The degree of international capital mobility is an expression of the power of capital over labor and society. Mechanisms to control the degree of capital mobility are therefore weapons in the political struggle for a more humane and sustainable economic and social life.
The heterodoxy has long been critical of capital mobility and has considered capital controls, but a tension has existed between different analyzes. At one level, Marx tended to argue that capital mobility, as a reflection of the power of capital, was a juggernaut that would wash over the globe, bringing capital to every corner of the world, eventually increasing both the forces of production and the class struggle that would ultimately bring about its own demise. Barriers against capital mobility might be able to dam its advance temporarily, but eventually, capital would break them down, and continue to roam the globe, unfettered (Marx and Engels, 1998).2
Keynes, on the other hand, believed that capital controls and government control over important aspects of social investment, could tame capitalism, even bringing about the euthanasia of the rentier. As we discuss in more detail below, Keynes believed national capitalism, protected by capital controls, was possible, at least in the UK and other large countries.
After the 1970s, with the rise of neoliberalism and the decline of the social democratic movement following World War II—when capital controls were widespread and the power of capital was subdued by social forces in many parts of the world—we once again face this tension. Marx’s prediction of the juggernaut of capital with its expression in the hyper-mobility of capital seems to have trumped Keynes’ hope for controlled capital, and more progressive national capitalisms. In this world of neoliberalism, financialization and globalization, are capital controls simply passe? Or, even in this situation, is there still a case that can be made for capital controls? And, what do the answers to these questions tell us about the relevance of the work of Marx and Keynes to contemporary debates about international capital mobility and economic dynamics? These are the questions this chapter addresses.
In making my argument I distinguish between the technical or policy aspects of capital controls on the one hand, and the transformative aspects of capital controls on the other. By “technical” I mean the ability of capital controls to facilitate one or another economic policy that might have more or less important impacts on economic growth, employment generation and income distribution. These impacts can be very important for the quality of life of workers and citizens and therefore are of major significance. Still, those hoping for a more profound change in the structure of society and economy may be more interested in the transformative aspects of capital controls: the degree to which capital controls are able to help shift political and social power away from capital and toward society, thereby making feasible a more dramatic change in the overall structure of the political economy which leads to a more egalitarian and sustainable—and, possibly, socialist order.
Below, I argue that, in contrast to the claims of much mainstream analysis, capital controls have been very successful and, indeed, can continue to be very successful in the technical sense. Moreover, looking over the last century, we see that capital controls have been crucial to virtually all transformative economic change. Nonetheless, more recently, left-leaning governments who have presumably wanted to undertake major transformative policies, have not tended to adopt capital controls. I briefly explore the reasons for this choice in recent years and attempt to understand the implications of this change for the prospects of fundamental political and economic change in contemporary capitalism.
The rest of the chapter is structured as follows. In the next section, I discuss in somewhat more detail Keynes’ views of the importance of capital controls and Marx’s views on the possibility of economic reform. Here I also develop further the distinction between the technical and the transformative aspects of capital controls. The third section briefly discusses the technical case for capital controls and the fourth section discusses in more detail the transformative aspects of capital controls, exploring the difficulties involved in transformative projects, focusing on the role that capital controls can and have in fact played. The final section briefly concludes.
Crotty (1983) described in great detail Keynes’ strong support for capital controls. Unearthing key passages from a variety of Keynes’ writings, Crotty showed that in a period spanning the 1930s and into the 1940s—virtually up to the time of his death—Keynes was very skeptical that nations could achieve full employment and social transformation as long as they were integrated into a world of highly mobile capital. He therefore thought that controlling international capital mobility was a requirement for both bringing about better macroeconomic management and achieving social transformation.
Crotty began by showing that Keynes understood that capital mobility posed a significant problem for Keynes’ proposal that the rate of return on capital be driven close to zero, bringing about the euthanasia of the rentier.
Crotty acknowledges that, by the 1940s, Keynes became more accepting of an internationally integrated British economy, but argues forcefully that Keynes continued to place a high degree of importance on the necessity to control international capital flows. Wrote Keynes in 1941: “I share the view that central control of capital movements, both inward and outward, should be a permanent feature of the post-war system” (1980:52). “When it became clear that the U.S. did not share his view on this issue, he insisted that strict capital controls be permitted in the new international monetary order in those countries which chose to adopt them.” According to Crotty, Keynes argued here as he had before that “the free flow of capital among countries would make successful domestic planning for full employment in any country impossible” (Crotty, 1983:62).
As Crotty shows, as late as 1942, in a letter to Roy Harrod, an ardent opponent of capital controls, Keynes remains a strong advocate of capital controls:
I disagree most strongly with your view that the control of capital movements may very possibly be unnecessary…. I see no reason to feel confidence that the more stable condition [of the post-war era] will remove the more dangerous movements [of capital]. These are likely to be caused by political issues. Surely in the post-war years there is hardly a country in which we ought not to expect keen political discussions affecting the position of the wealthier classes and the treatment of private property. If so, there will be a number of people constantly taking fright because they think the degree of leftism in one country for the time being looks to be greater then somewhere else.
Keynes goes on even more emphatically to state the case to Harrod:
you overlook the most fundamental long-run theoretical reason. Freedom of capital movement is an essential part of the old laissez-fare system and assumes that it is right and desirable to have an equalization of interest rates in all parts of the world…. In my view the whole management of the domestic economy depends upon being free to have the appropriate rate of interest without reference to the rates prevailing elsewhere in the world. Capital control is a corollary to this.
(1980:148–9)
In terms of the distinction between the technical or policy role of capital controls, and the transformative role of controls, clearly Keynes had both in mind. In the quote just reproduced, Keynes says that “whole management of the domestic economy” depends on capital controls, where management presumably refers to the policy or technical role. But for Keynes, the more important role was the transformative one. Keynes’ emphasis on social experimentation and protecting the possibility of bringing about the “euthanasia of the rentier” signaled truly transformative projects, designed to bring about a profoundly changed economy. Keynes made it clear that capital controls were a prerequisite for protecting the desired experimentation, presumably undertaken by a “leftist government,” which inevitably would call into question the prerogatives of the wealthy and powerful.3
Marx too seemed to have had this distinction in mind in terms of talking about political and economic transformation. Though I failed to find a direct quote from Marx on this issue with respect to capital controls per se, Marx did seem to make such a distinction in his writing on another important area of class struggle: unions.4 First, Marx chided those who claimed that trade union attempts violated some abstract law of economics:
As soon as workers learn … that the degree of intensity of the competition amongst themselves depends wholly on the pressure of the reserve army; as soon as, by setting up trade unions they try to organize planned co-operation between the employed and the unemployed in order to weaken the ruinous effects of this natural law of capitalist production on their class, so soon does capital and its sycophant, political economy, cry out at the infringement of the “eternal” and so to speak “sacred” law of supply and demand.
(Marx, 1865)
Marx appeared to argue that only the transformative role was worth trying to implement. One quote along these lines relevant to trade unions, is as follows:
Trades Unions work well as centers of resistance against the encroachments of capital. They fail partially from an injudicious use of their power. They fail generally from limiting themselves to a guerilla war against the effects of the existing system, instead of simultaneously trying to change it, instead of using their organized forces as a lever for the final emancipation of the working class that is to say the ultimate abolition of the wages system.
(Marx, 1865)
At times the line between the technical role and the transformative role of capital controls is somewhat blurry. Sometimes, goals which seem somewhat technical in nature, or policy goals that are short term, may in fact entail much more profound social transformations. This point comes through powerfully when we consider one of Keynes’ key goals, namely, the attainment of full employment. Kalecki pointed this out in his famous and profound paper “Political Aspects of Full Employment” published in 1943. Kalecki argued that maintaining full employment for a long period of time under capitalism would require a major transformation in the social relations of production, leading to a major redistribution of power from capital to labor. If true, this suggests that while capital controls designed to bring about and maintain full employment might, at first, appear to be a purely technical or policy role, in fact, over time, they would become truly transformative. This point has an affinity with the concept of “revolutionary reforms” well known from political and socialist theory.
Andrew Glyn (1986) recognized this point. In line with Keynes’ argument, Glyn argued that for Britain to adopt a full employment policy, it would need to put on capital and exchange controls. Glyn then went on to describe in great detail how such controls could work and what the costs and benefits of these controls would be. In doing so, he made it clear both that such controls would be a major undertaking with some costs, but that they could also be feasible and effective. One of the best papers ever written on capital controls, Glyn’s New Left Review piece appears to agree with Kalecki that full employment is both a technical and a transformative reform and that capital controls on behalf of full employment play both of these roles as well.
In Crotty and Epstein (1996) we expanded on Keynes’ argument for the role of capital controls in defending social experimentation. Whereas Keynes, Kalecki and Glyn were discussing a situation in which the advocates of social experimentation had the political power to implement experimentation, we were concerned also with the situation in which the “progressive’s” hold on power is somewhat more tenuous and in which labor and other progressive forces would need the cooperation of capital in order to make progressive changes. As such, we focused on the issue of how labor and social forces could enhance their bargaining power vis-à-vis capital in order to bring about more progressive economic and social transformation.
With this in mind, we argued that implementing capital controls, or in some cases, simply the threat of imposing capital controls, are a useful weapon for labor and society to get capital to come to the bargaining table and cooperate with attempts at social transformation, or experimentation as Keynes put it. In South Korea, for example, capital controls were used partly in this way. Of course, the capacity to implement controls are necessary in this case, in case capital refuses to cooperate and begins to flee. In short, our point was to emphasize the strategic aspects of controls in the class struggle and to emphasize the role of controls as a weapon in the class struggle, just as capital recognizes that capital flight is among the most powerful weapons in its arsenal (see, for example, Bronfenbrenner, 1997). But, empty threats of controls will only lead to capital flight, so social forces threatening controls must have sufficient bargaining power to begin with to use such a ploy.
Moreover, it should be obvious that capital controls of a transformative nature will not be considered without the strong presence of progressive political forces. At the same time, even capitalist interests with no transformative agenda may well chose to impose capital controls for technical reasons, for example, in a financial crisis when they have little or no choice. But, unintended consequences do occur and by altering the relative power of capital and labor, even in this case, capital controls might have a stronger political impact that initially intended. But for that to happen, progressive social forces would have to seize the time.
Capital controls, exchange controls, or more generally capital management techniques, historically have been widely used in many countries and, despite the march of neoliberalism, are more widely used today than commonly admitted. All countries, including the United States, have some type of capital controls; in the United States, they involve scrutiny of inward foreign direct investments on so-called “national security grounds.” On outflows, they likewise involve “national security” considerations in terms of sanctions against particular countries, or export constraints on the FDI associated with certain military technology. Increasingly, calls are going out for closer official scrutiny of inflows of so-called “sovereign wealth funds,” which would be a type of capital control on inward investment. Many countries have controls on foreign ownership in particular sectors, including natural resources, media and banking. And numerous countries have controls—on the books, at least—that apply to inflows and outflows of other types of capital.
Still, with the rise of neoliberalism and the aggressive push by capitalist enforcement agencies such as the IMF, many countries have been increasingly liberalizing their capital accounts, so that the global capital accounts are much more liberalized now than they were at the height of the so-called “golden age” of the 1950s and 1960s.
The technical case for capital controls is strong and has been well described by many, including Grabel (2005; Ocampo, 2002; and Epstein et al., 2005). Capital controls or capital management techniques can give policy space for more expansionary macroeconomic policy (Rodrik and Kaplan on Malaysia; Pollin et al. and Epstein on alternative policy for South Africa); they can help governments channel credit to socially and economically productive sectors (see Nembhard, 1996, on South Korea, for example; Epstein, 2007, on postwar experiences in Europe and Japan;) they can help maintain a competitive exchange rate and thereby help export-led growth (Frenkel and Rapetti, 2008, on Argentina; McCauley, 2006, on China and Singapore;); can insulate economies from financial contagion (see Epstein et al. on China during the Asian financial crisis); and they can prevent the currency from becoming internationalized and thereby retain more control over monetary, credit policy and the exchange rate (McCauley on Singapore and other Asian countries).
Though many economists still doubt the efficacy of capital controls in this technical sense, I believe the technical case for them is very strong. In this sense, Marx was at least partially wrong and Keynes was right. Capital controls—barriers to the movement of capital and some restrictions on the prerogatives of capital are feasible even in the long run, and even when capitalism is at its height of power.
But, what about the transformative case for capital controls? Was Marx’s view of the juggernaut power of capital more correct here? Or, as Marx sometimes implied, can the implementation of capital controls play a more transformative role if the political will, the organization of class forces and the strategic political acumen exist?
Ultimately, Crotty, Keynes and Marx are more interested in the transformative possibilities of capital controls. For Marx, capital controls are only truly important in the long run in so far as they help to facilitate a complete transformation of capitalism. As we saw, Keynes thought they would allow countries to engage in experimentation to develop institutions, including more state control over investment, that can bring about full employment, the euthanasia of the rentier and other socially more progressive outcomes. For Crotty, at a minimum, they could help bring capital to the bargaining table and allow workers and governments to pursue more progressive agendas and, ultimately, could help bring about the transition to socialism. To be clear: for neither Crotty nor Keynes are capital controls a sufficient condition for these outcomes. But, the argument is that they are a necessary condition, still a very strong claim.
Are capital controls a necessary condition for transformative change in modern capitalism? Another way to put the question is this: have major (at least somewhat progressive) social transformations occurred under capitalism in the absence of capital controls?
With respect to the issue of “necessity,” I believe the evidence shows that—at least so far—Keynes and Crotty are correct. To illustrate this, in what follows, I offer a very brief, and therefore superficial, survey of this vast historical landscape.5
Of course, after the Russian Revolution, the Soviet Union was closed off from the free flow of capital. With the Chinese revolution, Mao and his government also closed off China from market-determined capital flows. When China began to open up to capital flows with Deng Xiao Ping, these flows were managed carefully by the state; they were not market-determined flows. Strong capital controls remain in place in China to date.
In the 1930s, due to the collapse of the global economy, market-determined capital flows came to a virtual standstill and this was reinforced during the war, when most countries had very strong capital controls in place. Of course, under Schact, Germany had strong controls in place, though one can hardly call Nazi Germany’s transformation progressive. But limitations on capital flows also supported the New Deal in the United States. Major transformations continued to occur in the US economy during World War II, again behind the protection of a destroyed global financial system. Following World War II, social democratic regimes came to power in many European countries with strong credit allocation policies protected by capital controls. In Latin America, virtually all the import substitution industrialization policies were supported by capital controls of various kinds. Cuba, of course, by choice and necessity, has strong controls over capital.
The Asian tigers were all transformed behind protective capital controls or capital management techniques of various kinds, with the possible exception of Malaysia, though they did impose controls at key points. Perhaps South Korea had the most elaborate and well developed sets of controls, but Taiwan’s were also important. Even capitalist Singapore had effective controls that helped maintain a competitive exchange rate and helped with credit allocation. India, too, has long had an elaborate set of capital controls and though they have been somewhat liberalized the structure remains in place today.
It is difficult, if not impossible, to find counter-examples of major social and economic transformations from the modern era that have taken place without capital controls. It seems that, as Keynes and Crotty have argued, capital controls are in fact a necessary condition for a progressive transformation.
But are we now witnessing a change in this pattern?
This picture gets murkier when we look at recent history, say of the last 20 years. When we look at cases where political changes have led to the promise of major progressive social transformation, we find that capital controls have not been widely used. Nor, to be sure, has major social transformation occurred.
There are a number of examples where progressive forces came into power promising major social transformation but there are serious doubts about whether such transformations have occurred. We can start with the overthrow of apartheid in South Africa, where the African National Congress (ANC) has adopted a mostly neoliberal economic policy and has mostly abandoned capital controls. Likewise, in Brazil with Lula’s election, we again have seen a largely neoliberal set of policies in the macroeconomic sphere and commitments to open capital markets; in the new leftist states of Latin America, we mostly see very open capital markets with a few key exceptions: Argentina initially used capital controls to manage its transition, but these were quickly removed. On the other hand, Venezuela has implemented stricter capital controls in support of transformative policies.
For the most part, leftist governments are coming to power promoting more radical economic transformations, but without imposing capital controls. Can transformation be successful there? In the world of “high-tech” derivatives, could these countries implement more stringent controls to help facilitate transformational change if they wanted to, or would the costs simply be too high? Another possibility is the Gramscian point about ideological hegemony. Have these governments been hoodwinked by the IMF and the neoclassical propaganda that tells them that they will be severely punished if the try to interfere with the prerogatives of capital?
My answer is that there is some of both going on most cases. That is, there can be severe short-run costs associated with going against the juggernaut of financial globalization as Marx suggested, but—and this is where the “hoodwinking” comes in—the costs needn’t be as large and the benefits as small as the neoliberal ideological consensus would have us believe.
The “lessons” of Mitterand’s France and Mexico’s economic failures in the early 1980s are often seen as demonstrating the “futility” of capital controls, that nations on a transformative mission cannot stand up to the mighty power of the financial markets.
Let us take the French case first (see Lombard, 1995, for an excellent discussion). Socialist Francois Mitterrand was elected in May 1981 on a platform of completely overhauling of French society and substantially redistributing income (Lombard, 1995:359). Mitterand initiated a program consisting of four initiatives: income redistribution; expansion of the public sector; labor legislation to reduce unemployment; and nationalization of major enterprises (Lombard, 1995:360). Unsurprisingly, French capital was spooked by this program and initiated a great deal of capital flight. The French government instituted capital controls to limit capital flight, but within a year or so, the government relented and greatly cut back on the program. Critics have used this episode to argue that the program could not have worked because of the constraints of global capitalism, including international capital mobility. This program was especially problematic, according to many observers, because the French government was trying to expand at a time when much of Europe was entering a recession, thereby imposing balance of payments problems on the French economy.
Lombard, and others,6 by contrast, argue that the key problem was that the government was committed to maintaining a fixed exchange rate in the European Monetary System framework, which placed a major constraint on its monetary and fiscal policy. Moreoever, the capital controls that were imposed were not strongly enforced. Thus it was the external constraint that undermined the program but the program was not strongly followed to begin with. Stronger measures to deal with these external constraints were possible—such as exchange rate depreciations and stricter capital controls—but for largely political reasons, were not implemented.
The Mexican case presents somewhat similar lessons.7 For several decades prior to the Mexican Debt Crisis of 1982, developmentalist economic thinking had dominated the economics profession and economic policy advice in Mexico. This included support for capital controls and strong regulation of the financial sector. Just prior to the debt crisis, and in the early stages as it unfolded, were crucial moments in which transformative policy ran directly head-on with an economic crisis and powerful neoliberal pressures coming both from within Mexico, led by, among others, foreign-trained economists, and from without, primarily from US bankers, economists, policy-makers such as Paul Volcker at the Federal Reserve and the IMF. Mexican economists, many of whom trained at or were influenced by economists from Cambridge, UK, pushed for an expansionary macroeconomic policy, nationalized banking system, industrial policy and strong financial regulation, all supported by strong exchange and capital controls. In the end, they lost out to the neoliberal side in a fierce political struggle within the government and supported by outside actors.
The Mexican heterodox economists were fighting from a weak position because Mexico was on the verge of bankruptcy. Moreover, they had almost run out of foreign exchange reserves, partly as a result of massive capital flight. Still, despite this weakened position, many observers believe the Mexican government could still have followed an alternative path, including defaulting on foreign loans, possibly by joining forces with other debtor countries. Capital controls, as envisaged by the architects of this policy, was a crucial component of this alternative path. In the end, this was not the path chosen, but many believe that that it could have been.
What lessons do we draw from the French and Mexican cases? They are certainly consistent with the argument that capital controls are necessary for a transformative path in the simple sense that controls were not implemented and major transformation did not occur. But this is hardly helpful in a positive sense. In my view, they do NOT demonstrate that such controls are impossible in the new environment. They suggest that they are difficult, may be costly in the short run and require strong social forces, political and strategic savvy to carry off, as Marx suggested.
So what lessons on transformative change and the role of capital controls in the current environment are we left with? It seems that past experience does vindicate the notion that capital controls must be a central component of this change, as argued by Keynes and Crotty. This has worked most dramatically when the global financial system has collapsed or countries have been frozen out of financial flows so countries could transform themselves without the hindrance of foreign capital (say during and after the great depression and World War II or in the wake of communist revolutions). But this has also occurred when, for a variety of political, economic and cultural reasons, countries have chosen to go or remain behind strong capital control barriers as a way to develop (e.g. in the cases of South Korea, Taiwan, Singapore and post-Deng China). But as Marx suggests, the juggernaut forces of capital are strong and while the transformative role is not impossible, it is difficult to implement and can impose short-run costs that raise opposition and undermine the long-run project.
Paradoxically, this cost curve is an inverted U-shaped function of the degree of net-liabilities incurred from interactions with the global economy. At very low levels of integration, where the country has borrowed little from the global economy, there are few losses from closing off. Similarly, at the other end, where the country has borrowed an excessive amount (such as the case of Mexico in 1982 and Argentina in the 1990s) the costs of default and closing off the financial sector are relatively small. As we saw, Mexico chose not to close off while Argentina chose to put up barriers and default, at least temporarily. In the middle, where countries have borrowed a moderate amount from the global financial markets and can expand such interactions, the short-term costs of imposing strict capital controls and engaging in serious transformative policies may be higher, though, of course, the long-run benefits might be great as well. To do this, the party in power must be willing and able, being supported by a strong coalition, to institute broader institutional change. In particular, getting the government institutions and quasi-public institutions much more involved in credit allocation to help socialize investment, as Keynes argued, is key. Without these substitute institutions, simply instituting capital controls is likely to impose costs, without delivering the transformational benefits.
1 The author thanks James Crotty and Michael Hillard for extensive comments on the current paper and James Crotty, Ilene Grabel, Arjun Jayadev, Kang-Kook Lee, Robert McCauley and K. S. Jomo, who have contributed enormously to my thinking on capital controls over the years.
2 As is so often the case, Marx had a more nuanced view of the possibility for reform than this, one that we explore more fully below.
3 Of course, Keynes was no Marxist, or even socialist. But as Crotty, among others, has forcefully argued, Keynes’ arguments for the socialization of investment and the euthanasia of the rentier call for major changes in capitalism that radically constrain some of its central features.
4 I am indebted to James Crotty for help with this point.
5 In this whirlwind survey I draw on Epstein et al., 2005; Epstein, 2007; Nembhard1996; Helleiner, 1994; Helleiner 2005 and the references cited therein.
6 See the references in Lombard (1995).
7 For fascinating accounts of this history on which I have liberally drawn see Ros, 1987, and Babb, 2001, especially Chapter 7, pp. 178–9.
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