AMU3630 Lecture 10

Context: the globalisation of finance

RECAP & CONTEXT

The governance challenges of finance being able to flow freely across

national borders

• Embedded liberalism: limits on speculative capital movements,

pegged exchange rate system

• But 1970s-1980s: end of Bretton Woods pegged system, rise of

(private) FDI to developing countries, rise of Washington Consensus

ideas about capital mobility, floating exchange rates.

• (Recall: Washington Consensus-type ideas about liberalising capital

movements)

The non-globalisation of financial governance

Financial Governance

Financial interdependence – but the possibility of contagion as crisis in one place leads to crises of confidence in others

• International causes of the US housing bubble: capital inflow from

emerging markets and foreign governments leading to cheap credit in

the US, perceived security of the US market

• Unlike trade and the binding rules of the WTO, financial globalisation has not seen a transfer of sovereign authority to the supra-national level: no comparable international agency to govern capital movements.

• Instead: inter-governmental action (Basel accords) and voluntary

coordination.

The global financial crisis

What happened in 2008?

• Crisis of confidence: liquidity problems

• New methods of financial globalisation

and deregulatory trends making the

system difficult to monitor and regulate

• Vague and non-transparent system of

derivatives and other instruments

• Self-regulation and assessment of risk (and

the rise of credit ratings agencies)

• Expert consensus: optimism about efficient

markets

The 2009 Pittsburgh Summit: “the premier forum for international economic cooperation”

2009 Pittsburgh Summit

Key points from the G20 communiqué:

“3. Global output was contracting at pace not seen since the 1930s.

Trade was plummeting. Jobs were disappearing rapidly. Our people worried that the world was on the edge of a depression.

“4. At that time, our countries agreed to do everything necessary to

ensure recovery, to repair our financial systems and to maintain the

global flow of capital.

“5. It worked.”

What is the G20 claim to representation?

Claim to representation?

• Presidency can invite further guests: in 2017, Norway, Singapore, Netherlands, African Union chair (Guinea), APEC chair (Vietnam), New Economic Partnership for Africa (NEPAD) (Senegal)

• ‘Permanent guest’: Spain

• But: initial France/Sarkozy proposal of only a G14: India, China, Mexico, South Africa, Brazil + Egypt

• Continuing question of leadership and composition – who to exclude and who to include?

• Does it need to be permanent membership? “Variable geometry”

• Still a self-selected forum?

• Continued sidelining of the UN system?

Criticism of G20 (besides legitimacy)

Criticism

• Lack of formal charter and any formal ability to enforce rules
• "talking shop" and important decisions arrived at behind closed doors
• "shift of hegemony over global governance towards the emerging economies but [no] challenge [to] the authority or objectives of the international financial institutions." (Cammack, 2012)

Consequences:

Consequences

Nolke (2017):

1. Rise of populism exacerbated by the 2008 financial crisis.

2. Similarities to the Great Depression and its consequences in 1930s.

3. Prediction:

• Shift away from liberal economic order towards "organised capitalism" with more government direction and businesses/industry contributing to the wellbeing of a state.
• Liberal internationalism undermined by trade wars and rejection of multilateral agreements. WTO negotiations stalled and emergence of limited bilateral agreements