Reforming World Finance: Geopolitical Challenges - Essay Example

? Reforming World Finance: Geopolitical Challenges REFORMING WORLD FINANCE: GEOPOLITICAL CHALLENGES Introduction Bankers and policy makers, of late, have been keen to make clear commitments to lift debilitating uncertainties that have weighed down on the global financial systems. Globalization seems to be in retreat with de-globalization being in vogue, especially with countries that remained insulated as far as their financial systems are concerned; for example, China and India, suffering the least damage economically (Altman, 2009: p1). Changes in the structure of the global financial systems are not visible as of yet, partly because bankers and policy makers have delayed reform implementation in various places, whether intentionally or unintentionally, as well as resistance to these reforms. The current challenges are of an economic and geopolitical nature. Recent international affairs have seen the convergence of two trends. One has been the rebalancing of the configuration of geopolitical power while the second has seen a strong re-emergence of states in global finance. This convergence will most likely result in sustained turbulence, in global politics and uncertainties, in international financial systems. This is expected to be a major challenge in reformation of global financial systems. The Anglo-Saxon system seems to have reached its failing point with the current downturn in the global financial systems blamed, primarily on this failure. The state’s role is making a comeback as globalization is rolled back. President Obama makes this obvious in the United States as he moves the country towards a bigger and more activist government. The quasi-nationalization of automotive and banking industries and the reform pending for its financial system makes this clear (Altman, 2009: p4). There is work underway for the development of tools for intervention in institutions that are in distress while also being compliant to an international scale. Global financial system reformations have also seen activity by non-banking finance institutions that operate outside the perimeter, i.e. shadow banking. Finally, there is implementation of market reform derivatives in order to achieve over the counter implementation of global financial systems, as well as implementation of effective banking supervision on a global scale. However, these are hindered by changing geopolitical scenarios. Rethinking Global Financial Governance Reform The recent financial crisis has cast a cloud over the financial market’s deregulated model while also prompting increased attention to evidence that counter the globalization argument claims. The manner in which this feeds into operating procedures for development of organizations and economist opinions remains to be seen (Wade, 2009: p162). Most of the evidence, which is applied to support the argument on globalization is significantly weak with its acceptance being testimony to the strength that the confrmations bias carries in neoliberal ideology. The between-country distribution of income has tended towards inequality in the era of globalization by any plausible measures. There is domination of convergence by divergence, particularly when th`ere is exclusion of the Chinese Peoples Republic. This domination of divergence over convergence hajs far reaching consequences for rivalry between states, global governance, and the rise of leaders with messianic tendencies. However, even considering the weakening of the globalization consensus among world economists and interventions of governments in financial matters, it is increasingly clear that increased constraints on financial actors’ behavior will only be applicable when the crisis ends (Wade, 2009: p163). The financial interests among the different major nations still remain strong with the free market ideology being too ingrained in the western economic psyche for it to become permanently displaced in their financial policy paradigm. The form of neoliberalism identified in the world financial system order includes the regulatory, private, and public components, which have been in existence during, after, and before the financial crisis. While the neoliberal dogma’s public dimension appears to have made it through the financial systems crisis in the policy making and economic circles of countries from the Anglo-Saxon region, the regulatory and private elements have been altered irreversibly due to the financial system implosion (Nesvetailova & Palan, 2010: p28). In fact, two years following the beginning of the financial crisis, the manner of the debate in economic circles is suggestive of the fact that that neoliberal ideology has not been as severely dented as would have been expected. Neoliberalist economics have been altered and so has the fate of the global financial governance neoliberalism ideology. Simultaneously, announcements and plans at the G20 and other global gatherings seldom come up with any substantive institutions and policies. This is, caused, especially by the different directions that various regions pull in. Although the global financial crisis at first seemed to have destroyed the neoliberal project fronted by the Anglo-Saxon countries, the post-crisis reality is much more complex. For example, even as most financial commentators foresee a dollar demise orchestrated by the Chinese, China has its dilemmas. It has huge investments in nationalized agency bonds and US treasuries, which makes it in their interest to, at least, maintain the dollar at some level (Nesvetailova & Palan, 2010: p29). In addition, China is reliant on the US consumer. The shift to Asia and Europe and away from the Anglo-Saxon regions is highly evident. What is clear is that the global financial systems failure has been a major catalyst for this shift. Anglo-Saxon governments, however, emboldened by the signs of recovery, may be able to resist changes to global financial architecture (Nesvetailova & Palan, 2010: p29). However, it seems highly unlikely that governments in East Asia and Europe will go on subsidizing economies from the Anglo-Saxon regions, as well as support their neo-liberalism propped financial system reforms. Overall, it seems that the neoliberal ideologies that underlay the financial systems, fronted by the Anglo-Saxons are being sidelined with the Asian and European governments on one side. The neoliberal epoch, in a vital manner, is moving via a variety of double movement in polanyian terms. The decline of neoliberal ideology in the financial system has let loose geo-politico market hybrids that, at the moment, seem set to hijack and undermine the system of global markets and property rights that make up the essence of United States’ ascendancy and interest (Robinson, 2004: p418). It needs the constraint of oligarchic and populist interests in systems of state power that are insulated. It also signals, at the same time, a retreat from open global market systems that are fluid and do not possess any sort of hierarchy. This system is a threat to global hegemony that the financial markets were supposed to serve through reconstruction of a framework regional and bilateral arrangement to avoid mutual self-destruction of the main financial players in the market. Neoliberals, in other words, have been pushed towards accommodating other political realities in the reformation of financial systems. The financial crisis and the effect it had on the financial systems revealed some limits in the extent to which hegemonic forces have the ability to dis-empower various regions and groups and expect that they will be competent actors in capitalist economies. This is also extended to the relationship between the capitalist block of nations and the more conservative financial markets in the East of Asia and South America (Konings, 2009: p123). The situation as it is currently vividly illustrates the understanding of power as is set out in the master-slave dialectic narrative. Power has effects that are constraining, although it cannot eradicate, fully, the subjective agency and powers of the oppressed. When it cripples the capacities of as people to be competent actors, it results in erosion of the social bonds that include the socially constructed status of the master. Therefore, the current crisis in the financial systems is not caused by regulation and politics having allowed the financial markets to go out of control but, rather, is a product of internal contradictions in the operation of control and power, as well as financial power, having crossed the limits of its own possibility conditions (Konings, 2009: p123). It is at this point that geo-political possibility’s real moment lies in the experience of power’s contradictory effects. There is openness that cannot be found in structures of organization of the state taken by themselves (Konings, 2009: p124). The experience of power, of course, is shaped profoundly by all actions of the state. However, the point is that the various Anglo-Saxon states that have had an overbearing influence on the workings of the financial systems have to present their power in formal, ideal, and coherent aspects, rather than show its contradictory aspects. The states need to work in a manner that makes power work and not to expose the contradictions in their systems. This means that as long as the world does not question the manner in which the states presents its relationships to economic matters, strict limits will exist in the variety and range of oppressive sources that can be found. With the East Asian, European, and South American countries now looking at these relationships in the financial systems, they are being pulled further apart from the Anglo-Saxon side. What is changing in World Financial Systems? The free market project that was fronted for so long by Neoliberalist theories is on the ropes. Neoliberalism’s social, economic, and political role is now a major source of debate globally and publicly. The 2008’s crisis brought about repudiations from across the geo-political spectrum (Peck & Theodore, 2009: p94). This global financial crisis, seen from a historical perspective, worked to underscore and expedite various developments that seek to have significant impacts in the long term on the global economic and financial situation. The first has to do with the evolution of the global financial structure. The uni-polar moment that occurred in the 1990s after the end of the cold war is gone with the world now moving away from this situation as it was. However, whether the new structure of power in the world is non-polar or multi-polar, the fact is that global financial governance will have to be restructured. The non-western world and developing countries are looking towards occupying a more visible and pre-eminent position in the leadership of the institutions, which regulate global finance and will have a more powerful voice in global finance governance. The economic renaissance of emerging economies and markets was already visible before the coming of the crisis. This renaissance is concerned, primarily with long-run geopolitical and geo-economic dynamics as compared neo-liberalization as an institutional matrix, an ideological construct, and as a political project (Peck & Theodore, 2009: p98). The collapse of the financial system in the United States following the sub-prime bubble and the danger and fallacy of the market fundamentalism, which their financial systems stand for has also escalated to a re-evaluation of their role in global affairs (Amable,2010: p542). From the global financial crisis to their unilateral invasion of Iraq, the US has tarnished their role of the United States as a beacon of economic policy or performance. The Iraq war, while not of a financial nature, demonstrated the ability of the United States to abuse their paramount power and defy the rest of the international community. The financial turmoil, on the other hand, proved that the US could, do more harm economically to the world compared to the way most other countries could. Since the US is no longer viewed as a mentor in global financial governance, it has now lost its ability to have a unilateral voice on the issue. The US, for sure, will remain the leading financial power in the near future. It remains indispensable to solutions for the issues that confront the world. However, its rivals in Asia and Europe are now gaining from the relative economic situation the US finds themselves in and are pushing for increased institutional and political representation (Beeson & Bell, 2009: p70). The failure of risk assessment by the conventional methods of mathematical finance have also seen calls for a re-think of state-specific evaluation and further elaboration of a new generation models of risk management that would right the shortcomings evidenced by the subprime crisis (Amable, 2010: p544). Effective global financial governance calls for progressive concepts like balance of interests, win-win, and differentiated responsibility, a harmonious financial world, and effective multilateralism, as well as the formation of a stable, equitable, and fair international financial order that can promote global governance and international financial cooperation. Cooperation on a regional basis is geared towards promotion of economic growth and maintenance of regional financial and economic stability. The Current Prospects of Substantial Financial Governance Reform Various lessons can be adduced from the past couple of years during and after the financial crisis of 2008. Electoral realignments in Latin America and Asia has consolidated progressive gains with a previous period of hegemonic dispute giving way to amore regional hegemonic instability, although moving towards post-neoliberal governance models have been challenging (Peck & Theodore, 2009: p111). Owing to this dynamic, and the reason that the G7 is only likely to surrender prerogatives of financial governance when events force them to do it, the best hope to achieve adequate reforms is dependent on the formation of tactical alliances by the rising powers that can apply pressure on the G7 to accept the necessary reforms. The G7 excludes India and China and the natural divergence between economic interests of these countries and those of developed states will make it increasingly difficult to build consensus on tough economic issues (Bremmer, 2009: p9). The present realities suggest that a scope for tactical bargain exists between rising members of the G20, international civil society, and non-G20 developing countries. Currently, the global financial systems are going through effects of a financial crisis that is unparalleled since the end of the great depression (James, 2009: p1). In an environment as unpredictable as the global financial system in its current state, it is impossible to build stable and new global governance arrangements. Whichever reforms they adopt, they will mostly be partial responses to the problems that underlie the issue, shaped by that particular moment’s dynamics in the process of power realignment. It is inevitable that they will come under strain as evolution of these power realignments occurs. Nevertheless, these partial responses contribute to the gradual development of more legitimate and sustainable global finance systems. Innovation looks to be the only long run answer to problems in the global financial systems with supervisory and regulatory functions being handled through intensified response testing to hypothetical situations (James, 2009: p23). This contribution, however, will only be made if the non-governmental and governmental supporters ground their efforts in the acknowledgement of their limitations, as well as on a realistic assessment of their contributive ability to governance. This assessment can only be made through the basis of their strategy on a strategic vision that is a long term as far as global financial governance is concerned, as well as their actions regarding exploitation of whatever reform potential is in existence or may arise in the short term. Geopolitics of Global Financial Reform The new geopolitical agenda is set to provide for an interrelated and complex politics of reform in the medium term. This is set to revolve around the three axes of the overstretch question, the Asian question, and the European question. These axes of challenges and tensions stalk the reformation of global finance systems. The first axis has to do with challenges in the Euro-zone. The 2008 financial systems panic directly saw the Europeans react too conservatively in fiscal and monetary terms compared to China and the United States, probably due to the fact that the individual countries had no central bank (Bresser-Pereira, 2010: p30). The formation of the ECB, the European Central bank, and the ambiguity concerning who speaks on global financial issues for the Euro-zone, has left a vacuum that has given the US temporarily with wider latitude that seeks to shape the global financial agenda. While, previously, the Bundesbank gave a global counterweight to the United States treasury/federal reserve combination, as well as provision of a focal point for views from the Euro-zone on global finance, the ECB has emasculated this role sans the provision of an institution of similar kind in its place. It has made it seem like the EU is more concerned with regulating their financial systems compared to Britain and the US (Bresser-Pereira, 2010: p30). The second axis of challenges to the global financial system reform can be labeled as the Asian problem. It had been expected that, in the coming years, Europe and the US on one side and rising Asian countries would have more, rather than less, methods to cooperate in rule based and open ways (Ikenberry, 2010: p4). China, however, has pursued a very different route in response to crisis in the Asian financial system compared to its western counterparts, namely by limiting its currency’s convertibility and restricting the role that international capital markets play in the functioning of its economy and markets. China, in effect, has challenged the prescription of the IMF for Asia and the two countries, in addition to other Asian countries, have continued to hold out on pursuing a traditional Asian trajectory of development. However, it is also important to realize that the Asian countries are seeking new roles and influence in the financial global system and not global transformation (Ikenberry, 2010: p7). However, this has come with dark geopolitical overtones with the example of how they have challenged the manner in which, liberalization of capital account can be used as a panacea to reforms in the financial markets in response to the financial crisis. The overstretch question deals with the problem of financial governance structure in two respects. The first perspective deals with the profusion of global committees that have emerged because of the global financial instability of the last decade. It is, for example, of interest to ask just what role they played in fostering the financial crisis and the likely future for economic governance (Chorev & Babb, 2012: p460). Every one of these institutions has a further group of sub-committees that have regular meetings and possess specific mandates. This, in equal measure, ignores the existence of other existing global organizations that have an interest in global financial governance and domestic financial governance. The World Trade organization, for instance, has an interest in financial services provision, while the International Monetary Fund provides resources. The concretely distinct rule making systems, rule enforcement, and rule applicability contribute to the two institutions having different mechanisms in responding to dissatisfaction among its members (Chorev & Babb, 2012: p460). South America possesses an association for central bankers, as do Asia and Central America. The European ban for Development and Reconstruction has an interest, as well as the Inter-American Development Bank. These institutions possess a stake in international standard development, and each is consulted on one level or another during some point of the process. To keep all these institutions with their competing geopolitical interests is not an easy feat. The actual number of people, at the same time, who are involved in these institutions and committees, is less than it seems. This governance structure, as is the case now, is top heavy with regards to the participation of countries from the G7. Far from passing down and diversifying financial risks, these institutions with their uneven representation and being proliferated and concentrated only exacerbated the situation through its increasingly highly leveraged nature (Hay, 2011: p7). Even with comparatively more resources that the G7 possesses, the people who are involved in the system issues from every ministry of finance, regulatory agencies, and central banks of the countries involved would scarcely top a figure of two hundred. Global institutions do not fare better with the BIS, for instance, may employ approximately four hundred people in their totality, but less that seventy-five are concerned with global matters in general, as even fewer are tasked with the questions of the financial system reform. By global standards, BIS is filled with knowledgeable individuals. This sort of limited individuals is the very reason that they get to know each other this well by having meetings on a regular basis at various places around the globe. This results in their reliance on each other for support, information, and finally trust. Since they group together around their regions, they become a hindrance to global reform in totality. Similarly, the standards need to be implemented if they are to be operational, as they were developed to do. At this point, the widely varying resource levels that are available to the various governments bears heavily on how the emerging economy governments can commit themselves to the realization of financial systems reforms (Germain, 2012: p37). This reality has a bearing on the effort and time that these individuals in the central banks, ministries, and the regulators can devote to convincing political players of the requirement and legitimacy of the standards. Prudential regulation could be a plausible argument to regulators and central bankers in New Delhi, Pretoria, and Sao Paulo, although the implications to ensure the banks are managed along western lines is going to mean fewer funds for development, as well as government spending in the countries. It is here that the G20 needs to work hard towards the legitimization of various levels of flexibility to reach the standards. One vital role for the G20 has to do with the provision of a forum where the emerging markets and economies can bring forward their case for social and economic differentiation in the international financial system or a variegated balance between private gain and public responsibility, instead of one global standard. All the financial systems need benchmarks, but the manner in which the benchmarks are achieved and interpreted is dependent to a great extent on national or local context (Germain, 2012: p37). Ownership of the benchmarks is going to be a matter of ongoing compromise and negotiation. The final manner in which the reforms of global financial standards is reflective of problems within the new geopolitical agenda, as far as inclusion is concerned, lies in the manner in which progress towards achievement of the reforms will be judged. Judgment, at the moment, appears to be with the IMF that has this far carried out various experimental nation audits concerning the observance of these codes and standards that are clearly within IMF’s remit (Germain, 2012: p39). However, these audits cost money, are complex and the technical affairs having too much scope for information mishandling, as well as misinterpretation of significance data. At the moment, they are also run according to a template that does not distinguish between specific country circumstances. This occurs even while the assessment teams at the IMF are reliant on the member countries to give much of the information required. While this is a learning exercise, it has provided much as food for thought as far as the different requirements for the different countries and blocks of countries is concerned. The critical question, nevertheless, is who the judge should be and how this judge should take their place. With the current geopolitical realignments, coming up with a system of judging problems in the global financial systems, the reforms required, and how they should be implemented, will be a major sticking point (Germain, 2012: p39). Because there are conflicting interests from the various regions, coupled with the EU and US already being in control of most of the global financial institutions, reforms in the financial sector will be hindered for the near future. References Altman, R., 2009. Globalization in Retreat. Foreign Affairs , 1-6. Amable, B., 2010. 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