How does financial integration today differ from that of a century ago? Martin Wolf, Chief Economics Commentator, Financial Times Leverhulme Centre for Research on Globalisation and Economic Policy, School of Economics, Nottingham University April 30 th , 2003
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How does financial integration today differ from that of a century ago? Martin Wolf, Chief Economics Commentator, Financial Times Leverhulme Centre for.
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How does financial integration today differ from that of a century ago?Martin Wolf, Chief Economics Commentator, Financial Times
Leverhulme Centre for Research on Globalisation and Economic Policy, School of Economics, Nottingham University
April 30th, 2003
2
Financial integration then and now
• Why is financial integration so controversial?
• How has financial integration evolved?
• What are the big differences between the financial globalisation of the late 19th century and today’s?
• What are the big issues, especially for developing countries?
3
1. Why is financial globalisation so controversial?
• International capital flows are unstable and associated with crises
• They are also associated with constraints on policy makers
• This is the “trilemma”: one can have only two of capital mobility, a fixed exchange rate and domestic monetary autonomy
• Governments want all three. Since they cannot do so, the history of the past 120 years has been one of big shifts in the two they have chosen
4
1. Why is financial globalisation so controversial?
NET PRIVATE CAPITAL FLOW TO DEVELOPING COUNTRIES($bns)
$0.0
$50.0
$100.0
$150.0
$200.0
$250.0
$300.0
$350.0
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
f
2003
f
Source: IIF
5
1. Why is financial globalisation so controversial?
THE UPS OF EQUITY INVESTMENT IN DEVELOPING COUNTRIES ($bns)
$0.0
$20.0
$40.0
$60.0
$80.0
$100.0
$120.0
$140.0
$160.0
$180.0
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002f
2003f
Source: IIF
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1. Why is financial globalisation so controversial?
COMPOSITION OF EQUITY INVESTMENT IN DEVELOPING COUNTRIES ($bn)
• The UK’s foreign assets were three times GDP in 1914
• The US’s net foreign liabilities are a quarter of GDP today
• The UK was the world’s largest creditor
• The US is the world’s largest debtor
23
3. What are the differences? Emerging markets
THE MARGINALISATION OF DEVELOPING COUNTRIES(liabilities as a share of world liabilities)
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
45.0%
50.0%
1900 1914 1938 1960 1980 1990 1995
Source: Obstfeld & Taylor
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3. What are the differences? Emerging markets
DID CAPITAL FLOW TO POOR COUNTRIES?
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
less than 20 per cent 20-40 per cent 40-60 per cent 60-80 per cent more than 80 per cent
per capita income range of receiving regions (US = 100)
Sh
are
of
Wo
rld
Sto
ck o
f F
ore
ign
C
apit
al
1913 1997Source: Maurice Obstfeld & Alan Taylor
25
3. What are the differences? The rise of MNCs
RISE AND RISE OF MULTI-NATIONAL COMPANIES(Selected Indicators of FDI and International Production –
billions of dollars and percentages)
1982 1990 1999
FDI inward stock 594 1,761 4,772
Sales of foreignaffiliates
2,462 5,503 13,564
Gross product offoreign affiliates
565 1,419 3,045
Exports of foreignaffiliates
637 1,165 3,167
GDP at factor cost 10,611 21,473 30,061
Exports of goodsand non-factorservices
2,041 4,173 6,892
Source: UN (2000)
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3. What are the differences? Crises
FREQUENCY OF CRISES IN INDUSTRIAL COUNTRIES
42 1
7
1113 12
36
0
21
0
21
9
29
6
44
0
5
10
15
20
25
30
35
40
45
50
Banking Crises Currency Crises Tw in Crises All Crises
1880-1913 1919-1939 1945-1971 1973-1997Source: Bordo & Eichenreen
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3. What are the differences? Crises
FREQUENCY OF CRISES IN EMERGING MARKET ECONOMIES
116 8
25
73 3
13
0
16
1
1717
57
21
95
0
10
20
30
40
50
60
70
80
90
100
Banking Crises Currency Crises Tw in Crises All Crises
1880-1913 1919-1939 1945-1971 1973-1997Source: Bordo & Eichengreen
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3. What are the differences? Crises
• Crises are more frequent, but not more severe
• They are more than twice as prevalent as before
• The chief reason, suggests Eichengreen and Bordo has been the fragility of soft currency pegs (NBER Working Paper 8716)
• Banking problems were rarer before 1914 – so there were fewer twin crises – because exchange rates did not collapse
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3. What are the differences? Exchange rates
Activist policies Capital mobility Fixed exchange rate NotesGold standard Most Few Few Broad consensusInterwar Few Several Most Capital controlsBretton Woods Few Most FewFloat Few Few ManySource: Obstfeld and Taylor
Resolution of trilemma - countries choose to sacrifice
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4. What are the big policy issues?
• Global macro-economics and the US deficit
• Exchange rate regimes - the law of the excluded middle
• “Original sin” and foreign currency borrowing
• Capital controls and prudential regulation of the financial system