The overarching role of state to protect capital
George Soros surprised his audience in the Capital recently when he advocated against full convertibility of rupee and the capital account.
Sunanda Sen
George Soros surprised his audience in the Capital recently when he advocated against full convertibility of rupee and the capital account. The message can also be a cause of unease for policymakers and their advisors in the government, who have been advocating full convertibility of rupee by removing the restrictions on money transfers from the country by resident Indians.
Transfers, currently legalised, are up to $2,500 per person over a year, which amounts to $2.5 billion 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. Mr 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 Mr Soros, the propagator of open societies of the Popperian variety, 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 not clear whether his position on 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, Mr 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 explains, the dynamics of capital markets under uncertainty. The latter is absent in the equilibrium theories of neo-liberal economics. Mr 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.
George Soros surprised his audience in the Capital recently when he advocated against full convertibility of rupee and the capital account. The message can also be a cause of unease for policymakers and their advisors in the government, who have been advocating full convertibility of rupee by removing the restrictions on money transfers from the country by resident Indians.
Transfers, currently legalised, are up to $2,500 per person over a year, which amounts to $2.5 billion 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. Mr 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 Mr Soros, the propagator of open societies of the Popperian variety, 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 not clear whether his position on 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, Mr Soros refuses to go by the efficient market hypothesis of neo-classical economics.
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It is the departures from the belief (as cognitive function) and the facts (the participation function) in markets, which, according to him explains, the dynamics of capital markets under uncertainty. The latter is absent in the equilibrium theories of neo-liberal economics. Mr 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 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 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 scenario 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.
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While financial markets driven by speculation has its own decoy for those who are not risk-averse, nobody can predict its future course. A crash of the financial market not only wipes off the transitory gains for the participants 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 Mr 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 on 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!
(Author is visiting professor at Academy of Third World Studies, Jamia Millia Islamia, New Delhi)
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