, which together with Bermuda account for over half...
...A handful of countries within the region received the lion's share...
...Trading in foreign currencies, for the total value of all U.S...
...The capital surge in Latin America can also be explained in part by the more cosmopolitan investment styles of Northern portfolio managers...
...Five Latin American countries make it into the list of the top 20 capital recipients: Mexico, Argentina, Brazil, Venezuela and Chile...
...So, the "resolution" of the Latin American debt crisis created some of the securities-Brady bonds and stocks-that formed the bedrock of financial markets in debtor countries and led to the current boom of investments in the so-called emerging markets of Latin America...
...Most people who play on Wall Street and similar venues around the world would agree that markets overreact, often in extreme ways...
...Or, as de la Dehesa concludes, "in a world environment of freedom of capital movements...developing countries will be subject to severe economic discipline by potential investors...
...In most cases, little new capital was created...
...The similarities, however, are striking...
...authorities treat any purchase of 10% or more of a foreign company's stock as a direct investment, because that large a share is considered to constitute a significant business relation, and not a purely paper transaction...
...To resort to the cliched analogy, the household that makes more than it spends banks the difference while the one that spends more than it earns borrows it...
...8 That lesson was forgotten in the celebration of private capital flows over the next couple of years...
...It nosed out China, whose economy is twice as large, and dwarfed South Korea, whose GDP is about the same as Mexico's, by almost two-to-one...
...In other words, the Bank accommodated fleeing investors with overvalued pesos, exchanging dollars for pesos at a rate they must have known was unsustainable...
...Despite the United States' loss of world market if their complexity and cosmopolitanism were someshare, the dollar is still the dominant currency of inter- thing new...
...11 Vol XXIX, No 4 JAN/FEB 1996REPORT ON TRANSNATIONAL INVESTMENT and Trade (GATT) focused public attention on mechanisms usually obscured from public view...
...On the eve of the U.S...
...of money is relative...
...Board of Governors of the Federal Reserve System, Balance Sheets for the U.S...
...levels to nearly 30%, while Mexico's gap with its northern neighbor has hardly changed, bobbing around the 1215% level...
...This was not so in Latin America...
...Bondholders, however, can sell in an instant...
...The Dutch traded not only shares, but tion, most portfolio managers-the men and women futures and options as well...
...Yet, despite all the obvious changes over the last 100 years, the economic world of the 1990s really looks more like the late nineteenth century-an era of free trade, free capital flows, tight money, and no unions...
...they invented something called efficient market theory to prove the markets were rational...
...Foreign direct investment (FDI) is mainly the province of giant transnational corporations...
...Latin America has followed this general pattern over the past decade, as commercial and development-bank lending to Latin American governments has been eclipsed by private capital flows into the region's plants and stock markets...
...worry about inflation interests in the counin stock prices, try, lost 20% of its "value between its January 1994 peak (the first month of the Zapatista uprising in Chiapas) and Zedillo's inauguration in December of that year...
...While it's certainly the case that the markets national trade and finance, so this number captures a move faster than ever before, capitalism has from the very large share of the global money action...
...The gold standard is out too, replaced by the dictates of central bankers who preach orthodox financial principles like low inflation and tight money...
...Here Japan is the prototype...
...Smaller and poorer countries barely register on the charts-literally in some cases, since capital flows aren't even published in standard International Monetary Fund (IMF) reference volumes for Paraguay or El Salvador...
...Another efficient response to capital-flows shocks is the establishment of factor market flexibility, both for labor and capital," he said...
...dollars is conducted, is over $1 trillion a People often treat modern global financial markets as day...
...pie who contemplate them...
...While the $3.6 trillion U.S...
...That's three times the annual average that prevailed during the pre-crisis banklending boom years of 1977-82, and 12 times the levels of 1983-89 [see Table 1...
...The financial bubble produced no surge in real investment, but the bursting has caused an investment collapse...
...Despite the conservativesounding name, these are essentially pools of capital contributed by institutions and wealthy individuals that are handed over to a small circle of managers who are given license to borrow heavily and speculate nervily...
...In its 1995 annual report, the BIS makes the terms of the financial markets clear: The heavy influx of foreign capital into emerging-market economies in the 1990s took place against a background of broadly based economic reform...
...1 0 As Mexico showed, reward can turn into punishment overnight...
...International Finance Corp., Monthly Review of Emerging Stock Markets, August, 1995...
...Among the earliest shareresponsible for investing this money-display the emo- issuers were the Dutch and English East India tional instability of teenagers...
...Therefore, the monetary and fiscal authorities have to offset the inflationary pressures of the inflow by tightening the money supply...
...The development of stock markets was about the transformation of ownership-from privately or nationally held firms into internationally held ones...
...A sudden inflow of funds also creates a sudden demand for assets with no comparable change in supply...
...economy through global production networks...
...These investment pools are so huge that a few tenths of a percentage point could buy up an entire national stock market...
...These hedge funds often move like lightning, take giant bets, and invest in nearly anything...
...Detailed figures for direct investment are available, however...
...Capital inflow...
...See, for example, his Market Volatility (Cambridge: MIT Press, 1989...
...This translates into an average of over $105 billion a year...
...3 The gang with the worst reputation as portfolio terrorists are the hedge funds...
...There are -is the highest two major kinds of private transactions: direct virtue in the investment and portfoworld of lio investment...
...These countries, plus Colombia, accounted for 95% of the inflow into Latin America in 1992...
...Trade, after all, is about tangible things moved across borders, whereas capital flows are barely visible-mere blips on fiber-optic cables...
...1, p. 10...
...The capital account hile we hear constantly about economic glob- measures transactions in long-lived assets, like stocks, alization, politically the world is still orga- bonds, factories, and entire corporations...
...Mexico's level was around 4% from the 1960s through the 1980s, and rose to nearly 8% in the early 1990s...
...In theory, free capital flows are supposed to maximize human happiness, or at least our monetary incomes...
...Mutual-fund companies, which collect money deposited by individuals and invest it in an array of financial assets, also rode the early 1990s boom by creating country, region, and general emerging-market funds...
...Their volatile changes of Companies, which were raising funds to make good on heart may not have that much effect if they're merely their royally granted trading licenses-illustrative of shifting out of U.S...
...Computed from data in World Bank, World Development Report 1995 (New York: Oxford University Press, 1995), appendix tables 1 and 3. 2. UN Conference on Trade and Development, Programme on Transnational Corporations, World Investment Report 1993 (New York: United Nations, 1993), pp...
...Adding the small tax havens of Panama and the British Caribbean Islands to the total accounts for nearly threequarters of U.S...
...Old-style colonialism is out, replaced by the joint reign of the multilateral financial institutions and Harvardand Oxford-educated technocrats in the so-called Third World...
...The list is rounded out by Argentina, Chile, Colombia, the Bahamas and Venezuela...
...The lesson is clear: countries that commit themselves to a policy of free capital flows have to realize that they've put themselves at the mercy of these often whimsical, unaccountable forces...
...A nice symmetry, really...
...It was not over, however, for the poorest countries and regions for which capital inflows were almost unimaginable...
...The U.S...
...Direct Investment Abroad: Detail for Historical-Cost Position and Related Capital and Income Flows, 1994," Survey of Current Business, No...
...Even so, official estimates of capital flight from the Third World during the 1970s and 1980s are around $300 billion, meaning that the capital flood brought in is only a bit more-less, if inflation is taken into account-than was drained from the poorer countries during the decades of heavy borrowing and the ensuing debt crisis...
...9 Another drawback of reliance on portfolio investment is its fickleness...
...U.S.-based funds predictably play the biggest role in Latin America...
...The debt crisis was declared over for the banks, for those middle-income countries that had seen an influx of foreign capital, and as a threat to the international financial system...
...As anyone familiar with financial markets can tell you, these perceptions are as much a matter of feeling as analysis...
...Economy, 1945-93, C.9 release (September 20, 1994...
...Pension funds are huge pots of retirement savings under professional management that are typically invested in stocks and bonds...
...these surpluses are "recycled" by being invested abroad...
...FDI is in other industrial countries, which may surprise those who think that low wages are the prime consideration when setting up abroad...
...U.K.-based pension funds have long been highly internationalized, with 20% of assets held overseas in 1993...
...If Mexico is neoliberalism's prototype, the model is obviously a killer...
...As the twentieth century winds down, futurists evoke a wondrous world of hi-tech gadgetry and freedom...
...investors dominated the rush into Mexican and other Latin American stocks...
...Korea has rapidly developed because it violated most of the rules of textbook economics, as preached at the Massachusetts Institute of Technology (MIT) and the IMF...
...The country has long run a huge surplus on its trade with the outside world...
...The U.S...
...transnational corporations in any part of the world [see Table 2, p.15...
...While the most visible sources of the capital flow are the corporations and institutional portfolio managers of the First World, another important source-especially for Latin America-is repatriated flight capital...
...The surge into Mexico drove up the peso's value beyond sustainable levels, so some devaluation was in order...
...trading in U.S...
...In the last five years, Asian countries saw an increase in their already high levels of real investment, unlike Latin America, whose gross domestic investment levels actually declined as a share of GDP Table 2 between the late 1980s and the mid-1990s...
...Flows are regulated by investor perceptions of the "soundness" of a country-political stability, its adherence to stringent orthodox financial principles, and the docility of its workers...
...In the 1994 Per Jacobssen lecture, an annual talk sponsored by a foundation housed at the IMF, the Spanish banker and economist Guillermo de la Dehesa mused on the dangers of plenty...
...Of course, flight capital was drawn back for the very same set of reasons that motivated First World investors-the fervent embrace of neoliberalism in most of the Third World and the prospect of enormous profits...
...Mexico is a wonderful case for the study of how that discipline works...
...One of the principal ways by exports, or the exchange of money for goods and serwhich a world of nations is woven into a single world vices across borders...
...Capital outflow...
...Those developing countries that have received significant capital flows have put their windfalls to different uses...
...l Mexico's place at the top of the capital-inflow charts is remarkable in comparison to other major countries...
...Not only were coins exchanged to a week...
...But, of course, it's difficult to get ahead by serving as your rich neighbor's sweatshop...
...officials themselves admitted-precisely because a visible Mexican collapse would lead scores of countries to rethink their devotion to neoliberalism...
...2 FDI, whatever its virtues or vices, is reasonably stable...
...retirement pool currently has only 6% of its assets abroad, this is an eightfold increase over the 1980s...
...Department of Commerce, Bureau of Economic Analysis, "U.S...
...A great deal of debt was also swapped for stock in both existing private and newly privatized firms...
...It was the pioneer country for the Brady restructuring...
...Obviously, then, much restrictions on usury...
...In the process, they wreak havoc on financial markets...
...166-167...
...Direct investment is the estabfinance...
...Vast privatizations in recent years throughout the Third World have thrown heaps of new shares onto financial markets...
...trade accounts have been deep in the red since the early 1980s, when the country's imports of goods and services began to outweigh its exports...
...From 1990 to 1993, the top five countries-Mexico, China, Argentina, Korea and Indonesia-accounted for almost half the total capital flow into the developing world...
...142-145...
...instead, they sell them for cash and then plow the money into some new asset...
...Once the shares were Mexico one month only to desert it the next-as hap- issued, the original buyers were free to sell them, pened in the Mexican peso crisis of 1994-95-they can thanks to the existence of an organized stock exchange...
...Over 70% of U.S...
...raditionally, banks were the principal source of external financing in the Third World...
...9. Bank for International Settlements, Annual Report 1995, p. 142...
...therefore, the appropriate response should be policies to drive down wages-in order to save jobs...
...A translation of this technocratic language for a lay audience would read: "To respond to capital flows, markets for labor and capital must be minimally regulated, to assure that wages and interest rates adjust quickly to circumstances...
...To put that outset been a global system, and many of the instruinto context, the U.S...
...After these six, the flows decline sharply...
...This allowed the banks to sell these debts, and get them off their books...
...5. Calculations based on figures presented in Guillermo de la Dehesa, The Recent Surge in Private Capital Flows to Developing Countries: Is it Sustainable...
...they take time to evaluate potential borrowers, and once they've extended a loan, they're sort of stuck...
...If the model was intended to make a small circle of foreign investors and well-placed Mexicans very rich, then it must be counted a great success...
...Source: Survey of Current Business, various issues...
...central bankers rarely seem to worry about inflation in stock and other financial-asset prices...
...Despite attempts by apologists for neoliberal policies to blame bad Mexican policies for the country's present crisis, it was the prime model for neoliberal restructuring of Latin America...
...8. World Bank, World Debt Tables 1992-1993, Vol...
...4. IMF, International Capital Markets: Development, Prospects, and Policy Issues (Washington: IMF, August, 1995), pp...
...An important supporting element in many countries was the use of the exchange rate as a nominal anchor, in the form of either a fixed rate or at least of a relatively firm rate or band backed up by tight monetary policy...
...These top ten account for over 90% of U.S...
...porations, can be traced to seventeenth-century Despite their reputation for sobriety and sophistica- Amsterdam...
...For Latin America, U.S...
...The original buyer of a new bond can be thought of as making a loan, but very few bond buyers hold these debts for very long...
...Its crisis in 1982 marked the beginning of the generalized debt crisis, now officially declared over...
...As recently as 1989, institutional investors had only 2.5% of their 14 NACIA REPORT ON THE AMERICAS NACIA REPORT ON THE AMERICAS 14REPORT ON TRANSNATIONAL INVESTMENT assets in emerging markets...
...Though the Bank would never say it this way, such inflows are, for at least the short term, selffulfilling, because a Vol XXIX, No 4 JAN/FEB 1996 15 Vol XXIX, No 4 JAN/FEB 1996 15REPORT ON TRANSNATIONAL INVESTMENT flood of foreign money (on a scale often dwarfing that of domestically generated funds) is guaranteed to bid up prices-and rising prices generally attract new attention and new money...
...Money is kept tight so that wages and consumer prices don't rise...
...trade patterns-not surprising, since the two are intimately related in a world dominated by the investment and production decisions of several hundred transnational firms...
...A cross-regional comparison is instructive in this regard...
...The Free Flow of Money 1. Halves isn't really the right word to use...
...Despite the tough conditions imposed by public institutions like the IMF and World Bank, their terms are still easier than those offered by private markets...
...Wage flexibility will be needed not only to restore the balance but to avoid any negative impact on employment...
...depend on the operation of these essentially unhindered A country's financial relations with the outside world markets, they are worth a bit of scrutiny, can be divided into two basic accounts, the capital account and the current account...
...This changed, however, when-in the aftermath of the debt crisis of the early 1980s-bond and stock markets replaced banks as the key source of capital...
...In South Korea, for example, foreign investment-portfolio and direct combined-has averaged less than 1% of the country's total fixed investment since the 1960s...
...If wages are right to begin with (which they probably are, if markets are unregulated), then capital surges can drive them up above desirable levels...
...GDP, the wires burn up the equivalent of total transactions to evade Aristotelian, Christian and Islamic world income in about a month...
...The countries the World Bank calls "low and middle income" account for 85% of the world population, but only 21% of world income...
...So it's safe to say that Mexico was, on balance, harmed by capital inflows rather than helped...
...Here the United States is a good example...
...Cut wages to make the country's products more attractive to foreign buyers...
...Vol XXIX, No 4 JAN/FEB 1996 13REPORT ON TRANSNATIONAL INVESTMENT Other major players in emerging markets include pension funds and hedge funds...
...Mexico, for instance, is a leading recipient of U.S...
...Profit is a measure of social return: maximize profit and you guarantee fresh investment and sprightly growth...
...Liquidity-"the quality of being able to 'touch your money' at short notice," as economist Joan Robinson put it-is the highest virtue in the world of finance...
...At the top of the list is Bermuda, a favored tax and regulatory shelter for the insurance industry, which alone accounts for a quarter of U.S...
...Likewise, modern stock markets, of that turnover has nothing to do with "real" economic which facilitate the trading of ownership shares in coractivity, yet it is not without consequences...
...Unfortunately, the numbers for portfolio investment are very spotty...
...production in a bit more than example, is ancient...
...Cut wages to make the country more attractive to investors...
...As the BIS says, "not only is foreign direct investment more stable in itself, but it can also help to stabilize the current account over time by expanding capacity in the tradable goods sector...
...6. U.S...
...A third difference between the regions was that most FDI in Latin America was the result of debt/equity swaps and privatization, which mark a shift of ownership with little new capital formation...
...Academics have long denied the existence of fads and bubbles...
...7. Bank for International Settlements, Annual Report 1995, pp...
...Direct Investment and Trade TOTAL Canada W Europe Japan Latin America Brazil Mexico Venezuela China Hong Kong S Korea Singapore Taiwan US Direct Investment (Millions $) 612,109 72,808 295,936 37,027 114,985 18,977 16,375 2,978 1,699 11,986 3,612 10,972 3,882 Trade Balance Return 10.6% 6.8 9.6 7.8 14.0 25.4 16.1 13.1 4.6 13.9 9.4 14.5 15.0 1994 -166,099 -16,246 -16,563 -67,318 3,505 -769 688 -4,410 -29,545 1,722 -2,617 -3,189 -10,590 1995 -188,180 -22,420 -20,778 -68,940 -13,114 2,670 -19,428 -5,306 -30,052 4,602 1,104 -3,392 -8,844 Share of Total Trade 1994 100.0% 21.0 21.3 14.6 15.4 1.4 8.6 1.1 4.1 1.8 3.1 2.4 3.7 Table shows U.S...
...Rigidities" like currency controls, laws against foreign investment, or even unions and labor standards may block the natural flow of capital to its optimal use, which always means its most profitable use...
...By contrast, credit seems easy when put to financial ends, and Outside the New York Stock Exchange...
...The scale of capital flows is so vast, and their turnover so rapid, Traders at the Mexico City stock exchange...
...Instead of floating The tightness gently southward, the peso sank like a stone...
...so that wages and The Mexico Fund, a basket of Mexican consumer prices stocks packaged for don't rise, while trading on the New York Stock Exchange central banks rarely that is a proxy for foreign (mainly U.S...
...Not since that old order broke apart in 1914, with the onset of the First World War, have unions been so weak, and money and goods moved so freely across borders...
...Liquidity has become increasingly valued over longterm relationships...
...If its real purpose was to promote development, it has failed...
...by 1993, they had more than quadrupled that...
...capital investment is most important...
...do some real damage, both on the upswing and the Throughout history, the trading of existing shares has down...
...Korea heavily regulated its domestic financial markets, and restricted foreign capital flows...
...And over the last 30 years, South Korean incomes rose from about 5% of U.S...
...Since the entire fate of nations now seems to dwarfed the issuance of new shares...
...gross domestic product (GDP) is ments, thought of as quintessentially modern, are actuabout $7 trillion-meaning the CHIPS wire turns over ally as old as the hills...
...For Latin American nations, the shift from public to private sources, and within these private sources, from banks to financial markets, makes for a harsher, more volatile world...
...this deficit is covered by borrowing abroad...
...Moreover, investing firms were expected to transfer technology and skills...
...U.S...
...There are thought to be 1,000 of these hedge funds worldwide, managing some $75-100 billion-but since they borrow $10 for every $1 they have, they probably control $750 billion to $1 trillion, with minimal if any regulation...
...By contrast, Asian FDI funded joint ventures as well as entirely new enterprises...
...It was the leading recipient of capital inflows, as well as the model country for the neoliberal experiment celebrated by develNA6IA REPORT ON THE AMERICAS 16REPORT ON TRANSNATIONAL INVESTMENT opment banks and the business press...
...Portfolio investment isn't...
...6 Investment patterns correlate broadly with U.S...
...Augug...
...Latin America accounts for about two-thirds of the remainder-as well as for some of the highest profit rates for U.S...
...Portfolio investment in particular swung from a large outflow (a symptom of capital flight) to a gigantic inflow...
...In fact, in the following year's World Debt Tables, the World Bank enthused about the benefits of portfolio capital flows...
...moods can shift from enthusiasm to despair in an instant...
...the top 20 accounted for 83%.5 About the only low-income countries with market access are China and India, because of their huge populations...
...Capital began exiting Mexico well before Money is kept tight the peso's collapse...
...In a global context, the South is thought to be rich with possibility, and the North rich with surplus capital, and the trick is to bring the two halves of the world together.' In recent years, people have paid more attention to the flows of goods than capital, no doubt because the negotiation and ratification of treaties like the North American Free Trade Agreement (NAFTA) and the Uruguay Round of the General Agreement on Tariffs Vol XXIX, No 4JAN/FEB 1996 11 0 0 Doug Henwood is editor of the Left Business Observer, and the author of Wall Street forthcoming from Verso Press...
...FDI because of its (subordinate) integration into the U.S...
...The elimination of budget deficits and tighter monetary policies were the main pillar of macroeconomic adjustment...
...68 (March, 1995...
...7 sis, said the World Bank in its 1992-3 issue of World Debt Tables, was that "domestic resources and policy, not external finance per se, are the key to economic development...
...bailout of Mexico was so urgent-as U.S...
...Table 1 Capital Flows into Developing Countries (Annual averages in billions) 1977-82 1983-89 1990-94 Net inflows 305 8.8 104.8 FD + portfolio 07 19.8 82.6 FDI 11.2 13.3 39.1 Portfolio -10.5 6.5 4 43.6 Other 29.8 -11.0 -12.2 Source /MF Intemational Capital 0,r...
...Average volume on the New that is, the exchange of assets like stocks, bonds, curYork Clearing House Interbank Payment System rencies, and even more exotic instruments, all at prices (CHIPS), the computer network over which the world's that change in the blink of an eye...
...Developmrnent, Prospects, and Polcy suM- y ashington IM...
...Countries like Ecuador, Guatemala and Bolivia each account for well under 1% of U.S...
...Liquidity- The capital account is "the quality of itself divided into two "the quality of major components: being able to official transactions, or those involving gov'touch your money' ernments and central at short notice" banks, and private transactions...
...the return on the investment (income divided by investment position), the U.S...
...But capital inflows have their own drawbacks...
...calling its economic history a success must concede vast social and ecological costs...
...This forces up prices in the target country, and can drive up the country's currency as well...
...Money capital seems to thrive on frequent changes in its form, from shares in IBM to a forward contract on the Malaysian ringitt...
...It thereby prevented an isolated panic from metastasizing into a general collapse...
...For the issuing firms, the Bank listed the following advantages: "* broadening the investor base, leading to "a higher stock price and a lower cost of capital" "* access to vast new pools of capital for raising funds "* enhancing the visibility of the firm globally At the same time, First World investors could enjoy fresh access to arenas of great potential profit...
...Compared to bond markets, banks are slow...
Vol. 29 • January 1996 • No. 4
