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«THE (IN)SECURITY OF INTERNATIONAL FINANCE Valpy FitzGerald [Originally delivered as the first of the Wolfson College Lectures 1999 series on the ...»

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These common assets are built up historically through social investment (and tax payments) of previous generations, and thus are specific to nations (or cities) and not internationally mobile. This form of capital is ‘owned’ by the nationals of the country in question; and is essence means that their passport is the principal asset which citizens of rich countries possess. Their incomes depend upon the ‘dividend’ from joint ownership of their country’s social overhead capital - an equity which they mainly inherit through birth and deny to other members of the global community by prohibiting immigration. 47 In the strict sense of liberal political philosophy set out by Rawls, this arrangement is clearly unjust.

All parents in poor countries would doubtless prefer that their children be born citizens of a rich nation, independently wherever they were to eventually reside.48 Once behind the ‘veil of ignorance’ and not knowing which passport their children would receive in a lottery system, future parents from both poor and rich countries would logically vote for the free movement of labour around the globe.

In Rawls’ rigorous sense, the ‘indifference test’ demonstrates that the current situation is manifestly unfair and unacceptable.49 It can be argued, of course, that the citizens of individual countries do not belong to a single political community and can only be represented internationally by their respective states. This is a realistic interpretation, but leads logically towards more equitable representation in international organizations charged with the regulation of the international economic system. Specifically, this implies that the United Nations should be the forum in which investment issues are settled through the equal representation of states,50 or possibly by the creation of an ‘economic security council’ reflecting regional economic interests.51 None the less, it is worth considering the implications for the Hegelian moral imperative of the debates on international financial security outlined in this lecture, however hypothetical these may be.

All human beings are already members of a single political community by virtue of their participation in a global market; a participation in which they were not consulted. If financial assets become internationally recognized as they must be if they are to be effectively regulated, and if a multilateral property (and tax) system emerges, then this eventually means the recognition of natural persons as subjects of international law. Finally, such recognition opens the door to the redistribution of the global income from capital towards the labouring poor and the eventual elimination of global poverty in the form of social transfers rather than ‘aid’ in the twenty-first century in much the same way in which social citizenship replaced charity in modern Europe during the twentieth.52

5. CONCLUSIONS In less than an hour I have leapt somewhat unsteadily from economic theory to political economy and then on towards political philosophy - a somewhat perilous inter-disciplinary expedition which I trust has been worthwhile.

To recap, my three main points have been:

first, financial markets are inherently unstable because they deal in expectations; they require strong regulation to underpin contracts and prevent systemic collapse; so that global financial markets require global regulation - not as a means of protecting consumers or small investors, but just so that they can function at all; the consequences of this instability particularly for the three-quarters of the world population outside the OECD;

second, it has taken repeated international crises to convince global policymakers that the Bretton Woods Institutions are wholly inadequate to provide the required international security; but the implementation of the required regulatory framework faces the opposition of both the major global economic power and private financial intermediaries; resolution of this impasse may only come about through the geopolitical balance between new currency areas;

third, the process by which a new inter-governmental financial architecture is established will be slow and driven by successive crises; but it will entail a more critical approach to markets ‘rationality’ as a substitute for political process, to the nature of international property rights, and possibly ultimately towards the concept of global citizenship itself.

My argument has thus not been against global financial integration - which in any event is an inevitable trend - but rather a case for the construction of an appropriate international framework which an orderly market requires. The construction of that framework will be slow and driven by national interest, but I believe that it just might contain an opportunity for global emancipation.


1. I would like to thank the MacArthur Foundation for support to the research programme at the Finance and Trade Policy Research Centre from which this paper is derived.

2. According to the OED the use of the word ‘security’ in a financial sense is at least as old as that of personal safety, and that the latter originally implied carelessness. Security: I. The condition of being secure. 1. The condition of being protected from or not exposed to danger; safety. 2. Freedom from doubt. Now chiefly, well founded confidence, certainty. 1597. 3. Freedom from care, anxiety or apprehension; a feeling of safety. arch.

Formerly often culpable absence of anxiety, carelessness. 1555 (‘Security Is Mortals cheefest Enemie’ SHAKS ) II. A means of being secure. 1. Something which makes safe; a protection, guard, defence 1586. 2. Ground for regarding something as secure, safe or certain; an assurance, guarantee 1623. 3. Property deposited or made over, or bonds, recognizances, or the like entered into by, or one behalf of a person in order to secure his fulfilment of an obligation, forfeitable in the event of non-fulfilment 1450. 4. One who pledges himself (or is pledged) for another, a surety 1597. 5. A document held by a creditor as guarantee of his right to payment.

Hence, any form of investment guaranteed by such documents. Chiefly pl. 1690 (‘Liquid Securities, or in other words, those easily convertible into cash when necessity arises’ 1879). The sense of ‘state security’ first appears in the 1965 Addenda.

3. The oil crisis did of course cause serious problems for industrial countries, and was accompanied by calls for a ‘New International Economic Order’ from critics of the Bretton Woods system; but it did not lead to any change in the way the OECD countries viewed the world or arranged their institutions.

4. It is to say the least ironic that the in an attempt to broaden the membership of the OECD to include industrializing powers Mexico and Korea were admitted in 1994, while the candidates in 1997 were Russia, Indonesia, India, Brazil and China. Five of these ‘big seven’ have since suffered financial collapse.

5. Calculated from IMF World Economic Outlook Washington DC: International Monetary Fund (October, 1998).

As is frequently pointed out, these countries account for only 16 percent of the world population.

6. Because depositors in (say) pension funds cannot know the eventual value of the asset acquired when they retire, they can only rely on the current return on the fund in question as an indicator of the fund manager’s capability. This encourages short-term maximisation of returns by fund managers in order to gain market share; a bias which is exacerbated by the system of quarterly bonuses as a form of remuneration.

7. Just as good driving consists in correctly anticipating the actions of pedestrians and other motorists rather than efficient use of the vehicle as such.

8. ‘Global saving and interest rate behaviour: why don’t international capital markets clear?’ in S. Sharma (ed) John Maynard Keynes: Keynesianism into the Twenty-first Century London: Elgar (1998) pp. 223-239

9. In addition, financial liberalization means that in an economy such as Mexico, the entire domestic money supply is - in effect - a contingent foreign exchange claim on the central bank because bank deposits can be converted into dollars on demand.

10. See IMF (1998) Toward a Framework for Financial Stability Washington DC: International Monetary Fund

11. Kindelberger, C.P. (1996) Manias, Panics and Crashes: a history of financial crises (3rd edn) Basingstoke:


12. BIS (1998) Sixty-eighth Annual Report Basle: Bank for International Settlements. The BCCI and Barings cases are two of the best known examples.

13. There is an interesting parallel with the epidemiological concept of vulnerability to (say) tuberculosis, which combines exposure to a particular environment and the resilience of the victim.

14. E. V. K. FitzGerald ‘International capital markets and open-economy macroeconomics: a Keynesian view' International Review of Applied Economics vol 10.1 (1996) pp. 141-156

15. See FitzGerald, E.V.K., ‘Capital surges and sustainable macroeconomic policy’ in International Economic Association Adjustment and Beyond: the Reform Experience in South East Asia Basingstoke: Macmillan 1999.

16. For further details, see E. V. K. FitzGerald ‘Coping with uncertainty: global capital market volatility and the developing countries’ (paper presented to the North-South Roundtable Seminar at Easton MD, June 26 1998)

17. E. V. K. FitzGerald ‘Global Capital Market Volatility and the Developing Countries: Lessons from the East Asian Crisis’ IDS Bulletin, vol 29.4 (1998)

–  –  –

19. Eichengreen, B. and R. Portes (1995) Crisis? What Crisis? Orderly Workouts for Sovereign Debtors London:

Centre for Economic Policy Research

20.The assessment over whether the current account deficit of a particular country reflects longer-term debt solvency, and thus the evaluation of the exchange rate risk and the probability of a policy shift which could affect asset values, depends not only on knowing what the current payments and debt situation is, but also the expected rate of growth, the expected world interest rate and what investors will regard as an acceptable debt ratio. These are all matters of economic (and political) judgement rather than statistical information.

21. It is sometimes suggested that these agencies have emerging market governments as clients for the rating of new issues, they are reluctant to downgrade them - but there is no reliable evidence of this.

22. The concept of moral hazard originates in accident insurance, where car owners once insured may be careless of damage to their vehicle unless there is a minimum claim or no-claims bonus. Whether this notion can be rigorously applied to major macroeconomic crises where the outcome (ie a bail-out) is uncertain seems very doubtful - it is not applicable to life insurance after all. The other justification - that cancellation would reduce the IFIs credit ratings and thus ability to mobilize further development resources - is wholly implausible because the ratings depend not on the quality of lending but underwriting provided by the member governments. In other words, IFI borrowing on international capital markets is secured against fiscal receipts in developed rather than developing countries.

23. DAC Development Assistance Report 1998 Paris: OECD/Development Assistance Committee, 1998

24. Each of these has required funds of the same order of magnitude as the entire annual aid budget to all developing countries.

25. Ironically it had two Nobel laureates in economics on its board. It should be noted that although LTCM was a hedge fund registered in Bermuda and thus unregulated, it was speculating in US Treasury bill futures at the time.

26. The argument that offshore financial centres are autonomous states and thus cannot be forced to cooperate is of course nonsense - their very existence depends on the protection of a G7 member.

27. IMF Toward a Framework for Financial Stability...

28. Specifically, the 1933 Banking (‘Glass-Steagall’) Act and the 1956 Companies Holding Companies Act

29. FitzGerald, E.V.K. (1998) ‘Caveat Creditor: the implications of the Asian Crisis for international investment regulation’ [paper presented to the UNCTAD Seminar on ‘The Asian Financial Crisis’, May 1 1998 in Geneva]

30. S. Griffith-Jones, M. Montes and A. Nasution (eds) Managing Capital Flows in Developing Countries Oxford: Oxford University Press (forthcoming).

31. See Krugman, P. and Obstfeld International Economics

32. See Wyatt-Walter, A. World Power and World Money: the role of hegemeony and monetary order Hassocks:

Harvester Wheatsheaf, 1993.

33. This is the perspective set out by the OECD countries: OECD (1998) Open Markets Matter: the Benefits of Trade and Investment Liberalization Paris: Organization for Economic Cooperation and Development. See also World Bank (1997) Private Capital Flows to Developing Countries: the road to financial integration Washington DC: World Bank.

34. See the lecture by John Kay in this series ‘Global Business, Global Economics?’.

35. Sometimes referred to as ‘institutions of restraint’ - a significant choice of words.

36. See World Bank World Development Report 1997 Washington DC: World Bank, 1997.

37. “ We have this false theory that markets, left to their own devices, tend towards equilibrium.... To argue that financial markets in general, and international lending in particular, need to be regulated is likely to outrage the financial community: yet the evidence for just that is overwhelming” (George Soros, Financial Times 31 xii 97).

38. World Investment Report, 1997 Geneva: United Nations Conference on Trade and Development, 1997; and WTO World Trade Report, 1997 Geneva: World Trade Organization, 1998

39. See Fitzgerald, E., R. Cubero-Brierly and A. Lehmann, The Implications for Developing Countries of the Multilateral Agreement on Investment London: Department for International Development; Paris: OECD 1998.

40. From the point of view of individual countries, corporate profits are difficult to tax for two reasons. First, because capital is mobile it can be driven abroad by high tax rates or deterred from investing in the first place.

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