Dear Editor: I would like to pick up some threads on Mr. Rampersad’s article ‘Why financial globalization disappoints’ and his remarks on financial liberalization in today’s Stabroeknews business section.

Financial liberalization brings opportunities for economic growth in the domestic economy and a favorable climate for external capital inflows. We should therefore look deeper for disappointments when regulations do not support financial liberalization. It is a failure to implement financial regulations that weakens economic growth and spawns financial crises from Argentina to Mexico, through to the United States. We should look at institutions that are used as gaming opportunities that financial liberalization brings to the private sector.

The private sector thrives with unregulated government contracts. Huge government deficits bring lending-interest-earning opportunities for private firms. Therefore, financial liberalization should not be seen as a disappointment. There are other worrisome aspects of our institutional framework and Swiss-cheese regulations.

Financial liberalization is a prerequisite for mobilizing and accessing short term bank credit and for creating a favorable environment for mobilizing long-term capital through leveraging domestic savings and attracting foreign capital inflows. The level of bank credit is a monetary factor controlled by the Central Authorities. Governments also use bank credit or its debt instruments as a catalyst for public sector-led growth. Government treasury bills and securities interest earnings can rival real investment income earnings through wages and salaries and dividends in the goods producing sectors, offsetting the incentives for real investment and economic growth in the private sector. The current General Motors valuation crisis could be seen in this light, because GM had more interest earning opportunities from its financing business than from innovating and making fuel-efficient cars that global markets demand.

Export-led Economic Growth

Without financial liberalization, Guyana might not have succeeded in mobilizing external capital and achieved debt reduction successes. Capital mobilization was necessary for stimulating Guyana’s export sectors, although its export-led growth model is a one-sided one. The export-led model stimulates high capital investment in the short-run, accelerates foreign capital recoveries and private debt servicing charges, advances rapid consumption through the import sector, and produces an unbalanced, and perhaps unsustainable level of economic growth through export-sales maximization. Maximizing sales does not consider costs or equity shares in the export-led growth process, thereby leading to disappointments.

For example, the Export-led growth model in natural resource-rich developing countries has left many African countries poor. The cost of exhausting natural resources and damaging the natural environment is not subtracted from the benefits of growth, giving a false measure of economic growth and hardly any sense of economic development in resource-rich African countries. Export-led growth maximizes export sales at any cost-level of growing the national product. The negative growth potential from certain types of capital inflows, impoverishment and income-distributional issues should therefore be the source of real disappointment.

In the end, the real fundamentals of economic growth and a goal of economic-risk diversification should be considered by policy makers. The objective of financial liberalization should consider the development of long-term capital markets, supported by risk-taking and risk-making regulations. Capital markets in turn should support the fundamentals of deepening the growth process through attracting external capital inflows, providing the incentives for mobilizing household, government, and firm savings in long-term capital formation projects. Other growth factors such as those found in Asian economies include augmenting the quality of the labor force and the support of policies of technology diffusion and transfer. In financing and development, it is probably true today, that we have a knowledge gap in terms of how to manage and regulate costs arising from risks in the financial and the environmental sectors of the global economy.

Yours faithfully,

Ganga Prasad Ramdas

Ps: Interested readers, kindly see my article on ‘Inflation and bailout’ at http://www.usaopinionjournal.com. The journal is free to join.