Tuesday, February 19, 2008

Globalization and capital flows

I'd like to teach the world to sing In perfect harmony
I'd like to hold it in my arms and keep it company
I'd like to see the world for once All standing hand in hand And hear them echo through the hills "Ah, peace throughout the land"

Coca-Cola commercial (1971), written to be sung by The New Seekers. One of the most effective ads of all time. Original title: "True Love and Apple Pie". Commercial title was, "It'd like to buy the world a Coke, and keep it company" Globalization is a movement towards free trade, unobstructed capital flows, open borders for immigration, and interdependency among nations. The ideal of brotherhood of man and one world is not new. However movement towards global government has speeded up in the last half century, driven by awareness of the risks of atomic and biological warfare and the undisciplined use of the earth. The urge to form international linkages is old and universal in the political right and the left, the religious and agnostic, the artistic dreamers and the blatantly commercial.

Wendell Willkie, the Republican candidate for president in 1940, promoted “One World”. The early communists sang: So comrades, come rally and the last fight let us face, The Internationale unites the human race. Coca Cola hucksters mawkishly crooned how they would “like to teach the world to sing in perfect harmony”. Children find in Disney’s Magic Kingdom that “it’s a small world after all.” The descendants of the flower-children hold hands and sing “Kumbaya”. Ex-President Clinton spoke of “ultimate wisdom of a borderless world for people and for trade," (1) on the day that terrorists destroyed the World Trade Center and killed thousands of Americans. Deindustrialization is one result of globalization and has made the U.S. capital market highly dependent upon laws, customs, politics, and decisions made in other countries. For the most part, this dependency is fragmented, infinitely diversified, and counter-balanced by alternative dependencies. In some cases, such as oil, the dependency is obvious, but generally the connection is unclear and as seemingly insignificant as a change in an obscure tariff classification in Malaysia or the rewording of a minor article in Brazilian tax law.

So far, globalization has worked to the benefit of some, but not all Americans. The primary and most serious threat to globalization is international terrorism, which has the potential to thrust nations into isolationism, particularly the United States. In fact, this is an objective of the al Qaeda terrorists. Other opponents included labor unions, anti-immigration factions, extreme nationalists, and xenophobes of various stripes. Enemies of globalization are strange bedfellows.

Advantages of Globalization he practical advantage of globalization is suggested in the trade and commerce between the states that make up the United States. Americans living in any state may buy goods made in any other state without tariffs or foreign exchange transactions. When there is a shortage of labor in one state, people in other states get in their cars to drive there, without passports or working permits. No one is concerned if Florida has a negative balance of trade with New York, or if citizens of Alaska are financing their homes with money from savers in the other forty-nine states. In return for this economic flexibility, individual states surrender their sovereignty to the federal government.

However, when we try to transfer the advantages of the free movement of goods and services across the political boundaries of states within a single monetary and legal system to nations divided by currencies and laws, we may create an economic system that is far less stable. Global terrorism has the potential of slowing down or even shutting off international commerce in response to fear of clandestine commerce in nuclear weapons. Such drastic action might be required, for example, after a nuclear bomb is detonated in a U.S. city. Because of globalization, deindustrialization, and interdependency, any significant reduction in international trade would cause unemployment in the U.S., with the potential to bring on an economic depression. The national security aspects of deindustrialization have not been extensively addressed, primarily because the move towards globalization has been gradual and from hundreds of thousands of isolated decisions, both private and governmental. There are also legitimate concerns that globalization may lead to less freedom, not more.

In any event, globalization is being driven by technological, psychological, demographic, and economic forces that seem beyond the control of any country. Sovereignty on many critical issues has been surrendered to the World Trade Organization — a non-democratic body dominated by foreign countries, many hostile to the U.S., with power to impose economic sanctions and demand that Americans change laws already approved by their elected representatives. Non-Elected Government One interesting development in the last fifty years has been the rise of “international government”. It is not necessary to delve in conspiracy theories, black helicopters, or the secret plotting of Illuminati, Skull and Bones, the Freemasons, the Bilderbergs (2), the strange symbol on U.S. currency, or the Trilateral Commission (3) to recognize there are organizations other than the state that control our lives.

There is no formal, unified government with sovereign power over all citizens of the world. However, there are over forty thousand global associations (governmental and non-governmental) with specific interests that cover almost ever nuance of human behavior. There are tens of thousands of bilateral and multilateral agreements between countries that voluntarily surrender bits of sovereign power. International organizations write rules, regulations, and set standards that are often accepted by sovereign governments. They also set up courts, arbitration boards, and panels of judges to decide on many issues. They impose fees and taxes on those who choose to be bound by their rules and benefit from membership.

By the twenty-first century, there existed a dense thicket of regulations, rules, procedures, standards, judicial procedures and cross-border limits on economic activity. Since the end of World War II, the United States has supported the drift towards world government. America has backed the United Nations, the North Atlantic Treaty Organization (NATO), the World Bank, the International Monetary Fund, the Asian Development Bank, the World Trade Organization, and a multitude of other government sponsored international institutions. European states have abandoned their antagonism and sovereignty to form a European Union with its own currency and governing bodies. This was the result of years of gradual change, starting with Robert Schuman’s plan for the creation of the European Coal and Steel Community in 1950, through many advances until the forming of a Single Market in 1993 and the introduction of Euro notes and coins in 2002.

American wars became multinational efforts, when possible backed by the United Nations, described as international peacekeeping or police actions. The 2001 War in Afghanistan brought together the NATO nations and a broad alliance of countries from every corner of the world. Significantly, rather than getting approval of Congress to declare war as required in the Constitution, in recent decades U.S. Presidents have sought support from other countries and from the United Nations. The reluctance of the United Nations to back the 2003 War in Iraq because of a threatened veto by France – a country desperate to shore up its fading influence in world affairs – suggested the beginning of new international alignments and a reassessment of the United Nations and NATO.

The World Trade Organization, Interpol, the International Organization for Standardization, and the World Court are some of the thousands of associations that make up a seemingly inexorable trend towards world government, chipping away sovereign power, piece by piece. President George W. Bush’s principled stand with regards to states that support terrorists, including Iraq, may be but a pause in the trend towards unquestioned globalization. In most respects, world government is not democratic. Bureaucrats, largely anonymous, take actions without accountability to any electorate.

The International Monetary Fund is archetypical. This is an organization of a thousand civil servant economists from many countries, most with slight practical business experience and salaries of over one hundred thousand dollars, free from taxation, enjoying diplomatic immunity and generous expense accounts. These officials act through faceless committees, without transparency, to impose orthodox but disastrous policies on the unfortunate client-nations that are lured into their trap of promised assistance.

The web of international organizations that influence corporate behavior is exceedingly complex. There has been an international movement in corporate governance since the 1990s. Many international organizations have an interest in regulating company behavior and this influences corporate motivation and capital flows. In every area, special interest groups that are unable to gain support through democratic processes in their own country, turn to international associations that are easier to control, in order to pass resolutions that influence their home government.

The power of world government is not in organizations backed by law, as is the case in national governments, but rather in multifaceted linkages between tens of thousands of associations and groups, each acting with narrow purpose. These connections make it appear there is international consensus on thousands of issues. Seeming agreement among nations that include trading partners sways officials of sovereign governments. To create this consensus, private groups, commercial and nonprofit, work with associations that have government bodies as members, in exchanging ideas, information, and engaging in cooperative action. Some international associations, like the World Scout Movement, Amnesty International, and the International Red Cross are well-known. However, with over forty thousand organizations, and perhaps hundreds of thousands of special committees, working groups, and initiatives, full knowledge of what is occurring is beyond anyone’s capacity for comprehension. Domestic legislators and civil servants are under pressure to conform to "international standards". This force is irresistible when technical issues are backed by dozens of international associations, each with a public relations arm and proof of implementation in competing countries.

Until the 1990s, much of the activity of this vague “international government” was, if not secret, at least hidden and relatively difficult to discover. Reports of meetings and committees were usually restricted to members and were sold for hefty fees. However, with the coming of the Internet, this has changed; tens of thousands of associations now keep a web site and offer free reports, press releases, and studies for download. There is more information available than we can digest. "World Government" in Practice The story of the development of standards for international securities clearing and settlement during the 1990s shows how “international government” works.

The Federal Reserve flow of funds accounts indicates the importance of foreign issuers and investors in U.S. markets. A shortage of domestic equities, spurred by deindustrialization, "asset-late" thinking, and the buyback movement, induced domestic investors to seek offshore opportunities. To make foreign securities attractive to American institutions, many of which had legal impediments to the use of offshore custodians, Wall Street and foreign governments tried to reduce clearing and settlement risks and open foreign securities markets to U.S. institutional investors.

In October 1987, there was a sharp crash in stock prices that placed unusual stress on financial clearing and settlement. Recognizing the dangers of severe price swings to global clearings, thirty large international banks came together under the leadership of John Reed, Chairman of Citibank, and issued nine succinct recommendations for reducing risk in cross-border securities settlement. These banks called themselves The Group of Thirty (G30) (4). Their recommendations included curtailing settlement time, setting up book-entry settlement procedures and a central depository, adopting delivery against payment rules, netting trades while using same-day-funds, accepting International Standards Organization (ISO) guidelines for security identification and messages, and promoting the lending and borrowing of securities to ease settlement. The G30 used its exceedingly small staff to send an annual questionnaire to securities regulators throughout the world, asking them to report compliance with the G30 suggestions. The G30 issued an annual report of progress and added further proposals. Despite the G30's lack of official status, response to the questionnaire was good, since countries were eager to show the international banks that their markets were safe or improving, deserving attention of foreign portfolio investors. An older organization, the International Society of Securities Administrators (ISSA) (5), backed the initiative of the G30. This society had members in common with the G30. The heads of the global custodial services of Citibank and the Union Bank of Switzerland proposed setting up the ISSA in 1975. In 1979, other banks joined ISSA and took part in annual seminars on securities custody. The published reports of these meetings were of high technical quality and contained valuable information on custodial practices, prepared by experts with decades of experience. The ISSA published a Handbook that was the world’s best source of summarized, up-to-date operational information on world capital markets. The original nine recommendations of G30 were still being surveyed a decade later, now called the G30/ISSA recommendations to signal the joint-backing of these two associations.

In the 1970s, the U.S. Securities and Exchange Commission decided to sponsor an international organization to help promote American securities regulatory practice in Latin America. This group, called the International Organization of Securities Commissions (IOSCO) was headquartered in Montreal, Canada (to make the group acceptable in Latin America where anti-American sentiment ran high). In the 1980s, with globalization and growth of international portfolio investment, almost every country with a stock market rushed to join IOSCO. Now the organization acts as a supra-national policy board for securities regulators, with four strong committees serving the Americas, Europe, the Mid-East and Africa, and the Asia-Pacific regions. IOSCO approved the G30/ISSA recommendations in the 1990s. IOSCO received financial support from the World Bank and from member countries.

The Federation Internationale des Bourses de Valeurs (FIBV) with fifty-seven member stock exchanges also became involved in clearing and settlement matters and issued its own recommendations and ratings of clearing systems. The FIBV was formed in the 1930s in Paris by the International Chambers of Commerce, and was known as the International Bureau of Stock Exchanges until World War II. In 2001, the FIBV changed its name to the World Federation of Exchanges. Other regional associations of stock exchanges issued similar recommendations on clearing issues: African Stock Exchanges Association (ASEA), East Asian and Oceanian Stock Exchanges Federation (EAOSEF), FederaciĆ³n Iberoamericana de Bolsas de Valores (FIABV), Federation of Euro-Asian Stock Exchanges (FEAS), Federation of European Securities Exchanges (FESE), and the South Asian Federation of Exchanges (SAFE).

Finally, the Bank for International Settlements (BIS), dating from before World War II, got involved and formed a Committee on Payment and Settlement Systems (CPSS) and issued its own recommendations on clearings and settlement. Perhaps feeling the G30/ISSA recommendations were tainted by having originated in the private sector, IOSCO and the BIS adopted the G30/ISSA recommendations but added a few more, now calling the expanded package: the CPSS/IOSCO recommendations. Whereas the G30/ISSA recommendations had been devised by experienced custodians with a practical knowledge of the field, the CPSS/IOSCO Task Force on Securities Settlement Systems was made up of civil servants and politicians. The CPSS/IOSCO Task Force took over the original G30/ISSA recommendations, adding ten recommendations of slight technical merit such as the suggestion that “settlement systems should be cost-effective”. The G30/ISSA and the CPSS/IOSCO recommendations were discussed, approved, and promoted in seminars and workshops held by countless associations with connections to the globalization of finance. Groups were formed to deal with special issues on securities lending and borrowing, repurchase agreements, and collateralization.

There is a Global Straight-Through Processing Association (GSTPA) that deals with arcane matters about clearing and settlement of institutional trades through global custodians. Standardized contracts were proposed by such groups as the International Swaps and Derivatives Association (ISDA), the Bond Market Trade Association, and the International Securities Association. Implementation of proposals involved international clearinghouses such as CEDEL and Euroclear. Thousands of papers, studies, and reports have been prepared at universities, consulting firms, local securities regulators, clearinghouses, depositories, and stock exchanges. Because of these associations, there have been changes in laws in many countries, and several billion dollars has been spent on software, equipment, and systems that conformed clearing and settlement worldwide to the G30/ISSA and CPSS/IOSCO recommendations.

Financing of many of studies in emerging markets was provided by the World Bank, USAID, and regional sponsors such as the Asian Development Bank. There is nothing inherently nefarious about this form of international cooperation and the convergence of laws and customs is often beneficial. Similar international government work goes on each day covering almost every thing that people do. The International Standards Organization (ISO) is even proposing a standard on how companies should handle customer complaints. The practical effect of improving international clearings and settlements was to facilitate the transfer of U.S. savings abroad. This made retirement plans of Americans more dependent upon economic conditions in foreign countries. Better international flows in the equities markets also helped foreign issuers sell stocks in the U.S. and American corporations raise equity for offshore subsidiaries, thereby encouraging deindustrialization. These results, of course, had long-term national security implications for the United States. Dependence on foreign securities markets also effects the safety of the retirement plans of millions of Americans.

However, neither the World Bank, the IMF, the Securities and Exchange Commission, or any other organization involved even considered U.S. national security or retirement issues of American workers at any time in the fifteen years that these changes were taking place. It was simply not their job. Nor was there much mention in the press, other than in technical journals. Hidden Power Beyond formal associations, there is a world of clandestine dealings, legal and illegal, through offshore financial centers in places like the Cayman Islands, Hong Kong, Luxembourg, and Switzerland. According to the Bank for International Settlements (BIS),

in 2001, lending by banks in offshore financial centers, excluding Luxembourg and Switzerland, amounted to eight percent of international bank lending. This was on the same order of magnitude as the total capitalization of banks worldwide and one hundred sixty percent of international lending by Japanese banks. Adding Luxembourg and Switzerland to the BIS definition of offshore centers, bank claims from these secret sources exceeded the international lending of any single country except the U.S. in June 2001. Claims from these tiny countries equaled almost ninety percent of U.S. international bank lending. Most international financing escapes fiscal and regulatory scrutiny, because transactions are not through banks, but through trusts and offshore special purpose entities controlled through hundreds of law offices that set up these deals.

Another force, international organized crime, is an evil power beyond the reach of the American government. America’s unwillingness to impose harsh and swift justice for possession of narcotics (as is done in Singapore and Malaysia) results in a thriving billion dollar sub-economy that corrupts law enforcement, the judiciary, the legislature, and the executive branch. Countries like Columbia have lost much of their sovereignty to powerful, militarized crime cartels. Both Kennedy and Clinton had deniable links to domestic and foreign mafias.

There are still other international groups of a religious, ethnic, or cultural nature that exert diverse pressures on government, benign and otherwise. Just as the Pope and the Catholic Church in the Vatican City influences the lives and attitudes of hundreds of millions of Christians worldwide, the Saudi Royal Family, closely linked to the radical, fundamentalist Wahabi Muslim sect since the pact between Abd al-Wahhab and Ibn Saud in the eighteenth century, now influences one billion Muslims through control of Mecca and Medina, destinations of the religious pilgrimage that is one of the pillars of Islam. Since the twentieth century, Saudi oil money filters into coffers of terrorists like Osama Bin Laden, the architect of the destruction of the World Trade Center. Because of these secret offshore links, the influence and motives of the "rest of the world" tables in the flow of funds accounts are more difficult to discern. Personal Ties and Patriotism The United States, as the leading power, is intensely involved in globalization.

Americans have deep roots throughout the world, working in multinational corporations or the military, and through humanitarian, religious, environmental, and charitable endeavors, from Green Peace to the Peace Corps. Many staff members in American hospitals and research centers are foreign-born. American universities are dependent on foreign students and teachers. A significant number of computer technicians in Silicon Valley are from India on special visas. Almost all Americans have foreign ancestors, representing every country on earth. Millions of Americans have foreign spouses and children with dual citizenship. The American military forces that defeated Saddam Hussein in 2003 included many non-citizens. Millions are in the country illegally – a sign of the victory of globalization over law. Languages other than English are spoken in millions of American homes. The stereotype American is a white Anglo-Saxon Protestant, whose mother and father speaks English, and who boasts of lineage to the American Revolution, and who has no living relatives abroad. This type of American is an endangered species. Intermarriage, migrations, and religious conversions have been bringing the world together for thousands of years and the pace is accelerating. Personal and family ties are pushing globalization. These ties are also relevant for commercial reasons, and sometimes there is a political side, such as support for the Irish Republican Army by Irish-Americans and the backing of Zionist movements by American Jews. Americans in the 1930s and 1940s often tried to hide foreign ancestry, adopting Anglo names and embracing Norman Rockwell ideas of what it was to be American.

However, by the 1960s and 1970s, the pendulum had swung back; non-English curricula were introduced in public schools, old family names were restored and proudly displayed, with some groups, particularly African-Americans, even adopting fanciful, imaginary foreign names for which there was no genealogical basis, switching to the Muslim religion and celebrating Kwanzaa, a phony non-"White Christmas".(6) Isolationism, patriotism, and nationalism are linked, as are internationalism and lack of patriotic sentiment. When the Japanese attacked Pearl Harbor on December 7, 1941, less people were killed than when terrorists destroyed the World Trade Center on September 11, 2001. In World War II, Hollywood stars rushed to enlist and risk their lives to defend their country.(7) In contrast, the War on Terror generated only a few Hollywood patriots. (8) In a half century, the pendulum had swung away from a nation of patriots to a divided country with a substantial plurality of confused bleating sheep. In this environment, globalization, anti-nationalism, and disdain for national security flourishes.

By the millennium, a tangle of cultural ties, economic interests, and a long history of one-world movements, peaceniks, flower-children, deindustrialization supporters, and internationalists had solidified support for globalization; tens of millions of Americans were actually voting against George W. Bush for defending the country, "going it alone", and invading Iraq without the approval of France, Germany, and Russia. For better or worse, until terrorists set off tactical nuclear weapons in U.S. cities, globalization is here to stay. Until something snaps, dollar trade deficits will weigh on the flow of funds accounts. We can only hope that, in the meantime, someone teaches "the world to sing in perfect harmony".

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