GLOBALIZATION Week 6 . Class Notes
Finance: How has the domain of international finance changed and how have these changes driven globalization? How should finance be regulated in the global economy?
10.10.02
Readings:
- GT4: "Shifting Patterns of Global Finance"
Foreign exchange trading averages $1.4 trillion/day. We now have a truly global financial system created by deregulation of national financial markets, the development of new financial instruments (Internet), and the growth of international banks and other financial institutions. "Today worldwide trading of currencies and government bonds means that exchnage rates and interest rates, two critical variables in the formulation of national macroeconomic policy, are determined in the context of global financial markets."
financial openness - level of legal restrictions on international financial transactions
financial enmeshment - the extent of national financial involvement in global financial activity
financial integration - the extent to which the price of and returns to assets are equalized between different national financial markets
Historical
14th C - Florentine merchant banks
17th-18th C - rise of British and Dutch economies
Gold Standard Period 1870-1914 - London as financial center of world; communicationn/transportation/industrial revolution; gold standard became frame of reference with fixed exchange rates; national economies had to adhere to world standards but still, at this point, domestic considerations were just as important a determinant. Governments were free to ignore the social and economic consequences of their monetary adjustments since democracy was still in fragile form. "Net capital flows have so far never again attained the levels of the late 19th century"
Interwar Years: Global Monetary Disorder. inward focus, protectionism
Bretton Woods Era 1944-72 - Keynes et al promoted national monetary autonomy for control of inflation and promotion of full employment, and the founding of the IMF was part of this. Currencies were tied at fixed rates to the dollar, and the dollar tied to gold. Capital controls separated domestic money markets from foreign exchange markets
Contemporary - collapse of BWS (1972 Nixon's action brings about floating interest rates), emergence of Eurocurrency market (Soviets + multinationals deposit here to avoid US control or capital controls in general), and the oil price shock (huge surplus of oil income invested in international money markets) all paved the way for phenomenal expansion of financial flows
Floating exchange rates - currency values determined by day-to-day trading in foreign exchange markets; speculative activity means exxagerated responses - Mexican peso crisis of '94, East Asian currencies in '97, Russian rouble in '98, Argentinian crisis of '02
Economic autonomy and sovereignty in an era of global finance - Mundell-Fleming theory
- Michael Pettis: "Will Globalization Go Bankrupt?"
"Globalization has been driven primarily by monetary expansions"
Boom (emerging markets become funded with surplus cash, this leads to innovation and increased productivity...expanding liquidity induces investors to take more risks) - bust (sharp monetary contraction, populism, protectionism, reduced international lending) cycle has been repeated over and over in the last 2 centuries
- Benjamin Friedman: "Globalization: Stiglitz's Case"
Stiglitz holds the IMF largely responsible for globalization's failure to help developing nations. In an imperfect world (inadequate markets or institutions) free markets do not necessarily deliver
And that govts can intervene constructively with expansionary monetary and fical policy, regulation of financial institutions and corps to keep them sound, use of tax and trade policies to nurture developing industries before exposure to the world market, and train the workforce to adapt to new conditions
IMF makes use of fiscal austerity, high interest rates, trade liberalization, liberalization of capital markets, privatization, fear of default and its policies are negligent of the needs of the poor "stabilization is on the agenda; job creation is off. Taxation and its adverse effects are on the agenda; land reform is off. "
Counter-argument: things would be even worse without IMF intervention; poverty is not as bad as it is made out to be; developing countries are still poor because of their own poor decision-making
- Thomas Friedman: "The Electronic Herd" from "The Lexus and the Olive Tree"
Globalization not a choice, but a reality. When countries tap into the global stock and bond markets, seek out multinationals, and sell into the global trading system they place themselves at the mercy of the countless laptop-endowed investors who scrutinize their countries every fiscal and ploitical move.
Short-term cattle: currency traders, major mutual and pension funds, insurance companies, ank trading rooms and individual investors
Long-term cattle: multinationals (foreign direct investment, factories around world, alliances with foreign-based factories)
"democratization of finance, technology and information"
Problems: "marginal morons", imperfect, non-transparent markets, hedge funds which magnify risk, overreaction and rapid transmission of downturns from bad markets into good markets, social disruption due to multinationals having no national allegience and playing every developing country off each other
"The Electronic Herd turns the whole world into a parliamentary system, in which every government lives under the fear of a no-confidence vote from the herd"
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