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Introduction
This chapter
will chart the history of trade and the broader economy to which
it gave birth, first as an aspect of the life of early human social
groups, and later as the advance-guard of economic nationalism.
It will show how, after a relatively short period during which nation
states attempted with scant success to take over or directly supervize
trading mechanisms, the market is now reasserting itself through
the process of economic globalization, in the process creating multiple
opportunities for individuals to invest and trade with far greater
freedom than previously.
The term
'globalization' in the early 21st century carries with it a sense
that separate, national polities are somehow being homogenized into
a standard 'global' brand. In terms of economic life at any rate
it would be more accurate to say that it amounts to the removal
of national barriers imposed on a previously unimpeded global market-place.
It's likely
that many people think of trade as being one
of the 'highest' achievements of humans. That it is a force for
good is beyond doubt: it adds to the material wealth of the parties
who trade, it spreads knowledge about cultural
artefacts and even the cultures which produce them, and it diminishes
the chance of aggression between trading partners. But far from
being a result of the civilizing process, evolutionary, anthropological
and paleological work is making it more and more likely that trade
was a main cause of that process. An extreme view would be that
it was a necessary precursor of settled human life in the tribal
group. At the minimum it is hard to imagine the successful development
of inter-group relationships in the early stages of human civilisation
without the benign and informing influence of trade.
Matt
Ridley 1 says that trade, specialization,
the division of labour and sophisticated systems
of barter exchange were already part of a hunter-gathering
life, and that they had probably been so for many hundreds of thousands
or even millions of years: 'It is possible that homo erectus was
mining stone tools at specialized quarries, presumably for export,
1.4 million years ago.'
Kropotkin
2 sets out the case for the groupish
origins of trading and markets, with special relevance to German
and Eastern European models, suggesting that the merchant guild
was initially entrusted with commerce on behalf of the whole community,
and only gradually became a group of merchants trading on their
own account.
Regardless
of the origins of trade, for most economists, trade, and especially
free trade, is associated with economic growth; and the globalization
(freeing) of trade which has been taking place in the last 50 years
has had highly beneficial effects on the populations of the countries
that have participated in it. Jagdish Bhagwati
3 states unequivocally that freer trade
is associated with higher growth and that higher growth is associated
with reduced poverty.
It's a
very noticeable fact that many successful international bodies of
law have to do with trade. The WTO,
the International Chamber of Commerce, international
maritime treaties, Free Trade Agreements (EFTA and then the EU),
NAFTA, and many other organizations and treaties
are essentially commercial in their origins and effects, and by
and large they are welcomed by all nations, who more or less willingly
submit to their jurisdiction. Attempts at political, ecological
and social international co-operation have often been bitterly disputacious
and slower to come into effect, although later chapters will show
that even in those fields globalization is marching forwards.
From a
groupish perspective, this situation can be summed up quite neatly:
groups are xenophobic except when it comes
to exchange, when they become cooperative.
Exchange
In Early Groups
It is
reasonable to see exchange in primate groups and later in human
groups as the precursor of trade. Exchange is driven by reciprocity,
which originated before humans evolved, perhaps in primate
groups, or perhaps earlier. Among chimpanzees, food sharing is prevalent.
Males exchange food for social benefits, including sex
with receptive females, and appear to have deliberately constructed
the exchanges.
Ridley
describes research carried out by Frans de
Waal 4 at the Yerkes Primate Center
in Atlanta, in which reciprocity is the order of the day: 'If A
often gives foliage to B, then B will often give to A. There is
a pattern of turn-taking: A is more likely to give food to B if
B has groomed A recently, but not if A has done the grooming favour.
A chimp will punish another that has been stingy by attacking it.'
To de Waal all this implies that chimpanzees possess a concept of
trade.
Hunter-gatherer
tribes display the same behaviour, but on an expanded canvas. Individuals
choose to kill large animals which are far beyond the capacity of
themselves or their immediate family to consume, with the purpose
of exchanging the surplus meat for a variety of social goods, including
prestige, sex, expectation of future food, repayment of past favours,
payment in advance for future favours, and so on.
Says Ridley:
'I do not believe it is too far-fetched to see in the actions of
hunter-gatherers distant echoes of the origins of modern markets
in financial derivatives'. According
to Hill and Kaplan 5
the hunter is entering into a contract to swap the variable rate
return on his hunting effort for a more nearly fixed return rate
achieved by his whole group.
Trade:
Genetic or Cultural?
In other
words, was trade one of the features of early human groups which
developed during the period before instruments of cultural transmission
evolved (primarily spoken or symbolic language),
meaning that the propensity to trade is genetically encoded; or
was trade a 'social' or 'cultural' development,
passed from generation to generation by example or teaching? Or
are both mechanisms involved?
The existence
of reciprocity (reciprocal altruism) in humans
is not in doubt: individuals receiving generous treatment from others
they will not meet again nevertheless respond generously to them
in return. Unfair behaviour is also repaid in kind, without any
apparent future advantage being gained. Paul Seabright
describes experiments by Ernst Fehr at the University
of Zurich 6 which seem to establish
beyond doubt that reciprocity is instinctive (genetically encoded).
This conclusion has been confirmed by many subsequent experiments.
It's difficult
to know whether reciprocity was or was not adaptive at first as
between the members of a group and the external individuals with
whom they came into contact. Given that in the early stages of human
development, most non-group visitors are enemies, it might be thought
that it would be non-adaptive in such encounters. But then there
would be no trade, evidently, and a group which trades is eventually
fitter than a group that does not trade.
Seabright
7 says: 'Reciprocity has also mattered
in the history of humanity because it has enabled hunter-gatherer
bands to take the first cautious steps toward conducting exchange
with strangers (such contacts occurred, as we have seen, well before
the adoption of agriculture).'
It's no
surprise then that reciprocity (which evolved within the group
in order to cement personal relationships) would have been involved
in permitting external trade; a visitor with good intentions may
have used mimicry to appear friendly, obtaining a reciprocal result,
after which trade is possible. It's also possible that reciprocity
evolved within the group as much as to foster exchange (of which
trade is merely a special case) as to encourage individual relationships.
There
is therefore fairly strong evidence that genetic reciprocity is
a basis for trade, but that doesn't answer the question of whether
trade (exchange) is somehow genetically encoded, or just the reprocity.
Ulrich
Witt 8 adduces von Mises in support
of a general human propensity to trade. Von Mises
believed that being alert in looking out for new possibilities and
advantages is a general feature of 'homo agens'. For Mises, says
Witt, entrepreneurship is a trait possessed by many.
The balance
of opinion seems to be that the propensity to exchange is indeed
an evolved, genetic adaptation, carrying with
it the idea of comparative value, although the forms of modern commerce
and the institution of money (stores of value) are no doubt cultural
constructs. And it was trade which paved the way for constructive
relations between tribes which would otherwise have been enemies,
or at least, worse enemies than without trade.
The
Beginnings of Trade
Archeological
evidence suggests but does not prove that trade took place between
human groups of homo erectus prior to the emergence of homo
sapiens, in other words between 1.4 million years ago and roughly
300,000 years ago. These groups were kin-groups with a hunter-gatherer
and sometimes nomadic life-style.
It is
tempting to suppose that the gradual expansion of homo erectus from
its African home to coverage of most of Europe and Asia would have
created many demands for trade. If a sub-group splits off from a
group whose current territory includes a stone quarry (for axe-heads)
and migrates to an area where game is plentiful but there are no
quarries, it is easy to see that a trading network will come into
existence to maintain the supply of axe-heads to the sub-group.
Sharp
9 describes the Stone Age Yir Yoront
tribe living in the north of Australia, who trade (or used to trade)
sting-ray barbs for stone axes produced 400 miles to the south,
through a long line of intermediate tribes.
Among
surviving Stone-Age tribal cultures, division
of labour seems to take place to a marked degree even within an
area in which groups are in constant touch with one another, and
even in the absence of environmental features to drive it. Groups
which develop and practise different skills will inevitably need
to trade with each other; the suggestion here is that the propensity
to trade may be the cause rather than the result of division of
labour, with the benefit being a more harmonious, or at least less
bloodthirsty system of communal inter-group alliances. Matt
Ridley calls trade 'the beneficent side of human groupishness'.
The trust
that is displayed in reciprocal exchanges,
especially when the second half of an exchange is deferred, owes
much to its origins within the kin-group, to the extent that putative
trading partners often attempt to find a basis of trust by exploring
possible relationships, even if distant ones. Although this behaviour
is most marked in tribes which have not departed far from the kin-group
model, it is an everyday occurrence among modern humans, who eagerly
seize upon any basis for relationship with people they meet, such
as common friends or common origins (membership of the same group,
in other words) and feel much reassured when such a relationship
is found. While this doesn't damage the concept of reciprocity,
it does emphasize the extent to which group membership is helpful
in creating the trust needed for successful trading.
Healey 10 studied Kundagai Maring trading
patterns in Papua New Guinea showing that among un-related traders,
immediate exchange took place 483 times as against 35 cases of delayed
exchange, while among related traders, there were 697 cases of delayed
exchange as against 71 cases of immediate exchange. Healey notes:
'The search for kinship ties between erstwhile strangers introduces
moral principles that should obtain between
the parties'.
As explained
in the Introduction, those who practised trade in early human kin-groups
certainly understood it as a group activity, or if you wish, an
activity undertaken on behalf of the group, or between groups. This
was the prevailing cultural model of trade until very recently,
and is certainly how it was thought about by mediaeval traders in
the guild system. Although to the modern mind
trading often presents itself first and foremost as an individual
activity, its communal origins can be seen preserved in joint corporate
forms and partnerships. This is important to an understanding of
why trading can be conducted very satisfactorily under a rule-based
international order, and of why nation states
have more often been the enemy rather than the friend of traders.
Trade
Before Law
That sounds
topsy-turvy to modern minds; it is commonly thought, even by free-traders,
that trade can only flourish where the rule of law
has been established, as in 'Trade follows the flag'. The reality
is almost exactly the reverse, as the colonial histories of European
nation states demonstrate: the East India Company
is just one of dozens of examples of private enterprise based on
trade which were later subsumed by nation states as the basis of
colonies.
It has
been so throughout recorded history. The example of the Yanomamo
quoted in the Introduction demonstrates how trade leads to political
alliances rather than following from them; and the same can be observed
in the development of merchant guilds in mediaeval Europe under
the Hansa regime (see, again, the Introduction).
By the
time of the colonial trading companies, which had their heyday in
the 17th and 18th centuries, the State had
become much more powerful, and easily took over their private activities
when it chose to do so, mostly during the 19th century. The State
as it developed between approximately 1600 and 1900 also took over
the legal systems which the traders had developed,
as it would later take over education and the provision of other
social goods. However, as will be seen below, globalization has
undermined the nation state and has given a new lease of life to
independent (private) commercial law.
The
Advantages Of Free Trade
Although
the division of labour is an evolutionary innovation
that predates humankind (for instance among ants and bees), it was
humans who first developed the practice of division of labour between
groups. Groups of ants or other animal species may fight each other,
but only human groups co-operate, and the
possibility for this rests squarely upon the groupish propensity
to exchange allied to reciprocal altruism.
The division
of labour between groups that led to or was driven by trade 300,000
or more years ago was perfectly in accord with Ricardo's
Law of Comparative Advantage, which says at its simplest that each
group should do only what it is best at, and rely on trade for everything
else it needs. The relative competence of a group may be assisted
or constrained by its environment (raw materials etc), but even
on a completely level playing field two groups will collectively
achieve the best result if each one becomes a specialist in a particular
technique, rather than trying to compete against each other. This
is the basic argument for free trade.
Free
trade didn't have to evolve as such, because Ricardo's Law stands
even in the absence of human beings; but human groups evolved in
such a way as to be able to take advantage of the Law. However the
practice of free trade has been distorted in modern times by the
nation state, which is driven by the desire
to increase its own power, or by the short-sightedness of a narrow
merchantilist class which appeals to that power for protection against
the market (representing groupish human nature). This is of course
one of the key messages of Adam Smith's The Wealth of Nations.
The
Economic Weapons Of Nationalism
'Crony
capitalism' neatly sums up the common view of how countries often
approach economic activity. For the unreformed robber baron state,
business is a source of revenue, an instrument of policy, and a
means of rewarding its servants.
European
monarchs and their governments from the 15th to the 17th centuries
routinely created licensing or taxation regimes
to extract revenue from trade and business activity. Then there
was (and is) seignorage, the profits to be had from management of
currencies. The heads of licensed monopolies were seldom appointed
for their skill in managing commercial activity, but almost always
as a reward for services in another direction. As a result, economic
activity was less efficient and rewarding than it could have been
if carried out in a free market.
The 18th
century brought enlightenment, with the work of such great economic
rationalists as David Ricardo and Adam
Smith, resulting in a stupendous economic leap forward for most
of the nations of Europe and their colonies. However the 19th century
saw the arrival of social, doctrinal and political agendas for governments:
the State began to assume responsibility for
the regulation of economic affairs and not just to use or abuse
business on a pragmatic basis.
Mercantilism
led to the erection of trade barriers,socialism
led to the State take-over of large tranches of most economies,
and dirigisme led to their mis-management. By mid-20th century,
in most countries more than 50% of the economy was being throttled
in this way; in the 'command' economy countries such as the USSR,
that figure was close to 100%.
The
Market Fights Back
The second
half of the 20th century saw the rebirth of economic liberalism
to a greater or smaller extent in almost all countries. On a national
level, privatisation was a key mechanism
for returning economic activity to the market; internationally,
organisations were created or developed to guide and manage the
conduct of trade and business away from the hands of national governments.
It is
difficult to say why exactly this process started when it did. Perhaps
a growing, evidence-based understanding of the nature of the market
helped; perhaps the acceleration of international communications
started to bypass national markets; or perhaps the rise of the multinational
simply cut national governments out of the chain.
By the
year 2000, most sectors of the world economy had been mostly liberated.
Here are some of the instruments of their freedom (there is a much
fuller list of international economic organisations in Appendix
I):
The GATT,
later the World Trade Organization
The OECD
The IMF
(these
three are termed the 'Bretton Woods' institutions)
The Basle
Agreement
The World
Bank
Although
in many cases - notably the 'Bretton Woods' multilaterals - it was
leading nation states who set them up, it is
no longer accurate to think of them as being in any meaningful sense
the instruments of their progenitors. The reasons for this are complex,
and not the same for each individual organisation (see below). But
the results are the same: that to a large degree, nation states
have lost their power over the dimensions of economic activity controlled
by the 'multilateral' in each case.
Although
the United States, with its immense economic
wealth, has been able to stymie some aspects of the work of the
'globalizing' multilaterals in response to domestic protectionist
pressures, nonetheless its internationalist instincts have usually
prevailed in the end. And the hostile response of other countries
to the occasionally selfish behaviour of the USA itself demonstrates
a general underlying belief in the construction of a rational international
economic order, even if it is often cloaked in nationalistic language.
Alongside
the liberalization of economic governance, most individual economic
sectors have also been undergoing a process of 'marketization' during
the last 50 years, combining privatization with globalization. Of
all the sectors, the most important, because of its essential role
in all other sectors, is the financial industry. There is not space
here to analyze the spread of the multinationals
in energy, mining, transport, electronics and other sectors; and
this process has been widely described elsewhere so that its outcome
- a pattern of globalized manufacture and distribution that bypasses
national boundaries - is not in doubt.
In the
remainder of this chapter, we will first analyze the institutions
of global economic governance listed above, along with some of the
regional and sectoral governance bodies that are growing up, and
finally we will consider the globalization of finance, and what
this may mean for the future global polity.
The
Global 'Multilateral' Economic Organizations
The
World Trade Organization
The WTO
(given much fuller treatment in a subsequent chapter, as arguably
the most important, albeit the smallest, of all the international
economic organisations) has existed as such only from 1995, but
it had evolved by degrees out of the GATT (General Agreement on
Trade and Tariffs), founded in 1947
as a forum for
negotiating lower customs duty rates and other trade barriers. The
text of the General Agreement spelt out important rules, particularly
non-discrimination, and the major trading nations which signed up
to the GATT contracted to obey those rules.
The
GATT, updated in 1995 when the WTO was founded, has become the WTO’s
umbrella agreement for trade in goods. It has annexes dealing with
specific sectors such as agriculture and textiles, and with specific
issues such as state trading, product standards, subsidies and actions
taken against dumping.
Possibly
it is unfair to say that nation states have
been an incubus on the back of the market, given that it was just
those monsters who created the WTO. But not all ministers shared
the economic heresies of governments, then or now; and a small number
of visionary figures among whom John Maynard Keynes and US Treasury
Secretary Henry Morgenthau were two of the brightest stars, were
able to persuade governments to go along with the GATT. Had they
realised what they were letting themselves in for, they might have
put up more resistance! Little by little, the GATT and the WTO have
come to dominate world trade in goods. It is true that the Doha
Round seems very shaky as of early 2007; but the momentum for progress
is still there, even if much of it may be by way of bilateral deals
in the short term.
The
other two Bretton Woods institutions were the International Bank
for Reconstruction and Development (now known as the World Bank),
and the International Monetary Fund. Significantly, Henry Morgenthau
told the conference that the establishment of the Bretton Woods
institutions marked the end of economic nationalism; and so it has
proved.
The
summary of agreements from July 22, 1944 states: "The nations
should consult and agree on international monetary changes which
affect each other. They should outlaw practices which are agreed
to be harmful to world prosperity, and they should assist each other
to overcome short-term exchange difficulties."
Although
neither the IMF nor the World Bank (or its regional cousins such
as the EBRD) has quite fulfilled the intentions of their founders,
that is to say, they have not been the instruments through which
the allied 'western' nations could impose economic stability on
the world economic order, they have nonetheless achieved substantial
power internationally, the IMF perhaps more than the World Bank.
The
International Monetary Fund
The
IMF and its advisory sibling the OECD are the standard-bearers of
economic orthodoxy. It is arguable that the IMF, whose primary stated
purpose was exchange rate management, lost its way after the system
of fixed exchange rates broke down under the weight of economic
forces in the 1970s.
The
IMF's own (modernized) 'mission statement' is: 'The IMF is an organization
of 184 countries, working to foster global monetary cooperation,
secure financial stability, facilitate international trade, promote
high employment and sustainable economic growth, and reduce poverty.'
Paradoxically,
the nation states which fund the IMF probably see it as actively
helpful towards their individual economic well-being; whereas the
reality is that it forms part of a developing global carapace of
regulation whose clutches individual member states are no longer
able to escape. From this aspect, the crucial work of the IMF is
standard-setting, an activity shared by
all of the 'multilaterals', including also the World Bank and the
Basle Committee on Banking Supervision on a fiduciary level and
the OECD in fiscal affairs, to mention just the most prominent of
global economic standard-setting bodies.
The
IMF has also given its name to a Code of Conduct that emerged from
persistent sovereign debt crises: The Principles for Stable Capital
Flows and Fair Debt Restructuring in Emerging Markets. This was
formulated in 2004 between the representatives of emerging market
countries and private sector creditors 11
.
The
future of the IMF is problematic, and it may not survive the first
half of the 21st century as an independent institution. It has played
a useful part in helping the development of sound fiscal regimes
in many 1st, 2nd and 3rd world countries, but its task is nearly
done.
The
World Bank
Like
the IMF, the World Bank has also metamorphosed from its original
conception: set up as a source of funds to underpin the reconstruction
of a battered Europe, it has become an instrument of international
do-goodery, heavily focused on developing economies, poverty and
the environment. If you want, it forms a part of the conscience
of the first world. No doubt this is a valuable role, although many
question the World Bank's methods. From a globaliser's perspective,
however, what is significant about the World Bank is its involvement
as noted above in standard-setting, particularly
in association with the IMF, under the general rubric of the 'Bank/Fund
Initiative on Standards and Codes'.
As
for the IMF, the future of the World Bank is likely to be troubled,
and it may find itself without an intervention role in due time.
Its rule-making role would then probably be subsumed into another
institution, or it might be transformed (once again!) into a different
type of organization.
Says
Ngaire Woods 12 : 'The challenge for
the IMF and the World Bank . . . . is economic policy made in a
more transparent, openly contested, publicly debated, and democratic
way. That process is likely to be messy, complex and time-consuming;
it will often thwart rapid reform, and it will certainly marginalize
the role of the IMF and the World Bank.'
The
OECD
The
OECD (Organization for Economic Cooperation and Development) is
an organization which has power and influence out of all proportion
to its size. Like the Bretton Woods bodies, it was founded after
WWII as the Organisation for European Economic Co-operation, in
order to administer American and Canadian aid under the Marshall
Plan for the reconstruction of Europe after World War II. It transmogrified
into the OECD in 1961, and has been described as 'an international
organisation of those developed countries that accept the principles
of representative democracy and a free market economy'. It has 30
members, including all of the major economic powers other than Russia
and China.
The
OECD describes its global ambitions thus: 'After more than four
decades, the OECD is moving beyond a focus on its own countries
and is setting its analytical sights on those countries - today
nearly the whole world - that embrace the market economy.'
The
changing role of the OECD does not however affect its potency as
a standard-setter, particularly in fiscal
matters and through its subsidiary the FATF
(Financial Action Task Force) in the area of financial transparency
(money laundering, to be more blunt). Although it consists directly
of only 30 members, compared with the 150 in the WTO and the 184
in the IMF, its members' domination of the world economy ensure
that its writ runs wide.
Of
course this raises the question of national versus regional or global
government. The European Parliament and the European
Commission have got quite a lot to say about this subject, not to
mention the US Congress and the national parliaments
of European nations and the Japanese Diet. But the straw is there,
hanging in the wind. A multinational company,
swapping its executives between countries on a weekly basis and
with 200,000 employees in 50 countries, would be only too happy
to see, for instance, one international code of practice for its
pensions provision. Who can doubt that one day, the OECD (or one
of its competitors, the World Bank, say) will become the chosen
instrument of national legislatures to come up with a set of 'pension
guidelines', which after five years will become a 'Code', and in
10 years will be 'Regulations' with grandfather clauses, sunset
dates and all the rest?
Regional International Economic Bodies
The
OECD was in its origins sectoral rather than global; but its reach
is now global. Other geographically delimited rule-making bodies
which cannot claim global reach include a number of supra-national
groupings such as the European Union, NAFTA (North
American Free Trade Area), CAFTA (Central American Free Trade Area),
APEC (Asia-Pacific Economic Community), Mercosur and Caricom. Among
these the EU comes closest to having real extra-territorial power
through pacts such as the Lome Convention (aid to developing countries)
and its clout in standard-setting negotiations in such areas as
telecommunications and environmental initiatives.
Political aspects of the European Union, along with equivalent organizations
CARICOM and APEC are dealt with in Chapter Three: Globalization
of Politics.
As
economic actors, each of these regional groupings has real power
over its component member states. It is a commonplace that the EU,
with a formidable legal apparatus in the European
Court of Justice, has diminished the capacity for independent action
of its member states over a wide range of economic fields. Even
in taxation, one of the 'red lines' which EU competences are supposedly
not allowed to cross, recent rulings of the Commission over state
aid and 'level playing field' judgements of the ECJ over dividend
taxation, VAT and corporation tax have started to put severe limits
to the freedom of action of national tax authorities.
It
seems highly likely that there will come to be a common corporation
tax base in the EU within the next ten years, although rate-setting
itself will remain a national prerogative for a long time to come.
The VAT regime is already 90% harmonized, and
there is a (quite high) minimum VAT rate of 15% across the Union.
Free
trade areas such as NAFTA are
more limited in their scope than the EU, of course, but they still
put substantial limits to national powers in the areas in which
they apply. NAFTA competencies include the elimination of barriers
to trade, the promotion of fair competition in the free trade area,
the development of investment opportunities, and the protection
and enforcement of intellectual property rights. To this end, NAFTA's
secretariat (the equivalent of the European Commission) is empowered
to create effective procedures for the implementation and application
of the Agreement, for its joint administration and for the resolution
of disputes. So it has a quasi-judicial function which has supremacy
over national judicial procedures.
NAFTA
itself is complemented by further ancillary agreements, including
the North American Agreement for Environmental Cooperation (NAAEC)
and the North American Agreement on Labor Cooperation (NAALC).
NAAEC
established the North American Commission for Environmental Cooperation
(NACEC), a mechanism for addressing trade and environmental issues,
the North American Development Bank for assisting and financing
investments in pollution reduction and the Border Environmental
Cooperation Commission (BECC).
NAALC
aims to create a framework for the resolution of labor problems,
and is thought to have been partly responsible for an acknowledged
convergence of labor standards in North America.
This
is an example of what might be called regulatory creep, which is
a marked characteristic of all international rule-making or rule-enforcing
bodies. They are pushing at an open door, in fact, because any national
legislative body which attempts to create extra-territorial jurisdiction
immediately runs up against a storm of protest from other countries
concerned. Though one must note that the US Congress does not always
seem unduly held back by such considerations!
Sectoral
International Economic Groupings
Important
as are the trade-related groupings discussed above, for a business
operating in almost any international economic sector, there is
likely to be a sectoral global body with substantial rule-making
powers which will have a far greater impact on its operations.
Thus
for banking there is the Basle-based Bank for International Settlements,
for telecommunications there is the ITU (International Telecommunications
Union), for airlines there is IATA, and so forth. For businesses
engaged in international trade, in almost any sector, the International
Chamber of Commerce is likely to loom large.
There
is an analysis of many of these organizations at Appendix I. Here
it will suffice to study just a few of them briefly, to see how
far they go in terms of making and applying rules to their members.
They are, by the way, and not incidentally, almost exclusively monopolies.
It is an interesting fact that while combinations of actual businesses
fall under the spotlight of hyper-active competition authorities
in almost all parts of the world, no authority or mechanism exists
to limit or control the behaviour of these sectoral regulatory organisations.
It may be said (they would say) that they are democratically run
by their members. Even if that is true, which it may be in some
cases, Adam Smith had plenty to say about
the likely behaviour of combinations of businessmen, and they have
not changed their spots! In reality, many of these organizations
are run as self-perpetuating oligarchies. This is an aspect of globalization
which makes democrats and market liberals queasy. It is discussed
more fully in Chapter 8, The Future of the State.
The
International Chamber of Commerce
The
ICC was founded in 1919 to promote trade and investment, open markets
for goods and services, and the free flow of capital. During WWII,
ICC transferred its operations to neutral Sweden.
ICC
activities cover a broad spectrum, from arbitration and dispute
resolution to making the case for open trade and the market economy
system, business self-regulation, fighting corruption or combating
commercial crime. The ICC International Court
of Arbitration was founded in 1923. Since 1999, the Court has received
new cases at a rate of more than 500 a year. The ICC is far from
having a monopoly in arbitration, however: other centres, including
London and Stockholm have set up flourishing arbitration courts
which rival the ICC in Paris.
ICC's
Uniform Customs and Practice for Documentary Credits (UCP 500) are
the rules that banks apply to finance billions of dollars worth
of world trade every year.
ICC
Incoterms are standard international trade definitions used every
day in countless thousands of contracts. ICC model contracts make
life easier for small companies that cannot afford big legal departments.
The
ICC sees itself as a pioneer in business self-regulation and the
regulation of e-commerce. ICC codes on advertising and marketing
are frequently reflected in national legislation and the codes of
professional associations.
The
Bank For International Settlements (BIS)
BIS,
based in Basle in Switzerland, describes itself as an international
organisation which fosters international monetary and financial
cooperation and serves as a bank for central banks. It has 55 member
central banks.
The
BIS came to the fore as an international regulator after oil and
debt crises in the 1970's, emerging as the leader in developing
regulatory supervision of internationally active banks. The collapse
in 1974 of Bankhaus Herstatt in Germany and of the Franklin National
Bank in the US prompted the G10 central bank Governors to set up
the Basel Committee on Banking Supervision; the result was the 1988
Basel Capital Accord and its "Basel II " revision of 2001-06.
In
November 2005, the Committee issued an updated version of the revised
Basel Framework incorporating the additional guidance set forth
in the Committee's paper The Application of Basel II to Trading
Activities and the Treatment of Double Default Effects (July 2005).
On 4 July 2006, the Committee issued a comprehensive version of
the Basel II Framework.
The
extreme complexity of modern capital markets defies the wit of ordinary
parliamentarians, and it is probably inescapable that capital standards
for lending institutions should be set by an arcane expert process.
More, the highly evolved international ramifications and interconnections
of the banking system make it unavoidable that there should be only
one measurement system for capitalization. And hey presto, you have
your globalized banking supervision system. There will be no turning
back!
The
International Telecommunications Union (ITU)
The
first International Telegraph Convention was signed in Paris in
1865 by 20 founding members, and when the International Telegraph
Union (ITU) was established to facilitate subsequent amendments
to this initial agreement, it began, in its own words, to draw up
international legislation governing telephony.
In
1947 the ITU became a specialized agency of the United
Nations. At the same time, the International Frequency Registration
Board (IFRB) was established to coordinate the increasingly complicated
task of managing the radio-frequency spectrum; in the same year,
the Table of Frequency Allocations, introduced in 1912, was declared
mandatory. Radio frequency disputes are dealt with internationally
through ITU mechanisms.
Under
the Constitution of the International Telecommunication Union, its
purposes include:
-
To harmonize the actions of Member States and promote fruitful
and constructive cooperation and partnership between Member States
and Sector Members in the attainment of those ends;
-
To promote, at the international level, the adoption of a broader
approach to the issues of telecommunications in the global information
economy and society, by cooperating with other world and regional
intergovernmental organizations and those non-governmental organizations
concerned with telecommunications.
The
ITU also established the World Telecommunication Policy Forum (WTPF),
which has worked on policy-making for global mobile personal communications
by satellite, on trade in telecommunication services, and on Internet
Protocol (IP).
From
an economic perspective, the ITU exercises highly developed control
over multiple aspects of pricing and tariff-setting. It has published
some hundreds of 'recommendations' on tariff issues.
The
ITU is making attempts to assume responsibility for the management
of Internet Domain Names and addresses,
something that has so far been resisted by the Internet industry.
Says the ITU: 'Given ITU’s role in the development of IP standards
and protocols for IP-based networks, the (ITU) called for greater
partnerships with Internet standardization organizations, governments,
private sector and for a greater outreach to developing countries.'
Other
than its role in radio frequency dispute resolution, the ITU has
not acquired much responsibility for telecommunications dispute
resolution, which is performed by a variety of organizations, including
WIPO, Arbitration Courts in London, Stockholm
and other places, the ICC, and the WTO, not of course forgetting
national court systems. However the ITU does devote a great deal
of attention to dispute resolution issues through its publications
and events. It may be expected that as time goes by the ITU will
acquire an expanded role in dispute resolution.
For
a company operating in almost any aspect of telecommunications,
it is fair to regard the ITU as its most prominent regulator in
terms of the number and scope of rules and standards to which it
must adhere. Certainly, there are national telecommunications regulators,
and for European operators there is the EU; but important as these
are on some major policy issues, they are comprehensively overshadowed
by the ITU in terms of the regulation of day-to-day operations.
ISO
(International Organization for Standardization)
The
ISO, with 157 national members, is the world's largest developer
of standards. Although ISO's principal activity is the development
of technical standards, ISO says that its standards also have important
economic and social repercussions. 'ISO standards make a positive
difference, not just to engineers and manufacturers for whom they
solve basic problems in production and distribution, but to society
as a whole.'
Although
ISO standards are voluntary, they may become a market requirement,
as has happened in the case of ISO 9000 quality management systems,
or of dimensions of freight containers and bank cards.
The ISO - together with IEC (International Electrotechnical Commission)
and ITU (International Telecommunication
Union) - has built a strategic partnership with the WTO
(World Trade Organization) with the common goal of promoting a free
and fair global trading system. Says the ISO: 'The political agreements
reached within the framework of the WTO require underpinning by
technical agreements. ISO, IEC and ITU, as the three principal organizations
in international standardization, have the complementary scopes,
the framework, the expertise and the experience to provide this
technical support for the growth of the global market.'
Although
the ISO does not overtly attempt to make ethical or societal rules,
its importance in the globalization process is very clear. Labelling,
health and safety, and environmental issues are some of the areas
in which its 'technical' standards must necessarily confront or
even establish prevailing social standards. Already, it would be
meaningless to talk about a national technical standard in the face
of the ISO's over-arching competence, and it is difficult to see
why a country would want to try. The histories of mobile phones
and video recorders provide two examples of why global technical
standards are both inevitable and even desirable.
The
World Intellectual Property Organization (WIPO)
WIPO is dedicated to developing a balanced and accessible international
intellectual property (IP) system. It was established by the WIPO
Convention in 1967 with a mandate from its Member States to promote
the protection of IP throughout the world through cooperation among
states and in collaboration with other international organizations.
Its headquarters are in Geneva, Switzerland.
WIPO
treaties are normally implemented through national law. For instance,
the WIPO Copyright Treaty is implemented in United States law by
the Digital Millennium Copyright Act, while in the EU Directives
91/250/EC, creating copyright protection for software and 96/9/EC
for database protection and the Copyright Directive 2001/29/EC prohibiting
devices for circumventing "technical protection measures"
such as digital rights management largely cover the subject matter
of the treaty.
WIPO was instrumental in bringing about the Agreement
on Trade Related Aspects of Intellectual Property Rights
(TRIPS) which sets down minimum standards for forms of intellectual
property (IP) regulation. The administration of TRIPS falls under
WTO rule, and countries joining the WTO have
to sign up to TRIPS.
Disintermediation:
The Growth Of International Financial Markets
The mere fact of the
existence of the Bretton Woods institutions testifies to the mid-20th
century view of the financial sector as being a department of government.
This statist political doctrine was most clearly evidenced in the
Soviet Union, but also underlay the behaviour of western nation
states. When countries didn't actually nationalize banks, insurance
companies and other types of financial institution, they nonetheless
wrapped them up in a cocoon of regulation, almost entirely behind
national boundaries.
Who now remembers capital
controls in Europe? But in the 1960s, if you wanted to take money
from, say, France, to England, you had to put it in your shoes.
Would any young student of economics in 2010 believe without being
told that in 1960 it was against the law to own gold in most of
the countries of Europe? One of the really good things the European
Union has done, with the herlp of the World Trade Organization,
is to open capital markets. The explosion of world trade in the
last 60 years (see Chapter 6) is due in no small measure to capital
markets liberalization.
An
incidental consequence of the financial and fiscal straitjacket
imposed by countries on their citizens and their companies in the
first half of the 20th century was the creation of 'offshore'.
Switzerland grew fat on the savings of French and Germans which
they hastened to transport across their national borders to the
care of a regime that wasn't going to steal it as soon as possible.
Jersey, Bermuda and other jurisdictions performed a similar service
for the UK. The phenomenon of 'offshore' is explored in greater
depth in Chapter 4 (Fiscal Globalization), but it needs to be mentioned
here as one of the instruments of financial liberalization. While
it's true that economic liberals came into ascendancy in the 1970s,
and influenced the behaviour of many governments in the 1980s, leading
finally to the death of the Soviet Union and other obnoxious regimes,
their task was made much easier by the existence of an alternative
financial system that was already feared by rich country governments.
Feared indeed to such an extent that in the 1990s the left-leaning
finance ministers of the OECD launched an all-out
attack on 'offshore' - ultimately unsuccessful - in defence of their
ability to tax the living daylights out of citizens and companies
alike.
The amazing growth
of global (meaning, not national) financial markets is a key aspect
of the march away from national economies towards one global economy,
but is not always seen in those terms.
Markers on the road
include:
- the explosive growth
of the Euromarkets after the US foolishly imposed banking restrictions
in the 1950s;
- the frequent sovereign
defaults (bankruptcies, really, but they don't like the word)
between 1960 and 2000 (Brazil, Russia, Mexico, Argentina, to name
some of the more prominent ones), leading to much enhanced power
for the private sector vis-a-vis the sovereigns (think Brady bonds);
- commodity market
crises during the same period - admittedly not all of them national
in character - including gold, silver, oil, paper and cocoa, usually
due to producer-led cartel activity, and leading again to strengthened
private sector market mechanisms;
- the eventual abandonment
of persistent attempts to establish fixed exchange rates (the
last ones were the Plaza and Louvre Accords in the 1980s) and
the concomitant freeing of international capital markets after
a century or more of controls;
- the securitization
(the word could almost mean globalization) of one asset class
after another, often through derivative
markets, including sovereign debt (eg Brady bonds), mortgages,
corporate debt, private credit card debt, commodities, equities,
foreign exchange, interest streams, rent and leasehold income
streams, culminating in the rise of hedge funds, which securitize
simply everything.
By the end of the 20th
century, public (ie, international) markets had become more powerful
than all but the very largest nation states, financially speaking,
and even the United States is effectively powerless
to control the value of its own currency.
The internationalization
of financial markets has been accompanied by a process of disintermediation
and the growth of asset securitization. This is a sentence of rather
big, ugly words, but all it means is the imposition of market (trading)
disciplines, including transparency and rule-based governance on
financial transactions. Whereas for most of the last 100 years,
an investor needed to use a financial intermediary (often called
a broker, and usually with a nationally-protected monopoly) to make
investments into a usually opaque asset-owning fraternity (a recipe
for fraud and profiteering), increasingly an investor now has direct
access (often through the Internet) to
disinterested third-party information about proposed investment
targets, and can use transparent market processes actually to purchase
assets. Perhaps this sounds ordinary in 2007, but 50 years ago it
was anything but ordinary.
It can be difficult
to discern the process of financial globalization at work amid the
torrents of advertising, mountains of regulation and bewildering
variety of financial products that nowadays assail us. But the end
results can be confidently predicted: all providers of publicly-offered
financial assets (banks, insurers, listed companies etc) will be
regulated under global codes (even if these are delivered through
national agencies); the assets themselves will be offered to buyers
(investors) through transparent trading exchanges, most or all of
which will eventually be electronic; any asset for sale will be
described in detail and subject to rating by third party assesors;
and of course the assets themselves will be held by independent
custodians in de-materialized form.
This structure minimizes
the chances of fraud or disinformation, and gives both the widest
possible access to assets for investors and by the same token the
widest possible distribution to offerors. Most assets will likely
be offered in securitized form by investment funds, with direct
access to underlying assets available only to 'insiders', who are
presumed not to need protection from themselves.
This is not far from
being the case already for 'widows and orphans' products such as
mutual funds (unit trusts) and shares offered on bigger stock exchanges.
The result is to reduce transaction risk and cost to the absolute
minimum (in an ideal market both would be zero), leaving asset risk
isolated and as highly visible as possible so that the investor
can make the most informed judgement possible.
The regulatory separation
between 'ordinary' (public) and 'insider' transactions already exists
in respect of many types of financial transaction. It may be that
as the regulatory demands proliferate on providers of public assets,
many asset-owners will choose to offer their wares only through
securitized channels or direct to insiders. The overhead involved
in making public offers will simply be too great for all but the
largest providers. On the other hand, the Internet makes direct
communication with investors easier, so it is not completely clear
what balance will emerge.
There are a number
of international organizations bringing global coherence to the
financial services sector.
The
International Securities Services Association
The
ISSA was formed in 1979 in order to create an organisation able
to collect and disseminate information on the developments in the
rapidly changing international securities markets, and on the other
hand to offer securities operations professionals a forum to exchange
ideas and issues of common interest.
As
early as 1988 ISSA published the ISSA 4 recommendations that helped
pave the way for many of the G30 recommendations of 1989. ISSA also
monitored the progress on the G30 recommendations over the years,
and finally issued its own fully revised ISSA Recommendations 2000.
In
2004 The Group of Thirty (G30) mandated ISSA to monitor 5 of the
recommendations in its January 2003 report "Global Clearing
and Settlement: A Plan of Action."
The
International Swaps and Derivatives Association
ISDA,
which represents participants in the privately negotiated derivatives
industry, is the largest global financial trade association, by
number of member firms. ISDA was chartered in 1985, and today has
over 750 member institutions from 52 countries on six continents.
These members include most of the world's major institutions that
deal in privately negotiated derivatives, as well as many of the
businesses, governmental entities and other end users that rely
on over-the-counter derivatives to manage efficiently the financial
market risks inherent in their core economic activities.
ISDA's
2005 Novation Protocol offers parties to its various Master Agreements
an efficient means to agree to a uniform process by which consents
to transfer of interests in Credit Derivative Transactions and Interest
Rate Transactions (Covered Transactions as defined in the Protocol)
may be obtained.
The Financial Markets Association
(ACI)
ACI was founded in France in 1955 following an agreement between
foreign exchange dealers in Paris and London. In the years that
followed, other national associations were formed and there are
now affiliated financial markets associations in 65 countries and
individual members in another 17 countries. ACI has the largest
membership of any of the international associations in the wholesale
financial markets. The Head Office is based in Paris. In 1975 the
first ACI Code of Conduct covering foreign exchange and euro-currency
dealing was published.
The
scope of The Model Code is wide-ranging, encompassing the over-the-counter
markets and instruments traded by international bank treasury departments.
The official language of The Model Code is English.
Where
the counterparties of a transaction are unable to resolve a dispute,
the ACI Committee for Professionalism provides an Expert Determination
Service in order to facilitate its resolution. Market participants
are encouraged to avail themselves of this service in accordance
with ACI Rules for Over-the-Counter Financial Instruments Disputes
Resolution.
Summary
This
Chapter has shown that in all but a few, minor respects, there is
a comprehensive and largely benign trend towards regulation and
supervision of economic activity at a global level. Even if some
regulation is delivered through national laws or national branches
of international organizations, the nation has in most cases little
or no remaining power to influence the content of the regulation.
Judicial fora involved in the enforcement of economic regulation
and in dispute resolution are lagging a little behind rule-making
and supervision, but are equally sure to take on global dimensions
in the end.
It
is also clear that the move away from 'managed' markets to open
ones, which is a marked feature of economic globalization, much
enhances access to economic activity on the part of individuals,
whether alone or in groups, particularly with the assistance of
the Internet.
Economics,
perhaps because of the international nature of modern business,
has seen more globalization than some other sectors of society.
The two succeeding chapters will show however that cultural and
political globalization is equally ongoing and eventually inevitable.
Footnotes:
1.
Ridley, M (1996) The Origins of Virtue, Viking, New York
2.
Kropotkin, P (1902) Mutual Aid, Heinemann, London
3.
Bhagwati, J (2004) In Defense of Globalization, Oxford
University Press
4.
F B M de Waal, Journal of Human Evolution, 18:
433-459, 1989
5.
Hill and Kaplan, Population and dry-season subsistence strategies
of the recently contacted Yora of Peru, National Geographic
Research, 5: 317-334
6.
Fehr, E and Gachter, S (2000) Fairness and Retaliation: the
Economics of Reciprocity, Journal of Economic Perspectives,
14, pp 159-81
7.
Seabright, P (2004) The Company of Strangers, Princeton
University Press
8.
Witt, U (1999) Do Entrepreneurs Need Firms? A Contribution to
a Missing Chapter in Austrian Economics, The Review of Austrian
Economics, 1999, 11, issue 1-2, pages 99-109
9.
Sharp, L (XXXX) Steel Axes for Stone-Age Australians, Human
Problems in Technological Change, pp 69-92, Russell Sage Foundation,
New York
10.
Healey, C (1984) Trade and Sociability: Balanced Reciprocity
as Generosity in the New Guinea Highlands, American Ethnologist,
11, 42-60
11.
Truman, E M, ed, (2006) Reforming The IMF For The 21st Century,
Institute for International Economics, Washington
12.
Woods, N (2006) The Globalizers - The IMF, the World Bank and
Their Borrowers, Cornell University Press |