The facilitating framework for free investment and capital
first published 24 October 2008
Summary
New financial "products" have created havoc, as the current financial crisis illustrates all too clearly. Huge amounts of money and capital tied up in these products have been able to move around the world with ease over the past few years. Governments appear not to have been aware what was going on, let alone to know what to do now that the crisis has erupted.
In fact, it was (mainly Northern) governments that created the enabling environment for such free movement of capital and new financial products in the first place.
The paper describes the push to liberalise capital movements, investment and financial services, without putting in place accompanying regulation or supervision at national, regional or international level. It analyses another accompanying push to put in place binding obligations to ensure that all countries allowed such free movement of capital. (For more detail on the obligations created under the World Trade Organisation's services agreement, see another paper, "Financial instability and the GATS negotiations" by Ellen Gould.)
The financial crisis, however, may have a silver lining. It may finally allow another enabling environment to develop in which debates and decisions can be made about the financial reforms, regulation and supervision that are needed to re-orient the financial system towards supporting society, rather than the other way around.