Global Economic Issues - Essay Example

Global Economic Issues Introduction Free market ideologues have been advocating a fundamentally dissociative approach to international finance in particular and globalization in general (Held and McGrew, 2007). Of equal fundamental importance is the strategic significance of the operational and competitive environments of the public and private international financial services organizations. The theoretical constructs on globalization have been varied and complex. This diversity has injected a considerable amount of controversy and conjecture into the current discourse on the subject though. Financial services organizations that act in the international arena in facilitating financial flows between lenders and borrowers have to operate in a strategically competitive environment that compels them to adopt a quintessentially ideological stance which Stiglitz (2008) attributes to the predominance of the financial community’s view of the world (Lechner and Boli, 2008, p. 204). Stiglitz’s tirade against globalism and its consequences is not a one-sided affair either. Criticism of Washington Consensus, which advocates a minimum role for the government while at the same time actively encouraging privatization and trade liberalization, has not been a recent phenomenon (Stiglitz, 2003). International financial services institutions play a major role in determining the very outcomes in globalization process to such an extent that their impact is felt in the far corners of the globe in every sphere of decision making including those of the central governments’ and local bodies’. According to Stiglitz international financial institutions such as the International Monetary Fund (IMF) and the World Bank (WB), have been pushing forth a particular line of “market fundamentalism” that pays little or no attention to third world countries’ diverse needs. This total irrelevancy of policies that these institutions advocate for developing countries is nothing new even in respect of those East Asian economies like South Korea and Taiwan. However these latter countries could successfully ignore the Washington dictated reformist formula and achieve a greater degree of equality among their citizens. Analysis Globalization and/or globalism particularly refer to a set of liberal economic principles that underlie the very nature of how best to expand international trade and commerce links beyond the national borders of countries (Nagdeman, 2009). While the underlying theoretical constructs basically refer to such parallel concepts as international free trade and financial movements there are other related concepts too. For instance Washington Consensus has given rise to a series of theoretical conceptual frameworks that inform the very system of international finance and players, i.e. governments and, public and private financial services institutions. Financial institutional setting and its attendant conceptual framework necessarily envisage a global strategic response to international institutional policy outcomes from international financial services institutions that are part and parcel of the larger system (Chang, 2005). International financial services institutions operate in a strategically constrained environment of national and international policy issues that allow little, if any, freedom to them and governments. It’s against this backdrop that the analysis of liberalization and free market policies ought to be discussed (Bawa, Muhammed and Juhary, 1999). According to Stiglitz private and public sector financial services organizations have been functioning as auxiliaries of international financial institutions. In other words the global financial system, including foreign aid flows, functions just like an adjunct of the West dominated (US included) policy making institutions. A more vigorous and articulate strategic paradigm for the theoretically determined behavioral concepts of these public and private financial services institutions requires a well balanced approach. In the first instance these institutions have a system of corporate governance that along with organizational goals such as profitability and market share act as a compulsion on their functional behavior. With usual characteristic panache along with North American counterparts, the financial services organizations of Europe have dominated the scene since autumn 2007. Bank of America, South Trust and the Hudson Valley Bank in the US and Royal Bank of Scotland, ABN AMRO, and Credit Suisse in Europe all have a huge market presence in the world. Their strategic financial services provision in different market segments including insurance and shipping, have attracted the widest attention due to their innovative approaches. These institutions have been influenced by none other than the way global financial institutions like IMF act in order to bring about those intended outcomes that Stiglitz mentions in his article. In short, according to Stiglitz, they are none other than local agents of the latter (Greenwich Associates, 2001). Subject to the regulatory environments in which they operate, especially in Europe, these organizations have been strategically orienting and reorienting towards achieving organizational goals that on a broader consideration would show some remarkable features (Mohamed, 2009, www.polity.org.za). In the first instance many North American and European financial services organizations have had a checkered history of liberal market capitalism that has been evolving through a system of diverse phases. The ideological underpinnings that, Stiglitz refers to in his writings, have been remarkably borne out by the very organizational structures of these firms. Strategic orientation of international financial services organizations is of paramount importance in the analytical examination of their ideological postures. However it must be noted here that Stiglitz’s mention, of bad economics and bad politics in reference to IMF’s and the World Bank’s policies in developing countries in particular, have to be placed in its proper context. The organizational structures play a pivotal role in this backdrop and such role becomes an exponential function in respect of policy and its many faceted strategic alternatives (Child, 2005). In other words strategic choices in decision making process of the average financial organization are determined by organizational structures and strategic operational and competitive environments. Royal Bank of Scotland, ABN AMRO, Credit Suisse and a number of other private organizations in Europe for example have been operating in this kind of environment. However, the regulatory frameworks in which they operate also have a far reaching impact on their organizational outcomes. In this context Stiglitz’s arguments have to be reexamined with a view to establishing a theoretical basis for their behavior. The variables on which such a behavioral model can be built depend on the evolutionary process of these institutions through all manner of global financial crises (Robert and Winters, 2009). For instance all these institutions have necessarily acted in conformance with IMF’s and WB’s norms. Such conformance in behavior is dictated by the type of pressures in modern financial and capital markets. Stiglitz’s criticism of liberalization of these markets is based on the fact that developing countries did not have “commensurate rewards” from such liberalization. According to Stiglitz there is ample empirical evidence to prove that liberalization policies recommended by the global financial institutions like the IMF and adopted faithfully by developing countries have caused hot money to go in pursuit of opportunities thus creating “speculative real estate booms” in recipient countries. When this money is withdrawn suddenly at will by investors, markets collapse and economies suffer (Daniel, 2007). Theoretical premises on which such speculative bubbles in the real estate sector of the economy can be explained vary from sectoral imbalances to structural shortcomings. However the ideological premise on which such bubbles can be based and treated as a functional correlation is lacking in many respects. In the first instance empirical evidence in Europe suggests that financial services organizations operate in a strategically determined highly competitive and regulated environment and therefore their responses vary according to their individual freedom within the organization to take decisions more effectively (www.financial.software.com). Thus there is a very poor ideologically determined theoretical premise for the type of behavior displayed by these public and private financial services organizations. It’s particularly interesting to note the fact that financial services organizations have a set of norms that are presumably ideologically determined in other contexts and not in the strict organizational context. For instance the available empirical evidence since autumn 2007 suggests RBS and ABN AMRO, just to take two institutions, have been logically focused on creating market niches where the level of competition is limited or virtually nil. While much of their inner organizational features such as leadership/management style and organizational culture have played a very significant role in shaping the nature of performance-related outcomes, the external environment as determined by ideological premises such as market fundamentalism could be visible only to a certain extent (Hermann, 2006). Fundamentalist ideological underpinnings that free market forces overtly and covertly promote are not defined to include political undertones. In fact they are economically determined principles of basic behavioral patterns. Thus normative attributes of financial services organizations don’t lend themselves to a meaningful interpretation. Both ABN AMRO and RBS have failed to achieve predefined organizational goals in part or whole due to the changes in the global environment. Their response to this changing global environment is decisively more important in this context than an ideologically premised perspective. For instance very few of the financial services organizations either in the US or Europe have clear perceptions about clients’ needs despite the fact that they have been serving them for a long time( www.infed.org). Hence they tend to adopt general approaches in which small developing countries that Stiglitz mentions as the most unfortunate lot, tend to be ignored or treated with the same approach. Global financial and capital markets do not lend themselves to a particular interpretation. However his analysis that Russia cannot be held responsible for Argentina’s higher interest rates and economic woes arising from them while Argentina itself cannot be blamed for its woes is intrinsically valid. Indeed when one country borrows so much at the prevailing rate from international financial institutions, the interest rate would be positively influenced (Dawes, 2008). The subsequent exchange rates and balance of payments problems would impact on other countries as well (www.articlesbase.com). While both Argentina and Russia are big economies, his metaphorical illustration of poor small economies as “small boats caught up in a rough sea” is a vivid reminder of the economic misfortune faced by smaller countries. Given the kind of market volatility small developing countries are unable to successfully overcome the associated problems (Grabbe, 1995). In this context the IMF/WB formula of drastic structural economic reforms doesn’t work. They in fact worsen their situation. Yet to what extent financial services organizations become involved in this problem is not known either. Assuming that these organizations act in conformance with the IMF/WB dictated standard formula there is a very little chance that they would be able to integrate the particular needs and circumstances of these small countries meaningfully into the equation before their problems are solved. In other words financial services organizations such as the above mentioned ones act in conformity with not a particular ideology but a set of rules and regulations that are invariably the result of IMF/WB dictates. In this context strategic management perspectives happen to play a very significant role (Balling, Lierman and Mullineux, 2004). These financial services organizations’ strategic operational and competitve environments need to be studied with specific focus on their independence and impact on the global financial and capital markets. European financial services organizations have invariably adopted strategic initiatives that seem to have been influenced by the type of regulatory environment in which they operate. In the first instance strategic operational environment of these organizations can be defined as customer centric, highly regulated, industry driven and innovation-based (Madura and Fax, 2007). On the other hand their competitive environment though is part and parcel of the operational environment, can be separated to be treated as an exclusive entity. When the regulatory environment is imposed on them it’s obvious that their strategic response to external environment tends to be a well articulated one so that their long run strategic organizational goals are not sacrificed (Mayers, 2004). This particular perception of the financial services organization requires special analysis due to the fact that it’s perhaps the only performance-based system of metrics that significantly captures the type of behavior of these institutions. Long run strategic organizational goals include profitability, market share, share price, sustainability, corporate responsibility, customer satisfaction, brand loyalty and stakeholder satisfaction. Despite the kind of threats that the average organization is faced with in this environment, there is still a degree of freedom to place itself in a niche or across a range of market segments without being pushed out of it by rivals. This operational liberty enables it not only to identify threats and opportunities but also strengths and weaknesses of its rivals. Financial services organizations also benefit largely from the causative correlations between regulatory mechanisms and regulated markets (Kotabe and Helsen, 2008). The latter principle indeed is connected directly with Stiglitz’s argument on market fundamentalism. In fact financial and capital markets are sought to be regulated in line with IMF/WB requirements. Just a few days ago the IMF advocated that EU also would follow the example of the US government in applying bank stress tests to determine the probability of financial and operational viability. Thus what’s obvious is the fact that EU financial regulations have a still greater impact on the type of behavior of financial services organizations than any other factor. The conceptual framework that underlies these organizations strategic response to their environment is not necessarily a dictated set of tenets but the result of an evolutionary process. Of course Stiglitz does not mention that there is an overt set of rules and regulations adopted by the IMF/WB combine to demand compliance on the part of these financial services organizations. However according to him they serve the former’s wishes to a certain extent by being faithfully inclined to adopt the same fundamentalist financial market principles (Wright and Rayment, 2008). This argument focuses on the necessity for public and private sector financial services organizations to adopt performance-based metrics to measure success or failure on annual basis. Their own balance sheets, cash flow statements and loss and profit accounts are taken for granted as the best measures of success (Ehrlich and Fanelli, 2004). An inevitable outcome associated with this approach is that despite the fact that these organizations have to tread the same line as any other organization in another industry they haven’t been able to exert pressure on regulators to see the illogic behind performance-related metrics when markets are violently fluid or volatile. This is where IMF/WB dictated tests have gone wrong. Market imperfections that Stiglitz mentions aren’t determined by a particular set of events and he makes this amply clear. Volatility in financial and capital markets tends to be treated with the same dose of formula-based medicine that often doesn’t work in the case of developing countries (www.wikipedia.org). Indeed this argument is very strong and needs particular attention. In other words what has failed in the developed world is less likely to succeed in the developing world. Yet again private financial services organizations in the world cannot be expected to show the same amount of concern for public benefit that public sector financial services organizations show. Different organizations adopt equally different approaches to facing market volatility. The first and foremost concern is the liquidity problem caused by constant defaulting in repayments by clients. The current sub-prime mortgage crisis and the financial crisis both have a far reaching negative impact on these organizations. Their response is categorically determined by both policy level outcomes at the international level, i.e. how the IMF/WB duo seek to reshape the world affairs during a crisis and those outcomes associated with their strategic environmental factors involving operations( www.resources.bnet.com). The latter perspective is focused on the strategically determined market-based outcomes including basic structural paradigms. In times of volatility financial and capital markets happen to be influenced by structural shortcomings much more than say commodity markets. Structural shortcomings that inescapably affect these outcomes have been studied by many researchers to build theoretical conceptual models for contingency planning (Desai, 2006). Despite these efforts many financial services organizations both public and private have failed to come out with their own contingency models to deal with unexpected volatility related outcomes in the market (Rifkin, 2002). For example the failure of both off-shore and on-shore financial services organizations to achieve even marginal success against the unfolding disaster scenario in the international financial and capital markets can be attributed justifiably to this phenomenon. Market-based logarithmic metrics are less likely to afford an opportunity to these organizations to determine policy failure related outcomes. In this context Stiglitz’s universal rule of phenomenal failure arising from IMF/WB dictated policy has some relevance and is inescapable from the viewpoint of financial services organizations. Conclusion Global financial and capital markets evolve with a characteristically distinct set of norms like any other (Smith and Doyle, 2009). In this evolutionary process they adapt themselves to the changing circumstances while market players such as the IMF, World Bank, governments and financial services institutions play their respective roles in the process. Stiglitz’s analysis of causes and consequences of particular behavioral tendencies of these organizations both public and private indicates that they are being constantly influenced by “Washington Consensus” related IMF/WB dictated policy choices. In other words market fundamentalism is the rule of the game. While there is some really disturbing trend in this behavior, there is no sufficiently strong empirical evidence to suggest that public and private financial services organizations are directly influenced by the IMF/WB policy dictates. In the first place they are merely responding to market-based outcomes which leave very little freedom if any to design their own policy initiatives with full freedom (Razin and Sadka, 1999). In fact their strategic operational, regulatory and competitive environments are determined by these broader policy dictates of the international monetary organizations. Finally, what are so strategically imperative are the policy choices and strategic outcomes thereof. This policy norm applies equally well to these market-based outcomes mentioned above. There is no gainsaying the fact that financial services organizations, both public and private operate in a strategically intense environment of uncertainty and volatility. Developing countries, especially small ones, are just helplessly caught up in this big game of international finance though. REFERENCES 1. Altman, Daniel (2007) Connected: 24 Hours in the Global Economy New York: Farrar, Straus and Giroux 2. 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