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Dossier 6

Financial Globalisation

La montee en puissance of international finance in a context of globalization is one of themarking phenomenons of international finance in a context of globalisation.

Financial globalisation:

Definition: a procces of interconnection of the capital markets

at nation and international levels

leads to the emergence of unified market of money at the planetary

level. Part of a long and complex historic process, leading to the globalisation of the

economy. ultiple !auses:

political

demographic

technologic

"iven birth to different analyses that are more or less optimistic about its effects on

the functioning of the global economy. #onetheless, consensus on the need to reform the international financial architecture

in order to adept it to the globalization of the markets

$ouldn%t a ne& 'retton $oods be necessary(

The Three Dimensions of Globalization

"lobalization covers a great diversity of processes

!orresponds first to the opening of national economies to international transanactionsand the exchange of goods and services

)econd level, the mobility of the factors of production *more particularly capital+ that&e designate usually by financial globalisation.- ost important vector is the international movements of capital

notably D/%s done by firmes multinationales

*dimension multinationale+

Finally, gro&ing interpenetration of national economies

thus the progressive destruction of borders

&eakening of national regulations

deterritorialization of economic activities

more than an internationalisation of the economy, it concerns a

globalization of the processes of production

globalization of the markets, integrated markets and enterprises &ho become global

actors- decisions and comportment seem to escape all

national consideration dictate their o&n la& to those &ho are responsible

for national policy *global dimension.+

t is in the domain of finance that globalization of the markets is the most

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pronounced a 0uasi1perfect mobility of the financial flo&s at the planetary scale.

A Historic Phenomenon

2he process of globlization is not ne&3

it is a secular movement

historians trace back to the 45th century,

at the moment of the economic take off decollage- of /urope

the intensification of /uropean exchanges &ith the t&o great

civilizations of that period: the 6rabic &orld

!hina.

'ut, for many economists, the first great episode of economic and financial

gloalization is found at in the 47th century 6n intensification of international exchanges of merchandise and capital

bet&een /urope and the 6mericas. t deals &ith a process of expansion of the economic1&orld-,

according to the expression of the historian Fernand 'raudel, comparable in many respects of the globalization that &e kno& today.

2he process of globalization is interrupted by

the the t&o global conflicts

by the economic and finacnial difficulties of the inte1&ar periodm

notably the "erman hyperinflation of 47891478

the "reat Depression of the the 9;s.

2he fractionning of the economic &orld continued on into the after1&ar- period for

t&o series of reasons. 4. 2he !old $ar cut the planet in t&o

8. During the 2rente "lorieuses *47evolution,- attempts to redynamize capitalism by policies

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of deregulation and privatization. given energy by

>onald >egain in the @)

argaret 2hatcher in the @nited Aingdom,

2hese policies, called neoliberales- aim to tie back in &ith the ideology

of free1exchange and of free enterprise developed by 6dam )mith andDavid >icardo in the 47th century.

'ut the neo1liberal policy proBect is different because it consists in giving absolute

priority: to the logic of the market

to the interests of the sharers- of financial capital

explains the dominant role of finance in the in contemporary process of

globalization.

Creation of a global market of capital

2he policies of financial liberalisation

carried out in the maBority of developed and developing countries.

have given a boost of energy to the process of financial globalization have favored the creation of a uni0ue money market on the planetary level.

/x: 2he reforms led in France

instigated by Pierre 'eregovoy

the modernisation of the financial center of Paris *47?

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from the obligations in euro

11to stocks in dollar, from stocks to options...

n total, these particular markets *finance, exchange, options+ have become the

under1ensemble of a global integrated financial market, itself become global. 2he place of finance in the global economy has also changed.

n the past, the function of the international financial system &as to assure the

financing of global commerce and the balance of payments. o&ever, the international financial flo&s have recently kno& an explosive

progression, &ithout common measure &ith the needs of the global economy.

2he follo&ing numbers are elo0uent:

according to the estimation of the international >egulation 'ank, the rate of theexchange rate * on &hich the national moneys are change amongst eachother+ has been multiplied by 9 from 47?7 to 8;;3

that year, around 4.7 billion dollars, e0ual to the annual P' of France,

&ere exchanged every day on the exchange markets of the &orld. Ether&ise on this market, the transactions induced by the financial

operations are fifty times more imporatant than those linked to

inetanitonal commerce of goods and services. 2he interpretation of these numbers is simple:

thh international finance develops henceforth &ith its own

logic &hich has nothing more than in indirect relationship&ith the financing of exchanges and investments in theglobal economy.

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Two contraste theoretical conceptions of the financial globalisation:

For its defenders:

the globalization must engender important benefits for the planet. 2he develooment of the exchanges is

a source of gro&th and

must permit to the least advance countries to catchup on their delay.

2he financial globalization:

in favoring a better allocation of resources on the interantional scale, must

stimulate the most dynamic sectiors and countries. 6ccording to this conception, the saving of the countries of the #orth ought to

logically go and invest themselves in large part to&ards the countries of thesouth &hose potentential of development is the most important.

2his optimistic cvision is founded on the hyptothesis that:

in normal conditions, the financial markets are efficient- they tend to spontainously converge to&ards e0uilibrium

reach an optimal allocation of financial resources on a

planetray scale. En thiese effficeint- markets, the operators are incited to

utilise to their best all the available information. 6ccording to the theory of efficiency of markets:

*comes directly from the neoclassical theory+

the disfunctionings of the financial sphere are explained

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principally by the existence of obstacles to free circulationof caplital,

such as the public policies *regulation+.

Less optimistic a keynessiencne inspired concept of finance:

sho&s thtat the financial markets are characterized by

imporatant imperfections

lead to their instability

lead to itheir incapacity to proceed to a satisfying allocation of capital.

Aeynesian approaches:

defeneded notably by oseph )tiglitz *#obel Prize 8;;4+,

the imperfections of the markets

concern the 0uality of information

take the form of asymmetries of information bet&een lenders

and borro&ers. 2he disfuctionnings of the financial markets are linked to

these asymetries of information &hich impede the

markets: from evaluating correctly the financial stocks

from effectively directing the funds to&ards the

countries and teh economic agents &hich havethe opportunity to make the most producivtveinvestments.

2his imprefect information leads the operators to also follo& a

gregarious and mimetic behavioral pattern. *&hen the infamtion is lacking, one copies his neighbor,

hoping that he has more information than himself,+ 2hus the explanation:

in certain moments, the investors run en masse to&ards certainemerging countries, perceived to be eldorados, they then brutally pull back from these same contries if they are

nervous or disappointed about their returns this is at the origin of the crises!

The per"erse effects of financial globalization:

2he observation of the contemporary process of financial globalization seems to rather gi"e

reason to the the #e$nesian anal$sis of the finance. Ene notices that financial globalization,

on one part, has not permitted the resolution in a satisfactory manner of the problem

of the allocation of financial resources on the planet, and on anther part, has aggravated the instability of the global economy, bringing

about the serious and recurrent financial crises.

%e can classif$ countries into three group

the e"elope countries

2he lions share of the international financial flo&s are concentrated in the principally

developed countries.

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the e"eloping countries

represent ?; percent of the of the global population,

capture only a small part of the capital &hich, each year, circulates across the planet.

and among the developing countries &e have the emerging countries.

6s &as the case in the 47th century for the countryies of the #e& $orld-, the current

globalisation has favored their development

have inserted themselves into the international division of labor. situated principally in:

)outh /ast 6ise,

Latin 6merica,

!enrtal and /astern /urope

*and &ho are practically absent from the 6frican continent+

are only t&enty in total,

2herefore the grand maBority of the developing countries:

have not profited from the globalization

have even been impoverished in relative, *and sometimes absolute + terms in relation

to the developed and emerging nations.

TA&'()D( for Africa : *+ ','

2hus, in 8;;

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one notices that the developing countries send more capital to the developing

countries than the receive from them. n other terms, globaly, the least advanced countries finance the most rich

countriesK Can one consier. in these conitions. that globalization contributes to an efficient

an e/uitable allocation of financial resources on the international scale0 @nited )tates

receives the larges part of international fincancings.

has the privilege of issuing the principle international currence *monnaie+

&hich economists call the right of lordship.-

2he dollar is, by far, the most used money in commercial and

international financial transactions. 2his privilige permits the @nited )tates, up til present, to indebt itself

almost &ithout limit to foreign countries. 2he deficit of running accounts exterior to the @nited )tates

measures the financial need of the american economy

has passed from 4; billion dollars in 477? to more than

?;; billion dollars in 8;;5, more than 5G of @) P'

these deficits correspond to the clean entries of capital &hich

has come to irrigate the productive fabric *tissu+ of america. Ene can consider that, thanks to their dominant position in the

international financial system, the @nited )tates functions like a gigantic pump sucking the global savings

are at the origin of a phenomenon of eviction of the

counties on the &ay to development.

)nstabilit$ an financial crises at the heart of globalise capitalism

2he acceleration of the process of financial globalisation &ent as a pair &ith the mounting ofinstability on the planet. 2heses phenomenons of instability and financial crisis are not ne&.

!. Aindleberger: Global History of Financial Speculation from 1700 to our

times, sho&s that the financial crises are an eternal recurrence since Finance

began to organizes itself in the &orld around olland, "reat 'ritain,"ermany, and France.

2he concrete form of the financial instability transforms itself over the

course of the evolution of capitalism: in the 4=th and 4?th centuries, the instability is identified &ith:

the crises of sovereign debt

&ith the speculation on the commerce of tulip bulbs in6msterdam

then on the actions of the 'ritish /ast ndia !ompany.

n the 47th century:

instability in the stock exchanges of value

resounding bank failures

*!risis of the /nglish 'aring in 4?7;+

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2he 8;th century kne& the three main forms of the financial crises:

the stock market crashes,

characterised by a slump in prices *cours+ follo&ing a a brutal movement of

mistrust &hich lead to the maBority of operators to sell their titles. 4787 and 47?=

both came from #e& ork and spread

the crises of exchange, translated into a brutal lo&ering of price of money follo&ing speculative attacks

banking crises

depositor panics

chain bank failures,

2he recent period

spectacular acceleration of financial instability under all its forms.

)ince the beginning of the 7;Hs, the bank crises and the crises of monetary exchange

have multiplied, in /urope *crises of the /uropean onetary )ystem from 78179+

in the emerging countries of 6sia, Latin 6merica, or !entral or eastern /urope.

2hese crises have been so much more serious in the emerging countries that theyhave taken the form of t&in- crises rates of exchange

and banks.

/#!6D>/) 4. 2he recent financial crises

2he beginning of the 84st century

marked by the stock1market crises linked to:

the drop of the technological values *e1crash in 8;;;+

the difficulties and malpractices of the great enterprises

*/nron, $orld!om, Merox, Nivendi1@niversal+ .

2his instabilit has an economic and elevated social cost because it disturbs the development of the countries in crises

slo&s the gro&ith of the global economy.

2he maBority of economists agree in thinking that these crises have a narro& link &ith

the process of financial globalization. Eptimistic vision:

these disorders are linked to a process of learning:

the private actors and the emerging countries moust learn to

master the complex mouvements of the modern financel means that the rhythm of crises must slow downin the

future.

6ccording to a conception that is more realistic: coming from the information of history

instability

is &ritten at the heart of capitalism

finds itself amplified by the considerable &eight taken by

liberalized finance in the contemporary global economy.

%hat policies to use in light of the financial globalization0

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Financial globalization raises t&o principle problems:

une0ual allocation of financial resources on the planet,

to the detriment of the maBority of countries in development on one hand.

the financial instability

perturbs the gro&th of the global economy.

2here exists a consensus to consider necessary a reform of the architecture of theinternational monetary system.

o&ever, the propositions differ according to their schols of thought.

Defenders of the liberal conception of financial globalization:

today the maBority,

the obBective is to improve the function of the markets.

For those &ho hold to a vision more critical of finance:

the accent must be put on:

the oversight of the financial markets

the reform of international financial instituions.

2&o series of problems must be resolved:

4+ o& to prevent ne& crises *policies of prevention+(

8+ o& to curer crises once they have started *curative properites+(

2he principal measures proposed in order to assure the prevention of crises are oft&o orders:

6meliorate the 0uality of information:

the crises of the emerging countires in the 7;Hs have sho&n that the

international financial community &as misinformed of the exact situationof these counries.

t is the discovery the folling has led to foreign investor loss ofconfidence:

the critical state of banks

the exterior financies of these countries

n order to increase the transparency of information,

the F has propsed the putting into place of advanced

indicators of the vulnerability of the banks

of the financial systems

this gives, for ex. information on the 0uality of the

stocks and the bank results.

>einforce: the protection of the users

he generalization of the deposit assurance mechanism.,

geranteeing to the depositers reimbursement of their bankingpossesions, is a method of preventing the bank paniks3

the surveillance of the financial actors:

the putting into place of normalized prudential- rules

designed to oblige the banking establishments to protectthemselves from risksI

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the measure that is most kno&n is the !ooke ratio-, or

ratio of international stability, defined by the !omity of 'asil on 'ank !ontrol

*47??+ has led the international banks to dispose of an

amount of their o&n funds e0ual at least to ?G oftheir risks

measured as &eighted average, acorrdingto the risks of their debtsCclaims.

>ecent reforms have led to a reinforced prudential

system called &asil )) should improve the management of bank

risks.

2hese measures are Budged insufficiant by the economists &ho defend the keynsean

conception of a fundamental instability of the international financial markets. 2hese economists have made some propositions:

in order to insure a global controle to reinforce the international financial system:

Ene must begin by canceling the black holes- of the international

financial regulation. !ertain actors, such as the hedge funds-, are not the obBect of

any supervision3 it is nevessary to subBugate them to a reinforced

surveillance because they are a factor of destabilizationin the markets3

"eorge )oros, at the head of Ouantam speculatif

funds *hedge funds+, has thus been recognized tohaving contributed to the fall of the pound )terling

in 4778. oreover, certain zone geographic zones escape all control:

it is the case of fiscal paradises, one of &hose functions

is the &hitening- of dirty money. 0uestion of public salubrity

2o lift the bank secret

to impose on these zones of non1right- therules of common right

t is essential to implicate there *malicious(+ creditor nations in the

financing of the crises and of their conse0uences n case of crisis, the burden of adBustment rests most often on

the debtor countries. 2he international creditors *creanciers+ are reimbursed thanks to

the rescue plans of the F. mplicating &hould have a double advantage:

to obtain supplementary reseources for the countries in

crises lead the creditors into taking less risks and to reduce

their speculative operations. 2he proposition in 8;;4 of 6nn Arueger

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*adBunt director of the F+

reBected by the financial milieu

&anted to install a safeguard against )tate failues- falls into

this logic. 2he countries in development must have the possbility of putting into

place measures for the control of capital *regulation and taxation+,

this going to directly oppose the dogma of total liberalisation of

the movements of capital. Ebservation sho&s, in effect, that the countries *!hina,

ndia, !hile+ &hich have used these measures haveescaped the financail crises.

!urative Policies

2he management of financial crises

pose mainly the 0uestion of the lender of last resort- *PD>+,

role is to furnish emergency li0uidity to bank and financial establishments in

difficulty. 2he obBective of the PD> is to reduce the systemic risk-

aka the risk that the default of an individual actor spreads through theentiery of the financial system.

2his 0uestion of PD> has taken a ne& dimension in the context of financial

globalization. 'ecause the risk of the spread of crises amongst countires has become

important, this can necessitate a rapid and massive intervention of theinternational monetary authories.

2his role of an international PD> has been played:

by the F during the mexican crises of 477

by the 6merican treasury during the crisis of )outh Aorea

in 477?. 2heses solutions, decided during the catastrophes, are

not at the level of the ne& risk caused by the increasinginstability of the international financial system.

2hat poses the 0uestion of a supranational central

'ank. Aeynes had made t&o proposition in order to assure the mastery of the international financial

system 4+ install a taxation of capital

in order to reduce the ampleur of the speculation

in order to strike the most forunate actors.

8+ !reation a superantational institution+I

the international union of clearing-11 situated above states and private actors,

in order to bypass the conflicts of interests

to preserve this global public good

the international financial stability.

2hese t&o suggestions:

advanced in a period marked by international financial disorders

remains current.

2he proposition made by 2obin in 47=8 of a tax on the operations of monetary

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exchange: at the moment of the collapse of the international monetary system of 'retton

$oods, &as situated in the prolongments of the ideas of Aeynes.

2he installation of global taxes appears desirable today for t&o

reasons: in order to fight against thte disfuntctionings of the global

economy *negative externalities+ such as speculation *2obin tax+ pollution *eco1tax+ n order to raise the public resources on an

international scale. 2hese resources could complete the public aide of

development that the rich countries must increaseaccording to tehir agreements.

2hat &ould permit the financing of the development of

the least advanced countries &hich are the cast1offs offinancial globalization.

Finally,

the organization of an international monetary conference seems desirable in order to:

reconsturct an internation monetary architecture adeapted to the ne& contextof financial glovalisation.

)ince the abandonment of the principles of 'reton $oods:

at the beginning of the =;Hs,

the money floats

instability of the exchange rates has become the rule.

2he /uropean @nion:

has aresoponed ina radical maner

created a uni0ue currency, the euro ,

assures an absolute monetary stability among the

member countries. !ertain emerging countries

tried to peg their currency to the dollar over the course of the

7;Hs *notably 2hailand, >ussia, 'razil, and 6rgentina+,

but their currency became over1valued

o&ing to the elevation of the dollar from 4775.

2his situation has brought about:

the deepening of exterior deficits

the flight of venture(Cdebouchante- capital on the

serious financial crises. 2hese failures sho&:

the interest that there &ould be interest in redoing redo 'retton $oods-

taking back up the idea launched by Aeynes of a

multilateral universal currency issued by a supranationalcentral bank.

$e have the technical solutions for organizing a financial and monetary

order that is more efficient and balanced on the international scale. 2he obstacles to such a reform are of a political order.

2he come primarily from those &ho are advantaged by

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the current functioning of international finance.