BORN TO EMPIRE: CAN THE UNITED STATES RE IMAGINE ITS E LF? – Page 6

DECEMBER 2010  N o 1012

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Neither fair nor equitable by SERGE HALIMI

Neo-liberals are worrying about the poor nowadays. Britain’s Conservative prime minister David Cameron proposes a massive increase in university tuition fees, already raised by his Labour predecessor, Tony Blair (1). This publicspirited measure is designed to ensure that all taxpayers do not have to foot the bill for the higher education of predominantly middle-class “customers”. The state saves money and the poor will get scholarships to cover the fees. In France, the socialist columnist Jacques Julliard said three years ago that “a grant is a subsidy to the rich who send their children to university” (2). So charging high tuition fees is really an egalitarian move.

The scale of public deficits provides an excuse for extending this argument to all social benefits, challenging their universal application. The French rightwing former minister Luc Ferry has often said: “Above a certain level [of income], people simply do not notice the [family] allowances they are drawing. It is a complete waste of public money”. The former Socialist prime minister, Laurent Fabius, agreed (3). Alain Minc, adviser to Nicolas Sarkozy and a close friend of the Socialist leader Martine Aubry, was concerned, after his father “spent a fortnight in hospital receiving the very latest treatment”, that “the French public had spent €100,000 on medical care for a 102-year-old man. … We must look into ways of recovering the cost of medical care for the very old from the beneficiaries. This issue should be addressed in the Socialist programme” (4). The Economist regretted that Britain’s Chancellor of the Exchequer, George Osborne, had shied away from further attacks on the principle of universalism in the welfare system: he might have targeted the “costly perks dispensed to pensioners regardless of their wealth” (5).

Having introduced less progressive taxation, neo-liberals are apparently worried about the “fairness” of its redistribution. The next stage is a foregone conclusion – the US is already there. In political systems where the middle and upper classes are in control, cutting public and social services is easy as soon as the privileged no longer have access to them. It is argued that these benefits encourage a culture of dependence and fraud, so the number of claimants are reduced and endless conditions imposed. What meanstesting really means is that universal benefits will be phased out.

Translated by Barbara Wilson (1) Cameron now wants to increase university tuition fees from £3,290 to £9,000 a year; Blair already put them up from £1,125 to £3,000 in 2004. (2) LCI, French news channel, 7 July 2007. (3) Respectively in Le Figaro, Paris, 18 November 2010, and on Europe 1, 4 November 2010. (4) On “Parlons Net”, France Info, 7 May 2010. (5) The Economist, London, 23 October 2010.

GP

EDUARDO ARROYO – ‘Three of a kind’ (1983)

The currency wars

Once upon a time Bretton Woods ensured orderly exchange rates and the stability of the world economy. And then global currency trading mushroomed out of the control of nations’ central banks. Can it still be contained and an all‑out currency war averted?

y Laurent L Jacque

Brazil’s finance minister, Guido Mantega, first referred to a “currency war” in September when alerting the world to the danger of the appreciation of the Brazilian real against the US dollar and the Chinese yuan. Dominique Strauss-Kahn, managing director of the International Monetary Fund (IMF), repeated the metaphor soon after: “I am taking very seriously the threat of a currency war, even if it is a protracted one.”

ThisthreattakesusbacktotheGreatDepression of the 1930s, exacerbated then by competitive, “beggar my neighbour” devaluations amongst countries in recession. Today our international monetary system is radically different: there are many more protagonists and the rules of engagement have been redefined (see The new rules of engagement). Yet the stakes remain the same: economic growth and job creation, often driven by mercantile policies and turbo-charged by currency depreciation. Still the iron law remains true: a country with a cheap currency finds it easier to export because its goods and services are cheaper.

Fever is rising on the international monetary front. Massive intervention by the Bank of Japan on 15 September to reverse the course of the ever-rising yen went nowhere. This was followed by selective controls on capital inflows by Brazil and Thailand, and there was a threat by the US House of Representatives to impose retaliatory tariffs on imports from countries that undervalue their currency (with China the clear target). Has a currency war really broken out? We need to revisit the antecedents of the current international system.

In 1944 the Allied powers signed the Bretton Woods agreement laying the foundations for a “new international monetary order” meant to shield the world economy from the crisis that crippled it during the inter-war period. Central banks, in close cooperation with the IMF, would be custodians of their currency values, which were publicly pegged to the US dollar in “par value” (1). Exchange rates were monitored by central banks that would intervene in the foreign exchange market when rates deviated by more than +/- 1% from their par value.

From 1944 to 1971, this system enabled the rebuilding of economies devastated by the second world war and relaunched international trade; these were the heydays of the Bretton Woods order. Over the years, tremors shook this sound edifice, principally devaluations which were necessary adjustments to the relative value of currencies to recalibrate national balances of payments. The Bretton Woods system remained stable because all foreign exchange transactions were tightly controlled by central banks.

Starting in 1958, leading member countries of the Organisation for Economic Cooperation and Development (OECD) started to decontrol foreign exchange transactions linked to their current accounts (imports and exports of goods and services), while keeping a tight control of capital flows. However, continued growth was redrawing the world economic map and the Bretton Woods system of pegged exchange rates was growing obsolete.

In 1971 the US suspended the convertibility of the dollar to gold at $35 an ounce (2), formalising the devaluation of its currency. Major industrialised nations let their currencies float, allowing supply and demand to set the price. The foreign exchange market – not central banks – determined the value of each currency: but the float was, and is, a “dirty” float, since central banks often intervened massively to orient exchange rates.

As exchange controls over capital movements were loosened, central banks were forced to abdicate their absolute power over exchange rates. They had little choice since their key weapon – foreign exchange reserves – were drops of water in the vast ocean of the new foreign exchange markets: today the daily turnover in those markets exceeds $4 trillion, about five times the cumulative amount of foreign exchange reserves (3) held by eurozone countries and 25 times that of the US Federal Reserve Bank. Less than 5% of daily transactions can be traced to commercial operations in goods and services: 95% are speculative capital movements.

That means it is almost impossible for a central bank to reverse an appreciation or depreciation of its currency: at best it can hope to slow down appreciation by accumulating massive dollar reserves. This has been true in Asia for some time: Japan once led with more than a trillion dollars in reserves but has been overtaken by China (more than two and half trillion), followed at some distance by South Korea, Taiwan, Hong Kong, Singapore and Malaysia. Other emerging market countries – BRIC, Mexico, Thailand, Indonesia, Turkey and South Africa – continue to restrain capital movements, retaining a modicum of control over the price of their currency. But that is

Continued on page 3

aurent L Jacque is Walter B Wriston Professor of international finance and banking at the Fletcher School (Tufts University) and Professor of Economics, Finance and International Business at the HEC School of Management, France, and the author of Global Derivative Debacles: from Theory to Malpractice, WorldScientific, 2010

inside this issue Ireland protests against its politicians, bankers and the bailout package Page 2 US left divided: establishment protestors versus grassroots activists Page 5 What Aung San Suu Kyi’s release means for the political direction of Burma Page 7 Why Greece’s youth are no longer so keen to take to the streets Page 8

Latin lovers: Iran has some good friends, especially in South America Page 10 Hi-tech haul: China cashes in on its valuable and rare earth metals Page 12 Counting the sky-high costs of expanding Dubai’s national airline Page 15 Mario Vargas Llosa: Peru’s Nobel-winning author turned politician Page 16