Control policy, not capital
Many may be surprised that George Soros, an enthusiastic and highly visible player in global markets, speaks of a need to regulate global capital markets. Yet his utterances suggest that he does not truly understand how markets work.
In short, Mr Soros and others of his ilk may have considerable insights into running their businesses and appreciate the importance of political manoeuvring. However, the conceptual elements of the functioning of markets seem to escape him.
In providing his interpretation of contemporary problems, Mr Soros invites the revival of outmoded notions of control over international capital flows. Unfortunately, the record of failures from controlling capital flows is predictable, repetitive, and often catastrophic.
What is missed in these arguments is that if the market is the problem rather than the solution to our woes, then we must blame ourselves. Market outcomes are merely a summation of the actions arising from the decisions we make every day. A full understanding of the market indicates that if there is an enemy, it is us.
While some describe market outcomes as though they arise from a conspiracy concocted on Wall Street, it is more accurate to describe them as arising from choices made on Main Street. Certainly, the choices of mutual fund managers and bond dealers are more prominent and better chronicled. However, these self-important movers and shakers cannot begin to match the power of the faceless masses. Power in competitive markets will always be limited, ultimately by the refusal of consumers to pay higher prices for their perceptions of lower quality products or when their preferences shift without warning.
Unfortunately, it is difficult to make sense of the market in the context of the ongoing debate that has demonised the market. Despite having weathered the withering criticisms of and the real world experiments with communism, the market economy remains under assault, this time from within. Many critiques of the market are deemed credible even though university students could debunk most anti-market hype after their first week in an economics course.
Mr Soros' gesture for regulating capital markets may appear to be motivated by charity and public spirit. However, consider how his considerable personal fortune was made. His most visible success was in outmanoeuvring Bank of England bureaucrats hobbled by unsustainable policies that were opposing market trends. This was a no-brainer that only required access to piles of money to place a bet in a casino where all gamblers were sure winners. So it is not so surprising that Mr Soros promotes interventions to provide him more opportunities to earn huge payoffs by outmanoeuvring government agencies that gamble with taxpayers' money.
However, the problem with Mr Soros' analysis is not that it is tainted by his own self-interest. There are also serious lapses in understanding the difference between symptoms and causes as well as how markets operate. Economic crises in East Asia and the contagion that followed are a symptom of a wider problem and were not caused by a failure of the functioning of markets, per se. Indeed, most of the problems that plague emerging economies and frighten investors away from developing economies are the result of policy failures where governments used their power to rig markets to serve political ends.
Many governments refuse to acknowledge that their policies and the political culture supporting them are outmoded. They wish to deflect criticisms and the urge to modernise by blaming outside forces, instead of reforming their economic institutions to put them in sync with global markets.
In terms of economic impact, capital controls represent the ultimate in expropriation whereby a government debases the entire accumulated wealth of the country as well as the future earnings stream of its citizens. Proponents in East Asia for these controls point to the 'success' of such controls in sheltering India and China from the Asian contagion. However, India's trade accounts are relatively small and most of its imports are limited to energy supplies. China, unlike Malaysia, is a net creditor and its controls are extensive. In both instances, the trend has generally been away from capital controls.
In terms of political impact, the free flow of capital can be seen as an important part of civil society. Citizens have a limited number of means to express dissatisfaction with their leaders. Even if they have a right to vote, their choice might be trivialised by living in a one-party state. Migration would allow them to vote with their feet, but migration is often limited to those with the means.
Open capital markets and the choice of currency provides citizens with a third choice. Being allowed to hold their wealth in whatever form they want provides a financial vote to evaluate their political leadership. The revival of capital controls is a thinly veiled attempt to shield governments from the disapproval of their own citizens and outside assessment of their policies by investors.
Capital controls will surely fail to meet their purpose. This will only encourage new and additional controls upon other sectors of the economy. Where these controls are 'successful', they will retard capital flows to those countries most needing them. Also, investors will bribe their way around the rules, increasing problems with corruption. By implementing these ruinous policies widely, the revival of the Asian 'miracle' economies and sustained growth in other emerging economies will be put off.
It is little wonder the public becomes confused when financiers and stock market experts are unaware that their own successes depend upon the forces behind all market activities.
Christopher Lingle, an adjunct scholar of the Centre for Independent Studies in Sydney, is the author of The Rise And Decline Of The Asian Century (The University of Washington Press: 1998)