The Global Economy

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Introduction

• The Global Economy

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What is Globalization?(from Held, et al., 1999)

• Peoples everywhere are increasingly subject to
  the disciplines of the global marketplace.
• A myth which conceals the reality of an
  international economy increasingly segmented into
  major regional blocs in which national
  governments remain very powerful.
• States and societies across the globe
  experiencing a process of profound changes as
  they adapt to a more interconnected, but highly
  uncertain world.

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Generalization(from Held, et al., 1999)

• The widening, deepening and speeding up of
  worldwide interconnectedness in all aspects of
  contemporary social life, from the cultural to
  the criminal, the financial to the spiritual.

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Our Focus

• We shall focus on the institutions and markets
  that connect nations economies.
• More specifically, we shall concentrate on
  financial sector linkages.

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Real and Financial Sectors

• Real Sector Production and sale of goods and
  services.
• Financial Sector Transactions in financial
  assets.

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International Economic Integration

• International economic integration refers to the
  extent and strength of real- sector and
  financial-sector linkages among national
  economies. Real-sector linkages occur through
  the international transactions in goods and
  services while the financial-sector linkages
  occur through international transactions in
  financial assets.

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Growth of World Exports
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The global market for goods and services has
become more important for individual nations.
The percentage shown reflects each nations trade
as a share of its overall economic activity.
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Growth of Trade and Foreign Exchange Transactions
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Stylized Facts

• Unprecedented growth of FDI and portfolio
  investment in the United States.
• Unprecedented growth of MA activity.
• Extreme variability of the currency values of
  large developing and emerging economies.
• Development of the financial and monetary systems
  of Central and eastern Europe, of China, and
  other Asian countries.
• Sharp financial and economic crises.
• The worlds poorest economies mired in debt
  crises and economic stagnation.

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Cross-Border Transaction in Bonds and Equities
In Germany, the United States, and the United
Kingdom, international transactions in bonds and
equities have grown by more than 3,000 percent,
1000 percent, and 700 percent respectively.
SOURCE Bank for International Settlements,
International Financial Statistics, and authors
estimates.
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Global Capital Flows (Billions of US)
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Net Foreign Purchases of U.S. Long-Term
Securities (In millions of U.S. dollars)
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Capital Flows to Emerging Economies
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The A.T. Kearney/FOREIGN POLICY Magazine
Globalization Index ranks 62 countries,
representing 85 percent of the worlds
population, based on 13 variables grouped in four
baskets economic integration, personal contact,
technology, and political engagement. The index
quantifies economic integration by combining data
on trade, foreign direct investment, portfolio
capital flows, and income payments and receipts.
The index gauges technological connectedness by
counting Internet users, Internet hosts, and
secure servers. The index assesses political
engagement by taking stock of the number of
international organizations and U.N. Security
Council missions in which each country
participates and the number of foreign embassies
that each country hosts. Personal contact is
charted by looking at a countrys international
travel and tourism, international telephone
traffic, and cross-border transfers, including
remittances
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The Balance of Payments Accounting System

• International Bookkeeping

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Balance of Payments

• System of accounts which is a subset of the
  National Income and Production Accounts
• A double-entry bookkeeping system.
• Debit Entries Transactions that generate a
  payment outflow (e.g., import).
• Credit Entries Transactions that generate a
  payment inflow (e.g., export).

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Balance of Payments

• The current account is the broadest measure of a
  nations real sector trade.
• Includes
• Goods
• Services
• Income Receipts and Payments
• Unilateral Transfers

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Balance of Payments

• Goods Exports and imports of tangible items.
• Services Exports and imports of services, for
  example
• Typical business services such as banking and
  financial services, insurance, and consulting.
• Tourism

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Balance of Payments

• Income Receipts Includes items such as
• Investment income on US-owned assets abroad.
• Receipts of income on US direct investment
  abroad.
• Government income receipts

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Balance of Payments

• Income Payments Includes items such as
• Investment income on foreign-owned assets in the
  United States.
• Payments of income on foreign direct investment
  in the United States
• US Government income payments

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Balance of Payments

• Unilateral Transfers Includes items such as
• Government grants abroad
• Private remittances
• Private grants abroad

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Balance of Payments 2000
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Balance of Payments 2002

• Handout (Millions of dollars)
• Exports 974,107 Imports -1,392,145
• Goods 681,574 Goods -1,164,746
• Services 292,233 Services -277,399
• Income received 255,542
• Income Paid -259,512
• Unilateral Transfers -58,853

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Balance of PaymentsThe Financial Sector

• In June 1999, US capital account definitions were
  modified to bring them more in line with
  definitions recommended by the International
  Monetary Fund.
• Now there are two accounts The Capital Accounts
  and Financial Accounts.

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Balance of PaymentsThe Financial Sector

• The new Capital Account includes items that were
  previously included in unilateral transfers, such
  as
• Debt forgiveness
• Migrants transfers (money brought in and out as
  people move from one country to another).
• The new capital account is small for the US (lt
  0.1 percent of capital flows), but expected to
  grow.

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Balance of PaymentsThe Financial Sector

• The Financial Account
• Records international transactions in the
  financial sector
• Includes portfolio and foreign direct investment
• Includes changes in banks and brokers cash
  deposits that arise from international
  transactions.

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Balance of PaymentsThe Financial Sector

• US-Owned Assets Abroad Increase or decrease in
  US ownership of foreign financial assets.
• Foreign-Owned Assets in the US Increase or
  decrease in foreign ownership of domestic assets.
• Reserve Assets Primarily the assets of central
  banks.

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Balance of PaymentsThe Financial Sector

• Portfolio Investment Individual or business
  purchase of stocks, bond, or other financial
  assets or deposits. (An income strategy)
• Foreign Direct Investment Purchase of financial
  assets that results in a 10 percent or greater
  ownership share. (A financial control strategy)

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Capital and Financial Account (2000)
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Balance of Payments 2002
Capital Account, Net 1,285 Financial Account,
Net ? US Owned Assets Abroad -178,985 US
Official Reserve Assets -3,681 US
Government Assets -32 US Private
Assets -175,272 Foreign Owned Assets
706,983 Foreign Official Assets
94,860 Foreign Private Assets 612,123
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The Balance of PaymentsThe Statistical
Discrepancy
Balance on Current Account -480,861 Capital
Account, net -1,285 Net Financial
Flows 527,988 Statistical Discrepancy
-45,852
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The Balance of Payments
Some important balances are Balance on
goods Balance on services Balance on income What
do they reflect about the US economy?
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• EXAMPLES
• 1. A 10-year loan of 1 million is made by a
  private US bank to Romania. The loan is funded
  by creating a 1 million deposit for Romania in
  the U.S. bank
• foreign official assets in US
• U.S. private assets abroad (US claims by US
  banks) 
• 2.A US firm sells 1million worth of wheat to
  Romania. Romania pays for it with the funds
  given in (1)
• exports 1million
• - foreign official assets in US

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• 3. A US resident receives 10,000 in interest
  from a German bond she has. The 10,000 is
  deposited in a German Bank
• income received
• Foreign official assets in the US 
• 4. A US tourist travels to Europe and spends the
  10,000 deposit
• - imports of services
• US owned deposit in foreign bank (private)
•  
• 5. The US gives 100,000 worth of grain to
  Somalia
• merchandise exports
• - unilateral transfers

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6.The Federal Reserve buys 200 million worth of
Euros from US Commercial banks - Official Reserve
Assets US owned assets abroad (private)   7.
The Mexican government sells 20 million worth of
Mexican dollar denominated bonds to the US
government (gets paid in US accounts that are
kept in US Commercial Banks operating in
Mexico) - US owned assets abroad (government
assets) Foreign official assets in the US
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Debtor / Creditor Status

• Net Debtor Nation
• A nation whose total claims abroad are less than
  the total foreign claims on the nation.
• Net Creditor Nation
• A nation whose stock of foreign financial assets
  is greater than the stock of foreign-held
  domestic financial assets.

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The US and Net Debtor Status

• It is neither necessarily good nor bad to be a
  net debtor.
• The US is the worlds largest net debtor,
  primarily because of record FDI and portfolio
  inflows.
• Since most of US debt is in its own currency,
  there is not a problem in sustaining this debt

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Debt Relief

• Debt relief for the poorest nations is one of the
  most pressing international economic policy
  issues today.
• Beginning in the early 1980s, the stock of
  international debt became so large that many
  developing nations could no longer make all of
  their debt service payments.

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• Some problems are
• The debt is in US dollars, not the countrys own
  currency
• Such dollars must be purchased by selling goods,
  services and/or assets
• The levels of debt are so high that exports
  cannot pay for them sometimes cannot meet
  current payments they are not sustainable!

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Debt Relief / Institutions

• Paris Club
• Forum for multilateral negotiations between
  debtor and creditor nations.
• London Club
• Forum for negotiations on private debt owed to
  commercial banks.
• Millennium Fund
• Private sector donations for debt relief

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Debt Relief

• Despite the efforts undertaken in these
  organizations, during the 1990s, the debt stock
  of the poorest nations doubled in 5 years.
• At the start of 2000, less than half of the debt
  obligations were being fulfilled, with US60
  billion in arrears.

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Debt Relief

• In 1996, the leaders of the G7 nations agreed
  upon the HIPC (Heavily Indebted Poor Countries)
  Initiative, intended as a means to qualify
  nations (originally 26) and deliver debt relief.
• The HIPC initiative failed to deliver relief
  after 3 years, as only seven nations qualified
  and none saw any debt relief.

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Debt Relief

• In 1999, public pressure lead to the Cologne Debt
  Initiative (CDI). The CDI was intended to
  deliver faster and deeper relief.
• Expanded list of countries.

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Problems

• 15 percent of debt stock owned by nations not
  part of the CDI negotiations.
• 50 percent of the debt stock not being serviced
  as is. Hence, forgiveness of stock may not help
  that much.
• Public financing issues

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Large Debtors Nations
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Unsustainable Debt
Country
International Debt/GDP()
Angola
279
Congo, Dem. Rep
196
Congo, Rep.
280
Cote de Ivoire
122
Ethipia
135
Indonesia
169
Jordan
110
Mauritania
148
Nicaragua
262
Sierra Leone
126
Syria
136
Zambia
181