Monday, November 30, 2009

Notes from Held's book on globalization of finance

Held Ch. 4
Shifting Patterns of Global Finance
4.1: Indicators of Financial Globalization and Financial Enmeshment
· Openness of national financial markets: level of legal restrictions on international financial transactions
· Enmeshment: extent of national financial engagement in global financial activity
o Measured by: turnover of overseas assets on national markets, involvement of both foreign financial institutions in domestic financial markets and domestic financial institutions in overseas financial markets and national shares of various global financial flows
· Integration: precise economic sense of the extent to which the process of, and the returns to, assets are equalized between different national financial markets
· Best indicator of financial globalization as a historical process: extent to which there is a convergence between returns to, or process of, similar financial assets
· Extensity: measured by geographical reach
· Intensity: magnitude of global financial flows
· Velocity: related to changing infrastructure, like communications technology
· Impacts: it has always impacted but the kinds (decisional, institutional, distributional and structural) can vary among eras; mediated by national economic conditions
4.1.1: The structure of the argument
· Global finance embraces:
o Flows of credit
o Investment
o money
· Seeks to identify the key attributes of various eras
· Technical terms:
o International capital flows: cross-border flows of assets and loans differentiated into several types:
§ FDI: ownership of or investment in overseas enterprises in which the investor plays a direct managerial role
§ International bank lending: loans to foreign creditors in domestic or foreign currency
§ International bonds: credit instruments issued by or to overseas creditors which include a promise to pay a specified amount of money on a fixed date and to pay interest periodically at stated intervals – bonds are marketable securities denominated in standard units
§ Portfolio investment: investment in corporate shares or longterm bonds held simply for their return with the investor playing no managerial role
§ International equities: shares in companies issued to foreigners
§ New financial instruments: derivatives, options, swaps
§ Development assistance: official government-to-government aid flows
§ International monetary flows: buying and selling of foreign currency
o Gross capital flows: measure total capital flows out of an economy or alternatively flows inwards
o Net capital flows: measure gross outward flows minus gross inward flows – net flows indicate whether an economy is accumulating claims on the rest of the world or visa-versa.
4.2: Early patterns of global financial activity
· 12th century: Precious metals used by international traders
· 14th century: Organized international finance: Florentine merchant banks
· 16th century: Europe imported large quantities of precious metals used to finance purchases in Asia (Europe and Asia became intertwined
· 16th century: Antwerp developed as financial center b/c of liberal financial policies
o Growth of international finance fueled by 2 things:
§ Growing trade networks fueled demand for cross-border financial systems to prevent danger of transporting money across lands
§ Difficulties faced by states to finance wars created pressure and opportunity for organized finance
· Example: Bank of England created to finance England’s war with France
· 18th century: demand for international finance led to sophisticated markets
o Communications took about a week
o But intensity of trading makes it a cohesive whole
· Although extensive, the reach was limited to the reach of imperial systems
4.3: The classic Gold Standard period: 1870-1914
· Developments n communication and infrastructure means that international markets became enmeshed with national markets
· Skeptics: this period is the benchmark for financial globalization because it was during this time that the scale of net flows was the greatest and adherence to the Gold Standard meant that countries had to subsume their domestic economic policies to the international rules.
· Transformationalist: this is misleading and untrue
4.3.1: International capital: the extensity, intensity and stratification of financial flows
· Remember that Held is saying transformationalists believe the skeptic position is misleading
· Exact capital flows across countries is hard to measure, but the general sense is that it increased
· This period had capital flows changing from European-centric to having a distinctive interregional or intercontinental character
· Charts are in book to show capital flows and where they went/how much was invested
· A liberal financial market: little to no regulation on international transactions during this time; especially on global bond market (privately organized)
· There was an intercontinental reach but it was concentrated and stratified
· Infrastructure changes made it possible to have global markets more effectively: intercontinental telegraphs, encouraged the institutionalization and formalization of international monetary arrangements (classical Gold Standard)
4.3.2: International money: the operation of the classical Gold Standard
· Values of major currencies were fixed to gold
· Established formally in 1878 (Paris International Monetary Conference – 1867)
· Initially, participation confined to leading European economies, N.A. and Australia
· Membership required that countries both convert their currency to gold on demand and did not restrict international gold flows.
o Some say this was an open and automatically adjusting system
o Critics say – not so, but it was open
· P. 196: The operation of the Gold Standard – in theory

Saturday, November 28, 2009

Globalization and Finance: Held, Castells, and Gilpin

Finance is another aspect of the world that is examined when globalization is studied. Just like the Multi-national Corporation and union analyses, the analysis of finance will use Held’s measurement system.
The discussion of finance involves the comparison of financial flows over time. This is necessitated by the skeptic position which claims the world is less “globalized” now than in the golden era. In order to determine if the analysis of financial globalization supports the skeptic position, or supports one or more of the other positions, it is necessary to look at finance over time.
The skeptic position argues that the benchmark for a truly globalized financial system is the Gold Standard era, before World War I, and that the world today is not as globalized as the world then (Held 192). For the skeptics, the Gold Standard Era required that states subsume their domestic policies to the international rules of the Gold Standard system (Held 192). Today, according to the skeptics, the nation-state has not been undermined by the forces of globalization, that nation-states do not have to subordinate domestic economies and economic policies to the international system, and that although the role of the nation-state has declined, in some ways, in economics, it has increased in others (Gilpin 349).
Extensity and intensity are the first two criteria examined when analyzing globalization. For the skeptics, the extensity and intensity were greatest in the late 1800s: the markets were truly supreme and the nation-state had little power over economic affairs (Gilpin 350). In order to be a member of the Gold Standard system, a country had to convert their currency into gold on demand and not restrict international gold flows (Held 195). For skeptics, this is the ideal of a globalized financial system; the nation-state being subject to the market. During the late 1800s the extensity allowed the international flow of finance to reach all over the globe; there was a global capital market, multinational banks, and a flow of money between countries, although the flow was highly uneven (Held 198). Additionally, the intensity, the net capital flows around the world, has not been reached at a similar level since that time (Held 198). Since, as skeptics argue, this is not the case today, then globalization is less than it was in the late 1800s (Gilpin 351).
Transformationalists do not dispute that the extensity and intensity of globalization during the golden era were phenomenal, but instead state that the extensity and intensity still relied on domestic policy and a few countries, notably Britain, dominated the system (Held 198). It was centered in Europe, which made it regional rather than global in reach (Held 198). Compare that to today where almost all nation-states participate in the international financial markets either through international bonds, currency trading and setting interest rates (Held 222).
The intensity of the current market, for transformationalist, is much larger today. There is lending between banks- both in national and foreign currency – international bonds, stock markets, derivatives, and international money markets (Held 209). With all of these types of international financial flows, they are more global in nature and less regional. Europe does not dominate the flow of capital (Held 207) and more money flows to developing countries than it ever did in the golden era (Held 211). The various ways that capital and investment can flow without regard for national borders is unprecedented in the current time (Held 223).
Velocity is one area that is undisputed between the various viewpoints. Skeptics, transformationalists, and hyperglobalists all agree that velocity is faster today than it has ever been before (Held 223). This is because of the infrastructure and technological developments in the world. There was no internet to connect the world 24 hours a day, 7 days a week in the late 1800s. There is the Internet today. This allows for instantaneous communication around the globe in the financial markets. When this is compared to the trans-Atlantic cable that allowed for international telegraphs, there is simply no comparison. The velocity is much faster today than in any other period (Gilpin 352).
However, the presence of technology and communication between people is not the same as having a globalized financial system.
The area where there is the most difference between skeptics, hyperglobalists and transformationalists is on the impacts of globalization. For a skeptic, globalization would mean that nation-states must subordinate their national economic policies to the international finance market (Held 6). However, the skeptic maintains that in the world today, nation-states are just as important as the international financial markets and that the international financial markets only operate with the consent of the state, which means there is not globalization (Held 6, Gilpin 354). Skeptics also maintain that the ideal state of globalization, the golden era where the nation-state was required to subsume national economic policy to the requirements of the Gold Standard, is simply not met today (Gilpin 349).
A transformationalist would argue that the international market blurs the line between the nation-state and the international world, and that the international financial market forces nation-states to change the way they pursue their goals (Held 7). A hyperglobalist would argue that the international financial markets are eliminating the need for nation-states; that the nation-state is becoming obsolete in the face of international financial markets (Held 12).
How does the international financial market impact domestic policy and the decisions of nation-states?
Nation-states have to manage macroeconomic policy which consists of fiscal policy and monetary policy (Gilpin 354, Held 228). The nation-state has access to the international fiscal markets for borrowing and financing its debt (Held 229). The nation-state must also consider issues of interest rates and capital mobility when managing macroeconomic policy (Held 229). However, simply because a nation-state must consider these does not mean the nation-state is in decline, or that that nation-state is forced by the market to change their policies (Gilpin 355). Instead, the nation-state must make trade-offs, as it cannot have fixed interest rates, autonomy in macroeconomic policy, and international capital mobility (Gilpin 354).
For skeptics, if the world was truly globalized, then the state would not be able to affect its economic policy and would have to surrender to the global system (Held 192). However, the Federal Reserve still maintains a large control over the United States economic policy, the European Economic Monetary Union maintains control over its interest rates, and Chins has imposed controls on capital movement (Gilpin 355). If this were truly a globalized financial system, these domestic controls would not be possible because the domestic policy would have to be subordinate to the international policy and the nation-state would not be able to make the choices they do – like the EEMU, China and the Fed. Rather, the presence of the international financial system has made macroeconomic policy more complex (Gilpin 357), but has not negated the importance of the nation-state.
Castells, a hyperglobalist, admits that most of a nation-states’ economy is based on the domestic sector, but claims that the globalized core – the financial markets – creates a global economy that influences and diminishes the nation-state (311). In the financial markets, money can move instantaneously and at any time of day or night because of the Internet (Castells 312). However, this is an argument about velocity, not about impacts. The impact of the international financial markets cannot be seen merely in the presence of technology – that is infrastructure- but must be seen in how the nation-state is making, or not making, its own decisions. The lack of information from hyperglobalists about the impacts of the transactions, rather than merely showing that there is more velocity in the transactions, supports the skeptic position that globalization is being exaggerated.
Transformationalists also under-emphasize the impacts of financial globalization on the decisions of nation-states. In order for the transformationalist perspective to be the one with the most support, they would have to show that the globalization of international financial markets is changing the way that states think about sovereignty and the way states make decisions.
Although the presence of international markets has changed the way that nation-states do business, it is still the nation-states doing the business (Held 229). It is the German Bundesbank that determines the inflation rate, monetary supply and economic policy of Germany and although international markets have made this more complex, they have not taken that authority away from the German nation-state (Held 229). Financial liberalization has given nation-states more options regarding their finances, like borrowing from investors who might impose terms and conditions on the borrowing, but it is still the nation-state making the choices (Held 229). What this might signal is a shifting in the way a state thinks of itself. Instead of thinking that everything the nation-state does must be paid for by the nation-state, the nation-state might be willing to enter the international bond market and accept a reduction of its ability to make decisions in the future (Held 230). However, it is still the nation-state that must make the initial choice to reduce their abilities, and not all nation-states make this choice. This means that the nation-state is still the primary actor.
The strongest argument against the skeptic position is the way that risk is distributed throughout the system (Held 233). If the markets are truly globalized, then the risk of the market will be globalized as well. What happens when one market crashes in a globalized system? All markets crash. This is what happened in 1982, and in 2007-08 (Held 233, New York Times). The risk of the system was spread among the world and was not confined to one area, or one nation-state (Held 234).
The hyperglobalist and transformationalist positions simply do not have enough evidence to support them. While these positions claim that the state is declining in importance, the state, even in their proffered evidence, does not seem to decline in importance. Markets, such as stock markets and futures markets, are nationally based. Nation-states make decisions to seek out loans with certain terms and conditions. Nation-states still set domestic economic policy. While the nation-state may take into account certain international financial issues, it is unclear that the nation-state is declining in importance or in their decision-making power. This leaves the skeptic position, that globalization is being exaggerated, as the strongest position.