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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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