Psc124-100, "Global" Trade and Finance

Combining our text with the online notes, you find that very little new information is presented in this chapter.  That's just as well because, at the end of the semester, we don't have time to treat it thoroughly ;)

Do you notice that the same guy who wrote the lead chapter hypothesizing that 'globalization' is occurring also wrote this chapter?  He agrees with himself!  That's reassuring.

This chapter offers a new definition of globalization: it refers "to processes whereby social [ subsuming economic and political ] relations acquire relatively distanceless and borderless qualities, so that human lives are increasingly played out in the world as a single place." Not everyone likes this definition, because it makes (for instance) geography much less important.

Recall Chapter 13 on International Political Economy? In Chapter 24, we get much the "same" phenomena covered from the perspective of Liberalism, as best as I can tell from the perspective of neo-Liberal institutionalism. (Note the emphasis upon multilateral "management" of international economic affair by the organizations in box 24.1.)

If a (neo-)Realist wrote this chapter, it would tell us that states act through, or utilize, these organizations. If a Liberal institutionalist wrote it, it would tell us that these organizations manage international economics. The difference is one of emphasis: do international organizations merely reflect the relative influence of their state members in their policies (essentially Realist), or do they express and pursue their own interests (as given in their charters or mission statements). The answer is rarely crystal clear, so it is not surprising that neo-Realists and neo-Liberals debate the impacts -- actual and potential -- of such organizations.

Basic claims of this chapter:

Huge flows of money across national (actually, state) boundaries is not new.  In an era when the British pound was based on gold -- from about 1870 -- huge international flows occurred, but were cut by the outbreak of WW1.

Money is flowing across national boundaries at an accelerating rate.  Most of this money is used either for currency trading or for portfolio investment.  

Much of the financial flows that appear to be international are transfers within large companies which are operating in several states.

Some currencies are widely preferred not only for what they can purchase but also because they are (believed to be) relatively stable in value.  For instance, the Turkish lira  (TL) is losing about 65% of its value (relative to the $, Euro and Yen) each year.  If I return from a trip to Turkey with some TL, I surely don't want to put them in a sock in my clothes drawer, possibly to use some time in the distant future.  I want to exchange them immediately for a currency which is not losing its value so rapidly, perhaps the Swiss Franc.  Lots of people around the world like to hold part of their liquid assets in the form of the $ (USD).  Until the Euro supplanted the German Mark (DMK), the latter was also popular.  Many banking systems permit a customer to deposit a foreign currency (without exchanging it for the local currency). Thus USDs in European banks are called Eurodollars.  They are exactly the same as $s in the US, except that they are held in Europe!  Further, one expects that most of them won't in the near future be used to buy goods or services from the U.S.  But at any moment, their owner could decide to use them to purchase, for instance, a college education in the U.S.

How about petrodollars?  (No, not dollars held in Petro ;)  The international petroleum trade is conducted in dollars.  When a Japanese company purchases petroleum drilled in Saudi Arabia, it pays in $!  Petrodollars are simply dollars which we spend on petroleum imports which are deposited outside the U.S.  If some of these $ are deposited in Europe, then they are also Eurodollars.  After the two hikes in crude petroleum prices in 1973 and 1975, the income to oil-exporting countries soared.  A major problem for the international economy was how to recirculate these dollars, i.e., find productive investment opportunities for the newly rich persons who owned them.  In this context, the term "petrodollar" emerged meaning simply dollars acquired in exchange for 'petroleum'.

Many banking services are offered to people who are not citizens of (and, indeed, have never visited) the state in which the bank is located. For instance, Cyprus is a favorite location for "offshore banks" which serve Russians.  Our text mentions the Cayman Islands as another center. Offshore banks sometimes enable people to avoid local taxes, to diversify risks (in case their local banking system collapses), and to launder money!  We already studied this.

Several IGOs share responsibility for management of the current system.  (Theorists as well as politicians dispute whether these institutions are adequate, fair, efficient, etc.)  Among the most important are:

• GATT, superceded by the WTO in 1995: to facilitate international trade by encouraging lowering of (tariff and non-tariff [e.g., quotas, standards]) barriers to trade, and to adjudicate trade disputes among its members. The WTO inherits all the previous GATT rulings and negotiation results (and enormous corpus of rules -- on only trade in services see here).
• International Monetary Fund, to provide short-term (usually not more than 3-year) loans to help countries to import goods and services which would promote their economic growth, and to stabilize economies whose currencies are so volatile or so rapidly falling that persons in other countries don't want to hold them (e.g., the TL).  The funds of the IMF are actually loans made by states which, in return, earn interest on their deposits and acquire the option to borrow from the IMF.  Units of deposited funds are called Special Drawing Rights (in contrast to any particular currency, such as the Euro).  Depositors also gain voting power over the decisions of the IMF roughly in proportion to the size of their loans to it.  IMF
• Bank of International Settlements, used by 40+ wealthy state members  to clear transactions among their central [government-directed] banks [whicth typically issue the currency], and to promote transparency (i.e., external visibility of operations) in interbank transactions more widely.
• Group of Seven (G7, now, on occasion, meeting as the G8 with the addition of Russia), whose heads of states meet regularly to discuss world economic problems and, sometimes, to work out common approaches to these problems.  [Realists often point to the activism and influence of the G7 as evidence that states are still ultimately in control.]
• The World Bank (which, with its subsidiaries created for special types of loans and for technical advice, now refers to itself as the World Bank Group), whose formal name is the International Bank for Reconstruction and Development.  The Bank was created to lend money to help reconstruct Western Europe (the Soviet Union chose not to participate) after WW2.  Its lending today is directed toward poorer countries.  It makes long-term loans (in contrast to the IMF) usually for infrastructure (e.g., water, transportation, power, some housing). Check out World Bank Group
• There are many other multilateral banks -- IGOs -- which have more limited missions. Check out the Asian Development Bank, the African Development Bank, the new Black Sea Trade and Development Bank, the European Investment Bank, the Inter-American Development Bank, and the Antarctic Trade & Development Bank ; )
• As private investment lending has overtaken lending by governments (as one form bilateral aid) and IGOs, institutions such as the IMF and Bank have increasingly emphasized the provision of technical assistance to poorer countries to develop such things as mortgage markets for housing construction, local banking services, specialized education, and the marketing of exports.

Which understanding of international affairs do these institutions reflect?  All Liberal?  How about the G7?  None that are Marxist?  

Some what different are:

• OECD: It is engaged in a wide variety of activities.
• UNCTAD (recall that from chapter 16! A UN programme)

You should have a general idea of what these non-technical terms refer to:

protectionism

liberalization (of trade) Note that liberalization is a process which reduces obstacles to the movement of goods and services across state boundaries. People often talk about "free trade" as an ideal or as a condition, not making it clear which they mean. Liberalization should be equated with "ever-freer trade." Liberalization is generally used to refer also to opportunities for foreign direct investment and to portfolio investment (terms which you already know), as well as to trade.

gold standard (until its end the "standard" was 1 oz. gold = $35. Now the $ floats, and its value to gold is ???) and sterling community (the latter consisted of those countries -- most at one time part of the British Empire -- which pegged their currency to the pound sterling). The more general idea is fixed exchange rates (vs floating exchange rates, which are prevalent today). What is the $ worth today? Most currencies are traded like any other commodity. [Hey!  Didn't we go to the same url to find the price of gold as to find the price of francs, or pounds, or dollars?] There's a crucial difference though: governments can simply print more money when they want. For Liberals, this is one source of need for management of the international economy.

Futures and options are nicely explained here, by an organization which invites you to trade with it. There is nothing intrinsically international about these derivatives, but even though they are held for short periods of time, exchange rate shifts can make internationally traded futures extremely volatile. Don't risk your milk money.

Table 24.1 may help to show the significance of the processes and mechanisms listed in this chapter. Its message is that the volume of transactions in all sorts of transborder commerce is growing rapidly, with no sign of decrease. Equally importantly, many investments in other countries are held in forms that are highly liquid -- which means that they may be sold at short notice. Thus investors buy and sell huge sums daily of currencies, short-term securities, and equities (shares in private firms). The conditions are set for rapid rises and declines of any currency with respect to any other. We saw the currencies of Indonesia (rupiah), Malaysia (ringgit), South Korea (won), and Thailand (baht) tumble in 1997 against the major currencies, yen, dollar and mark.  Currency crashes can be destabilizing in a number of respects. For neo-Liberal institutionalists and for some neo-Realists, the importance of the organizations listed in Box 24.1 is their ability -- and inability -- to forestall currency collapses and, if that fails, to (a) prevent the instabilities from spreading to other currencies and (b) extend credit to the economies most injured so that they can recover rapidly.

What's at issue, especially for neo-Liberals, is that the existing set of organizations and practices and probably not powerful enough to manage short-term volatility of international markets. These organizations are limited by both lack of knowledge and lack of resources, as I'll expand in class. Of course, no state or coalition of states seems up to the task, either.

Bottom line: Many Liberals fear that they lack the knowledge -- and that their institutions lack the capacity to intervene delicately -- to sustain a growing, reasonably stable, global economy.