International Finance and Business in the "Wild West" of Globalization

The subject of this week’s post could just as easily be “To Regulate or Not to Regulate?  And if we wanted to, could we?”  The decade leading up to the 2008 financial meltdown, or The Great Recession as the press is now tagging it, saw unprecedented growth in the internationalization of business and finance.  International corporations not only extended their supply chains throughout the world but also moved entire business units such as payroll and customer support to other countries where labor was less expensive.  Even more dramatic was the incredible rise in purely financial trading that occurred across international borders. “Financial integration and generally open governments have encouraged growth in cross border investment during that time as well, from $200 billion in 1990 to nearly $1.5 trillion in 2008”  (ATKearney, 2010, p.5).  With relatively little in the way of international regulation there is a bit of the Wild West feel to the international markets in the past decade.  Not only have private business and financial institutions been involved in the global financial frenzy but governement investments, soveriegn wealth funds, have increased to an estimated $3 tillion in assets through investment in foreign companies and financial products  (Halliday, 2008). And the 2008 meltdown showed the world just how much the average person was impacted by the actions and risks companies and financial institutions would engage in.  How the democratic governments react to the public pressures  vs the pressure put on them by the business elites will really determine the future of the global political order.

What makes the 2008 melt down interesting is that the hardest hit countries were the richest and most democratic nations in the world.  Europe and the United States have been experiencing quite a bit of public backlash to the crisis and the subsequent fallout to the general public.  Unemployment is running at about 10% in the US, which after having spent a number of years at all time unemployment lows of approximately 5% feels terrible to the general public.  Also a large number of people are facing the loss of their homes due to the combination of variable rate interest  loans to high risk borrowers and the high unemployment.  Public perception both in the US and Europe is that their democratically elected government who is supposed to represent them is “in bed” with the financial and corporate elites that they believe to be responsible for their current hardship. Public funds were used to “bail out” the banks and other financial institutions who were on the brink of collapse.  Good arguments can be made either way if these were necessary to stave off the next Great Depression or if they were an over panicked reaction by the goverments. Whether or not they were the right thing to do will make little difference moving forward as the public percieves them as a violation of their trust.  The public does not take kindly to being asked to make sacrafices, see the various protests and strikes in Europe, to help get government balance sheets in order following the bailouts of the elites.  In the US the public is taking its anger out in the midterm elections where it is expected that the balance of power in the House of Representatives and possibly the Senate will shift to the Republicans.

The governements of these nations know they are under great pressure to “just fix it” from the public.  What options are available?  The first option is to appeal to the nationalistic rehtoric and start closing the doors to international interactions.   “… national governments in a troubled economy might take actions to protect local interests that run counter to the strategy of a global corporation”  (ATKearney, 2010, p.8) .  As an example ATKearney points to the amendment to the TARP package which was to prohibit recipients of funds from outsourcing service functions (i.e. payroll or customer service) to other countries  (ATKearney, 2010).   Congress is responding to the public pressure to create jobs and bring them back in country.  There is a valid argument though that by paying extra wages for US workers, these companies will cease to be competitive and have to shut down or contract, thus adding to the unemployment process.  This is a hard sell though when the public is bombarded by the extraordinary salaries made by many of the corporate CEO’s.  ” Multinational chief executives 30 years ago made 35 times the wages of an average employee; today it is more than 350 times. The crisis has focused attention on the obscene inequities of this era - the world's 1,100 richest people have almost twice the assets of the poorest 2.5bn”  (Rothkopf, Change is in the Air for Financial Superclass, 2008).  Many companies, especially financial companies who have limited fixed assets, would likely just move to countries where there is less regulation thus reducing the cost of doing business.

A second option governments have is to strengthen the international institutions ability to regulate international commerce.  This is much easier said than done as there are two major forces acting against any coherent regulation.  First is that getting the majority of nations within these institutions to agree on any real form of regulation is a huge challenge.    Countries that have continued to see growth through the crisis, i.e. China and India, will pull a great deal of leverage in trying to keep the international community from controlling their financial futures. “The top creators of great new personal fortunes are in China, India and Russia. It seems unavoidable that the transatlantic elite that have been the habitués of Davos will be rivaled in influence by the Asian contingent - a group that has as little appetite for the Alpine gabfest as for the values and priorities of the western financial super-class” (Rothkopf, Change is in the Air for Financial Superclass, 2008). In addition the growing power of sovereign wealth funds means that not only would private business be regulated but states as well.  With the fundamental rule of sovereignty reining supreme within the international institutions they are unlikely to gain any real strength in enforcement of regulations. 

Europe, hard hit with the challenges of national balance sheets due to the shared currency, is evaluating stronger changes to regulation of state economies and business within the Union.  They are much more likely to get agreement on trade and currency regulation within the EU as it is a much stronger institution and has fewer cultural hurdles to overcome.  In the US though, the call for the government to fix the problem is balanced also by a call for less government at the same time.  Likely scenario is that not much will change in the long term.  There may be some legislation that will be passed to appease the public by looking like they are putting the crunch on corporations, but at the first sign of the economy becoming worse or more job losses that practice will be stopped in the interest of getting the economy to grow again.  The combination of the weakness of international institutions and the political and financial power of the elites to ensure that there is little that national governments can do to regulate.  The one hope for holding these corporations accountable is in the public themselves to pressure businesses and only support those businesses who behave with an outlook towards the public good.

Further Reading and References:

ATKearney. (2010). Globalization Enters a New Era: What Course Will It Take. Corporate Finance Review , 14 (5), 5-11.

Cowen, T. (2008, April 27). Freer Trade Could Fill the World's Rice Bowl. Retrieved October 16, 2010, from New York Times World Business: http://www.nytimes.com/2008/04/27/business/worldbusiness/27view.html?_r=1&scp=1&sq=Freer%20Trade%20Could%20Fill%20the%20World's%20Rice%20Bowl&st=Search

Gilpin, R. (1987). The Political Economy of International Relations. Princeton, NJ: Princeton University Press.

Halliday, F. (2008, March 5). Sovereign Wealth Funds: power vs. principle. Retrieved October 16, 2010, from openDemocracy: http://www.opendemocracy.net/article/globalisation/global_politics/stolen_wealth_funds

Rodrik, D. (2009, March 11). Project Syndicate. Retrieved October 16, 2010, from Blame the Economists, Not the Economics: http://www.project-syndicate.org/commentary/rodrik29/English

Rothkopf, D. (2008, May 15). Change is in the Air for Financial Superclass. Retrieved October 15, 2010, from Carnegie Endowment for International Peace: http://www.carnegieendowment.org/publications/index.cfm?fa=view&id=20162

Rothkopf, D. (2008, May 14). Superclass and the Inequity of Globalization. Retrieved October 15, 2010, from Carnegie Endowment for International Peace: http://www.carnegieendowment.org/publications/index.cfm?fa=view&id=20161

Rothkopf, D. (2008, May 4). They're Global Citizens. They're Hugely Rich and They Pull the Strings. Retrieved October 15, 2010, from Carnegie Endowment for International Peace: http://www.carnegieendowment.org/publications/index.cfm?fa=view&id=20096