Tuesday, January 20, 2009

INTERNATIONAL FINANCE IN THE PERIOD OF GLOBALIZATION: CURRENT TRENDS

The contemporary debate about globalization has a very large impact on the structure and the practices of international public finance. As many critics are calling for reform of the IMF and World Bank, others fear the consequences of the continued dominance of less developed countries by the wealthy few. The games of power politics and economics play out even less equitably in the globalized world, according to the anti-globalizers. Undoubtedly, however, and despite the recent financial crisis, current trends show that private capital flows are high; institutional investors are more inclined to use their leverage ; access to quick information that is not always thorough is increasing financial market instability ; and hedging and speculation are on the rise . As Ross Buckley concludes, "[e]ach of these aspects of globalization tends to increase the volume of portfolio capital flows to emerging market nations and the volatility of such flows. Indeed, there is considerable evidence that the globalization of financial markets increases the volatility of such markets." Therefore, the increase of globalization produces higher financial risks, and consequently also increased need for bailouts.
Pro-globalization advocates support the process of globalization, arguing that its long-term benefits will outweigh the short-term difficulties, with respect to the less developed nations. They split, however, regarding the means of establishing a more globalized economic and financial system. Some argue that structure in the system is necessary in order to produce stability and more accountability. Others maintain that a laissez-faire approach is most favorable to the higher levels of development, and to the absolute wealth gain.
Anti-globalization movements are gaining increasing strength in their opposition to the globalized economy. They point to the increased poverty and militarization, hazards to environment, and lack of protection of human rights as evidence of the lack of success of the current state of affairs.
A. CURRENT PRACTICES OF THE IMF AND THE WORLD BANK
The IMF and the World Bank continue to play their traditional roles in world global finance, encouraging global capital movements, both private and public, and stepping in to provide managed defaults and structured bail-outs. For example, the IMF dealt with the global financial crisis of 1997-1998 by ensuring the bailout of large banks and other lenders to the countries in crisis. Less developed countries have generous access to foreign capital, which, as many would argue, is not beneficial for those countries, either politically and economically. Examples of Mexico, the Asian states, and Russia, all demonstrate that whatever the benefits globalization may have, it also produces many undesirable effects.
1. GLOBALIZATION AND DEVELOPMENT
It is hardly disputed, at least with regards to the short term situation, that the globalization of capital can have bad effects on the less developed states. The repayment of loans leads to higher national taxes, reduction of price substitution for essential products, and decreasing spending on public health care, education, and infrastructure (many recognize that the liberal capital inflows into these countries often end up enriching the local rich who, when they cannot make the payments on these capital inflows, subject their populations to the consequences of the capital outflows).
Still others point out the risks found in incurring further debt to finance the existing loans "[b]ecause private banks and institutions often view a credit package as a "seal of approval" that the nation is a reasonable investment, the IMF and the Bank have developed into de facto analysts of a nation's economic health." Moreover, the IMF bailouts are essentially long-term loans that are used to repay short-term creditors , particularly private and commercial developed world banks. Therefore, the bailouts are funds to creditors who made bad loan decisions, rather than to the nations themselves. Critics calling for reform of the IMF and World Bank, or for an alternative regime, support their position by arguing that "even though the IMF identified poor local prudential regulation and underdeveloped local capital markets as two of the principal contributing causes to the [1997-1998 financial] crisis, the IMF-orchestrated bailouts contained not one dollar to correct these weaknesses.

Even the supporters of the globalized financial system and, in general, supporters of the IMF and the World Bank, criticize their current programs. Because the IMF and the WB have a flawed vision of development, they argue, the continuous lending to governments increases the state sector at the expense of the private sector. This produces further debt, not development, and it stalls reform. These critics argue that the organizations finance governments whose anti-growth policies of trade barriers, state-owned corporations, and investment restrictions, among others, resulted in very high debt.
2. THE LOCAL ENFORCEMENT PROBLEMS
Certain critics argue that the current situation is not conducive to globalization because the majority of entrants to the global marketplace lack developed financial structures, poor legal, accounting and regulatory framework, history of political interference and cronyism.
3. THE CONTINUING ROLE OF DEBT
Many countries presently spend large amounts of their GDP, and millions of dollars servicing their international debts. The IMF and G7 creditor nations have instituted a debt relief plan for the most impoverished states (Heavily Indebted Poor Countries Initiative), which are located mostly in Africa. The HIPC Initiative has provided for a Trust Fund, administered by the World Bank, which provides debt relief owed to multilateral institutions, funded by the World Bank and certain donor countries. It also provides an ESAF-HIPC Trust which extends grants and loans to these countries, and subsidizes interest rates through donors and IMF's Special Disbursement Account.
The problems inherent in these debt relief programs are that they are nevertheless within the IMF conditionality principle. The IMF provides the relief contingent on the country's meeting the structural reforms required by the IMF, such as reduction in government spending, which inevitably reduces state employment and social benefits. Moreover, the IMF limits the "dimensions of the goal of broad participation" by limiting the number of countries that are eligible and by imposing structural adjustment programs. The proponents of debt relief on the pro-globalization side argue, however, that debt relief coupled with reforms will eventually lead to a more efficient, high-growth economy.

There are many critics who call for flexible debt relief, especially for the least developed nations, arguing in some cases that servicing the debt forces violations of human rights in those countries: "By continuing to insist that poor states use their scarce resources for debt service payments, rather than for improved access to health care, education, food, and basic shelter for their impoverished populations, the international community becomes complicit in the wide-scale violation of human rights."
B. ALTERNATIVES TO THE CURRENT GLOBAL FINANCIAL SYSTEM
The current international financial system is governed by the IMF, the World Bank, the WTO, and the OECD. The IMF regulates the transparency practices for central banks, government finances, fiscal and monetary policy, and possesses broad economic, financial, and sociodemographic data. The World Bank governs the development project loans and the cross-border insolvency. The OECD regulates the principles of corporate governance. The WTO replaces GATT, essentially regulating international trade.
Both the anti-globalizers and the pro-globalizers argue for some kind of alternative to the current system. Some pro-globalizers still maintain their position that the laissez faire approach is the best way to deal with financial issues in a globalized world. Along the same lines, some anti-globalizers argue against a globalized monetary system per se. In the middle, both the anti and the pro globalization advocates argue for a reformed monetary institutional system. They differ in their specification of the kind of system that would best serve the nation-states.
1. GLOBAL LENDER OF LAST RESORT
A lender of last resort lends to state and private banks "freely and quickly, on good security and at high interest rates, at times of need." As a result, the depositors do not bail at the first sign of financial trouble, because they are sure that their banks will be able to meet their account balances. This, in essence, assures that the debt crisis of the 1980s does not happen again. Although some refer to the IMF as an international lender of last resort, the IMF actually does not lend "freely and quickly", but instead conditions its loans on specified economic criteria. Moreover, the IMF disburses the funds slowly as compliance with its criteria is proven. Finally, because of its difficulties in securing funds from its wealthy members, it does not have a sufficient amount of capital to serve as a lender of last resort.

On the other hand, the establishment of a true lender of last resort would require that both the borrowers and the lenders take responsibility for bad loans: "borrowers should repay their debts, even when it is painful to do so [and] banks and investors who make errors should suffer the consequences". Furthermore, such a lender would have to make loans available for bailouts of international banks and member states so that they can repay their loans, rather than to meet the financial needs of short-term private creditors who make bad loans.
2. GLOBAL BANKRUPTCY COURT
Although not really a viable alternative due to the substantial limitations on sovereignty that it would impose, an international bankruptcy court would be able to more equitably allocate losses and improve the functioning of the system. On the other hand, many nations have already surrendered their sovereignty to a number of international courts and arbitration panels, as well as to the IMF and the World Bank.
3. REFORM OF THE IMF AND THE WORLD BANK PRACTICES
The IMF and the World Bank are criticized for their role in a globalized financial system. Critics point out that these two organizations do not monitor their own standards given the conflicts of interests they have inherent in their many roles, the political role of their governance, and the increased bureaucratization and concentration of power in the institutions.
Instead of advocating the withdrawal of the IMF and the World Bank, some argue that these institutions still have an important role to play in a global financial system, but that they need to reform their lending practices. For example, the organizations could lend to the nation without conditions and demand payment at the end of a specified period, which, if left unpaid, would result in a lack of extension of further loans. The problem with this approach is that defaults would still inevitably occur, and when they did, especially in economically and politically important nations whose stability is essential in a geopolitical sense, the IMF and World Bank would have to step in. This, in turn would affect their credibility, in addition to not solving the bailout problem.

In the alternative, the IMF and the World Bank could impose limited conditionality, which allows for discrimination on the basis of the type of economic problems causing the repayment difficulties (i.e., those problems that are caused by the nation's policies and those that are beyond a nation's control). However, this approach also produces challenges in that it would be extremely difficult for these organizations to police these issues and to accurately identify their causes. The significance of this problem is magnified in the global interdependent economy.
Milena Makich-Macias argues that the IMF bailout program should remain intact, coupled with a number of changes that would make it function better. Her proposal calls for strengthening the macroeconomic stabilization policies, expanding the structural adjustment reforms (such as low interest loans to poor countries), and exploring innovative approaches to address social concerns so that emerging growth countries can become and remain self-sufficient. Macias states that "[f]ocusing on macroeconomic stabilization and structural adjustment reforms allows the IMF to ameliorate social concerns...In addition, by its promotion of a stable system of exchange rates which promote the balanced growth of international trade, the IMF contributes to sustainable economic and human development."
4. SINGLE WORLD REGULATOR
Fratianni and Pattison argue that a single regulatory body would achieve the efficiency and the ease of acting when mandated, to impose the best solution, limited by standards of accountability. These standards would ensure that the regulator takes a strictly regulatory approach, instead of a market-friendly regulatory approach. The agency should also not be amenable to any particular country, and should be made in reliance on an international agreement.
CONCLUSION
Globalization has produced an increase in interdependence of monetary and fiscal policies, with the resulting movement of private and public capital and increased risks. The globalization debate has certainly invaded the area of IMF and World Bank policies. Depending on the particular side that one takes in the debate, different proposals as to how to deal with challenges and problems of the interdependent world are made. The one thing that all the commentators agree on, however, is that the system needs change. They only differ as to the means for implementing this change.

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