Thursday, November 8, 2018

Book Review: 'Ruling Capital: Emerging Markets and the Reregulation of Cross-Border Finance' by Kevin P. Gallagher

Among the victims of the financial crisis were emerging economies, caught in the downdraft of Western mismanagement and lack of regulation. The flow of capital in and out of their countries became an issue as their currencies rose along with unemployment. Depending on the country, its agreements, its economy and its politics, changes, restrictions and regulations began to appear and have effects. Ruling Capital examines this phenomenon in a broad sweep around the world.

You cannot have an adjustable monetary policy, a fixed exchange rate and unfettered capital mobility at the same time (the “impossible trinity”). Countries are forever juggling them as conditions change. At the same time, pairs and groups of countries always try to set rules for them in treaties. The United States, and its proxies the IMF and World Bank, are standout examples.

As in so many instances, the inflexibility of the IMF distorted economies and made client countries uncomfortably restricted in their actions. It seems that the IMF’s role is to get countries to self flagellate in exchange for support, for the ultimate benefit of the big western economies. The fund’s one size fits all policies have never proven valid, and Gallagher demonstrates how several key emerging countries employed workarounds and loopholes to shore up their economies. Grudgingly, even the IMF had to agree they worked (in 2012). Gallagher is more than fair with the IMF, as impartial as is humanly possible, and ignoring details of the damage done to countries all over the world.

The problem is not straightforward; it is more of a cobweb. Countries can implement controls with certain others according to agreements (trade and financial), with them, or with groups of them (OECD, WTO, FTAs, etc). It makes having a consistent policy almost impossible, as tugs from all directions pervert plans. 

More fundamentally, he shows the literature does not support the theory that capital mobility promotes growth. Quite the opposite. It clearly shows that smaller economies must control the flow of capital in order to thrive and avoid the spillover effects of the larger economies. The current financial crisis has demonstrated this plainly for all to see, worldwide. 

However, free movement of capital favors the United States, which is an exporter of financial services, and hurts emerging nations, which are net importers of financial services. By making it a requirement within larger trade agreements, the US damages other nations’ abilities to self govern. That so many of them do it anyway, legally or illegally, in the open or through loopholes and workarounds, points to the unsustainability of the system. Gallagher calls it a cornerstone of US trade policy. It is a form of divide and conquer.

Ruling Capital is enormously evenhanded in the face of overwhelming evidence. It is deeply researched and vetted. It is a less public aspect of American dominance in world affairs that could use a little more light on it.

Editor's note: This review has been published with the permission of David Wineberg. Like what you read? Subscribe to the SFRB's free daily email notice so you can be up-to-date on our latest articles. Scroll up this page to the sign-up field on your right. 

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