Daniels and VanHoose International Monetary and Financial Economics, 2ed. Using the Power Point Files.

Daniels and VanHooseDaniels and VanHooseInternational Monetary and International Monetary and Financial Economics, 2ed.Financial Economics, 2ed.

Using the Power Point Files

Daniels and VanHoose

Using the PowerPoint Slides 2

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IntroductionIntroduction

The Global Economy



The Backlash Against Globalization

• Genoa, Italy, 2001, Protests against globalization: Target: G8 Leaders

• Jubilee 2000, a “World-Wide Movement to Cancel the Crushing Debt of Impoverished Nations.” Target: G8 Leaders

• Seattle, Washington. Target: WTO• Washington, D.C. Target: IMF, and World

Bank



What is Globalization?(from Held, et al., 1999)

• Peoples everywhere are increasingly subject to the disciplines of the global marketplace.

• A myth which conceals the reality of an international economy increasingly segmented into three major regional blocs in which national governments remain very powerful.

• States and societies across the globe experiencing a process of profound changes as they adapt to a more interconnected, but highly uncertain world.



Generalization(from Held, et al., 1999)

“The widening, deepening and speeding up of worldwide interconnectedness in all aspects of contemporary social life, from the cultural to the criminal, the financial to the spiritual.”



Our Focus

• We shall focus on the institutions and markets that “connect” nations’ economies.

• More specifically, we shall concentrate on financial sector linkages.



Real and Financial Sectors

• Real Sector: Production and sale of goods and services.

• Financial Sector: Transactions in financial assets.



International Economic Integration

International economic integration refers to the extent and strength of real- sector and financial-sector linkages among national economies. Real-sector linkages occur through the international transactions in goods and services while the financial-sector linkages occur through international transactions in financial assets.



Growth of World Exports

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FOREIGN EXCHANGE TURNOVER AND WORLD EXPORTS Foreign Exchange

Turnover ($ trillion)

World Exports of Goods ($ trillion)

Ratio

1979 $17.5 $1.5 12:1

1986 75.0 2.0 38:1

1989 190.0 3.1 61:1

1992 252.0 4.7 54:1

1995 297.5 5.0 60:1

1998 372.5 5.4 69:1

SOURCES: Held, David, Anthony McGrew, David Goldblatt and Jonathan Perraton, Global Transformations, p. 209; Bank for International Settlements, Central Bank Survey of Foreign Exchange and Derivatives Market Activity, 1998, p. 5; International Monetary Fund, World Economic Outlook, 1998, p. 200.

Growth of Trade and Foreign Exchange Transactions



Stylized Facts• Unprecedented growth of FDI in the United States.

• Unprecedented growth of M&A activity.

• Extreme variability of the currency values of large developing and emerging economies.

• Development of the financial and monetary systems of Central and eastern Europe, and of China.

• Sharp financial and economic crises.

• The world’s poorest economies mired in debt crises and economic stagnation.



Capital Flows to Emerging Economies

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1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

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Direct Investment Portfolio Other

The Balance of Payments The Balance of Payments Accounting SystemAccounting System

International Bookkeeping



Balance of Payments

• System of accounts which is a subset of the National Income and Production Accounts

• A double-entry bookkeeping system.

• Debit Entries: Transactions that generate a payment outflow (e.g., import).

• Credit Entries: Transactions that generate a payment inflow (e.g., export).



Balance of Payments

• The current account is the broadest measure of a nation’s real sector trade.

• Includes:– Goods– Services– Income Receipts and Payments– Unilateral Transfers



Balance of Payments

• Goods: Exports and imports of tangible items.

• Services: Exports and imports of services, for example:– Typical business services such as banking and

financial services, insurance, and consulting.– Tourism



Balance of Payments

• Income Receipts: Includes items such as– Investment income on US-owned assets abroad.– Receipts of income on US direct investment

abroad.– Government income receipts



Balance of Payments

• Income Payments: Includes items such as– Investment income on foreign-owned assets in

the United States.– Payments of income on foreign direct

investment in the United States– US Government income payments



Balance of Payments

• Unilateral Transfers: Includes items such as:– Government grants abroad– Private remittances– Private grants abroad



Balance of Payments (2000)Exports Millions 1,414,925

Goods 773,304 Services 296,227 Income Receipts 345,394

Imports -1,797,061 Goods -1,222,772 Services -215,239 Income Payments -359,050Unilateral Transfers -53,241Current Account Balance -435,377



Balance of PaymentsThe Financial Sector

• In June 1999, US capital account definitions were modified to bring them more in line with definitions recommended by the International Monetary Fund.

• Now there are two accounts: The Capital Accounts and Financial Accounts.




• The new Capital Account includes items that were previously included in unilateral transfers, such as:– Debt forgiveness– Migrants’ transfers (as they leave the country).

• The new capital account is small for the US (< 0.1 percent of capital flows), but expected to grow.




• The Financial Account– Records international transactions in the

financial sector– Includes portfolio and foreign direct investment– Includes changes in banks’ and brokers’ cash

deposits that arise from international transactions.




• US-Owned Assets Abroad: Increase or decrease in US ownership of foreign financial assets.

• Foreign-Owned Assets in the US: Increase or decrease in foreign ownership of domestic assets.

• Reserve Assets: Primarily the assets of central banks.




• Portfolio Investment: Individual or business purchase of stocks, bond, or other financial assets or deposits. (An income strategy)

• Foreign Direct Investment: Purchase of financial assets that results in a 10 percent or greater ownership share. (A financial control strategy)



Capital and Financial Account (2000)

Capital Account, Net 680 Financial Account US-Owned Assets Abroad

-553,349

US Official Reserve Assets -290

US Government Assets -715

US Private Assets -552,344

Foreign-Owned Assets 952,430 Foreign Official Assets 35,909 Other Foreign Assets 916,521

Net Financial Flows 399,761



The Balance of PaymentsThe Statistical Discrepancy

Balance on Current Account -435,377

Capital Account, net 680

Net Financial Flows 399,081

Statistical Discrepancy 35,616

International DebtInternational Debt

Debt Relief for the Poorest Nations?



Debtor / Creditor Status

• Net Debtor Nation– A nation whose total claims abroad are less

than the total foreign claims on the nation.

• Net Creditor Nation– A nation whose stock of foreign financial assets

is greater than the stock of foreign-held domestic financial assets.



The US and Net Debtor Status

• It is neither necessarily good nor bad to be a net debtor.

• The US is the world’s largest net debtor, primarily because of record FDI inflows.

• The US has been a net debtor in the past, and it spurred an industrial revolution.



Debt Relief

• Debt relief for the poorest nations is one of the most pressing international economic policy issues today.

• Beginning in the early 1980s, the stock of international debt became so large that many developing nations could no longer make all of their debt service payments.



Debt Relief / Institutions

• Paris Club– Forum for multilateral negotiations between

debtor and creditor nations.

• London Club– Forum for negotiations on private debt owed to

commercial banks.

• Millennium Fund– Private sector donations for debt relief



Debt Relief

• Despite the efforts undertaken in these organizations, during the 1990s, the debt stock of the poorest nations doubled in 5 years.

• At the start of 2000, less than half of the debt obligations were being fulfilled, with $US60 billion in arrears.



Debt Relief

• In 1996, the leaders of the G7 nations agreed upon the HIPC (Heavily Indebted Poor Countries) Initiative, intended as a means to qualify nations (originally 26) and deliver debt relief.

• The HIPC initiative failed to deliver relief after 3 years, as only seven nations qualified and none saw any debt relief.



Debt Relief

• In 1999, public pressure lead to the Cologne Debt Initiative (CDI). The CDI was intended to deliver faster and deeper relief.

• Expanded list of countries.



Problems

• 15 percent of debt stock owned by nations not part of the CDI negotiations.

• 50 percent of the debt stock not being serviced as is. Hence, forgiveness of stock may not help that much.

• Public financing issues.



Current Status

• For current information on HIPC, visit the web sites of the International Monetary Fund and the World Bank.

Daniels and VanHoose International Monetary and Financial Economics, 2ed. Using the Power Point Files.

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