Daniels and VanHoose International Monetary and Financial Economics, 2ed.

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Daniels and VanHooseInternational Monetary and
Financial Economics, 2ed.

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Power Point Files

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PowerPoint Slides

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Introduction

• The Global Economy

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The Backlash Against Globalization

• Genoa, Italy, 2001, Protests against
  globalization Target G8 Leaders
• Jubilee 2000, a World-Wide Movement to Cancel
  the Crushing Debt of Impoverished Nations.
  Target G8 Leaders
• Seattle, Washington. Target WTO
• Washington, D.C. Target IMF, and World Bank

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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
  three 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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Growth of Trade and Foreign Exchange Transactions
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Stylized Facts

• Unprecedented growth of FDI 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, and of China.
• Sharp financial and economic crises.
• The worlds poorest economies mired in debt
  crises and economic stagnation.

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Capital Flows to Emerging Economies
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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 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 (as they leave the country).
• 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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The Balance of PaymentsThe Statistical
Discrepancy
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International Debt

• Debt Relief for the Poorest Nations?

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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 inflows.
• The US has been a net debtor in the past, and it
  spurred an industrial revolution.

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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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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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Current Status

• For current information on HIPC, visit the web
  sites of the International Monetary Fund and the
  World Bank.