Bagwati, Jagdish. "The Capital Myth: The Difference Between Trade in Widgets and Dollar". Foreign Affairs, Vol.77, No.3 (1998): 7-12.

Bagwati, Jagdish. "The Capital Myth: The Difference Between Trade in Widgets and Dollar". Foreign Affairs, Vol.77, No.3 (1998): 7-12.

• The dominant view in economics, even after the 1997 Asian Financial Crisis, is that liberalized international capital markets are both inevitable and ultimately desirable. They advocate for a further reduction of restrictions and a move towards full capital convertibility for all IMF members, with the IMF being moved to a role as lender of last resort (7).
• The two versions of this view are a conservative idea that markets in crisis should be abandoned and left behind by the world economy and the liberal idea that the IMF should act as a lender of last resort and impose certain conditions on debtor countries (8).
• The idea that free international capital markets are beneficial is a myth perpetrated by the Wall Street-Treasury complex. There have been many claims that free movement of capital is extremely beneficial, but these claims have not borne out in practice and most of the actual benefits from capital flows are obtained by direct equity investment (7).
• Whereas free trade advocates can muster numerous studies that demonstrate that free trade has positive effects on economic growth -- with even skeptics, like Paul Krugman, claiming that it is at worst ineffectual rather than harmful -- advocates of free capital flows do not have the support of evidence, as they fail to account for the impact of crises, falsely equate free capital markets with encouraging foreign investment, and ignore that economic giants like Japan and China achieved high rates of growth without liberalized capital markets (9-10).
• Economic liberalization, of both trade and capital markets, is driven by free trade ideologues. These ideologues have captured institutions and states through lobbying and flooding the political system with money by Wall Street interests who would benefit from liberalized finance (11). They confuse the interests of Wall Street with those of the rest of the world and direct the policies of the IMF and other major financial organizations towards its ends (12).
• Part of this power is through a complex of interests between Wall Street, the Department of the Treasury, the IMF, the State Department, and the World Bank. This complex is maintained by frequent hiring between the institutions, so they all have the same pool of staff (11-12).
• "[...] testifying before the Senate [...] in March 1995, right after the Mexico peso crisis, I [Jagdish Bagwati] was witness to the grilling of Undersecretary of Commerce Jeffrey E. Garter on why India's financial system was not fully open to U.S. firms. To his credit, Garten said that this was not exactly a propitious time for the United States to pressure India in this direction" (11).
• "And despite the evidence of the inherent risks of free capital flows, the Wall Street-Treasury complex is currently proceeding on the self-serving assumption that the ideal world is indeed one of free capital flows, with the IMF and its bailouts at the apex in a role that guarantees its survival and enhances its status. But the weight of evidence and the force of logic point in the opposition direct, toward restraints on capital flows. It is time to shift the burden of proof from those who oppose to those who favor liberated capital" (12).
• Prior to the Asian Financial Crisis, the general assumption among economists was that free movement of capital acted on the same principles as freedom of trade in goods and services. Accordingly, protectionism in capital markets, like restrictions on goods and services, harms the economic performance of both rich and poor countries (7-8).
• In reality, the benefits to both countries from free capital mobility may be outweighed by the risks from financial crises. The Asian Financial Crisis demonstrated that such crises are endemic to liberalized international capital markets (8).
• Financial crises impose terrible economic costs on affected countries and their dangers outweigh the benefits of functional free capital flows. The South American debt crisis in the 1980s cost those state a decade of growth, the 1994 Peso crisis wiped away several years of economic advancement in Mexico, and Asian growth rates have not yet recovered from the 1997 financial crisis (8).
• The Asian Financial Crisis is intimately linked to deregulation of Asian banks and the end of capital account controls, which allowed those banks to engage in excessive short-term borrowing on international capital markets. The relation between capital mobility and crisis is clearly showed in the levels of private capital flows in the affected countries, which jumped up from $41 billion to 1994 to $93 billion in 1996 before reversing to an outflow of $12 billion in 1997 during the crisis (8).
• When financial crises occur, countries must take all possible measures to restore investor confidence, typically by increasing interest rates and selling domestic assets at cut-rate prices. These measures, enforced by the IMF after the 1997 Asian Financial Crisis, further open the capital markets of countries and often force heavily indebted firms into bankruptcy (8-9).
• These policies also erode the political independence of crisis countries, restricting their sovereignty in determining financial policy and subordinating national decision-making to the IMF (9).
• The current solutions to the financial crises brought on by international capital market liberalization are wholly inadequate. US Secretary of the Treasury Robert Rubin's proposal to reform banking is good, but does not actually eliminate the risks posed by international capital flows themselves. Similarly, strengthening the IMF will not prevent crises, only help contain them. Nor will its abolition end these crises, as international crises will occur without a lender of last resort just as domestic financial crises still existed before Walter Bagehot proposed that central banks serve this role (10-11).