Exactly ten years have passed since the strike of the world financial crisis. The countries that played the most important role in it managed to avoid turning the financial markets collapse into a full-blown economic depression. Still, few people understand the price.
In 2008-2009, the governments managed to stay afloat at the cost of the unprecedented in terms of its size state credit. Trying to avoid a new “great depression”, they took upon the role of the “lender of last resort”.
The reality is different now. There are new mechanisms to suppress the escalation. Nonetheless, the political events of the recent years have demonstrated that, just like in the 1930, the political elites are still ready to start a military combat (albeit on the outskirts of the world).
However, if we follow the logics of the 20th century events, both WWI and WWII did not begin in the West. WWI was a result of the fight for the division of the Ottoman Empire legacy, WWII started with the Japanese invasion of China in 1937. In both cases, the war was the consequence of the search for new resources and markets and the fights for these markets among the old and new players.
The same in happening today. This is the reason why geopolitics and geoeconomics, so popular in the first half of the 20th century, are, once again, in big demand today. At that, the modern life presents infinitely more informational possibilities for such research. And it is not only due to the globalization.
The level of globalization at the beginning of the 20th century was perhaps even higher. The principal difference, however, is that the “globalization” of the 19th-20th centuries variety was nothing but the commercial and financial coordination of the British Empire. The information on that was distributed via the British governmental offices but was not an object of analysis.
Nowadays, despite the reign of the “dollar empire”, the number of the important players is much greater. Besides, the very nature of the “empire” has changed, too. Now it is not just a single state, it is a matrix of the economic and political connections among different players. Therefore, even given the availability of the statistical data, the analysis of this material is not a trivial matter.
Understandably, this task has been taken upon by the research department of the WIF – the organization that was created especially for the purpose to prevent the escalation of local financial problems at the time of global crises. Philip R. Lane and Gian Maria Milesi-Ferretti have analyzed a mass of statistical data to see what changes the world financial system has undergone since the 2007-2008 crisis. The results of their research can be found in the “International Financial Integration in the Aftermath of the Global Financial Crisis” article that is available on the WIF website.
This, of course, is not an official WIF report, however, it has still been approved for the publication by the organization’s research council. Therefore, we may regard it as not inconsistent with the existing consensus of the globalization expert communities. However, as we know, any consensus works at the price of flattening the sharp angles, therefore, presenting the authors’ conclusions to our reader, we retain the right to comment on them.
The main conclusions of the research can be narrowed down to the three global trends.
- Financial globalization is slowing down.
- Direct foreign investments are the main locomotive power of the financial system.
- International financial centers’ power is growing.
The Death of Debt Capitalism
The growth of financial flows has practically stopped. We say this taking into consideration the ratio of the financial system and the general economy whose level of development reflects the GDP, the main denominator of any economic activity. The authors of the research believe that there are two reasons for this phenomenon.
The first is connected to the numerator. The flows of capital to the financial centers of the developed countries have slowed down. In particular, this is connected to the general retardation of the bank system credit activity among the countries with developed economies.
The second reason has to do with the denominator. The matter is that the emerging market economies are growing contributing to the world GDP. Their role in the world financial system, however, measured by the size of their assets and liabilities, is not significant enough.
Therefore, to the “new players”, the existing world financial system has little value. Today, the governments of the major emerging market countries, as a rule, do not have problems with the balance of payments and, consequently, do not need the “simple” monetary loans. Hence the stagnation of the emerging markets debt obligations portfolio.
Theoretically, it means writing off the “debt capitalism” that used to be the basis of the Western theory of development. Up until now, the countries that broke forward and upward did it on the acquired loans. The Great Britain is a classic example of this. It acquired a loan to invite the Dutch who built its fleet. Afterwards, with this fleet, Britain conquered the world immediately covering its outlays. Today, however, the growing economies do not need loans. They have enough money of their own. They hurl all their efforts into acquiring technologies and expertise on the investment, not the credit, basis.
From Credits to Investments
One of the functions of the international financial system is to create a global investment mechanism. In practice, it works like this.
At first, the emerging markets save a significant part in the form of international reserves. Based on the WIF research, increasing the official reserves has now become the main article in the general asset growth of these countries. Official reserves consist of government bonds or major Western banks deposits. This way the “newcomers” of the world economy actively extend credit to the “old” players.
Then, having rotated inside the complex financial system, the money returns to the emerging markets in the form of direct investments. Based on the research, direct foreign investments have become the main factor in the growth of the emerging markets’ obligations to the developed countries.
In other words, the Western financial system plays the role of a giant fund that gathers cheap resources and then distributes them among the profitable albeit risky assets. The price difference between investing and borrowing can be called “the roof covering” since the West guarantees the judicial and administrative protection of such investments. It can also be called a technology transfer payment because direct foreign investments are not so much monetary funds as patents, know-hows, expertise and project management experience.
In this sense, the current financial system represents a giant step forward in comparison to the one of the olden days. During the reign of the British Empire, for example, all the colonial administrations, even having administrative autonomy, were obligated to hold security deposits on their balance sheets at the Bank of England. These security deposits performed the role of perpetual credits to the mother country (during the WWII, Britain simply froze these funds).
In the 1980s, the oil-dollars from the OPEC countries were eventually reprocessed and given as loans to the Latin American governments by the WIF. This way the US bought the loyalty of the local elites in order to avoid another Cuban scenario. All this money was then spent ineffectively and the loans had to be restructured on the security of the US.
Now is all looks differently. Nonetheless, the authors of the report believe that the current debt model slowdown is a temporary phenomenon caused by the rapid development of the real economy in the emerging market countries. Later, it will all go back to the norm. Note though that the thousand-year-old history of China has left us no trace of any significance of the role of credit. It is not at all impossible that the global financial system will be based on investment and not on credit.
The financial globalization is moving not only to the emerging economies but to those financial centers whose growth has become possible thanks to a combination of several factors.
At first, such centers were used for hiding assets from the state (taxes, illegal income laundering, sanctions avoidance) and for concealing the property structure from the cartel authorities and raiders. However, as the infrastructural possibilities grew (transportation, information technologies), the financial centers had become the routine of the everyday business, and not just for the large corporations but for the small enterprises and for average people as well.
Nowadays, such centers are an integral part of the world financial system’s infrastructure. Today we cannot imagine the existence of the financial system without the “counter-insurance hub” on the Bermuda or without the funds functioning under the judicial umbrella of Luxemburg or the Cayman Islands.
The offshore territories make it possible to create a special legislature to regulate the complex financial architecture. At that, it does not affect the lives of too many people. The “onshore” centers located in the countries with developed economies are more like hubs, resource concentrating systems. They, too, need to have freedom-to-operate.
Britain’s moving away from the EU is a clear example of this. Choosing between the Scylla of the European over-regulation and the Charybdis of the risk of losing the European clients, Britain has decided to take the risk. The thing is Britain has all the reasons to fear that tomorrow it will become non-competitive in this rapidly changing world. Especially since the EU is not the only pebble on the beach so to speak.
From Economics to Geopolitics
So, the geographic move of the economic activity centers that has led to the change of the financial flows structure can be called the main result of the post-crisis decade. This change is real. In its turn, it reflects the change in the world economic system. Eventually, the move will lead to the transformation of the geopolitical map of the future. Of course, only if a new financial catastrophe does not lie ahead.