Essays in Honor of Lance Taylor
Edited by Amitava Krishna Dutt
Chapter 9: Selling the family silver or privatization for capital inflows: the dual dynamics of the balance of payments and the exchange rate
9. Selling the family silver or privatization for capital inﬂows: the dual dynamics of the balance of payments and the exchange rate Amit Bhaduri* I INTRODUCTION The ideology of market-driven economic development is gaining ground at a time when the ‘globalization of capital’ is also proceeding at a dizzying pace. Multinational corporations, banks and other ﬁnancial institutions like mutual funds are major players in this process characterized by overwhelmingly large private capital ﬂows. The daily volume of foreign exchange transactions is estimated currently (circa 2001) at nearly 2 trillion dollars in spot and future markets together including various ‘options’and ‘derivatives’-related ﬁnancial transactions (Felix, 1996). This daily ﬂow is enough to wipe out the entire stock of reserves of all the Central Banks put together and less than 2 per cent of this ﬂow is related to trade, while an even smaller percentage is accounted for by direct foreign investment. The overwhelmingly large proportion of this transaction is in the form of ‘foot-loose’ portfolio capital, often of a short-term nature (cf. Neal, 1990). The process of globalization of capital dominated by private players seems to present unprecedented opportunities and dangers at the same time to the developing economies. Privatization of the public sector is often considered a window of opportunity in this context. The programme of privatization proves to be a convenient way of attracting private foreign capital. While this provides opportunities for faster growth through relaxing the constraint of foreign exchange, it is intertwined with the danger that such...
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