Soros
On Capital Account Convertibility
By Sunanda Sen
25 January, 2007
Countercurrents.org
George
Soros, the self-styled advocate of ‘open societies’ and
the successful practitioner of hedge funds in global financial markets
gave the audience a state of surprise as he was speaking to a group
on industrialists in the capital this week. Asked by an academic if
he thinks that developing countries like India should make a move for
full convertibility of the capital account and the rupee , George Soros
gave the reply with a clear negative. This came as a shock to many in
the audience, who came to hear Soros, one of the most successful practitioners
in global financial markets. The message can also be a cause of unease
for policymakers and their advisors in the current government , who
have been active in advocating the full convertibility of the rupee,
by removing the restrictions as are still there on transfers of money
from the country by resident Indians. Transfers currently leglised are
upto $2500 per person over a calendar year, which amounts to $2.5billion
per year if one million Indians take this route of legalised money transfers.
Removing the restriction will add to the sum by encouraging more transfers
by individuals and corporates, especially when the future worth of the
rupee in terms of dollar or other currencies is suspect . Of course
what thus remains in India today as remnants of the capital control
regime happens to be rather slender, with capital inflows of all varieties
enjoying a free play in the economy. Soros, of course, did not go to
the specifics of India’s capital account liberalisation and its
current state when he made this point on the possible dangers to a complete
liberalisation of capital flows for India. It was more of a broad argument
which applies to developing countries in general with India as an example.
A position as above on capital
account controls (or its opposite, convertibility) as held by Soros,
the propagator of ‘open societies’ of the Popperian variety,
however is consistent with his rather candid statement in the same session
that markets are not supposed to cater to the ethical aspect or the
social consequences of its actions and it remains for other institutions
(the state?) to provide the correctives. It was however, not clear whether
his position on the inadvisability of lifting all controls on capital
flows originates from his concern for markets or goes beyond!
In judging the moods of
the capital market, Soros refuses to go by the ‘efficient market’
hypothesis of neo-classical economics. It is the departures from the
belief (as ‘cognitive function’) and the facts (the ‘participation
function’) in markets which according to him explain the dynamics
of capital markets under uncertainty. The latter is absent in the equilibrium
theories of neo-liberal economics. Soros borrows the ‘uncertainty
principle’ of Heisenberg, the physicist, and qualifies it to arrive
at what he calls the ‘reflexivity’ principle’ , a
two-way feedback between the views held by participants in the market
and the actual course of events in the latter. Soros can interpret the
financial bubbles as well as the boom-bust cycles in financial by means
of these lags between what is expected and what happens in reality.
The explanations are similar to notions of disequilibrium and ‘animal
spirits’ in Keynes. Knowledge relating to the movements in the
market is thus ‘kaleidoscopic’ as the economist Shackle
once described it. It is thus uncertainty which explains the herd behaviour
instincts of participants in markets, with outcomes close to what Keynes
described as a ‘beauty contest’, one where opinions are
shaped by how others view it. There is no role in this scenerio for
a set of well-defined knowledge on future events as is held in mainstream
economics.
Dwelling on the capital
market and its behaviour pattern, a financial boom necessarily dwells
on the belief system, one where the participants do not withdraw from
the market because they believe that the boom will continue. Once they
retreat, the party is over and the belied perceptions of the dissenters
(lenders) will erode and depress further the worth of financial assets
transacted in the market, thus signalling a sharp turnaround. What lies
beyond the fast changing fortunes of participants in the financial markets
thus do not necessarily reflect the world of realities in terms of what
is often described as the ‘fundamentals’ , the growth in
physical terms and its stability!
George Soros’s warning
, delivered in a platform run by private capital in India and on a day
when Thai monetary authorities faced the wrath of speculators while
trying to restrain short term outflows, leaves a message for the markets
and the regulators in developing countries. While financial markets
driven by speculation has its own decoy for those who are not risk-averse,
nobody can predict its future course. And a crash of the financial market
not only wipes off the transitory gains for the participants therein
but also spills over to other arenas affecting output and employment
among others. Thus the financial and real losses reinforce each other
in a crashing market.
It is not the responsibility
of the market, as clarified by Soros, who made his career in financial
markets, to act on the ethical implications and the social consequences
of the above possibilities. It thus remains for the regulators in the
state machinery to take on newer responsibilities in these de-regulated
financial markets, not only for what may befall to public in general
but also to protect capital itself under capitalism . Combined with
the demands for minimal survival and its stability in a social democratic
set up, as in India, responsibilities of regulating the financial markets
for the common good of the country is even more. This is probably the
message which comes out from the reservations of George Soros on full
convertibility of the rupee and the freeing of capital account transactions
in India!
Sunanda Sen is a Visiting
Professor at the Academyof Third WorldStudies, Jamia Millia Islamia
New Delhi.
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