Financial Globalisation and Child Wellbeing

This paper addresses the relationship between financial crises associated with foreign capital flows on the one hand and the wellbeing of children in emerging market countries on the other. The literature on child welfare in crises suggests that the level of employment and labour incomes are the key linkage, because these constitute the major component of the incomes of poor families and affect the division of labour within the household upon which child welfare depends. A simple analytical model of labour markets illustrates the linkage between corporate sector contraction under financial crisis and the incomes of the poor in the urban informal and rural sectors. This insight leads to recommendations for the reconsideration of capital controls and exchange rate management in merging markets as means of employment stabilisation (in the spirit of the original Bretton Woods objectives) and thus child wellbeing.

The Winner´s Curse: Premature Monetary Integration in the NAFTA

During the 1990s the NAFTA has stimulated a process of financial integration which was not properly anticipated at the beginning of the decade or regulated under the treaty arrangement. The secular process of private sector currency substitution (‘dollarisation’) stimulated by successive financial shocks now poses serious challenges for the conduct of North American monetary policy. Although the monetary calculus for a potential dollar area yields a positive outcome for peripheral members, historical experience suggests that the asymmetric impact of external shocks will require specific arrangements to contain the economic and social results. Further, the consequences of currency unification for capital markets under the gold standard, the sterling area, currency boards and the euro-zone have all meant that inter-governmental agreements for liquidity provision and prudential regulation have become necessary. This is the ‘winner’s curse’: the success of North American market integration is necessarily leading to a degree of institutional co-operation that US legislators have desired to avoid.

The Instability of the Emerging Market Assets Demand Schedule

asset demand, international finance, capital flows, emerging markets, financial stability

Regulating Large International Firms

This paper explores the existing arrangements for multilateral regulation of large firms, and makes the case for balancing strengthened global corporate property rights with more explicit and enforceable social obligations. In a democratic market-based society, investors have legally enforceable rights but must also obey laws designed to protect labour, consumers and the environment, while competition regulations are designed to counter market power and business taxes ensure the provision of public goods. Strengthened multilateral co-operation in three related areas - investment, tax and competition - is under way. Although progress is slow and contested, the distinct interests of host and home countries are clear and the 'development dimension' broadly recognised. In marked contrast, corporate conduct on labour and environmental issues is still almost exclusively regulated at the national level. Moreover, external standards of international corporate responsibility in developing countries are set by voluntary initiatives at best, with market incentives rather than legal requirements constituting the basis for compliance. A better approach would be a multilateral definition of the obligations of international firms that is explicitly linked to the guarantee of property rights. These obligations might reasonably include international taxation, competition rules and stakeholder issues such as employment conditions and environmental protection. The ongoing process of regional integration - particularly in Europe - could present an additional opportunity for such a definition.

International Tax Cooperation and Capital Mobility

The international mobility of capital and the geographical dispersion of firms have clear advantages for the growth and modernisation of the region. They also create fundamental challenges for national tax authorities. Modern principles of capital taxation for the open developing economy indicate the need to find the correct balance between the encouragement of private investment and the finance of social infrastructure, both of which are necessary for sustainable growth. This balance can be sub-optimal where countries compete for inward investment by granting tax incentives or exercise conflicting principles in determining the tax base. The current practice of international taxation indicates that fiscal authorities in Latin America and the Caribbean could attain a more equitable share of capital tax revenue without depressing investment and growth. This might be achieved through more effective regional tax rules, double taxation treaties, information sharing and treatment of offshore financial centres along the lines already promoted for OECD members.

Global Financial Information, Compliance Incentives and Conflict Funding

Interdiction of terrorist funds has become a priority for intergovernmental cooperation. Logically, this initiative should affect SDM financing as well as conflict funding more generally - particularly where incumbent states can outlaw such movements. However, multilateral and unilateral attempts to ensure timely reporting of transactions made by targeted individuals or groups, and to deny them access to the international financial system, have had limited success. This is mainly due to economic disincentives for the disclosure of the identity and purpose of transacting agents, particularly those using correspondent banking services, informal money transfer networks and offshore financial centres. Solutions should be based on positive incentives for disclosure, and could include trans-border withholding taxes on transactions with unregulated clients and the provision of affordable transfer systems for emigrants. But this in turn would require a clear and practicable definition of the 'right to self-determination' in terms of international jurisdiction.

Regulatory Investment Incentives

This paper examines recent policy issues relating to foreign investment incentives in the regulatory domain. By 'regulatory incentives' in this context we mean those administrative conditions offered by governments to foreign firms other than special fiscal (eg tax) or financial (eg subsidies) treatment. The key issue addressed in this paper is whether competition between host countries for inward investment on the basis of their regulatory regimes has any effect on the level and 'quality' (technology, stability, employment etc) of that investment on the one hand. And on the other hand, whether such competition between countries leads to a welfare loss to that country and other OECD members or non-members. Section 2 examines the economic principles involved in the analysis of the impact of regulatory incentives on the investment decision of the international firm; where the predictability of future regulatory policy can be as significant to investment decisions as the particular standard enforced. Section 3 explores three current issue areas in relation to regulatory incentives at the national level: (i) property rights and market access rules; (ii) environmental protection; and (iii) labour standards. Section 4 addresses the existing international codes and agreements that might provide an alternative to, or support for, national regulatory arrangements and overcome the co-ordination problem. Section 5 concludes with some suggestions as to a possible agenda for policy research.

The Instability of the Emerging Market Assets Demand Schedule

This paper addresses the nature of the demand schedule for emerging market assets in both its macroeconomic and microeconomic dimensions. The former is usually analysed in terms of the 'push factors' (such as interest rates or contagion) determining international capital flows; while the latter is normally approached through the portfolio composition decisions (such as herding or risk appetite) of investment managers. Bringing these two perspectives together contributes to an understanding of how sudden shifts in the demand schedule can cause large and asymmetric shocks for emerging market countries. Official interventions by agencies such as the IMF focus on 'supply' interventions (such as improving information or avoiding default) and neglect the need to stabilise demand. The chapter suggests that official intervention is required in order to stabilise and lengthen demand schedules, and thus construct an orderly international market in emerging market assets.

The Security of International Finance

This lecture, presented at Oxford on 19 January 1999, opened the Wolfson College Lectures 1999 series Globalization and Insecurity. The first part of my lecture attempts to explain the origins of inherent instability in international capital flows, and why this requires public institutions to maintain an orderly market. In the second part, it is argued that despite widespread recognition of this problem, the necessary institutions do not exist due to the mismatch between intergovernmental power and the requirements of a global market. The third and last part of the lecture sketches some of the implications of this dilemma for belief in the efficiency of markets, the establishment of international property rights, and ultimately for global citizenship itself.

Finance and Growth in Developing Countries: Sound Principles and Unreliable Evidence

Financial development and economic growth are clearly related, yet the institutional channels and even the direction of causality remain unresolved theoretical issues. None the less, and despite the persistence of a wide range of organizational forms in advanced economies, strong causality from particular forms of organization of financial institutions towards rapid economic growth has become a central axiom of orthodox development economics, recently strengthened by the empirical findings of 'new institutional' economists. This chapter argues that this canonical literature is deeply flawed both methodologically and empirically. Further, the observed consequences of financial liberalisation for savings and investment on the one hand, and for macroeconomic stability on the other, suggest that an alternative interpretation of the relationship between finance and growth in developing countries is more plausible: leading to quite different policy prescriptions.