Capital rules

Some rough notes on Rawi Abdelal’s Capital Rules: Abdelal attempts to turn much of the standard history of neoliberal finance on its head. Through his analysis of the changes in international financial flows and their regulation at the institutional and state levels, he shows how the so-called Washington Consensus that is supposed to have dictated the last few decades is largely a fiction. Far from being the direct desire of Wall Street as coded and enforced by the U.S. Treasury department, the contours of neoliberal finance are, in Abdelal’s account, the result of a multiplicity of actors and factors: states’ endorsement of capital’s realities, Europe’s desire for multinational expansion, and, perhaps most importantly, capital’s need to be maximally cooperative.

The book focuses on a few areas of finance, capital flows and currency exchange mostly, and how the regulation of those has evolved over the last few decades. One thing Abdelal makes clear is that capital liberalization was never an essential end for most states, including the United States and developing nations. Liberalization was a technique, not a principle, and so it was pursued inconsistently, in some instances it was codified and in others it was not. For instance, the United States forged a handful of bilateral agreements in which the terms governing capital flows differed greatly, as did agreements between countries in much of the developing world.

Insofar as the decision to formalize the rules of capital movement was made, it was done so by France and Germany, not the United States. Abdelal says that the rewriting and codification of OECD requirements for its members was primarily carried out in the 80s by European nations, with the support but not the initiative of the United States. It was this same systematization that France and Germany used in the process of European integration into a common market. Countries were added to the union almost exclusively on their desire and ability to abide by the complete liberalization of capital flows.

The Europe-led formalization of the rules of finance in many respects already validated facts on the ground. The national-based restrictions on capital flows that dominated during Keynesianism were by the 80s under attack, thanks mostly to the United States’ adoption of numerous bilateral agreements that rendered them weak and inconsistent, but also because governments were increasingly unable to control the flows. I’m tempted to say that Europe reterritorializes what the United States deterritorializes.

But that’s a bit simplified, and not entirely accurate, as the United States provided its own reterritorializations, which Abdelal shows in his treatment of currency trading. Even though throughout the immediate postwar era currency exchange had been tightly regulated, by the 1960s the national restrictions had become ineffective because of the active trading in eurocurrency markets, which essentially voided the fixed exchange rates laid out by the Bretton Woods agreements. Though formally in effect, fixed exchange rates were not functioning and there was a strong consensus toward floating exchange rates. Thus, Nixon’s 1971 decision to abandon the gold standard was more of reflection and validation of actually existing facts than it was, as it’s typically come to be seen, a way for the United States to flex its muscle and turn itself into singular imperial power.

So far I’m merely showing how governments have validated capital’s actualities. But states had their own ambitions as well, as I noted above when I described how the EU utilized and altered capital-flow relations to determine which countries would be included in the union. That is, the (multinational) state tried to use capital flows and their formalization as a mechanism for its territorial purposes. For Europe, then, capital liberalization was an end, a principle, in that it helped it achieve the expansion of its sovereignty. Not that this expansion was limitless: the great majority of flows would occur within the EU, or between EU and other OECD members, so that capital flow and currency exchange mark the (multi)national borders of the EU. In this way, the simultaneous implementation of a freeing of capital and enacting of Fortress Europe legislation represents not a moral or ideological failure or an as yet uncorrected oversight but a necessary consequence: capital would flow coterminously with borders and largely exclude what was not subjected to the logic of national capital rules.

Adbelal devotes a whole chapter to the credit-rating agencies, mostly Standard & Poors and Moody’s. On one hand they seem to be the privatization of formerly public functions, in that their purpose is to validate, regulate, and mediate the flows between countries and investors. On the other hand, though, they don’t really act along national lines; in fact, they sort of have a supranational form of power in that they evaluate the investment-worthiness of entire nations as well as the companies that are based in them. As Abdelal says, Europe and Asia have become unhappy that these U.S. companies wielded so much power, but he also notes that for the most part the companies simply validate the already formed opinions of capital markets. That is, if the markets deem a country or company an unworthy or a risky investment, the rating agencies generally validate that judgment. Rarely do they diverge from markets’ assessments, and their downgradings generally follow after the markets express their opinions.

The financial crises of 1998-99 prompted a rethink of the imperative to capital liberalization that prevailed in the 80s and 90s. Malaysia of course led the charge, with its strict capital controls instituted in September of ’98. That Malaysia was able, after taking a bit of beating from financial markets, to recover from the crisis fairly quickly, more quickly than its neighbors Thailand and Indonesia, which did not institute capital controls, revealed something that no one wants to admit: that nations are still the base regulative unit. The U.S. had already indirectly shown this with the success of its bilateral agreements on capital movements, both of the de facto (China) and de jure (Chile) kinds. Across the world there began to be skepticism of absolute liberalization. As an IMF advisory board said at the time: “the financial community oppose[s liberalization] until it is clear that [it] would on balance strengthen the legal foundation for private capital flows to emerging market economies.” This questioning of the soundness of unfettered capital — which came from the Treasury Department, private finance, and most governors around the world — is able to put forward because strong legal norms and protections are a necessity and arises because though capital is easily disconnected from nations, the realization of surplus-value is not.

In other words, capital’s strength was directly tied to the health of norms and rules within each nation. Capital’s viability is impossible without a strong nation undergirding it. The capture of capital is impossible without the nation-state.

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