BRICS Impact on Capital Mobility & Imbalances: Tech, Finance, & Global Power, Prove d'esame di Geopolitica

Scarica BRICS Impact on Capital Mobility & Imbalances: Tech, Finance, & Global Power e più Prove d'esame in PDF di Geopolitica solo su Docsity! Luca Scaglione Student ID: 0000781637 Global Geopolitics of Business Millo: 1.Discuss the role of United States in the birth and death of the Bretton Woods agreement. After the second World War the political and economic predominance of USA led the reconstruction of the world monetary system trough the Bretton Woods Conference in 1944. The US economy - in spite of the physiological consequences of a world war - was the least affected by the WWII, being in a position of relative advantage over Europe. Fixed changes were unanimously considered decisive in order to establish stability and peace between nations and to promote international trade. So, during the BW Conference 44 countries established - as well as the financial institutions World Bank and IMF - that their currency had to be set at a fixed change with US dollar1, the main currency of the system. The United States were committed to support every dollar overseas with their gold reserves. The US dollar was the only currency pegged to gold based on the exchange rate of 35 $ for one ounce, and the other members could sell dollars against gold to the Federal Reserve at the official price. So each country settled its international account in dollars and was obliged to adopt a monetary policy aimed at stabilizing the exchange rate at the value fixed against the dollar2. Just the FED could pursue an independent monetary policy, while the other Central Banks had to follow the US monetary policies in order to maintain the central parity fixed3. US dollar became the international trade currency4. 1 In practice, countries maintained their currencies +/-1% of the fixed rate established. (author’s note) 2 Although large devaluation (more than 10%) was allowed - under the IMF supervision - for countries that, due to structural issues, could not correct the current account balance, in practice the rule was the adoption of fixed rates without parity rate adjustments. This was because the members soon realized that the use of devaluation made more probable speculative attacks against their currencies, even though the control over the capital inflows and outflows of the time. (author’s note) 3 As we can notice later for the EMS agreement, even on BW was allowed to fix a new parity or to apply to IMF in case of structural imbalances. (author’s note) 4 Formally US dollar was the first currency totally convertible since 1945, the European countries restored their currencies convertibility just in 1958. So, this important choice, together with the economic and political weight of the US and their role in BW exchange regime, bring the dollar to an hegemony position in the international trade. P. Krugman, M. Obstfeld, M.J. Melitz, International Economics, Pearson Education, 2014, p. 334. But in the 1960s this asymmetric system begun to show the first signs of the future collapse. Starting from that period, despite formal restrictions, international financial flows increased. The USA began sterilizing capital outflows with liquidity injections quickly absorbed by surplus countries which bought dollars to prevent their currency from being revalued. Few years later in 1968 the US current account balance5 joined a negative net position leading to a balance of payment deficit. The dollars international reserves were increasing faster than the FED gold reserves . These processes, on the one hand, brought the USA to became an “inflation-exporting” country and, on the other hand, created a crisis of confidence in the ability of United States to guarantee the gold convertibility of dollars6. The gold of the US, after a decade of rise in public spending and inflation rate7, and balance of payment deficits, became insufficient in front of the huge mass of dollars circulating in the world and the FED can no longer control that circulating with its reserves. In 1971, Germany trying to stabilize the level of domestic prices - not tolerating more the high inflations rates imported by US monetary policy- , decided to left the BW agreement letting the exchange rate float. At the same time, France and Great Britain threatened to convert their reserves into gold. On August the 15, 1971, the US president Nixon, because of the increasing demand for gold conversion from the other countries, suspended the dollar's gold convertibility. With the following G10 Smithsonian Agreement, US dollar was devaluated until the exchange rate of 38 for one ounce. The exchange rates of the other currencies were also modified and settled a +/-2.25% fluctuation band around the new parity, but this attempt to stabilize the system failed. Between 1971 and 1972, the speculation pressure began to intensify on the United States to further devaluation. The formal end of the BW fixed changes regime took place between February and March 1973, when governments of member countries just let their currencies float. A period of totally flexible “market- lead” exchange rates started. 2. Discuss the effect of countries macroeconomic fundamentals on the 1992 crisis of the European Monetary System, especially referring to Italy, UK and France. 5 In part because of the increasing in public expenditure mainly due to the hegemonic role of US during the Cold War and the further rise in defense expenditure due to the Vietnam War started from ‘60s. (author’s note) 6 Nevertheless, there was an endemic lack of liquidity inside the system. This was because the monetary mass, linked to a real good limited in quantity, couldn’t keep up with economic growth when gold finished. R. Triffin, “Gold and the dollar crisis”, Yale University press, New Heaven, 1960. 7 From 2,9% of GDP in 1966 to 5,7% in 1970. Main Economic Indicators: Historical Statistics 1964-1983, OECD, Paris, 1984. Pansa: 3. Discuss the role of the technological development in the processes of power distribution between public and private institutions on one side, and advanced and emerging countries on the other. Technological development is , of course, one of the key factors in the globalization spread. It affects both the increasing power of private institutions and their ownership of technological (and financial) innovation. The new technological wave started from late ‘70s, and consisted in a fast development on telecommunications and microelectronics, briefly produced dynamics of dematerialization and miniaturization of products. Technology became no more incorporate in goods with a considerable size, that negatively sway commercialization, but in smaller and smaller ones, even up to be dematerialized in software and inputs. These important characteristics of technological development combined with the improving skills and resources of emerging economies17, and the end of political-ideological obstacles18, led to the fall of many non-tariff barriers to the internationalization of technological trade. According to this point of view, there is a strict link between technology internationalization and the simultaneous liberalization of capitals movement, because capital is necessary to develop technology. Today, high-tech goods and services like systems, software, bio technology, biochemical molecules, ICT services, etc… are characterized by high research and development risk (so fixed cost) but by low production, reproduction and distribution cost. In practice the low marginal cost leads these companies19 to exploit increasing economies of scale, bringing them to monopolistic positions. These new ITC monopolists are able to master platforms and networks. So, they have gained control of large market shares re-building barriers to entry, by merging or buying other companies, using licensing agreements to make their networks and platforms as “industry standards” and extending their intellectual property domains20. This “network economies” dynamic gave a chance to few innovative firms to increase in size and power, and considerably rise their possibilities to affect both the globalized market and the political institutions. They use their economic dominance to gain political power through lobbing activities and thus strengthen their market power. Step by step, the State has lost many of its traditional sovereign prerogatives, without mentioning authority, leaving logical and political hegemony to private and technocratic institutions. This disempowerment of politics got people disoriented as they had gotten used to think of the State (and politics) as the legitimate center of power. These powerful private players operate at global level, but, until now, democratic decision making remains tightly lodged within nation states21. The middle class, hit by this fast evolution of the 17 Made up by the increased level of education, investment and the use of reverse engineering. (author’s note) 18 The end of the Cold War. (author’s note) 19 High-tech business as pharmacology and ICT. (author’s note) 20 R. Reich, Come Salvare il Capitalismo, Fazi Editore, 2015, p. 58. 21 D. Rodrik, The Globalization Paradox, W.W. Norton & Company, New York, 2011, p. 208. economic (and financial) system, has progressively lost contractual power. As a matter of fact, today, the powers of citizens - understood as the electoral body to be held at more or less pre- existing deadlines – are weak compared with the shareholders and investors ones that could influence market and politics every day moving billions and billions. As large multinational companies and big business banks put pressure on politics through their demands (profit, freedom to move, political stability, get market power, labor force flexibility, prestige, etc… ), it is becoming more and more difficult for politics to take on the demands coming from the citizens who are mainly concerned about job, welfare, health and safety. Regarding the distribution of power between developed countries and emerging economies technology plays a central role. Emerging countries like BRICS, Petro-monarchies, South Korea, Mexico, Indonesia, etc… apparently reached lots of power during the last raising decades, especially if we take in consideration the capital accumulation (positive trade account). Countries that accumulate capital are supposed to become the leaders of both technological and financial innovation. But, while the percentage of technological devising in emerging countries arose in 2000, in 2010 this percentage decreased more or less at 1990 level. This dynamic can be explained analyzing on one side, the peculiarities of high tech innovation and on the other the role of patents and property regulation. As we mentioned before, new technology consist more and more of device and software development and most of the time high tech products (and process) are affected by lots of licenses and single intellectual properties. So, if the real owner of the product is the deviser of the software, when to build up a new technology are required licenses from too many owners, to get into all the licensing agreements needed becomes very complex and expensive. Patents regulation and WTO rules - particularly the interdiction of reverse engineering for WTO members - protect intellectual property encouraging this “fragmentation of knowledge” dynamic that affect the commercialization of technologies22. In this way, those who master technological innovations, a handful of corporate giants of the western technologically high-range-oriented countries, can increase their return while securing significant market shares from other emerging competitors23. To give an example, as new online sites, e-commerce and services depend more and more on the owners of the standard platforms (Google, Facebook, Amazon, etc ...)24, firms of many hi-tech sectors are increasingly forced to buy licenses from few business “heavyweight” to use a protected technology. For these reasons, emerging economies may find it challenging beyond their possibilities to fill the technological gap with western economies both on high tech industrial segment and on managing financial innovation instruments. 22 “Trade-Related Aspects of Intellectual Property Rights (TRIPS) Agreement (1995) now requires all WTO members, with few exceptions, to adapt their laws to the minimum standards of IPR protection. In addition, the TRIPS Agreement also introduced detailed obligations for the enforcement of intellectual property rights.” World Health Organization, WTO and the TRIPS agreement: http://www.who.int/medicines/areas/policy/wto_trips/en/. 23 So industrial sector, especially high-tech one, is affected by the same concentration process that we will discuss on the next paragraph regarding the financial sector. (author’s note) 24 Systems and software that, being industry standards, affect the development of compatible software applications. (author’s note) 4. Discuss the role of financial technology in the evolution of capital markets, in their structure and in their capacity to affect political decisions. Today the ownership of financial technology is almost completely in the hands of few western big banks. The financial market is around 10 times bigger than the real one, and even if this is more and more globalised, because of the completely free capital mobility, western operators manage a large part of it. Starting from the ’80s Anglo-American financial players, thanks to the success of a deep and extensive lobbying effort, altered the structure of the international financial system. They brought it from a regulatory order in which “all that is not provided is forbidden” to another where “all that is not provided is permitted”. At the same time, Thatcher and Reagan’s neoliberal view on economic development, which believed in the power of free market and in the rule of profit, encouraged this banking-supervision reduction process. In this sense, the City of London Reform25 (1986) and the gradual deregulation of the US financial activity, actually started in 1974 with the Employee Retirement Income Security Act26 and ended with the abolition of the Glass-Steagal Act27 (1999) had been crucial. According to this deregulation process, we assisted to a full and complete liberalization of the capital markets. So the western financial services industry - become the most influent sector on the direction of economic policy, taking the place of defense and energy industries – undertook an innovation process which brought to the development of a good number of growingly complex financial tools which permitted the capital market expansion and its centrality for the State accounts’ sustainability. This dynamic was encouraged by the simultaneous information technology revolution, which made easier financial transfers, developing e-trading and new instruments like derivatives (options, futures, swaps, etc…). In fact, just big banks had the money, and the technological and intellectual skills to elaborate innovative algorithms and new financial instruments taking advantage of ICT. So this investment on ICT and on innovative financial technology, jointly with the success of free capital mobility narrative, placed the UK and US financial systems in a hegemony position, permitting to extend their superiority and spreading the financial market internationalization to the 25 The so-called “Big Bang” because of the significant boost in market activity came from an aggregation of measures including abolition of fixed commission charges, the distinction between stockjobbers and stockbrokers and change from open-outcry to electronic trading on the London Stock Exchange. Among these reforms, very important was the one which permitted to chose - on the London Stock Exchange - the financial regulation that a financial institution prefer the most to work with, between UK one and the one of its own country. (author’s note) 26 R. Reich, Come Salvare il Capitalismo, p. 171. 27 The new law abolished the provisions of the Glass-Steagall Act of 1933, which included the separation between traditional commercial banking (transformation) and investment banking (financial services addressed to companies, public and financial institutions). But other significant reforms were: in 1997 the abolishing on the limits to invest in Stock Exchange for American pensions funds and insurance companies, and the possibility for US banks to operate outside their State of origins. Goldstein: 5. Discuss the role of emerging economies in the global economy, the factors that explain their performance since the late 1990s, the origins and development of the BRIC(S), and the nature of their economic and social development. The acronym BRIC was invented by O’Neil, a Goldman Sachs researcher, in 2001 to indicate emerging countries which share similarities in key development sectors like demography, resources, growth rates, etc… to the point of being able to lead the world economy between 2030 and 205036. Size, long term potential, possibility to invest and access to regional market, turned these countries into a sort of single asset to invest in. In the course of last two decades BRIC became relevant poles of global economic growth and from 2000 to 2010 have contributed by one-third to the increase of global GDP37. During the 2008 crisis, BRIC's economies suffered by an international capital outflow and by the slowdown in world aggregate demand, but good growth rates were quickly rejoined from 201038. Trying to describe and model the BRICS evolution process, it is possible to find some common patters, which obviously show some differences among each country. According to that, the structural economic transformation which brought these economies from low-productivity traditional activities to higher productivity ones was driven by a combination of different factors. Surely the positive demographic trend roused a considerable increase in labor force39 that, jointly with a fast urbanization, produced a rise in the development of internal network economies40. The resulting decrease in unit labor cost (so a labor productivity gain) brought to a comparative advantage on high labor-intensive manufacturing sectors. From the ‘90s we assisted to a series of systemic reforms as large privatization plans, industrial and trade liberalization. But these reforms were not enough to fix the BRIC economic condition and overcome obstacles as high inflation rates and external dept. Institutions are crucial in determining the behavior of economic agents, ensuring macroeconomic stability, and managing social conflict situations41. So these countries also undertook structural internal reforms (public deficit reduction, tax reform, price stabilization, Central Bank operational reforms, and so on) to build the necessary institutions and financial discipline to oversee the “free market” policies. 36 J. O’Neill, A. Stupnytska, The Long-Term Outlook for the BRICs and N-11 Post Crisis, Goldman Sachs Global Economic Paper, n°192, 2009, p. 22. 37 A. Goldstein, F. Lemoine, L’économie des BRIC, La Découverte, Paris, 2013 p.13. According to PPP GDP half of the increase. 38 Thanks to a relatively low public dept level gained through a prudent management of the State finances undertaken from ‘90s. (author’s note) 39Increase in active population from 1980 to 2010 was of 84% in Brazil, 68% in China and 21% in India. 40 The role of informal economy was and is still crucial in the development progress of emerging countries. (author’s note) 41 D. Rodrick, One Economics, Many Recipes. Institutions and Economic Growth, Princeton University Press, 2007. (Via A. Goldstein, F. Lemoine, L’économie des BRIC, p.34.) Commercial liberalization allowed BRIC to strengthen internal competition in order to supply the success of the internal market liberalization. Slowly, thanks to a competitive exchange rates policy, BRIC stimulated the export and became more and more attractive to foreign direct investment. Moreover, such market openness gave businesses a wider access to goods, services and capitals, allowing the development of industrial specialization, and – especially through reverse engineering - the replication of developed countries' goods and services, firstly on the medium technological segment. So, the role of the State institutions - passing from interventionist to regulator - has been crucial in gaining financial stability, promoting development and mobilizing internal resources more efficiently. The gradual and pragmatic market opening reforms42 have contributed both to improve the use and the adoption of technology and to the development of productive sectors, letting enter BRIC in the global value chain. In this sense, the increase in capital stock is a sign of the growing weight and interdependence of BRIC in world production, trade and finance, and ultimately to their economic growth. On one hand this structural evolution and increase in GDP brought a considerable reduction of poverty in BRIC, but, on the other, there are still lots of poor people, especially in rural areas, who needs poverty measures and a part of global aid should be redirected there. At the same time, the fast development of a market friendly environment caused an inequality rise43 in almost all these economies (except Brazil which had already one of the highest Gini Index in the world44). Inequality is slowly becoming not only a veritable social problem, but it also adversely influence the economic development prospects of these emerging countries that are now involved with complex social policy programs. Furthermore, the BRIC economic development is affected by a large use of polluting activities that have a huge direct impact on global sustainability. As evidenced by the Indian President statements during the COP21 summit in Paris45, emerging countries claim the right to pollute in support of their catch-up process. That’s why, climate change and emissions reduction are now some of the most problematic points in the dialogue with environmental-friendly advanced countries. But, despite the large similarities mentioned before, there are, of course, wide variations among these countries in terms of production structure, income and aggregate demand. Brazil and Russia have had a previously industrial evolution, compared to Chinese and Indian ones, that place these countries in a good position in term of income46. On supply side, they are better placed in services sector. Nevertheless, the most important part of the Russian economic weight come from oil and gas export. In China the real engine of the growth was obviously the manufacturing industry. From this point of view, Indian delays in industry are revealed mainly by the high portion of agricultural sector on GDP, rather than by the services sector’s one. Services development actually led the Indian growth during the 2000s. 42 Except the Boris Eltsin liberalization “shock therapy” undertaken in Russia after the fall of socialism. (author’s note) 43 It could be the beginning (first segment) of the Kutsnets trajectory. (author’s note) 44 Brazilian Gini Index 51.48 (2014). http://data.worldbank.org/indicator. 45 D. Fabbri, Perché la Conferenza di Parigi non sarà il fiasco che fu Copenaghen 2009, limesonline.com, 3/12/2015. 46 In term of GDP per capita PPP (US dollar): Russia 25.411, Brazil 21.496, Cina 14.107, India 6.162 . World Economic Outlook database, April 2016, IMF. So, Russia is now affected by the weight of raw material export (gas and oil) on GDP, and it needs to get involved in an industrial diversification. China has to think about an industrial reconversion based on the internal market development47. Furthermore, the Chinese overinvestment on fix capital could become a debt corporation problem in the medium term. Brazil should try to avoid the “Dutch syndrome” importing capital goods instead of consumption ones to stay competitive. India should develop infrastructures and industrial services to increase the development of manufactory sector, the only able to employing its growing labor force. Ultimately, these emerging economies should “achieve greater diversity in terms of economic structure, so as to reduce a country’s vulnerability to poverty and external shocks”48. In order to address these challenges, BRICS countries from 2009 start collaborating to influence more international negotiation, to rebalance the weight of the “great powers” - especially calling for a reform of the international financial institutions like IMF and World Bank49 – and to enforce their economic partnership trough regular summits and multilateral institutions like the New Development Bank created in 2014. But even these attempts are controversial. There are evidence of a lack of cohesion on international negotiations. Because of the single countries’ peculiarities listed above, national interests often prevail over central issues such as trade liberalization, anti-dumping, exchange rate policies and capital movements regulation. Indeed, BRICS governments, which strongly opposed protectionism through official rhetoric, are actually undertaken a fair number of protectionist measures reciprocally50. In particular, the competition for foreign market shares and the commercial inter-sectorial trade relations, which seem to have settled between China and the others member, could have a negative impact on BRICS political cohesion. 6. Discuss the origins of informal governance, first as G7/8 and more recently as G20, which topics are discussed, the role of the summits I shaping formal global institutions and their record in facilitating consensus and action. G7 informal governance – formed by the heads of the State or government of USA, UK, France, West Germany, Italy, Japan and Canada - was instituted during the ‘70s by the strongest economies of the time, to take charge of global economic negotiation on commerce and monitor financial 47 Chinese GDP (demand side) component relative to household was around 35% in 2010 compared to: 61% Brazil, 57% India, 52% Russia. UN, National Account Statistics. 48W.Naudé, A. Szirmai, N. Haraguchi, Structural transformation in Brazil, Russia, India, China and South Africa, UNU-Merit Working Papers, 2016, p. 2. 49 As will be mentioned in the next paragraph, a partial IFI reform was undertaken in 2012. (author’s note) 50 “Furthermore, notions of BRICS solidarity on protectionism should be set aside – almost a third of the times a BRICS commercial interest is harmed, it is due to actions taken by another member of the club.” S.J. Evenett, BRICS Trade Strategy: Time for a Rethink, CEPR Press, 2015, London, p. 4; References http://data.worldbank.org/indicator http://data.worldbank.org/topic/financial-sector World Economic Outlook database, April 2016, IMF. World Health Organization, WTO and the TRIPS agreement: http://www.who.int/medicines/areas/policy/ wto_trips/en/. Priorities of the 2017 G20 Summit (Hamburg): https://www.g20.org/Content/DE/_Anlagen/G7_G20/2016-g20-praesidentschaftspapier-en.pdf? __blob=publicationFile&v=. 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