Global Finance And Global Trade As Agendas
Introduction
Globalization refers to the increasing interdependence and integration of countries worldwide through the growth in the volume and variety of cross-border transactions of goods and services, free international capital flows, widespread diffusion of technology, and the presence of multinational corporations in many countries. Globalization is characterized by both the intensity and extensity of global economic flows and activities.
Intensity refers to the magnitude and density of economic flows and transactions across national borders. This includes measures such as trade volume, foreign investment flows, capital transfers, and migration. Extensity refers to the geographical spread and reach of economic flows and activities across countries. This includes the number of countries involved in trade and investment relationships and the dispersion of economic flows.
An increase in both the intensity and extensity of global economic flows signals greater economic integration between nations and a higher degree of globalization. While the world has seen an overall rise in globalization since the 1970s, the process has been uneven with greater economic integration concentrated among advanced industrial economies. Many developing countries still remain weakly linked to global economic activities and flows.
Global Trade Trends
Despite disruptions from economic downturns and global crises, world trade has exhibited a general upward trajectory in recent decades. The total value of exports has risen substantially since the 1970s. This reflects an intensification of global flows and economic interdependence.
However, the benefits of expanding trade have not been evenly distributed across all nations. Many less developed countries remain only lightly integrated in world trade networks. The poorest developing countries have minimal shares of global exports and imports. Their domestic economies remain insulated from the major currents of international commerce.
This highlights a core feature of contemporary globalization - it is geographically uneven, concentrated in advanced industrial regions. Vast areas of the globe participate only marginally in cross-border trade. The remarkable increase in the total value of world trade since the 1970s stems primarily from greater exchanges between northern economies, regional trade partnerships, and flows between emerging market economies. It does not signify ‘genuine’ global integration or inclusion of the planet’s most impoverished nations.
So while international trade linkages have intensified in recent decades, they remain geographically clustered. The least developed countries continue to operate at the margins of the global trading system. Their limited connectedness restricts access to overseas markets, foreign investment, and opportunities for export-led growth. Addressing this participation gap remains an ongoing challenge.
Regional vs. Global
Despite increasing trends in world trade, much of this growth is attributed to regional economic integration rather than “genuine” globalization. For example, foreign direct investment (FDI) flows predominantly occur within regional trading blocs, reflecting the geographical concentration of economic activity.
In contrast to trade, global finance remains heavily concentrated in the North Atlantic economy. The major increase in world trade since the 1970s appears to be more closely linked to regional agreements that reduce barriers between neighboring economies, rather than reflecting true worldwide integration.
Looking at actual global impacts, financial trading patterns often diverge significantly from the underlying trade flows. The global reach of financial transactions does not necessarily correlate with their real economic effects across different countries and regions. Overall, the extensity and dispersal of international trade and finance varies depending on the specific metric used.
Bretton Woods Conference
As World War II drew to a close in 1945, the Allied powers realized they needed a new international economic order to prevent the recurrence of a post-war depression like the one that followed World War I. In July 1944, representatives from 44 Allied nations met in Bretton Woods, New Hampshire to outline a new system for regulating international finance and trade. This came to be known as the Bretton Woods conference.
The chief aim of the Bretton Woods conference was to establish a new monetary order that would foster economic growth and financial stability in the postwar world. The attendees wanted to avoid the economic policies of the 1920s and 30s that had contributed to the Great Depression. The Bretton Woods agreements introduced a regime of fixed exchange rates tied to the U.S. dollar. It also led to the creation of key international financial institutions like the International Monetary Fund (IMF) and the World Bank.
One of the other major outcomes of Bretton Woods was the General Agreement on Tariffs and Trade (GATT). Drafted in 1947, GATT’s purpose was to reduce barriers to international trade like tariffs and import quotas. It established principles and rules for promoting free and fair trade between nations. GATT came into effect in 1948 and would later evolve into the World Trade Organization (WTO) in 1995. Overall, the Bretton Woods conference fundamentally reshaped the global economic system in the postwar era. Its vision of integrated markets and shared financial governance laid the foundations for modern globalization.
GATT to WTO
The General Agreement on Tariffs and Trade (GATT) emerged in 1947 as a set of rules governing international trade. However, GATT’s unwieldy structure, which required unanimous agreement among all members for the terms of trade liberalization, led to the eventual establishment of the World Trade Organization (WTO) in 1995.
The WTO provides a foundation of rules for international commerce and a mechanism for negotiating trade agreements and resolving disputes. By joining the WTO, member countries commit to following established free trade norms and principles. WTO membership also serves as an important signal to the International Monetary Fund, World Bank, and credit rating agencies that a country is pursuing free trade.
However, the WTO has faced challenges in addressing contentious issues such as agricultural subsidies and support programs in developed countries. These types of support mechanisms in countries like the United States and European Union are seen by developing countries as limiting their ability to benefit from comparative advantages in agricultural production. As a result, negotiations at WTO summits have often stalled around agriculture issues, hindering progress on establishing a more fully liberalized system of global trade.
IMF and World Bank Lack Democratic Governance
The International Monetary Fund (IMF) and the World Bank lack democratic governance and are dominated by contributing countries. Both institutions impose politically-motivated conditions on developing countries seeking loans and financial assistance.
The IMF and World Bank were established at the 1944 Bretton Woods conference with the goal of restoring global economic stability after World War II. The United States and Western European nations have the largest voting shares and influence in both organizations.
The IMF provides loans to countries facing economic crises and balance of payments issues. In return, it requires borrowing nations to adopt austerity measures and other economic reforms aimed at fiscal discipline and free market policies. Critics argue these conditions undermine national sovereignty and self-determination.
Similarly, the World Bank finances development projects and requires borrowing countries to adopt policies friendly to foreign investment and trade. Opponents believe the bank’s conditions promote neoliberal policies over locally-determined priorities.
While the IMF and World Bank aim to promote global growth and stability, their undemocratic governance structures allow major powers to wield significant influence over weaker nations. The conditions imposed on borrowers often reflect the geopolitical and economic interests of dominant countries rather than the true needs of recipient states.
Financial Liberalization
Financial liberalization refers to policies that allow financial services firms and markets to operate with minimal regulation and oversight. In theory, financial liberalization allows capital to flow freely where it can be put to its most productive use. However, critics argue that financial liberalization has led to increased inequality and instability.
Self-regulating financial markets have allowed wealth to become highly concentrated. The prevailing trend towards liberalization of finance from the 1980s onwards contributed to the rise of “too big to fail” banks and the wealth of top earners and large corporations. When markets are left to regulate themselves, critics believe they tend to operate in favor of the wealthy and well-connected.
At the same time, finance has become increasingly disconnected from trade in goods and services. The IMF and World Bank, originally designed to promote free trade, have experienced “mission creep” into promoting free flows of finance. As developing countries open their markets to foreign financial firms and investments, they can experience rapid inflows and outflows of “hot money” that destabilize their economies. Critics argue the IMF and World Bank, dominated by wealthy nations, prioritize the interests of Western banks over the well-being of people in developing countries.
In summary, the trend toward financial liberalization has been linked to rising inequality and economic instability. Self-regulating markets appear to concentrate wealth, while the “mission creep” of the IMF and World Bank serves the interests of financial institutions over broader development goals. More regulation may be needed to ensure finance serves society.
2007-08 Financial Crisis
The 2007-2008 crisis brought numerous Western banks to the brink of bankruptcy. A case study on the sub-prime crisis shows that this crisis stemmed from the overexposure of banks to risks associated with mortgage-based securities. This issue was exacerbated by the prevailing trend of financial liberalization and a lack of effective public authority.
When the housing bubble burst in the United States, it triggered a chain reaction that threatened the solvency of many large global financial institutions that had invested heavily in subprime mortgages. As home prices declined and interest rates increased, many subprime borrowers defaulted on their mortgages. This caused substantial losses for banks and investors with exposure to these mortgages and related securities.
The crisis quickly spread to financial markets worldwide. As uncertainty around the value of mortgage-backed securities grew, the flow of credit tightened. Stock markets plunged as investors reacted to declining asset values. Numerous major financial firms in the US and Europe either failed, were bailed out by governments, or were purchased under duress during the crisis.
Public bailouts of large banks and financial firms prevented a wider contagion of instability in the global financial system. However, the crisis underscored the problems that can arise from financial liberalization without adequate regulatory oversight. It revealed risks that built up in opaque corners of shadow banking and derivatives markets. The crisis made it clear that financial liberalization is incompatible with the control regimes required to ensure stability.
The 2007-2008 crisis led to a global recession, demonstrating how increased interconnectedness can transmit instability rapidly across borders. It prompted reforms and tighter oversight of the financial sector in many countries. However, some argue the reforms did not go far enough to curb excessive risk-taking and prevent another crisis in the future. The full impacts of the crisis highlighted the need for balanced regulation to mitigate systemic risks in liberalized financial markets.
Crisis Analysis
The 2007-2008 financial crisis highlights how risk exposure from mortgage-backed securities, combined with financial liberalization trends, can bring even the largest banks to the verge of failure. When the U.S. housing bubble burst, it exposed the over-leveraged and under-capitalized positions of many banks that had invested heavily in subprime mortgages and complex mortgage-based derivatives.
With assets tied up in illiquid securities, the banks lacked the capital to honor obligations as they came due, sparking a liquidity crisis. Several major banks like Bear Stearns and Lehman Brothers collapsed. Others needed government bailouts and guarantees to survive.
This crisis revealed the incompatibility of financial liberalization policies with the control regimes necessary to mitigate systemic risks and moral hazards. The regulatory environment had encouraged increased risk-taking while failing to account for how interconnected the global financial system had become. Many viewed the crisis as an indictment of the prevailing laissez-faire, self-regulated ideology in global finance.
Conclusion
In conclusion, the 2007-2008 sub-prime mortgage crisis provides a case study on the pitfalls of unchecked financial liberalization and deregulation. Despite the prevailing trend towards removing restrictions on global financial flows, the crisis revealed the incompatibility of financial liberalization with necessary control regimes and oversight. When large banks were allowed to take on excessive risks in the mortgage securities market without accountability, it led to a system-wide meltdown that required massive public bailouts to contain. The crisis underscored that financial institutions must be subject to prudent regulations in areas like capital requirements, leverage limits, and transparency rules. Pure self-regulation is insufficient. While the ideology of open and borderless finance seems attractive in theory, the real-world economy requires a careful balance between market freedoms and regulatory controls. The sub-prime experience demonstrated that tipping too far towards liberalization exposes the financial system to cascading systemic risks. Governments around the world are still grappling with how to strike the right balance. But the key lesson is that some regulation and supervision of global finance is indispensible for economic stability. The crisis showed financial liberalization has limits, and global finance cannot safely operate as an uncontrolled, self-governing entity detached from public authority.