This letter is at odds with a longstanding project of major financial firms: to allow them to move money across borders with no muss or fuss. This was the dream of Citibank’s Walter Wriston, who perversely was not deterred by the large losses his bank incurred in its sovereign lending misadventures of the late 1970s. It became a matter of policy in the Rubin/Summers Treasury Department.
Although the danger of destabilizing “hot money” inflows has been well recognized since the Asian crisis of 1997, the thrust of US policy has been to continue to push for more capital markets liberalization, particularly in emerging economies. Yet the evidence has continues to mount that a high level of international capital movements isn’t merely a potential threat to developing markets, but to economic stability. As we’ve pointed out repeatedly, the Carmen Reinhart/Kenneth Rogoff work on financial crises showed a strong correlation between high levels of international funds flows and banking crises.
The odd, and telling bit in the debate is the unwitting concession to financiers embedded in the existing terminology: capital controls. It incorrectly implies that money is every and always stateless, and any effort to restrict it is unnatural. But truly stateless commodities are highly transportable, high density stores of value whose content can be readily verified: think diamonds (at least pre the era of synthetic diamonds), gold, platinum. But despite their obvious value, what someone receives in exchange if one transports them across borders is very much in doubt, not just due to price fluctuations but also to the difficulties of finding a trustworthy party who would convert the commodity into local currency at a fair rate.
In other words, we’ve all gotten so used to being able to change money, use credit cards, and suck local currency out of ATMs when traveling abroad that we’ve forgotten that this has been put in place with government support. And it has come more recently in some countries than others. I recall running into a McKinsey colleague in the Hong Kong airport in 1985. He was astonished to see that the foreign exchange booths would exchange Indian rupees. The rupee then was a controlled currency; that sort of operation was in theory impermissible. But Hong Kong was always a bit lawless, and this was probably a small scale enough operation so as to fly under any official radar.
But so far, we have been talking about money, and the conversion of currency in a personal/retail context. By contrast, “capital” carries with it the idea of investment. Money is not being moved simply to get it into another country (well it might be if you are a drug dealer or the leader of a banana republic planning your exit strategy) but to put it to work. That in turn means you expect some sort of legal protection in the recipient country, ideally as good as the natives get (again note we accept the idea of equal protection under the law in some contexts and not others, so this is not a given).
But what about movement of funds between countries? How exactly is this a matter of rights? For individuals, as with our drug lord example, the reason for trying to move it abroad is almost certainly not legitimate; it’s to escape prosecution and taxation. The US takes the view that the income of its citizens, no matter where earned, is subject to US taxation. Governments lose significant amounts of money due to corporate gaming of tax regimes. Nicholas Shaxson, in his new book Treasure Islands, argues that poor African nations are actually capital exporters. They lose more in tax revenues via arranging their affairs so as to show income in low tax jurisdictions (often with little in the way of real operations there) than they gain in foreign aid.
Now as the letter above acknowledges, international treaties have effectively given investors the right to move funds without restriction into certain types of instruments. But look at the implicit logic, and it’s one that actually goes back to discussions early in the history of the US over whether Congress should charter a bank (yes, Virginia, pre-revolutionary America thrived without banks). The debate centered around differing ideas of what “freedom” meant.
The opponents of the bank charter were concerned about potential abuses that could result from concentrated power. To them, “freedom” meant the right of citizens to take action and use democratic processes to move their government and society in directions that they could hopefully agree on and would produce better outcomes.
The bank advocates, most notably Robert Morris, took a very revealing position: they argued that the government had the right to grant privileges, but not to take them back. It amounted to arguing that economic interests extended to private actors somehow became their property, and that any reversal of these grants was not simply an act of bad faith, but was despotic theft.
Yet we routinely accept the rescinding of government privileges of various sorts; consider the 1990s “end of welfare as we know it” or the expected reductions in pensions of state employees. But when large commercial interests obtain valuable economic rights, reining them back when they are found to impose undue costs on others is depicted in a completely different light. Restricting them isn’t framed neutrally, as, say, a revision, but as a “control” when the prevailing ideology treats that as a “c” word.