Protectionism For Capital?

With Evans-Pritchard mooting the possibility of capital controls, it's pretty much necessary to revisit a column by Oliver Kamm entitled 'Learn the right lessons from the Depression', published on 19 February.

Mr. Kamm wrote,

"There is a more recent historical parallel that ought to be cited in policy debates. This is the Asian currency crisis of 1997-98. It was regional and on a much smaller scale than today's global financial ructions, but there are parallels in causes and available remedies. "

Agreed.

"The Asian crisis was a product of weak banking systems, wide current account deficits that had to be funded by flows of foreign capital, a cascade of bad debts after a property bubble and foreign currency debts that became increasingly difficult to service. But the most important parallel is this. The crisis was born in a dysfunctional financial system. "

Not wholly agreed.

"The consequence was a steep and painful recession with immense social costs. But the problem was not with the wider system of global markets. With one exception (Malaysia, which introduced capital controls), the Asian economies maintained openness to the world trading system. Asian growth recovered. Lessons were learnt and even overcompensated for. (Witness the build-up of a huge surplus of Asian savings, much of which was invested in Western capital markets, contributing to the credit bubble.) "

This is extremely contentious. On Page 93 of 'Globalisation and its discontents', Joseph Stiglitz wrote,

"In the end, only Malaysia was brave enough to risk the wrath of the IMF; and through Prime Minister Mahathir's policies - trying to keep interest rates low, trying to put brakes on the rapd flow of speculative money out of the country - were attacked from all quarters, Malaysia's downturn was shorter and shallower than of any of the other countries".

That point is of fundamental importance to the understanding of Malaysian policy in the autumn of 1998, and its other consequences such as the growth of 'import substitution', and is not made clear in Mr. Kamm's piece. I have no credentials in economics; but those of Professor Stiglitz are unimpeachable.

Mr. Kamm concludes by recovering some ground, writing that,

"There is a good case for regulating movements of capital, given that not all banking systems are able to cope with them. But the free movement of goods and labour encourages better working practices and stimulates demand. "

The statement that 'the free movement of goods and labour encourages better working practices and stimulates demand' does not sit at all well either with global labour arbitrage theory, or the empirical evidence available regarding the impact of immigration on GDP per capita.

He continues,

"The “buy American” clause - even in a watered-down version - of the US fiscal package is a bad idea. Gordon Brown's pledge of “British jobs for British workers” is an inflammatory call that encouraged the most irresponsible strikes since the miners sought to bring down an elected government 25 years ago. Western governments in the 1930s adopted the self-defeating policies of protectionism. This time must be different. "

Mr. Kamm does not define in what way the Lindsey oil refinery dispute was 'irresponsible'. This is an odd adjective to use. In many ways the strikers were extremely responsible - whilst reacting naturally to the operation of unmandated laws which have permitted their home market to be flooded with cheap foreign labour and their exclusion from working opportunities near their own homes, they played the game by the rules they did not make and dissociated themselves from those elements of the BNP which were attempting to muscle in on the action. Is striking in favour of the interests of one's trade to be considered responsible, while striking in the interests of one's countrymen as countrymen to be considered irresponsible? The logic behind Mr. Kamm's statements is foggy.

What is not stated in any advocacy of capital controls is that their immediate and principal beneficiaries are, of course, those for whom holding capital for others is a business. As Mr. Kamm, a former banker, well knows, the biggest holders of capital in any society are usually banks. Banks benefit from capital controls - indeed, it is not at all beyond the realm of logic to state that they are a form of protectionism for banks. This raises a fundamental question of fairness, for which those advocate free trade and free movement of labour for others but protectionism for themselves have no answer.

If capital controls are acceptable in order to protect the interests of capital holders, controls on the import of goods and the movement of persons must also surely be acceptable in order to protect manufacturers and workers. Anything else is fundamentally unjust; and there really should be nothing more required to be said in the cause of protectionism.