James Schipper: It is certainly possible to transfer savings abroad, and that is not beneficial for ordinary citizens, but a lot of what rich people do is not beneficial to ordinary people. More important than what rich people do abroad is the income distribution.
Suppose that Ruritania is a closed economy. In a closed economy there can’t be capital flight of course. Let’s further suppose that the richest 10% of Ruritanians have 64% of national income. The average income of the richest 10% is than 16 times higher than the average income of the remaining 90%. To a social-democrat like me, that certainly would be highly undesirable, but there is no capital flight to worry about.
Capitalists can certainly carry out an investors’ strike. If they really dislike or distrust a leftwing government, they can refuse to invest, but that is possible also in a closed economy. We shouldn’t become obsessed with balance-of-payment problems.
Concerns about balance-of payment are mainly justified when a country has limited export capacity but has to import a lot of essentials. In such a case, it may not only be necessary to have rigid controls on capital outflows but also to restrict the import of luxuries. If a family has limited income, then it should not allow dad to buy expensive cigars or mom to buy designer cloths.
Let’s take 4 rich Peruvians, Pedro, Pablo, Diego and Carlos. Each year, Pedro transfers 25,000 USD to a foreign bank. Pablo imports luxuries worth 25,000 USD each year. Diego employs 5 Peruvian servants with that amount. Carlos adds 25,000 to his Peruvian savings account each year.
There is no difference between Pedro and Pablo. Diego employs Peruvians, but the services produced by those employees are for him. Those 5 servants could be providing services for ordinary Peruvians. It is never enough to look at job creation. We should also look at what those jobs produce and for whom. Carlos is the only one who is doing what rich people should be doing: saving money in order to reduce conspicuous consumption and free up resources for investment.
If capital flight is no big deal, why do nations get so upset about it. Venezuela was losing $50 billion a year to capital flight, money that could have been invested in the economy. It was all going straight to Miami and Houston. Venezuela was so upset about this that they put in capital controls to keep people from moving money out of the country. But every time you do that, you seem to end up with an underground money economy and a dual exchange rate.
Capital flight -> capital controls -> dual exchange rates with black market exchange rate diabolically manipulated by the opposition in Houston precisely to ruin the economy -> fixed exchange rate instead of floating the exchange rate -> wild inflation.
And the capitalists went on strike anyway an refused to put any money into the economy. They ran their factories and firms at 50% capacity and stockpiled and even destroyed goods in order to create artificial shortages to wreck the economy.So they stopped the capital flight but not the capital strike.
The capitalists wave the threat of capital flight over the head of any leftwing government like a Sword of Damocles. They just did it was Castillo in Peru, and it forced him to reign in many of his more leftwing proposals. The main thing they need to do in Peru is nationalize the mining business. Mining is extremely profitable in Peru but all of the money goes to foreign corporate carpetbaggers and parasites and the Peruvians themselves hardly get a nickel.
Castillo merely threatened to renegotiate the contracts with the foreign companies so Peru got more of the money, and the oligarchy went nuts. That is because while the foreign-owned mining industry is disastrous for your average Peruvian, the Peruvian oligarchy, like most in the region, is a comprador oligarchy. They make a lot of money off of those mining contracts somehow or other, don’t ask me how. No matter how much the country itself is getting screwed by foreign corporations raping the country, somehow the oligarchy always positions itself between the corporations and the nation and makes money off of the pillage.
They Peruvian oligarchy said if you try to do the tiniest leftwing thing, we will take all our money out of the country. They also said that that would tank the stock market. That is another sword they wave over our heads. “We will tank the stock market!” They’re basically terrorists. “If you don’t give us what we want, we will use these economic bombs to blow up the economy!
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What you said is pretty spot on. Gabriel Boric has just recently won in Chile, and the Capitalists have already sent threat signals, with the price of the currency dropping dramatically along with the stock market. It always happen that whenever a leftist type wins, or is perceived as winning, any election of sorts including primaries, or announces redistribution, the national and foreign oligarchies act by threatening and acting to give a blow to the economy in some way. It’s not even like they are proclaiming that they are going to expropriate all private property or something.
It’s not currently seen in Venezuela, Cuba or Nicaragua because they have already used all the tricks by this point.
My 2 main points are that most capital is physical and financial and can’t simply be taking out of the country. It has to be sold first. Those foreign mining companies with investments in Perú can’t just pick up those investments and take them out of the country. Liquid capital is another story. The second point was that income distribution is more important than balance-of-payments.
The real whammy to Venezuela’s economy was the drop in oil prices. It is hard to believe that in Venezuela there was so much liquid capital that for several years, 50 billion could leave the country.
Every leftist victory in Latin America leads to a drop in the stock market and the exchange rate. What happens in the stock market is of no interest to the masses, who don’t own stocks.
A fall in the exchange rate can be a good thing. Many rightwing governments try to keep the exchange rate high in order to keep inflation down. It is what the Brazilians call âncora cambial, that is, using the exchange rate as an anchor to keep inflation down. If the exchange rate is high, the country will be flooded with cheap imports, which prevents prices from rising. To finance the trade deficit, the central bank keeps the interest rates high, which attracts short-term capital that can pay for all those imports.
The combination of high interest rates and a high exchange rate are inimical to economic growth, and they always end up badly, as is the case now in Turkey and Lebanon. The Pinochet government did the same thing, and the result was a deep economic depression in the early eighties, something that the egregious neoliberals always forget to mention.
Instead of worrying too much about capital flight, leftists government should prevent all foreign capital from coming in in the first place, except direct foreign investment in the export sector or the import-competing sector.
Another policy that every leftist government should avoid is selling bonds in a currency other than its own. As the MMT’ers like to say, a government with monetary sovereignty that has debts in its own currency cannot go bankrupt.
Another must for leftist governments is never to relinquish monetary sovereignty. Don’t dollarize your economy, don’t have rigid fixed exchange rates. The greater the role of a foreign currency in a country, the more dependent the country becomes on foreign financiers.