From poverty to power - Oxfam-Québec

5 THE INTERNATIONAL SYSTEM FINANCEBy 2007, the average daily global turnover in traditional foreignexchange markets stood at $3.2 trillion, five times the 1989 figure and90 times the volume of global trade. 33This financial tsunami has been driven by a combination oftechnology and politics. Computerisation and the Internet haveturned global financial markets into integrated 24-hour operations,while governments around the world have acted to remove barriers tocapital flows. In this they have been urged on by orthodox economists,notably at the IMF and World Bank, who argue that allowing capital toflow freely (known as ‘capital account liberalisation’) boosts efficiencyand growth.Poor countries undoubtedly need capital to invest, both in theprivate sector and in public investment such as roads, energy generation,or schools and hospitals. Poor people need access to finance formortgages, to finance small farms and businesses, or to cover the costsof ill health or other shocks. However, instead of a steady transfer oflong-term investment, capital flows have been so short-term, volatile,and huge that in the past decade alone, they have triggered financialmeltdowns in Russia, Malaysia, Brazil, South Korea, Thailand,Indonesia, the Philippines, and Argentina. By one calculation, bankingand financial crises have wiped 25 per cent off the economic output ofdeveloping countries over the past 25 years. 34The most recent wave of crises has prompted a rethink in Washington,with some recognition that, while foreign direct investment (FDI)tends to be both stable and productive, the more short-term flowsoften encouraged by capital market liberalisation are downrightdamaging. Even before a crisis hits, capital account liberalisationcarries some serious risks:• Investors are prone to ‘herding’, jointly rushing into (or outof) an economy in such huge numbers that they destabilise it.This was something recognised by the economist J.M. Keynesas long ago as 1941, when he said,‘Loose funds may sweeparound the world, disorganising all steady business. Nothingis more certain than that movement of capital funds must beregulated.’ 35311