Global Financial Centers, Economic Power, and (In)Efficiency

180 Pages·2020·2.592 MB·English

by  Fikret Čaušević

Global Financial Centers,
Economic Power, and
(In)Efficiency
Global Financial Centers, Economic Power,
and (In)Efficiency
Fikret Čaušević
Global Financial
Centers, Economic
Power, and
(In)Efficiency
Fikret Čaušević
School of Economics and Business
University of Sarajevo
Sarajevo, Bosnia and Herzegovina
Academy of Sciences and Arts
of Bosnia and Herzegovina
Sarajevo, Bosnia and Herzegovina
ISBN 978-3-030-36575-2 ISBN 978-3-030-36576-9 (eBook)
https://doi.org/10.1007/978-3-030-36576-9
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To my first grandson Luca,
a beautiful combination of Selma and Marco, and
cultural influences of Bosnia, Colombia, Italy and the Netherlands
P
reface
This book is a result of my ongoing interest in studying financial
liberalization and globalization’s impact on (i) the global distribu-
tion of economic power, (ii) the effectiveness of economic policy and
(iii) national economic sovereignty. My interest in this topic began with
my doctoral thesis, written between 1999 and 2002 and published in
2006 in a revised and expanded English version by International Forum
Bosnia in Sarajevo as Economic Sovereignty and Global Capital Flows.
In that book, I presented an analysis of financial liberalization’s impact
on and consequences for the effectiveness of economic policy, particu-
larly during the final two decades of the twentieth century. Ten years
later, in 2016, I completed my next book on the topic, which Palgrave
Macmillan accepted for publication in 2017 as A Study into Financial
Globalization, Economic Growth, and (In)Equality.
Global Financial Centers, Economic Power, and (In)Efficiency is my
next foray into the field. In it I look at the concentration of global finan-
cial flows and stocks and changes in the balance of economic power, as
represented by key countries’ shares in total world output of goods and
services. The central part of my analysis is in Chapter 4, where I focus
on how changes in economic growth in the 43 BIS reporting countries
are related to overall changes in world per capita output (i.e. each coun-
try’s share in per capita global output), and how these in turn are related
to changes in those countries’ net international investment positions and
domestic credit activity.
vii
viii PREFACE
The first 17 years of this century saw very significant changes in
the balance of power between the advanced and the emerging market
economies. The latter, led by China, tripled their share in global out-
put. Gradual financial liberalisation in China, India, and the countries
of South-Eastern Asia combined with major changes in the countries in
transition to create sharply rising global capital flows from West to East
and East to West. At first glance, it seems paradoxical that the financially
most sophisticated, largest, and most complex economy in the world
during this period, the US, saw its net imports of capital increase con-
stantly over the past 30 years. Nonetheless, its negative international
investment position expanded aggressively between 2007 and 2019,
when its net imports of capital quadrupled. At the same time, the third
fastest-growing economy in the world, China, was becoming the sec-
ond-largest economy in the world in terms of total output and had the
fastest-growing levels of domestic lending among the advanced and
emerging market economies.
The concentration of global financial flows and stocks in small econ-
omies has also been increasing, especially in Luxembourg. Such finan-
cial conduits’ importance has been increasing, both in relative and
absolute terms, particularly since 2010, which poses a crucial question
regarding the financial (in)stability of the Eurozone countries, particu-
larly as the concentration of global financial stocks in those economies
(Luxembourg, Republic of Ireland, Malta, and Cyprus) is based on a
combination of tax competition and institutional stability, underwrit-
ten of course by the economic strength and institutional stability of the
major EU countries, especially Germany and France. These countries’
future collective institutional stability and economic strength will depend
in large part on how capable economic policymakers prove at both the
supra-national and national levels in coordinated their economic policies
and reducing the differences in tax rates, something that will necessarily
have implications for certain major European financial centres’ continued
significance in the distribution of global economic and financial power.
Last year, Paul Collier published a new book, The Future of
Capitalism. Collier sees the key factors in the crisis of global capitalism
as lying in a crisis of ethical values at three levels: the family, the com-
pany, and society as a whole. Collier presents his proposals for over-
coming the serious problems posed by this crisis in ethical values in
the second part of his book, where he advocates a pragmatic approach
based upon strengthening feelings of belonging. The yawning gap in the
PREFACE ix
concentration of financial resources is far greater than that in the distri-
bution of global output, whether one is talking about the richest and the
poorest deciles or the richest 25% and the poorest 25%. This necessar-
ily generates constant pressure on financial stability at both the global
and the national level. While my own work has not focused on differ-
ences in the distribution of income at the national level, research pub-
lished in some very well-known recent works (for example by Thomas
Piketty) has demonstrated the presence of major and ongoing processes
of stratification and social disintegration, in both the advanced coun-
tries and the rapidly growing emerging market countries. A return to the
ethical values of the sort advocated by Collier presupposes considerably
more developed mechanisms than currently exist for coordinating global
economic and financial flows, with a more balanced distribution of eco-
nomic and financial power, and the development of more effective inter-
national institutional mechanisms to “bypass” institutional instability and
inadequate institutional capacities across-the-board, in the developing
countries, the countries in transition, and the poorest countries in the
world.
I would like to express special thanks to Tula Weis, senior editor at
Palgrave Macmillan New York, for ensuring the publication of this book.
Her professionalism has been both inspiring and fascinating. I owe a sig-
nificant debt of gratitude to the anonymous peer-reviewers, whose sug-
gestions, comments, and recommendations have considerably improved
the text. Thanks are also due to Lucy Kidwell and Thangarasan Boopalan
for their professionalism, prompt reactions, and technical assistance in
preparing the text. To my old friend and collaborator over the years,
Desmond Maurer, I offer my special thanks, both for his excellent edi-
torial work and for our always stimulating conversations and his sugges-
tions. I worked with Desmond, with great pleasure and success, on the
publication of my previous international publications.
To my wife Indira, I am grateful for her love, consideration, and con-
stant encouragement to seek new authorial challenges. In the preface to
the Bosnian edition of my The Global Crisis of 2008 and Keynes’s General
Theory I wrote that our children, Selma, Nejra, and Tarik, are our great-
est treasure and, to our great satisfaction, each of them has developed in
accordance with their own gifts. Four years have passed since that pref-
ace. At the end of 2019, Selma has almost completed her doctorate at
Delft University, Nejra has received a Chevening scholarship to attend
UCL, and our son Tarik has just embarked on his final year at the SSST
x PREFACE
in Sarajevo. As parents, we are both pleased and humbled by these devel-
opments, in a world so full of challenges.
There is a saying that a man’s life has meaning if he leaves behind him
at least one child, one tree, and one book. My mother Katka planted gar-
denfuls of roses, among which I grew up. She did that when I was a
child and she is doing it now at more than eighty years of age. My father
Rasim planted more than 1500 trees during his retirement. My parents
had four children. A life full of obligations and challenges, not always of
their own making, did not leave them much opportunity to write their
books. This book, however, like those I have published previously, are
the product of their limitless moral, material and every other kind of
support, spurring me on to pursue the work that has brought me such
satisfaction.
Sarajevo, Bosnia and Herzegovina Fikret Čaušević
October 2019
c
ontents
1 Introduction: Global Financial Flows, Stocks, Economic
Power, and Financial Sustainability Under the Current
Structure of Global Finance 1
References 7
2 Cross-Country Analysis of Financial Assets
and Liabilities: 2005–2017 9
2.1 Theoretical Background on Financial Flows, Stocks,
Savings, and Investment 10
2.2 Global Financial Flows and Accumulated Financial
Assets and Liabilities for 2005–2017 13
2.3 Cross-Country Analysis of Financial Assets
and Liabilities in 2005 13
2.4 Cross-Country Analysis of Financial Assets
and Liabilities in 2010 18
2.5 Cross-Country Analysis of Financial Assets
and Liabilities in 2017 21
2.6 Changes in Accumulated Assets and Liabilities: The US,
the UK, and the Most Advanced EU Economies 25
2.7 The US and the UK as the Two Most Important
Financial Centres in the World 27
2.8 Japan and China as Two of the Three Biggest Net
Capital Exporters in the World 30
xi