The view that capital ought to flow unrestricted across the world gained currency during the 1980s and 1990s until it became the reigning orthodoxy of international finance. But according to Rawi Abdelal, associate professor in the Business, Government and International Economy unit at the Harvard Business School, this orthodoxy is already in decline.
In his new book, Capital Rules: The Construction of Global Finance, Abdelal claims that while capital flows remain relatively free, when it comes to the norms and rules of global finance, the "height of this era of globalisation has already been reached".
Abdelal argues that the globalisation of finance reached a peak in the autumn of 1998, when the international financial community reached a virtual consensus in condemning Malaysia's new capital controls. According to Abdelal, this was the point that "restrictions on the mobility of capital were deemed inappropriate under any circumstances, even during a financial crisis that began elsewhere".
He writes: "At that very moment in 1998, the IMF Executive Board and Interim Committee were considering codifying the norm for all 184 members, as had the EU and OECD for their own clubs. That autumn was as close as the world has come to a consensus - written and unwritten - that capital's right to freedom applied always and everywhere."
But Abdelal says that things have changed considerably since, and that caution towards full capital mobility now prevails within the international financial community. He argues that "every organised voice of authority within the international community has backed away from embracing complete, unqualified capital mobility" with the exception of the European Commission, which still insists on the complete absence of capital controls as a condition for entry to the EU.
Outside the EU and OECD, Abdelal argues, the rest of the world is running on "ad hoc globalisation", led by the United States. In recent years the US has "consistently turned to unilateral decisions and bilateral trade and investment treaties to advance its national interests", he says. And because so much of the world sits outside the EU and OECD, this ad hoc globalisation is undermining the legitimacy of financial openness as a universal norm.
He cites an interesting historical comparison. "The international financial community has formulated lessons for itself of the crises of the 1990s that, in both principle and language, are nearly identical to those that policymakers believed they had learned from the crises of the 1920s and 1930s," he says.
But if this is the case, he asks, why is the rediscovery of the lessons from the interwar years treated as new information? And why is the EU apparently immune from the lessons that the rest of the world has already accepted?
Capital Rules: The Construction of Global Finance
By Rawi Abdelal
Taken from an extract published by Harvard Business School Working Knowledge
Review: Nick Loney