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3/2002 Content

77 (2002) 3: Control of international financial flows

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Articles

What is the use of capital controls?
Dietrich Hartenstein

The article discusses the usefulness of capital controls against the background of the recent international financial crises. It begins by showing that the free flow of capital is instrumental in achieving an optimal allocation of resources. Then, “legitimate” reasons for restricting the flows of capital are sought. Particular attention is devoted to examining the question as to whether and, if so, how the free flow of capital fuels susceptibility to crises. The author argues that speculative capital movements tend to be a side-effect of financial crises while the causes are to be found elsewhere. Finally, it is pointed out that the IMF and its member countries continue to pursue the liberalization of capital movements and that capital controls would contribute little to international peace.

New forms of regulation for new financial markets: The need for a Tobin Tax
Stephan Hessler

Financial and currency crises are a latent threat to the world economy and to peace in the affected regions and societies. The vast majority of policy responses to the recent crises fail to integrate financial actors. These models tend to socialize the economic costs of currency and financial crises: It is the international society and/or the population in the affected countries who have to pay the costs of both the IMF “bail out” packages with their structural adjustment conditionality and the “bail in” proposals designed to include external bond owners. Outside the classical financial institutions, new constructs of “hybrid” self-regulation are emerging. In this respect, James Tobin’s proposal for a tax on currency transactions and recent policy modifications provide an alternative path. The Tobin Tax would be the first step to a global tax offering both a more efficient and more equitable solution to the challenges of the new financial markets and a powerful response to the emergence of global problems.

There is capital enough – but not everywhere. Challenges of globalized capital markets for the developing countries
Hartmut Sangmeister

Argentina is one of the developing countries that most enthusiastically embraced the neo-classical model promoted by the Bretton Woods institutions. For years admired as one of the most successful emerging market economies, Argentina is now at the center of the most recent financial crises that struck many developing countries during the late twentieth century. Argentina’s financial and currency crisis has laid bare several critical weaknesses in the current international financial system. Empirical evidence indicates that the rapid growth of international financial transactions and private capital flows to developing countries have contributed to higher investment, faster growth, and rising living standards in some countries. But the liberalization of financial markets – both domestic and international – has also been associated with costly economic and political crises in several developing countries, not only those with major economic imbalances but also, through contagion, in countries with a sound economy. Direct controls are needed to reduce the risk of destabilizing capital inflows and outflows as well as international regulatory policies which still allow the benefits of open markets to prevail. Though international action for a new financial architecture is crucial, developing countries must themselves adapt their policies to prevent and better manage financial and currency crises.

The hidden financial flows of Islamic terrorist organizations: Some preliminary results from an economic perspective
Friedrich Schneider

This paper tries to summarize the existing knowledge about the financing of international (Islamic) terror organizations in order to develop strategies for fighting international terrorism beyond political and military means. First, some short remarks about the organization of Islamic terror organizations are made and their financing systems are described. Then, with the Al Kaida network as an example, different sources of financing are analyzed and the amount of existing financial means is estimated. Following a survey of measures recently taken in some major countries strategies are developed to detect and reduce the financial flows of international terror organizations. As countermeasures among others an efficient international task force applying criminal network analyses and efforts to remedy some weak points in the international banking system as they get visable in the problems of off-shore centres and tax heavens are proposed.

Miscellany

Angola – on the way to peace?
Tatjana Reiber

Since the death of UNITA leader Jonas Savimbi in February 2002 progress has been made in the peace process in Angola. The two belligerent parties have signed a ceasefire agreement and the demobilization is moving forward. However, political, social and economic problems still pose serious threats to enduring peace in Angola. The legacy of 27 years of civil war, various failed peace initiatives and a weak state constitute hurdles for successful peace building. If the peace process is to be sustainable, not only the conflict between the competing elites of UNITA and the MPLA government has to be transformed, but also potential root causes of violent conflict have to be addressed.