8. International Finance

Background

The international financial system must be reformed. We cannot go on lurching from crisis to crisis with ever larger bailouts that benefit the rich at the expense of the poor.

The burden of external debt must be lifted, as it continues to cause a perverse transfer of wealth from impoverished peoples to their creditors. Over the years 1981 through 1987, less developed countries paid US$1.5 trillion more in debt service than they received in new loans. In 1995, the countries of Latin America had a total external debt burden of more than $600 billion.

These debt payments, and the structural adjustment conditions imposed by creditors, exacerbate inequalities among nations and distort development.

The rise in financial speculation at the expense of investment in production threatens the well-being of working people everywhere, North and South. NAFTA's investment rules, the proposed MAI, and proposals for changing the articles of agreement of the International Monetary Fund are all designed to allow investors to take any kind of capital in or out of member countries in any amount at any time. We can only expect that FTAA negotiators will pursue similar objectives.

Our vision of international financial regulation has a different logic.

Guiding Principles

• The international financial system should ensure stability and allocate capital for productive purposes.
• National and international measures must be taken to minimize the disruptive consequences of speculation and fly-by-night capital flows.

• International financial institutions must promote sustainable economic and social development instead of austerity and structural adjustment policies that impoverish peoples and erode health care, education and the environment.

• External debts contracted by repressive military dictatorships are illegitimate, "odious debts" that should be written off.

• The remaining debt for many nations is so high that it renders sustainable development impossible. Unsustainable external debts that accumulated due to high interest rates must be renegotiated and partially written off, with the remainder payable over longer terms at low interest rates.

Specific Objectives

• New ways of regulating speculative capital should be agreed upon multilaterally to avoid instability and vulnerability for national economies and for the international financial system.

• Inasmuch as the International Monetary Fund and World Bank have failed to oversee the international financial system in a manner that supports sustainable and productive development, they should either be fundamentally restructured or new institutions put in their place.

• National authorities must have the ability to regulate flows of "hot" money into and out of their countries. There are several proposals at the international level for confronting this problem that should be evaluated and discussed. At the same time, there is a consensus on the need to give priority to direct and productive investments, assure that investments are long-term, and prevent instability that can cause their rapid flight. Such measures should include taxes on speculative profits, laws requiring portfolio investments to remain within the country for a minimum period, and incentives for direct and productive investments.

• Any agreement in the Americas must include provisions to allow governments to channel foreign investment into productive purposes instead of speculation. The North American Free Trade Agreement must be amended to this end. Any other agreement for the Americas or under the World Trade Organization, where they may attempt to integrate the worst aspects of the proposed Multilateral Agreement on Investment, must also share this orientation.

• A tax on foreign exchange transactions, as proposed by James Tobin, a prominent monetary economist and Nobel Laureate, should be instituted to slow down currency speculation and enable national governments to exercise more control over their monetary policies. The revenues from a Tobin tax (conservatively estimated at US$302 billion a year from a 0.25% tax) should be administered by an independent United Nations agency and used for social and economic development.

• Every agreement between countries at different levels of development must include compensatory financing to allow for achieving the competitiveness that integration implies, and to fund social programs. This approach has been followed within the European Union, where the richer countries have funneled development aid into Spain, Portugal, Greece, and Ireland to lift up their living standards closer to the level of other EU nations. In the Western Hemisphere, the most effective way to level the playing field would be through a substantial reduction of the debts owed by low-income countries. Therefore, the FTAA should include the negotiation of a reduction of the principal owed, lower preferential interest rates, and longer repayment terms.

• Orthodox structural adjustment conditions demanded by the World Bank and the IMF should be abandoned, as they have manifestly failed to resolve the debt crisis and have caused enormous hardship for the poorest sectors of the population. Instead, countries should adopt economic development policies like those proposed by the UN Economic Commission for Africa in its African Alternative Framework to Structural Adjustment Programs for Socio-Economic Recovery and Transformation.

• Central banks and other national regulatory bodies should be strengthened to assure that they are not subordinate to national and international banking oligopolies. Central banks and monetary authorities should be free from the short-term electoral interests of parties or groups. Therefore, they must have a certain autonomy from the executive branch of government. However, in no way should these financial institutions be completely autonomous bodies free from social control through democratically elected legislatures.

• Central banks and national monetary authorities must take concerted international action to lower interest rates, stimulate demand for goods and services, and channel investment into production instead of speculation. International cooperation is also necessary to combat money laundering.

• No international agreement should diminish the capacity of states to establish monetary and financial policies for the development and well-being of their peoples.