Lecture notes: Limits
Twenty-four hours of reality
Webpage here.
Rodrik, Globalization paradox
talking to economists and experts — as well as ordinary people
“do x in order to compete in the global economy”
why is everything we do done for the sake of the world economy
shouldn’t globalization be benefiting us
this way of talking started in the 1980s
what does it mean if globalization works for us?
three steps in the argument
1. markets and govt are complements, not substitutes, they go together
markets work well only when there are strong institutions — you need legal institutions, stabilizing institutions, legitimizing institutions
markets work best when states are strongest
how open the market is to trade — strongly correlated — the most open economies have the strongest governments
2. there is not a single model for market capitalism
not one is better than the other
Japanese model, and then something else
1990s, American financial model
Chinese model
this is a major strength of capitalism — very malleable
no necessary convergence
3. collective decisions regarding institutions
who should be doing the thinking?
through democratic deliberation?
what is the appropriate locus of these decisions?
how are political communities organized?
few global institutions — it’s mainly nation-states
govts saved us from the 2008 financial crisis
conclusion:
since we cannot have global political institutions, we have to limit economic globalization
national democracies matter — there must be variety — national decisions matter
this could go well with a “healthy globalization”
globalization only works if it benefits people economically, socially and politically
better functioning world economy if we give power to the nation-state
Q & A
strong and weak institutions
capital controls — none, or too much
trade — if you want open economies, you need much better social protection
Rodrik’s views have become more mainstream
the problem is not that the nation-state is too strong, it is that it is too weak — by making the nation-state stronger, we make the world economy work better
regulating banks — common around the world — or individual for countries
I want to politicize these issues — they are political and they have to be treated as such
China and India — future tougher for China — India is a democracy
the economic engine will not function as well if it is not a democracy
I would bet on India rather than China
but both value national sovereignty
this could make international institutions more nationalistic — and this might be a good thing
think of a world in which you create traffic rules
democracy and human rights are higher norms
no reason to justify yourself in democracies — our rules reflect the will of the people
non-democracies — more difficult to justify certain labor standards, for example
national debates might also concern the international — there are impacts elsewhere
economic development
lot’s of govts are not concerned — there are many other considerations
it always is a matter of govts making it a key priority
you need to rely on your own resources — not international experts
all success is very context specific
what might work here
always economic growth in relation to local constraints
clear sense of where obstacles to constraints are
you don’t need to do everything at once — any chance will help
looking for the most effective change — perhaps trade barriers — what the obstacle is
do them all one after the other
give incentives to markets — but with strong govts
WTO — new traffic rules
negotiate not just market access, but also policy room for individual countries
different countries regulate in different ways
interfere with capital markets flows — stop undermining each other
labor markets — move from one country to another
rise of China
Anti-globalization protesters
Topics
- Globalization and its critics
- Left-wing critique
- Right-wing critique
- Walls and bridges
- Global warming and the limits of growth
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Lecture notes
Right-wing backlash
Climate change
- there are famous
courses on this at this school – I always try to stay away from it
… - considerable lack of
clarity:
- how to
define the concept - many competing
definitions ‘multi-dimensional
concept’ (Held) - how to
measure the concept - is it
increasing or not? - implications
- a major
force or not? - a threat or a
promise?
cf. rules of academia:
- the importance of coming
up with new concepts that establish your name - cf. earlier debate on
’inter-depedence’ - many of the same ideas –
in a different vocabulary - which is
not to say that could scholarship doesn’t take place …
dimensions of the concept
- most
generally speaking — ‘global connectedness’
- various
activities no longer confined within one state — becoming global - people, corporations,
cultures — all participating together in the same world-wide
system - measure in
various dimensions - much of
this we have discussed already …
- trade
- more
international trade more trade
dependence higher
percentage of GDP derived from foreigners
- manufacturing
- more
foreign direct investments
companies treating the world as one country - more dependent on
decisions taken in company headquarters in other countries
- technological
factors
- new media
- satellite
TV — internet - mobile phones
access the world at local rates
reach anyone, anywhere, at any time
- migration
- more
refugees - especially
in countries in Africa — Asia - more
migration - people are
moving to where the jobs are — especially within the EU
- cultural
factors
- more global
cultural influences - but
cultural influences in other ways — Indian films popular in West
Africa - standardised
culture
- English
language - movies, music
- news gathering
- food
you never see ‘restaurants’ anymore
except in Italy
critics:
- in various
forms - ‘nothing
new under the sun’ – denying the newness - ie there
are considerable effects – but it’s happened before - e.g.
- compare
trade at the turn of the 20th and 21st century - classical 19th
century imperialism that was
globalisation! - compare contemporary
‘Americanisation’ with the impact of French culture in the 18th
century - or Roman imperialism
for that matter – cf. Asterix! - denying
the impact – the changes aren’t that great
- continued
role of the state – there is still a role for traditional politics - companies are trans-
rather than multi-national - cultures and social
systems remain distinct - basic reason –
power still resides in the hands of the same people and the same
states
impact on view of IR
IR
implications
- end of the
Westphalian model - end of the neat
“world stage” model - sovereignty etc means
less
domestic
implications
- less role
for politics - less role for
democracy - erosion of the
position of the state
forces of convergence:
- political,
economic, cultural, social – convergence? - what is it
that makes us all the same? – how does the pressure work?
1. cultural forces:
- people come
to hear, see and read the same kinds of material
- is it a
good or a bad thing? — both interpretations are possible! - people are sharing
more cultural references – - Canadians
get very worked up about - it worries
others less — the Irish - difficult
to complain about … - we are
doing it to ourselves! - to what
extent is this a force of homogenisation?
- people who
eat hamburgers and watch American films are all the same - you are what you eat!
– - you are want you see!
– people who see the same TV shows become the same! - technological
determinism:
- society –
and personal life – shaped by technology - using the same
technology we will become increasingly similar
cf. migration
- the more
‘mix of peoples’ there will be – the more similar we will
become
- cf. the
creation of homogenous nation-states in the 19th century - France etc. – Eugen
Weber
but scepticism:
- decoding
- TV
programmes will be interpreted differently – cf. Umberto Eco on
commercials in India and the West - now quite clear what
hamburger consumption says about other aspects of society – not
necessarily ‘just like us’
2. economic forces:
- economic
determinism: - characteristic
of Marxism – base and superstructure - Marx &
Engels, Communist Manifesto, 1848: - The
bourgeoisie, by the rapid improvement of all instruments of
production, by the immensely facilitated means of communication,
draws all, even the most barbarian,
nations into civilization. The cheap prices of its commodities are
the heavy artillery with which it batters down all Chinese walls,
with which it forces the barbarians’ intensely obstinate hatred of
foreigners to capitulate. It compels all nations, on the pain of
extinction, to adopt the bourgeois mode of production; it compels
them to introduce what it calls civilization into their midst, i.e.
to become bourgeois themselves. In one word, it creates a world
after its ownimage. - Cf. Schumpter:
- The
capitalist outlook, starts upon its conqueror’s career
subjugating ― rationalizing ― man’s tools and philosophies,
his medical practice, his picture of the cosmos, his outlook on
life, everything in fact including his concepts of beauty and
justice and his spiritual ambitions. - ie
- the economy
has the power to make us all alike - how does it work?
- easy to imagine a
number of mechanisms …
a) economic man arguments:
- rationalisation
- economic
calculations of means and ends - maximisation of
utility - economic goals
- institutional
convergence — things that all societies require
- financial
institutions - legal institutions
- political
institutions — guarantees of property rights etc.
b) globalisation arguments
- specific
points …
- corporate
take-overs:
- making
corporate culture more homogenous
- changing
the companies that are taken over - eg. Americans taking
over European companies — forcing them to change - ‘hostile
take-overs’ as a cultural issue! - or,
alternatively – demonstration effect - forcing
other companies to conform to a more efficient way of doing things - ie
competition is a force for homogeneity
- you are
forced to emulate people/companies more successful than yourself or
you will lose out - cf. Realist argument
– Waltz – regarding the imperatives of states
- creating
a ‘favourable business climate’
- consequence
of the creation of a global market in production - economic
blackmail by companies:
- cf.
Lindblom’s argument about ‘the market as a prison’ - ‘we’ll move
unless you change your policy’ - pre-emptive
actions on the part of the state - in order to
attract foreign companies - competitive
deregulation – race to the bottom
- all
countries will eventually converge at the lowest standard – race
to the bottom - cf. Britain –
competing with other low-wage economies - cf, Taiwan —
deciding that they cannot compete with mainland China …
- tax
harmonisation
- again –
the role of competition
- forced to
create a similar business climate - companies –
employees – money – will move to where the taxes are lowest - EU issue –
tax harmonisation - rejected by
Britain – they reserve the right to undercut others - but
- will to
some extent happen by itself! - cf. self-balancing
mechanism – those who have too high taxes will get punished!
- monetary
policy
- consequence
of the creation of a global financial market - global
market for credit
- tendency
for interest rates to converge – especially since distance plays
no role - the state is forced
to move interest rates in line with other countries – or there
will be consequences for the exchange rate etc. - takes away freedom in
monetary policy – most obviously in the case of the EU!
- fiscal
policy:
- eg
government spending on goods and services - traditionally
where all ‘reforms’ take place - countries
still reserve the right to pursue their own fiscal policy - but
spending has to be paid for …
- taxes or
borrowing - taxes harmonised –
see above – and always difficult to raise anyway since
people don’t want to pay them! - borrowing –
always more of a temptation – ie make others pay!
- problems of
borrowing on the international market – forced to play by rules
set by international investors - higher interest rates
charged to governments that stimulate the economy too much — fear
of future inflation – need higher interest rates to compensate
themselves - credit ratings of a
country – make it more difficult to borrow – eg problem in Latin
America (we talked about this last week)
consequences:
- let’s
assume that there is complete convergence … - what would the
consequences be?
political consequences
- the
end of the state?
- Susan
Strange, among others, has made this point
- the state
is more constrained – it is losing its power - end of a historical
era started in the 15th century – ‘the end of Westphalia’ - ‘the end of
sovereignty’ – although sovereignty was always a myth anyway
… - but
Realists – Gilpin is one of them - the state
will remain – even if weakened – at least for now
- the
end of democracy?
- only state
institution as democratic - no
democracy on any other level - tied to a
particular history evolution - parliaments,
constitutions, parties are all
the parliaments, constitutions, parties of a particular state! - problem if
- state no
longer can make decisions that matter - if politics
at the state level is irrelevant - democracy
at state level more and more like democracy in universities! - cf. exit
vs. voice (Hirschmann)
- globalisation
— makes it much easier to exit - this makes voice more
difficult - the market as
allocation mechanisms rather than the state - democracy
requires a community
- people
should not be free to leave
there must be something that locks people in - as soon as people are
able to leave democracy breaks
down - but —
experiment with new kinds of democracy - ‘international civil society’ etc. — cf. Mary Kaldor
- the
end of the ‘social’?
- one of the
first lectures – the ‘rise of the social’ - as a sphere
where economic issues become topics of political concern - ‘republican perspective’ – cf. current regime in the US:
- politics
will no longer be about economic issues – social problems - economics will be
private concerns - there is
nothing the state can do for people
- it has no
power over the economy - political will once
again be about war and justice — Arendt would have liked Bush! - end of
Social Democracy
- end of
‘social’ – end of ‘democracy’ - we’ll discuss John
Gray and the welfare state in the seminars …
forces of resistance:
- evolutionary
theory ..
- all about
how things become similar and how they become different - life as one – but
branching out and becoming diverse - would seem to hold
lessons for us if we are interested in similarities and differences
…
evolutionary theory:
- cf.
evolutionary biology
- you have to
adjust to an environment or you won’t survive - ‘survival of the
fittest’ - example
- fish
evolving to live in water - throw a mammal in –
over time they will come to look like fish – e.g.
dolphins - world
economy as an ecological system
- there is
only one world market — everyone is competing with everyone else - one system that
everyone has to adjust to or die - cf.
globalisation
- there is
only one environment – one market – ruled by one set of rules - everyone is forced to
become similar to everyone else or they will fail
reasons not to
believe this is the case
- an
evolutionary model of competition
- explore niches
- internal factors
protection in niches:
- ecological
niches:
- not
everyone has to survive in the same way - if you cannot survive
as a shark — you can survive as flat fish with protective
pigmentation - economic
niches
- explore
niches — if you cannot make cars, make bicycles — or invent
something new - if you can’t grow
wheat — grow raspberries — difficult to transport - cf. German
industry - long term
contacts with clients — high quality goods
external vs. internal
convergence:
- ecological
environments:
- external
convergence - but internal
differences - only some
aspects are exposed to evolutionary pressure
- other
aspects are hidden - e.g. superficial
similarities – anatomical differences remain - compare
fish and dolphins:
- they look
the same on the outside since they adjust to the same watery
environment - but look entirely
different on the inside since they have entirely different
evolutionary history - dolphins are
mammals who once lived on land!
empirical examples:
- show that
this actually is happening …
example 1: Japanese car
companies
- obvious
convergence
- cars —
becoming more and more similar - a global demand from
the same kinds of consumers - external
aspect - turning
towards customers — cars become more and more similar due to
competitive pressure - but also —
internal aspect
- how
corporations operate — relations with staff — corporate culture —
standard operational procedures - these aspects are
always far better protected from competitive pressure - there are
alternative, but functionally equivalent, ways of producing cars - corresponds to an
‘anatomical’ feature of a company – you cut them up and you
find that they differ! - the
Japanese employment system as ‘strange’ — we discussed this
the first week
- life-time
employment – although not for everyone … - no job market in
white-collar jobs - salary increases by
seniority - company run trade
unions - one would
expect this to disappear
- more
rational market – for efficient - be able to get rid of
people that are not needed – hire new people on an open market - remunerate people
that make important contributions – encourage everyone to try
harder
reasons for the persistence:
- probably
economically inefficient in some ways, but - encourages
other goals - long-term
planning - better
access to labour on a permanent basis - staff
training - possible to
retain within the company – since no one leaves - loyalty and
commitment - employees
who commit their lives to the corporation - less labour
militancy
- company
wide-trade unions - more modest wage
demands - company as
protecting people against the market - you never
have to fear unemployment – test your market value
example 2: the German
financial system
- German
corporations financing themselves with the help of banks rather than
stock markets - this is
true of Japan as well … - US view:
- stock
markets are more efficient! - easier access to
credit – cheaper terms! - what is
happening to the bank-dominated system —
- is it evolutionary stable or not?
- is there Anglo-Saxonisation?
evidence for it:
- big German
companies — Siemens, Volkswagen
- relying
less on the big banks - developing their own
- more
financing through
- corporate
bonds and shares - i.e. on
the market
reasons:
- more global
reach — finance not tied to Germany
- easier to
raise money in London - more efficient way of
raising financing - EU
regulation - develop
financial markets - government
attempts to develop German financial markets - Finanzplatz
Deutschland
evidence again:
- small and
medium size companies (SMEs) — still very dependent on co-operative
and savings banks
- important
part of German industry — and important part of German banking - these companies don’t
have independent access to international financial markets - these banks are
becoming more sophisticated — providing all round services — as
investment banks - great
interlocking ownership still remains
- between
corporations — and banks - has in fact become
more important — as a way for corporations to provide
stability - German
stock market - still
actually quite small – they never mention this when they
compare the DAX with the Footsie or Dow-Jones …
example 3: the welfare
state:
- the welfare
state should not survive in a global market
- many have
claimed that it wouldn’t - John Gray in the
Global Transformations Reader –‘the end of social
democracy’ - I made this argument
in the previous lecture - obvious
sense of threat in the late 1980s and 90s: - the end of
‘the welfare state model’
evidence in favour:
- privatisation:
- public
utilities — post offices, railroads - cut-backs
in insurance provisions - 85% of sick
pay
evidence against:
- the broad
outlines are still intact
- e.g. public
ownership of companies never very important - commitment to restore
levels of welfare provisions – if they are cut - taxes are
still high - people are
still happy to pay them
reasons for the persistence of
the model:
- popular
demand
- a welfare
state is needed to protect people against the market - cf. correlation
exposure to international trade – the size of the welfare state
(Rodrick) - some protective
arrangement is required – or there will be no social consensus - the welfare state as
a way to provide stability and predictability – obviously the case
in Sweden with 70 years of Social Democracy - this is good for
business too! - much more
matters for corporate decisions than welfare spending
- taxes high
– but very competent state - well organised
society – things work – no corruption - clear accountability
– non-bureaucratic bureaucracy - all this makes it
into an attractive place to do business!
financial globalization & the
“Asian financial crisis”
intro:
- the international — external — dimension of deregulation of
financial markets —
- first in the West in the 1980s
- in East Asia in the 1990s
- globalization
integration of markets —
globalization
- 1980s ….
- forces making domestic borders more permeable — less relevant
- question from now on:
- what happens when these units are becoming less important?
- will the units — the states — cope?
- will the international system cope?
- the East Asian financial crisis of 1997 as a kind of case study
- ‘it is when things break down that we learn how they operate’
“the second era of financial globalization”
- ‘globalization’
- considerable lack of clarity:
- how to define the concept
- many competing definitions
‘multi-dimensional concept’ (Held) - how to measure the concept
- is it increasing or not?
- implications
- a major force or not?
- a threat or a promise?
‘global connectedness’
- various activities no longer being confined within one state —
becoming global - people, corporations, cultures — all participating together in the
same global system - measure in various dimensions
- trade
- manufacturing
- technological factors
- culture
financial globalization
- general impression:
- the area where globalization has gone quickest — furthest
- the constant example — IMF, the City of London as targets of the
anti-globalization movement - integration of financial markets — 1.3 trillion dollars moving
around the world in a day - three issues:
- how to define and measure?
- how explain?
- what are the economic, political and social consequences?
1) how to define and measure?
global financial market:
- measure according to
- extension
- how large is it? how many countries does it encompass?
- intensity
- how much capital flowed? how many transactions?
instead of overwhelming you with data:
- since 1980s
- vast increases in international bank lending — financing
development countries, etc. - sale of international public and corporate bonds — new role for
investment banks - privatization — sold internationally
- enmeshment of national stock markets
- foreign exchange markets — annual turn-over 1979 — 17.5
trillion — today: 300 trillion $
compared with the first era of
globalization:
- extension — first era
- large, but uneven
- mainly Americas
- Britain as the only country with a general reach
- intensity
- net capital flows have so far not attained the levels of the late
19th century — although gross flows were below
contemporary levels - Niall Ferguson:
- external debt/GDP ratios strikingly similar for Russia, India —
1913 — 1997 - capital export/GDP — around 5 % in 1913 — today only 2.3
- particularly important for countries like Argentina, Canada, etc.
today …
- trade much more extensive — many more foreign direct
investments - there is much more of a global financial system
- countries are far more monetised — everyone more integrated
- communications are quicker — response times are lower
- first era — domestic impact of globalization restricted through
trade protectionism — colonial trading preferences, etc. — the
possibility of migration - today — much more pressure for harmonization
2) how to explain?
- the stuff we already have discussed …
- international trade
- technological factors
- regulation — deregulation
1) international trade:
- far more need for international financial transactions
- pay for goods from abroad
- more investment abroad — foreign direct investments
- find a way of financing
- repatriating — recycling — profits
2) technological factors:
- satellite communications
- far quicker transactions
- communications instantaneous from one part of the world to the other
— all of them integrated into one system
- continuous trading — Tokyo, London, New York
- prices influence each other — markets move in a similar direction
- prices and rates even out — a truly global market
- internet — for consumers
- possible to buy things over the internet
- make investments in other countries
- especially in combination with credit cards
- “disintermediation”
3) regulation — Euromarkets
- internationalization of financial markets
- Euromarkets
- dollars
- bonds
- unregulated
- opened new opportunities for American companies
- new opportunities for London — first, international, centre
of finance - cf. Wall Street — basically only served American needs, not
international ones
general deregulation
- 1970s uncertain situation — we discussed this last week …
- new financial instruments
- derivatives — futures, swaps, options
- junk bonds — corporate take-overs
increased competition
- the logic by which deregulation leads to increasing
internationalization … - deregulation more efficient
- easier to finance — less risk
- some corporations are given better terms
- competitive deregulation
- no country can afford not to follow
- the more regulated a country is — the more at a disadvantage
- e.g. restrictions on capital flows — what if a
company cannot repatriate profits?
3) what are the consequences?
- first era of globalization
- imperialism — war
- hardly issues today …
war:
- wars are less likely
- at least between European powers — one of the few solid
findings of the social sciences! - new kinds of wars — internal — civil wars — terrorist actions
- more difficult blame this on financial globalization
- cf. Normal Angell, The Great Illusion, 1913
- how should one best think of this issue today?
imperialism:
- imperialism disappeared
- what is the connection to globalization ― financial or other?
- neo-imperialism/colonialism:
- meaning influence
- cf. Mahathir Mohammad in Malaysia
- anti-British — anti-Soros — anti-anything Western
- influence
- comes with inter-connectedness
- not the same as imperialism!
- not exercised on the part of one particular country
- compare UK and United States
- first era — UK — net exporter of capital — makes for more
influence - second era — United States — net importer — makes for less
influence - everyone is lending to the US ―
instead:
- consider three issues:
- instability of financial markets
- the role of the state
- question of convergence
instability of financial markets?
- greater integration
- increase systemic risk — greater risk of propagation — knock-on
effects through the system - are international financial markets more irrational? — will we all
suffer
global recycling of money
- oil crisis, 1973
- money recycled in London and New York
- question is what to do with the money
- lent to countries in Latin America
- both lenders and borrowers irresponsible
- debt crises in the 1980s — unable to repay
- if you only borrow enough ― not only you have a problem, but your
creditor does as well - still today — debt problem, Third World
- although the greatest problem is not with the poorest countries
- they always relied more on aid
global search for investment
opportunities
- moving into East Asia
- often unsophisticated investors
- creating bubbles — real estate, etc — in Thailand
- crash
- moving out
- into Wall Street
- creating a boom in shares — dot.com in particular
- crash ― where to put one’s money today? ― French
vineyards…
more regulation needed?
- Mahathir Mohammad and Georg Soros agree — more is needed
- slow down capital flows — introduce stickiness into the system
- to slow down propagation ― to give time for decision making
- not to stop, but to regulate
- the need for a “regime” …
- collective action problem
- impossible to accomplish without international agreement
- one country who acts on its own will immediately be punished —
e.g. Malaysia - requires a “hegemon” — a state that takes the responsibility
- I will return to this in the discussion of the East Asian financial
crisis in a minute …
what is the role of the state?
- several reasons for less control by the state
technological changes:
- people with credit cards in third countries
- not legal, but it works
- internet cash
- this is privately issues not
controlled by any government - money supply
- money supply — more difficult to define and to measure — more
difficult for the government to control or even influence
exchange rates:
- floating rates
- give up government attempts to control
- fixed rates
- obvious problems defending
- speculators betting that it can”t be done — to the extent
that they have been right, they have made a lot of money — again,
Soros - most extreme in the case of the Euro – topic for the next lecture
interest rates:
- more dependent on international rates
- difficult to set in isolation — money will seek its highest
returns — necessary to set in relation to other rates
monetary policy:
- forced to run tighter monetary policy
- i.e. control inflation
- investors have required a higher interest rate — given more
expensive loans — in order to compensate themselves for the risk
of inflation - OECD countries — “largely reflect the world interest rate
rather than domestic financial or economic conditions”
fiscal policy:
- the end of Keynesianism
- for independent reasons — not efficient way to control the economy
— unemployment etc - tax ceiling
- as a result of international financial flows
- countries with budget deficits — borrow money — risky countries
are punished with higher rates - large public sectors — inflationary —
regulation:
- difficult to regulate in isolation
- countries that impose more stringent rules on capital are likely to
be punished - at least they think they will be — and this is what matters
- mentioned before
- competitive deregulation
- in particular
- transparency in banking
- corporate legislation
- cf. East Asia
alternative sources of authority
- the EU
- the political units have to be as large as the economic markets
- for the sake of the market — and the sake of people and societies
… - but implications for democracy etc.
convergence?
- will there be convergence around a neo-liberal agenda?
- will international financial flows make us all the same
- less and less diversity
reason to believe this is the case
- cf. competitive deregulation
- mentioned above
- cf. evolutionary biology
- you have to adjust to an environment or you won”t survive
- “survival of the fittest”
- world economy as an ecological system
- there is only one world market — one system that everyone has to
adjust to or die - cf.
- cars — becoming increasingly similar as a result of a global
demand - corruption law — banking law — becoming more international —
impossible to survive with a less attractive set of rules
reasons not to believe this
is the case
- an evolutionary model of competition
- explore niches
- internal factors
- protection in niches
- ecological niches:
- not everyone has to survive in the same way
- if you cannot survive as a shark — you can survive as flat fish
with protective pigmentation - economic niches
- explore niches — if you cannot make cars, make bicycles — or
invent something new - if you can”t grow wheat — grow raspberries — difficult to
transport - cf. German industry
- long term contacts with clients — high quality goods
external vs. internal convergence
- ecological environments:
- external convergence
- but internal differences
- compare fish and dolphins
- they look the same on the outside since they adjust to the same
watery environment - but look entirely different on the inside since they have entirely
different evolutionary history — dolphins are mammals who once
lived on land!
example 1: German banks
- what about competitive pressure?
- is there Anglo-Saxonization?
evidence for it:
- big German companies — Siemens, Volkswagen
- relying less on the big banks
- developing their own
- more financing through
- corporate bonds
- shares
reasons:
- more global reach — finance not tied to Germany
- easier to raise money in London
- more efficient way of raising financing
- EU regulation
- develop financial markets
- government attempts to develop German financial markets
- Finanzplatz Deutschland
- less reliance on a particular bank
- much more competition between banks in Germany too
evidence again:
- SMEs still very dependent on co-operative and savings banks
- important part of German industry — and important part of German
banking - these companies don”t have independent access to international
financial markets - these banks are becoming more sophisticated — providing all round
services — as investment banks - great interlocking ownership still remains
- between corporations — and banks
- has in fact become more important — as a way for
corporations to provide stability
German stock market ― still small
‘the east asian financial crisis’:
- 1997 — East Asian financial crisis
- test case
- how fragile is the contemporary international financial system?
trauma of 1997:
- many observers question the foundation of the economic development
of the region
- exaggerated optimism of investors before 1997 replaced by an equally
exaggerated pessimism - before 1997 there was boom — after 1997 there was gloom
- for a while
- fear of contagion to the rest of the world
- break the optimism of Wall Street — plunge the world into
recession - East Asia — varying impact
- Thailand, South Korea usually identified as the origin of the crisis
- seriously hurt Malaysia, Indonesia and the Philippines.
- Burma, Vietnam, Laos, Cambodia, and Singapore were less affected
- mainland China, Hong Kong and Taiwan escaped more or less unscathed
- Japan has had serious economic problems throughout the 1990s, they
had little to do with the events of 1997
causes and consequences of the events of 1997:
- why did the crisis occur?
- what, if anything, can be done to avoid future events of this kind?
- why is it that the consequences were so unevenly distributed between
different countries?
glass analogy
- nature/constitution:
- some countries have a constitution that makes them more brittle
- exposure:
- some countries are more exposed to risks than others
- events:
- some countries go through particularly serious series of events
1. the events of 1997
- Thailand, 1997
problem of the exchange rate:
- the Thai currency, the bath
- pegged to the dollar
- the value of the bath was fixed in terms of its value in dollars
- advantage
- buyers and sellers of the currency were able to rely on a given rate
of exchange in which to carry out their transactions - those trading or borrowing money in dollars, this removed a
potential source of anxiety - disadvantage
- the Thai central bank was obliged to make sure that the exchange
rate would stay fixed - if the value of the bath was under threat, the central bank was
compelled to defend it even at very high costs in terms of foreign
currency reserves. - sentiment of the market — ‘the bath was overvalued’
- middle of 1997, the Thai government decided to unpeg the bath from
the dollar and allow it to float - the currency had lost 40 per cent of its value within weeks
- ― so did investments in Thailand denominated in baths
knock-on effects on the stock-market:
- loans taken by Thai companies in foreign currencies simultaneously
became 40 percent more expensive — defaults since people are
unable to repay - many foreign loans had short maturities — normally easily renewed,
but in the crisis conditions of the second half of 1997, lenders
insisted on immediate repayments at the new exchange rates - many firms went bankrupt — including many companies which
otherwise were sound - banks incurred losses on loans to enterprises that were themselves
exposed to exchange rate risk — the entire financial system was
quickly undermined. - investors” confidence in many businesses was undermined — the
Bangkok stock market crashed, losing some 70 percent of its value
to strengthen the economy:
- Thai government was forced to accept a 17 billion dollar bailout
from the International Monetary Fund and from other Asian countries - and accept the conditions that always come with such loans —
cutting fiscal spending — tight monetary policy — to control
inflation
propagation throughout the region
- spread quickly throughout Southeast Asia
- affected exchange rates, corporate debt and stock markets
- exchange rates
- currencies that were floating fell sharply in value
- pegs attached the US dollar were severely tested
- all Asia-Pacific dollar pegs were abandoned except for those of the
currencies of China, Vietnam and Hong Kong - stock markets
- given the scale of the debts — and the collapse of the domestic
market — even otherwise viable companies would run into trouble
and go bankrupt - stock markets fell sharply throughout the region
2. the
constitution of the economy:
- this is where all the stuff on the domestic practices etc belong —
corruption and networks and moral hazards of state guarantees
problems
- unclear accounting practices:
- banks had been too liberal in their lending policies
- had not undertaken the proper checks of borrowers and their projects
- lack of regulatory supervision — not always clear why and on what
terms many loans were given - or what counted as a defaulted loan
- or when and how a restructuring of non-performing loans — loans
that could not be paid — were to be undertaken
political connections
- projects supported not because they were economically feasible, but
because they had the appropriate political backing - moral hazard — government played a part producing a
particular loan — it was always assumed that it would play a part
in repaying it.
- implicit understanding rather than a clearly stipulated agreement
- as long as the economies of the region grew — and loans were
serviced — none of this mattered — but as soon as companies
began defaulting, investors immediately became nervous.
shortcomings of regulations:
- loss of trust from international investors
- the transparency and accountability of the regulatory framework
becomes crucial - people want to know what is happening to their money — even if
they are losing, they want to know that they are losing fairly - only regulation — transparency, accountability — can reassure
investors - take money elsewhere — or they will require additional risk
premiums
differences in constitution
- Singapore very robust
- Thailand very sketchy and informal
3. exposure:
- this is where all the stuff blaming the international financial
investors for the crisis goes - Southeast Asia had remained spectacularly successful in attracting
foreign capital throughout the 1990s
- annual growth rates of around 6 to 10 percent, it was easy for
Southeast Asian companies to borrow money on international markets - in fact, it was a little bit too easy — e.g.
Thailand — cheaper to borrow money from international than from
domestic banks - exposure to exchange rate risk
- the price of loans came to depend on the exchange rate
- generally fixed — or “pegged” — against a basked of
currencies — to minimise risk
different degrees of exposure
- developmental states
- Singapore, Thailand, Malaysia — highly exposed
- socialist states — central planning protection remained
- Vietnam, Laos, Cambodia — not exposed
- predatory states — various monopolistic practices reduced exposure
- Burma, Philippines — few international investors had dared to
commit themselves - Indonesia — more of a developmental state in this respect
e.g. Thailand
- export dependence — large boom in manufactured products
- started in the late 1970s
- FDIs from north-east Asia
- financial dependence
- from 1990-92 — as markets were opening up
- net inflow jumped 67% — in one year more than in entire 1980s
- seriously increasing exposure to risk
- never a problem to borrow money as long as the investments one makes
are productive future profits will help us to service the debt - Thailand mid-1990s:
- this was increasingly unlikely to be the case — too much money
around and not a sufficient number of profitable objects of
investment - money went into five-star hotels, country clubs, and condominiums
… - enormous price rises on real estate
- the advantages of real estate
- work as collateral — sold so that the borrower can recover its
money - the bubble burst
- prices of such assets will quickly decline — the collateral will
be worth a lot less ― the banks will never be paid.
asymmetric information:
- unsophisticated investors — Thai problems — foreign investors
realise just how poor their understanding was of the economies to
which they were exposed - demand large increases in the risk premia they required on their
investments — they suddenly asked for more of a profit margin in
order to compensate themselves for potential and unforeseen losses
conclusion: differences in the
region
- not all countries equally exposed
- compare, for example, Singapore and Indonesia
- Singapore
- initially general scepticism from international investors and
institutions - yet the effectiveness of the regulatory systems overseeing
corporations and financial institutions meant that investors’
confidence quickly returned - Indonesia
- scepticism increased with every new revelation regarding financial
and political improprieties - exposure — constitution
- Singapore more exposed than Indonesia — in the sense of
sensitivity — but the more robust constitution - when the financial turmoil started, the inherent flaws in
Indonesia”s financial and economic system made the country an
easy victim
reform and restart
- a number of reforms were urgently needed
- and soon implemented in the countries worse affected
- positive results — economic growth has now resumed, albeit not
quite at the same high levels as previously ― 2003: booming car
sales in Thailand! - the drastically reduced exchange rates for all the major currencies
of the region have been very good for exports - makes the region into a more attractive place for tourism
- reforms as a reply to the diagnosis of the problems
- better regulatory frameworks — clear who is lending money to whom
and on what terms, and it must be obvious what happens if loans are
not properly repaid. - regulation through the market — liberalization of financial
markets — more competition between banks will make sure that only
the best practices survive - allow foreign banks to establish themselves in Southeast Asian
markets would be a good start - Thailand where three major banks so far have been sold to foreign
buyers - relationship between politics and big business
- restores at least the semblance of a level playing field
- cronyism and monopoly capitalism do not work as developmental
strategies - urgently required in Indonesia, Philippines, but also Thailand