The Engine of Globalisation?: The Motives for the ...lnweb90.worldbank.org/.../$FILE/SPEL03_2_BANTI_MARKOUTI.pdfBANTI-MARKOUTI ELSA SPEL 2003 (2) 10 ii. The notion of financial globalisation

BANTI-MARKOUTI ELSA SPEL 2003 (2)

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The Engine of Globalisation?: The Motives for the Liberalisation of

Capital Movements and Opening of Emerging Markets

VICTORIA BANTI-MARKOUTI∗

Abstract: The notion of globalisation is controversial. It is a multi-faceted phenomenon which raises discussions on different levels of analysis. In this article we have tried to explore the political, economic and legal motives that led to the liberalisation of capital movements and the opening of new emerging markets in particular. Since globalisation is a political issue, in this essay the motives behind the globalisation of financial markets and the opening of new capital markets in particular, are explored from a political as well as an economical point of view based in the legal framework of the relevant institutions. Then the ways of opening of new capital markets and the different roles played by the international organisations in this process are examined. Afterwards, we tried to assess the motives for the opening of new markets and the legal ways which were put into force for this purpose. Furthermore, a separate section that refers to the role of the US is added, since it is the major promoter of the financial globalisation. Lastly, we present an analysis of the reasons of the success of the coalition which supported the liberalisation of capital movements worldwide. A. Introduction: The phenomenon of financial globalisation i. The general phenomenon of globalisation The notion of globalisation is controversial. It is a multi-faceted phenomenon which raises discussions on different levels of analysis. There have been many contradictions and tensions over its meaning as well as its potential. Professor Joseph Nye argues that globalisation is a phenomenon which is changing frameworks at time and space1. In the first place, it would be useful to give an overall perspective of the globalisation. ‘Fundamentally, it is the closer integration of the countries and peoples of the world which has been brought about by the enormous reduction of costs of transportation and communication, and the breaking down of artificial barriers to the flows of goods, capital, knowledge and to a lesser extent people across borders’.2 Leaving aside many different fields of research it influences- such as culture, environment, society- this essay will focus on the financial aspect of globalisation.

∗ Graduated from the Law School of Athens in 2002. She had her master degree (LLM) in commercial and corporate law in the London School of Economics. She is currently participating in the LLM programme of the Norwegian Institute of Computers and Law on telecommunication and information technology law. I would like to thank my supervisor Dr. Christos Hadjiemmanuil. I have also benefited from Ms. Ceren Cenker insights and I’m truly grateful. 1 J.Nye, lecture in the LSE, ‘The paradox of the US foreign policy’, January 2003 2 Joseph Stiglitz, Globalisation and its discontents, Penguin books, 2002, p.9


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ii. The notion of financial globalisation Financial globalisation is the elimination of rules and regulations that are designed to stabilise the flows of volatile money into and out of a country3. It basically refers to the global interests across national borders and the global solutions which diminish national interests for the common welfare4. It has as a result to ‘increase the incentives for governments to pursue national macroeconomic strategies which seek low and stable rates of inflation, through fiscal discipline and a tight monetary policy, since these appeal to global financial markets’5. The basic characteristics of the global markets are the liberalisation of capital movements, the free movement of goods, financial services and payments and the free transferability of currency. Regarding to the elements which have contributed to the financial globalisation, they could be summarised in the reduction of government regulations, the privatization of national industries, the elimination of capital controls and the encouragement of foreign investment 6. A good example of such elements is the ‘Big Bang’ in 1986, when the system of a minimum stockbroking commissions in the UK was abolished, as was the distinction between jobbing and stockbroking firms7. iii. Special aspects of financial globalisation Additionally, some special aspects of financial globalisation are the globalisation of banking and securities markets. The elements of this phenomenon are three: the cross border delivery of financial services to foreign residents, the penetration of foreign financial markets by branches and subsidiaries of multi-national institutions and transactions between banks and investment firms from different firms that give rise to inter-jurisdictional counterparty risk.8 From the European point of view, globalisation is a relatively new financial market trend among other trends such as securitisation and risk management. It refers to the expansion of the Euromarkets on an international scale and integration of the world’s financial markets into a single homogeneous unit.9 Finally, the interdependence of goods, capital, labour and services needs international coordination. For this purpose there are a number of international organisations which operate on a regional field such as the EU and NAFTA, or in an international level such as the OECD, the IMF, the World Bank and the World Trade Organisation.

3 Ibid,p.10 4 T.C.Fisher, The United States, the European Union and the ‘globalisation ‘of world trade, Quorum books, 2000,p.4 5 M. Rupert, Ideologies of globalisation, Routledge, 2000, p. 46 extract from:Held, Global Transformations, Polity, 1999 6 M.Bordo, B.Eichengreen and J.Kim, ‘Was there really an earlier period of international financial intergration comparable to today?’ Conference proceedings, The implications of globalisation of World International Markets, The Bank of Korea, 1998, p.59.60 7 The Palgrave Dictionary of Money and Finance, p.303 8 Dale, The Regulation of Investment Firms in the European Union,1994,9, Journal of International Banking Law p.396 9J.J.Norton,,Bank regulation and Supervision in 1990's, Lloyd's of London Press jointly with the Centre for Commercial Law Studies and the Chartered Institute of Bankers , 1991,p.102


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iv. Historical background and evolution The beginning of the financial globalisation can be put in the post-World War II period. The Bretton Woods agreement and the GATT encouraged the reductions of tariffs and the internationalisation of trade. Of course, the markets were not completely open since there were still capital controls, but the development of technology and communications made it difficult to exclude national markets from international transactions.10 Without a doubt, every new telecommunication development influenced the integration of financial markets from the beginning of the 19th century. Firstly, the creation of the telegraph joined markets across countries. At the second half of that century, telephone facilitated the transactions and by 1900 the radio linked the two continents, North America and Europe11. Nowadays, the volume of communication through the internet and telecommunications has helped the unification of markets worldwide. Furthermore, apart from the technology evolution whose role is auxiliary, perhaps the basic element of financial globalisation in our days is the trade of a wide range of financial claims. ‘Where international financial transactions were once determined by claims on governments, railroads, and mining companies, entities with tangible and therefore relatively transparent assets, international investors now transact freely in a much broader range of securities’12. Certainly, the mass production industry which emerged in the US and its large firms which entered in the foreign markets increased the competition worldwide. This rapid development is summarised in the following: ‘By the 1970’s a largely free trade order had been established among all the OECD countries and since the 1980’s this has been extended to developing countries and countries formerly closed to trade under communism, with the result that a global trading system now exists. Historically, protection levels are lower than in previous eras while trade liberalisation is likely to continue. Trade levels are higher, both absolutely and in relation to output, than ever before’13. v. Results of financial globalisation on international markets The financial globalisation boosted mostly the US and European economy which were able to penetrate in new open markets. It actually created the conditions for ‘free’ and ‘effective’ competition. ‘Such competition is seductive to the financial institutions performing most efficiently their essential factor of promoting savings and directing them to the most productive investments and thus accelerating economic growth’14. But should the liberalised markets where exists ‘free’ and ‘effective’ competition be regulated or supervised so as not to be oligopolistic? The regulation or supervision in the liberalised economy is one more issue related to the financial liberalisation. However, the financial globalisation had also many serious disadvantages to the western world. The International Labour Organisation estimates that there is a higher proportion of

10 M.Bordo, B.Eichengreen and J.Kim, ‘Was there really an earlier period of international financial intergration comparable to today?’ Conference proceedings, The implications of globalisation of World International Markets, The Bank of Korea, 1998, p.28 11 Ibid, p.56-7 12 Ibid, p.27 13 M. Rupert, Ideologies of globalisation, Routledge, 2000, p. 45extract from:Held, Global Transformations, Polity, 1999 14 I.G.Paterl, Some reflections on Financial Liberalisation, International Journal of Development Banking, Vol.12 No 1, January 1994, p.40


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people unemployed today than in any other time since the 1930’s. There is also a widening global divide between the rich and poor within the same countries15. As regards the developing countries, the liberalisation of capital movements was effective for their macroeconomic performance. The IMF reports credit that the opening of new capital markets has a positive impact on the developing countries’ economies. Hence, in this paper we shall focus more on the motives for the opening of new markets. In fact, the opening brings ‘a strong growth in domestic markets, improves communication technologies, greater privatisation of infrastructure… and helps to free up public resources for greater investment in meeting social needs’16. Indeed, the developing countries can borrow easier from the western world and invite foreign investors. Undoutfully, the interest rate gap between an emerging and an advanced country is a good motive for foreign direct investment. However, ‘under the globalised financial market, small emerging countries are very vulnerable to changes in the international capital market. Even small movements of international capital can generate large boom-bust circles in emerging countries, sometimes leading to a crisis when accidental shocks trigger a panic. Poor economic management will aggravate the adversity of the circles and increase the possibility of a crisis’17. A very good example of this kind of crisis is that of Korea which made people realise the vulnerability of big emerging markets to the international capital movements. In brief, ‘the foreign debt structure of Korea became very fragile due to competitive investment and lending binge by international capital to expand their business scope in Asia and the moral hazard problem caused by the governments misguided policies. […]When […] South East Asian crisis came and Japanese and other banks refused to roll-over short term debts Korea could not avoid the crisis’18. Finally, the negative effects of financial globalisation and the opening of new markets raise crucial problems such as the equitable distribution of the benefits of globalisation and the elimination of poverty. In this point it is worth mentioning the observations of Lionel Jospin, ex-prime minister of France on the effects of financial globalisation: ‘My country is fully integrated in the globalisation process, in this dynamic created by the opening of markets, the movement of capital, rapid spread of technological innovations and even-faster communications… It promotes global growth, yet brings growing inequality. It encourages the exploitation of human diversity, yet carries within it the risk of uniformity… We must bring it under control if we are to enjoy its benefits and prevent its negative aspects. Globalisation therefore is a political issue that calls for political response-by our governments’19. Since globalisation is a political issue, in this essay the motives behind the globalisation of financial markets and the opening of new capital markets in particular, will be explored from a political as well as an economical point of view based in the legal framework of the relevant institutions. Then the ways of opening of new capital markets -as an aspect of liberalisation of capital movements- and the different roles played by the international

15 C.J.Gentle, After Liberalisation, Mcmillan Press, 1996, p.42 16 World Bank Study Projects Near-Term Drop in Private Financial Flows to Developping Countries, IMF survey Vol.27 N.7 April 6, 1998, p.7 17 J.Kim, Y.Rhee, Currency crisies of the Asian Countries in a globalises Financial Market’,Conferrence proceedings, The implications of globalisation of World International Markets, The Bank of Korea, 1998,P.183 18 J.Kim, Y.Rhee, Currency crisies of the Asian Countries in a globalises Financial Market’,Conferrence proceedings, The implications of globalisation of World International Markets, The Bank of Korea, 1998,P.183 19 L.Jospin, My vision of Europe and Globalisation, Polity, 2002, p.1


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organisations in this process will be examined. Afterwards, the motives for the opening of new markets and the legal ways which were put into force for this purpose will be assessed. Furthermore, a separate section that refers to the role of the US will be added, since it is the major promoter of the financial globalisation. Lastly, an analysis of the reasons of the success of the coalition which supported the liberalisation of capital movements worldwide will be presented. B. The main components of financial globalisation After having examined the notion of financial globalisation and its general background in the introduction, we shall focus on three specialised areas. Firstly, we shall present the difference between capital movements for investments and payments for goods and services. Then, we shall examine the phenomenon of liberalisation of capital movements. Lastly the procedure of the opening up of emerging capital markets will be assessed. i. The distinction between capital movements for investments and payments of goods and services. Perhaps, the clearest distinction between capital movements and current payments was made by the European Court of Justice in the case of Luisi and Carbone in 1984. It held that current payments were transfers of foreign exchange which constitute a consideration within the context of an underlying transaction, while movements of capital were financial operations essentially concerned with the investment of the funds in question rather than remuneration for a service20. Furthermore as the Court put it: The freedom to provide services includes the freedom for the recipients of the services to go to another member state in order to receive a service there without being obstructed by restrictions even in relation to payments. Member states retain the power to verify that transfers of foreign currency purportedly intended for liberalised payments are not in reality used for unauthorised movements of capital.21 In order to appreciate better the use of capital movements a good understanding of investments and financial assets is needed. In particular, investment is the acquisition or creation of resources to be used mostly in production. According to the explanatory notes appearing at the end of Annex I to EC Directive 88/361, 'direct investments' means: 'Investments of all kinds by natural persons or commercial, industrial or financial undertakings, and which serve to establish or to maintain lasting and direct links between the person providing the capital and the entrepreneur to whom or the undertaking to which the capital is made available in order to carry on an economic activity’. In this point we preferred to give this technical definition of direct investment rather than an academic one since it helps to understand better the practical issues of the matter. Besides, financial assets are the financial instruments or securities representing intangible assets. The future benefit associated with financial assets is mainly a claim to future cash. The entity that has agreed to make future cash payments is the issuer of the financial asset, the owner of the financial asset is the investor. The economic functions of a financial asset are 20 Vigneron, New EC directive concerning liberalization of capital movements, 1989,3 JIBL, p.125 21 Judgment of the Court of 31 January 1984. Graziana Luisi and Giuseppe Carbone v Ministero del Tesoro. {1984] ECR 377.


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relevant to transferring funds so as to control risk22. Free capital mobility means that residents have access to international financial markets and non residents may access domestic financial markets23 On the other hand, trade movements include payments of services and goods. More specifically, trade in financial services such as insurance, banking, securities trading and portfolio management services takes place when services are provided in exchange for payment of fees, commissions and other charges. Free trade in financial services means that domestic consumers may use services of foreign institutions, and domestic financial institutions may provide services to foreigners.24 Finally, it is important to mention the difference between the account balance and the balance of payments, balance of trade. Balance is the sum necessary to equalise the debit and credit totals of an account while, balance of payments is a record of all of a country’s international transactions for goods and services, financial assets and investments. The balance of payments takes into consideration the spending of money abroad and foreign spending in the domestic nation25. ii. The Liberalisation of Capital Movements The engine of financial globalisation operates through the increased, uncontrolled capital mobility. Liberalisation of capital movements is the result of freeing economic exchange from regulatory restraints. It is the elimination of the rules and regulations that are designed to stabilise the flows of volatile money into and out of a country26 and is associated with the ‘cutting of red tape and bureaucracy’27. Markets are freed and competition is much higher. Mergers and acquisitions among corporations reshape the global economy. Furthermore, liberalisation of capital movements allows massive amounts to be shifted from one currency to another without state intervention. ‘Computer modems and fiber optic cables link together the world’s financial markets and enable round-the-clock trading’28. As a result of this progress a business in a far away continent can be managed from Switzerland on a minute-by-minute basis. Nevertheless, deregulation of financial markets was a very important factor which contributed to the liberalisation of capital movements since the regulation framework posed large barriers in capital flows. For example the deregulation of the world’s securities markets which began in the US during the 1970’s, spread to all financial centres worldwide and encouraged the growth of highly capitalised financial conglomerates with worldwide operations29. Capital movements increased substantially in the 1980’s. By the elimination of capital controls and the mutual current-account balances increased. As it had been said ‘The world monetary system underwent three revolutions all at once-deregulation, internationalisation and innovation’30. 22 The Fitzroy Dearborn Encyclopedia of Money and Finance, C.J.Woelfel,1993,p.444 23 IMF Working Paper, Tamirisa, Trade in Financial Services and Capital movements, p.4 24 Ibid, p.4 25 The Fitzroy Dearborn Encyclopedia of Banking and Finance, C.J.Woelfel, 1993, p.67-8 26 Joseph Stiglitz, Globalisation and its discontents, Penguin books, 2002,p.10 27 C.Gentle, After Liberalisation, St.Martin’s press, 1996,p.4 28 M.Rupert, Ideologies of globalisation, Routledge, p.46 29 N.Poser, Chinese Wall or Emperor’s New Clothers?, The Company LawyerVol9 no 6,p.119 30 R.Solomon, Money on the Move, Princeton university press,1999,p.109


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Moreover, liberalisation was pursued by the changes negotiated through the General Agreement on Tariff and Trade framework. These agreements actually reduced the barriers to trade between countries. The freeing of global markets led to the establishment of a new institution which means to play a major role in global liberalisation, the World Trade Organisation. The functions of this organisation are basically influenced by the neo-liberal ideology which favours the liberalisation of capital movements. In fact, many political economists argue that neo-liberal free goals should be protected by private international ‘trading rights’ recognised before international and domestic courts. There was also a call for recognition of ‘freedom of trade as basic individual right’31. In concluding, liberalisation of capital movements resulted to the change of financial organisation worldwide, of the structure of banks and financial institutions and the manner in which money flows around the globe. iii. The notion of capital markets and the opening of new capital markets The opening of new capital markets is an aspect of the liberalisation of capital movements32. In this section we shall examine the notion of capital markets and the steps taken for the opening of new capital markets in developing counties. In particular, capital markets are markets buying in securities. Securities33 may be broadly divided into two categories: stock or shares and bonds or other debt instruments. An equity or an ordinary stock or share represents a share in the ownership of a company. Bonds are fixed interest securities, which entitle the owner to regular payments of interest to the eventual payment of the initial sum lent. They are issued by commercial undertakings and by governments, municipalities and other public bodies, including international organisations, whereas shares may only be issued by commercial undertakings. Capital markets provide an alternative and cheaper way of raising funds to the banking system. They tend to be more effective than banking because borrowers and lenders are able to meet directly, avoiding the cost of banks’ intermediation. The deepest capital markets are located in the United States, on Wall Street. In order to open up a market many steps should be taken both by the governments and the international institutions. Usually, banking sectors of developing countries were entirely

31R. Hudec, The Political Economy of International Trade Law, Cambridge University Press, 2002, p.354, footnote by Ernst Ulrich Petersmann, Constitutional functions and constitutional problems of international economic law,1991 32 The source of the information on the definition of capital markets is the Routledge Encyclopedia of International Political Economy edited by R.J.Barry Jones, 2001, p. 125 33 The official definition of equity securities from the Securities Exchange Act of 1934, is: "Any note, stock, treasury stock, bond, debenture, certificate of interest or participation in any profit-sharing agreement or in any oil, gas, or other mineral royalty or lease, any collateral trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit, for a security, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or in general, any instrument commonly known as a 'security'; or any certificate of interest or participation in, temporary or interim certificate for, receipt for, or warrant or right to subscribe to or purchase, any of the foregoing; but shall not include currency or any note, draft, bill of exchange, or banker's acceptance which has a maturity at the time of issuance of not exceeding nine months, exclusive of days of grace, or any renewal thereof the maturity of which is likewise limited." www. investorwords.com


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nationalised. Developing and particularly ex-communist countries adopted a policy of seeking to protect their domestic industries by tariff barriers and import restrictions. The liberalist schemes of the governments included among others elimination of protectionist measures, rationalisation of the income tax structure and abolition of wealth tax on financial assets.34 After the opening of the market it is possible for foreign institutional investors- such as pension funds, mutual funds, asset-management companies- to invest in its securities market. It is also possible for industrial and trading companies to make direct investments in domestic companies and foreign securities houses can operate in these markets. There are a great number of surveys of the IMF concerning the large amounts of the investment flows to Asian and Latin American countries. During the 90’s developing countries have experienced a surge in foreign direct investment. According to an IMF article ‘their sharp rise is in part explained by factors that are likely to exert an influence over a limited period of time, such as the privatisation of government assets or the rebalancing of asset holdings in response to economic reforms in developing countries’35. Moreover, domestic banks receive loans from international organisations in order to support modernisation including computerization, staff training, and improvement of management systems. For example, six banks of India received US $150 million on to the World Bank package for this purpose in late 90’s36. Finally, one of the most recent examples of the opening up of a capital market is that of China. ‘Under the Qualified Foreign Institutional Investors (QFII) scheme - which became effective on December 1 2002- qualified fund managers, insurance companies, commercial banks and securities companies can access the renminbi 'A' share and domestic Treasury bond market for the first time. Foreign investors had previously been blocked from access to China's capital markets’37. It is important to mention that the opening up of a market has both positive and negative effects for the state’s economy. As it is stated in an IMF article ‘the classic case in favour of open, or liberalised, capital markets includes the more efficient allocation of savings, increased possibilities for diversification of allocation risk, faster growth, and the dampening of business cycles. Critics of open capital markets, on the other hand point to the inefficiencies resulting from adverse selection, moral hazard, and herding behaviour, all of which are products of asymmetric information- a situation in which not all parties to a transaction have equal information. Government policies, however, can lessen or mitigate the potential damage from asymmetric information products’38. Nevertheless, about the objective of opening up new markets we shall briefly refer to a pointedly comment: ‘capital market liberalisation may not have contributed to global economic stability but did open up vast new markets for Wall Street’39. We shall try to examine this view in the following section. C. The motives for the liberalisation of capital movements

34 J.Russel, The emerging financial market in India, in Globalisation of capital markets , Kluwer, 1996,p.204 35 IMF, World Economic Financial Surveys, Private Market Financing for Developing Countries’, March 1995, p.35 36 J.Russel, The emerging financial market in India, in Globalisation of capital markets , Kluwer, 1996,p.204-215 37China Takes First Small Steps To Opening Up Capital Markets EuroWeek12/11/02 38 IMF, Liberalising capital movements, February 1999, p.13 39 Joseph Stiglitz, Globalisation and its discontents, Penguin books, 2002,p.207


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I. The organisations which put pressure for the realisation of freedom of capital: IMF, World Bank, OECD, EU There are a number of intergovernmental organisations which had the first role in the liberalisation of capital movements and direct investment flows in particular. The most important among them are the International Monetary Fund, the World Bank, the Organisation for Economic Cooperation and Development and the European Union. Therefore, before studying the motives for the liberalisation of capital movements and the legal ways which were put into force for the realisation of this purpose, it is important to examine the structure and objectives of each one of these organisations separately. We shall focus more on the policies of these organisations which relate directly to the opening of new markets. i. The International Monetary Fund It is stated in the IMF’s official website that: ‘The IMF is an international organization of 184 member countries. It was established to promote international monetary cooperation, exchange stability, and orderly exchange arrangements; to foster economic growth and high levels of employment; and to provide temporary financial assistance to countries to help ease balance of payments. Since the IMF was established its purposes have remained unchanged but its operations — which involve surveillance, financial assistance, and technical assistance adjustment — have developed to meet the changing needs of its member countries in an evolving world economy’.40. Each member state of the IMF has a quota based, to some extent, on the size of its trade. The US quota is about 20 per cent of the total originally and the UK had the second largest quota. In 1991 new quotas were established with Japan and Germany having 6 per cent and the United Kingdom and France only 5.5 per cent. These quotas reflect the amount of influence that each state poses to the IMF. As it is stated in its reports, the IMF is a monetary rather than a development institution41. However, it has issued a number of large loans to developing countries such as Russia, Zambia and Argentina in 1995, Mexico in 1994 and Brazil in 1999. Thus, the IMF has been often characterised as ‘Bank of the last resort’ to developing countries. In practice, it aims at the free convertibility of the currency and the freeing of capital flows and financial services to keep access to foreign investors42. ii. The World Bank

The IMF and the World Bank together have become very influential in affecting the economic policies of many developing countries. This influence derives mainly from the general advice both provide on broad economic policies and technical matters. The World Bank group was founded right after the end of the Second World War in 1944. It is working in more than 100 developing economies and provided US$19.5 billion in loans to its client countries in the fiscal year 2002. For each of its clients, the Bank works with government agencies, non-governmental organizations, and the private sector to formulate assistance strategies. 40 http://www.imf.org/external/about.htm 41 IMF, World Economic Financial Surveys, Official Financing for Developing Countries’, February 1998, p.19 42 J.Dalhuisen, International Commercial Financial and Trade Law, Hart Publishing 2000, p.780


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The World Bank is owned by more than 184 member countries whose views and interests are represented by a Board of Governors and a Washington-based Board of Directors. Member countries are shareholders who carry ultimate decision-making power in the World Bank.43

The Fundamental mission of the World Bank is to promote economic growth with a view to reducing poverty and raising the living standards all around the world. The broad strategic objectives were summarised in a Bank staff report prepared in 1989 in terms of five inter-related elements: ‘a. To mobilize adequate external resources to meet the investment needs of developing countries, b. to devise cost effective and environmentally sustainable means of reducing poverty and bringing poor people into the mainstream of economic growth, c. to sustain and extend policy reforms which enhance equitable and efficient growth, d. to develop human resources and institutional capacity in member countries and e. to strengthen developing countries’ creditworthiness and access to global financial markets and to range of efficient financial services’44.

As concerns the World Bank and the IMF, the two institutions are moving to each other’s directions. At the beginning the Fund was giving short term balance of payments support while the World Bank was engaged in long term projects. Today, the Fund has lengthened its repayment requirements, while the World Bank has structured its lending in a way so as to be regarded as conditional balance of payments support when it is not being tied to specific projects.

iii. Organisation for Economic Cooperation and Development45

As the website of the OECD refers to its activities: ‘The OECD groups 30 member countries sharing a commitment to democratic government and the market economy. With active relationships with some 70 other countries, NGOs and civil society, it has a global reach. Best known for its publications and its statistics, its work covers economic and social issues from macroeconomics, to trade, education, development and science and innovation’. Furthermore, the major areas where the OECD is involved are industry, agriculture, science, technology, development cooperation, environment and education. It also carries out annual surveys of the economies of its 30 member states and publishes the sixth monthly Economic Outlook.

Unlike the IMF, the OECD does not refer directly to money and finance but it only comes to this in its codes on the Liberalisation of Invisible Transactions and Capital Movements. Through these codes the member states accept legally binding obligations. The codes are regularly updated by decisions of the OECD council and it allows a comparison of the degree of liberalisation achieved by each member country in regard to capital movements covered by the codes.

iv. The European Union The EU is the result of a process of economic and political integration between the nation states of western Europe. It began as a coal and steel community and has evolved into an economic, social and political union46. It now consists of fifteen member states, which will be

43 http//www.worldbank.org 44 I. Shihata, The World Bank in a changing world, Martinus Nijhoff Publishers, 1991,p. 38 45 The information source for this chapter is the extract of the New Palgrave Dictionary of money and finance, Newman Peter, 1928 p.97-99 on Organisation for Economic Cooperation and Development written by Francis Cassavetti 46 The Political System of the European Union, Simon Hix, Palgrave editions, 1999, p.1


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twenty seven soon. Unlike the IMF and the World Bank, the policy of the EU is defined by the dynamics of its member states and not by the influence of those members who hold the largest percentage of its quota. The legal equity of the European Union resembles that of the federation and there are many debates on the legal entity of the EU. It is neither a new State replacing existing ones nor is it comparable to other international organisations. Its Member States send their delegations to the common institutions within the European Union, the Parliament, the Commission and the European Courts. All these institutions represent the interests of the Union as a whole on questions of joint interest. All decisions and procedures are clearly stated in the basic treaties ratified by the Member States. The Economic and Monetary Union is a new institution established within the European Union and was launched between 11 EU member states on the first of January 1999. The governments actually decided to replace their national currencies with a single European currency, the euro. The main economic benefits from this single currency are the lower transaction costs since firms involved in trade between states do not have to pay exchange rate commissions or insure themselves against currency fluctuations. Also, the market becomes more efficient since a common currency reduces the possibility for price discrimination and there is greater economic certainty, the exchange rate stability increases certainty of prices and revenues. Furthermore, the interest rates are lower because the new economy is less exposed to trade in foreign currency. All the above factors try to lead to higher economic growth, there is more capital accumulation and the economy is larger, more integrated with better productivity.47 Inevitably, the euro may rival the US dollar as the dominant global currency. It is also said that through the Economic and Monetary Union, Europe has a single voice in the global economy48. The European Investment Bank is another institution of the European Union which relates to the opening of new capital markets. The European Investment Bank provides long term finance for capital projects both inside and outside the EU. Its financing operations include countries with which the EU has completed operation agreements, while lending operations of the EU or member states’ budgetary resources are more of bilateral nature49. Another institution of the EU which relates to this topic is the European Bank for Reconstruction and Development (EBRD). Its goal is to assist the countries of Central and Eastern Europe, the Baltic countries, Russia and countries of the former Soviet Union to develop into market-oriented economies. For this purpose it finances private companies or state-owned enterprises undergoing privatisation and newly created companies.50 Moreover, there are a number of institutions which relate to the functioning and growth of the European capital markets and to the development of cross-border trading and investment. Such institutions are the European Capital Markets Institute (ECMI)51 and the Federation of European Securities Exchanges (FESE)52 of the European economic area and Switzerland.

47 Simon Hix, The Political System of the European Union, Palgrave editions, 1999, p.279,280 48 Ibid, p.279,281 49 IMF, World Economic Financial Surveys, Official Financing for Developing Countries’, February 1998,p.19 50 IMF, World Economic Financial Surveys, Official Financing for Developing Countries’, February 1998,p.21-22 51 http://www.ecmi.es 52 http//:fese.be


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II. The legal ways put into force: a. The European Union

i. The motives of the European Union for the opening of the member-states’ markets: The creation of a European market One of the main objectives of the European Union is the creation of a common market. In fact, the common market was defined in the article 8a of the EC Treaty as ‘an area without internal frontiers in which free movement of goods, persons, services and capital is ensured’. This objective was accompanied by a very clear caution regarding the liberalization of capital movements which takes place according to article 67 of the EC Treaty ‘to the extent necessary to ensure the proper functioning of the common market’53. The political and economic rationales for a large, single market have prompted ongoing financial liberalisation, while the political imperative of stable exchange rates has pushed toward a single currency, the euro54. The internal market programme was completed in 1993. While Europe was not involved in the economic global evolution in the 60’s, it was surprising how its position changed in the late 80’s. The German Presidency of the first half of the 1988 reached many agreements on difficult economic issues which had remained blocked for many years. The decision to proceed with the liberalisation of capital movements after no progress in this area for twenty five years was a political decision. This political decision was influenced by the ideology of neo-liberalism which was promoted by the centre-right, conservative governments of the member states at the 80’s. Neo-liberalism refers to a model of societal relations where the government regulation of trade is restricted so that private enterprises are able to pursue profit maximization55. The first example was the USA under the ‘two Reagan administrations’ and then in Europe, Britain under the ‘three Thacher governments’56. Even socialist European governments such as the government of Mitterrand in France were persuaded about the effectiveness of this new economic model. ‘Centre-right, conservative governments can be expected to embrace free trade and market oriented policies, whereas left governments can be expected to value distributional objectives and the protection of workers higher than pure allocational gains from trade. Centre-right and centre left governments, however, may well be dependent on the support of an outward-oriented business community as well as of organised labour’57. Besides the political motives, the economical motives that put the European governments into action were focussed on the need to compete in the arena of global economy against NAFTA and ASEAN trade blocs or the US and Japan. Indeed, the EU wanted ‘to boost the credibility of the internal market programme and to show to the international markets that European governments actually meant business’. Certainly, this message was clear through the long boom that Western Europe experienced during the second half of the 80’s. In the last two years of

53 Loukas Tsoukalis, The new European Economy Revised, Oxford University Press 1997,p.14 54 IMF Working paper 8847, M.Obstfeld, A.M.Taylor, Globalisation and capital markets, p.56 55 R. Hudec, The Political Economy of International Trade Law, Cambridge University Press, 2002, p.351 56 C.Jentle, After Liberalisation, Macmillan Press, 1996,p.3 57 K.G.Deutsch, The Politics of Freer Trade in Europe, St. Martin’s Press, New York, 1999, p.75


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the decade, the average rate of growth of the EC economies approached 4 per cent, while most of the weaker economies grew faster by investment led growth58. Another economic motive for the liberalisation of capital movements in Europe was to assist the consolidation and merger activities of European firms. Indeed, strict capital controls in many industrialised European countries, such as France and Italy, had prevented mergers of national and foreign firms and loans to foreigners by national institutions, while the nationals could not hold foreign bank accounts. But, ‘with capital mobility interest rates converge {…} and national welfare increases’59 and so, this kind of economic activities were made possible. Indeed, many firms increased cross borders mergers and acquisitions, while linkages between EU members were extending outside the region ‘especially in Atlantic patterns of cross investment and trade’60. Without doubt, the liberalisation of capital movements helped the European firms to get involved in the largest cross-border mergers. ‘British, German, French, Dutch and Spanish firms each carried out total cross border takeovers of at least $25 billion during 1999’61. A research by KPMG in 2000 showed that three-quarters of the firms involved in the world’s largest mergers, such as Vodafone group, Deutsche Telecom and ScottishPower plc, were European62. ii. Legal ways put into force for the liberalisation of capital movements The creation of the Economic Monetary Union was first connected to capital liberalisation agreed upon in June 1988. During the Hanover summit the same month a new report was created for the establishment of The Economic Monetary Union63. The EU legislation concerning the liberalisation of capital movements starts from directives for partial liberalisation in 1960 and 1962. Before these directives, the Treaty of Rome did not impose any formal requirement regarding the freedom of capital in the article 67. The Commission imparted major force towards the creation of a European financial area in May 1986: its "Programme for the liberalisation of capital movements in the Community" [COM(86) 292 final of 23 May 1986] describes in detail all the conditions to be met and the measures to be taken. The fist step towards the liberalisation was actually taken by the Directive 86/566/EEC which was adopted on 17 November 198664. The aim of this directive was to interconnect national financial markets and for this purpose required full liberalisation of capital transactions. The decisive step towards this direction was taken on 24 of June 1988 with the Single European Act. Free movement of capital was placed in the same basis as freedom of goods and services. The directive 88/361/EEC was designed to give to the single European market 58 Loukas Tsoukalis, The new European Economy Revised, Oxford University Press 1997,p.48-9 59 L.Neal, D. Barbezat, The economics of the European Union and the Economies of Europe, Oxford University Press, 1998, p.80 60 T. Brewer,P.Brenton, G.Boyd, Globalising Europe, ‘TheEuropean Union in the global economy at the millenium’, P.Taylor, ed.Edward Elgar, 2002, p.2 61 Ibid, p.101 62 Ibid, p.112-3 63 Loukas Tsoukalis, The new European Economy Revised, Oxford University Press 1997,p.50 64 The Directive 86/566/EEC is not in force. Copy is included in the appendix


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its full financial dimension. It decided the elimination of all capital controls in eight countries by July 1990. This directive actually established the basic principle of free movement of capital as Community law65. Transitional arrangements were put into force for the four remaining countries, Greece, Spain, Portugal and Ireland which were allowed to maintain the restrictions until the end of 1992. The first two articles of the directive could give us a general idea about its content66: Article1 1. Without prejudice to the following provisions, Member States shall abolish restrictions on movements of capital taking place between persons resident in Member States. To facilitate application of this Directive, capital movements shall be classified in accordance with the Nomenclature in Annex I. 2. Transfers in respect of capital movements shall be made on the same exchange rate conditions as those governing payments relating to current transactions. Article2 Member States shall notify the Committee of Governors of the Central Banks, the Monetary Committee and the Commission, by the date of their entry into force at the latest, of measures to regulate bank liquidity which have a specific impact on capital transactions carried out by credit institutions with non-residents. Such measures shall be confined to what is necessary for the purposes of domestic monetary regulation. The Monetary Committee and the Committee of Governors of the Central Banks shall provide the Commission with opinions on this subject. With the entry into force of the Treaty on European Union (1 November 1993), the principle of full freedom of capital movements was incorporated into the Treaty. With regard to transitional arrangements, article 68(1) required from member states to be ‘as liberal as possible’ in granting all the needed exchange authorisations in order to put the EC Treaty into force67. There is a list of articles included in the EC Treaty which refer directly or indirectly to the liberalisation of capital movements (73a -73g)68. However, in order to make liberalisation of capital movements possible it was needed to break the national monopolies, cartels and restrictive practices. So, it was necessary for Europe to run privatisation and liberalisation at the same time. European governments were forced to privatise public services such as airlines and telecommunications following the Thatcher government which privatised large parts of state industry. However, there is also the opinion that privatisation is in fact policy preference and is not actually imposed by the EU to its member states. The World Bank estimates that around 15000 firms had been privatised since 199069. By this way, the European countries had actually succeeded to create a big European market which could compete with the other liberalised international markets and particularly the US market. The European Court of Justice followed the Commission’s steps for the liberalisation of capital movements and the privatisation. In fact, there is a number of cases where the Court of Justice condemns member states for not allowing the privatisation of state undertakings. 65 Usher, The law of money and Financial Services in the European Community, Clarendon Press, Oxford, 1994, p.18 66 Copy of the Directive 88/361/EEC is included in the appendix 67 Usher, The law of money and Financial Services in the European Community, Clarendon Press, Oxford, 1994, p.14 68 The list of the EU Treaty articles is included in the Appendix 69 C.Jentle, After Liberalisation, Macmillan Press, 1996,p.38-9


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As an example we could refer to the case C-367/98 Commission v. Portugal. As the Court put it: ‘First, the prohibition precluding investors from another Member State from acquiring more than a given number of shares in certain Portuguese undertakings, pursuant to Decree-Law No 65/94 in conjunction with Law No 11/90, gives rise to discrimination between Portuguese entities and those of other Member States which is incompatible with Articles 52 and 73b of the Treaty. Such discriminatory restrictions can be accepted only if they are justified on grounds of public policy, public security or public health, which is not the position in the present case […]. In the light of those considerations, it is necessary to consider whether the legislation in issue, which (a) prohibits the acquisition by investors from other Member States of more than a given number of shares in certain Portuguese undertakings and (b) requires the grant by the Portuguese Republic of prior authorisation for the acquisition of a holding in certain Portuguese undertakings in excess of a specified level, constitute a restriction on the movement of capital between Member States’70. What is mostly interesting in this case is that the Court instead of characterising it as ‘corporate case’ since it has to do with article 295 EC Treaty which refers to property ownership and has the objective to protect nationalised enterprises, it characterises it as ‘capital movement case’. iii. The motives for the opening of capital markets in Central, Eastern Europe and former Soviet Union countries

One of the most important points of the new directive 88/361/EEC was that the liberalisation was erga omnes, it was referring to capital movements between member states and third countries. From this starting point, the European Investment Bank and the European Bank for Reconstruction and Development focused on supporting private sector development and privatisation in third- Eastern, Central and former Soviet Union- countries, recognising the private sector as the main engine of growth71. Indeed, the European Union had a very important role in the opening up of the markets of Central and Eastern Europe. With respect to the US, the EU is the number one investor in forty two states and number two investor in eight states72. It is worth mentioning that the new directive was not only targeting towards the markets of the Eastern and Central Europe but also to the US. Thus, the numbers of US treasury bonds bough by European investors increased rapidly. On the other hand, the EU opened up and its own market to foreign investment mostly coming from the US. Most of the Central European countries adopt the EU directives concerning public finance. There is a number of regulations after the collapse of the Soviet Union which aim to prepare these countries to ‘stick to the rules of the stability and growth pact which commits them to submit an annual convergence programme to the EU Council…Currently all the CEE countries are able to meet the public debt criterion of the Maastricht Treaty’73. In addition, an economic motive for the opening up of the central and eastern European markets is to help Russia to reform its economic structures. These new markets could serve as an example for Russia in order to establish its credibility which was badly heart by the

70 Copy of the case C-367/98 is included in the Appendix 71 IMF, World Economic Financial Surveys, Official Financing for Developing Countries’, February 1998,p.21 72 T. Fischer, The United States, the European Union and the ‘G lobalisation’ of world trade, Qorum Books, 2000, p39 73 ECMI, The new capital markets in Central and Eastern Europe, Springel,2001, p.XIV


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crisis in 1998. Then, ‘European countries should open their markets for Russia, particularly for finished products. A customs union with the EU could stimulate trade and a better business climate, promote integration of Russia into Western markets and boost reforms’74. Furthermore, a major economic motive for the opening up of these markets is that they constitute an important economic alternative to the EU. They provide to the western European industry a huge market for its goods: ‘German capital goods, British pharmaceuticals, Italian luxury goods’75. The markets of the developing countries are now widely open and willing to accept the new industrial goods and foreign investment which will mobilize them. As it has been pointedly said ‘the EU wants them to revive as export markets and security buffers’76. Nevertheless, the EU has increased its imports from developing countries. Through the opening of new markets the European countries are able to import in lower prices or to import goods that they do not produce. This kind of economic activities can be presented as ‘promotion of developing countries exports’ and ‘a key contribution to the poorest countries’. In particular, as Jean-Claude Trichet, governor of the Fund for France put it at the joint annual discussion of the IMF and the World Bank: ‘The European Union has made considerable efforts to promote developing countries’ exports. More than 40% of the EU’s imports now come from developing countries and it buys two thirds of Africa’s exports. It’s generalised system of preferences is one of the most generous in the world and it’s ‘everything but arms’ initiative adopted last year is a key contribution to the poorest countries were to adopt this initiative, it would create a powerful leverage effect for poor countries exports’77. Also, in this speech, he indicates a political motive which is the ‘everything but arms’ approach. Furthermore, the European Union by promoting the opening of the new markets opened a new field for the European industries. Through foreign direct investment the new markets are ‘a low cost accessible location in which to manufacture’78. Regarding to deregulation of capital markets, the European Commission supported the removal of obstacles to foreign direct investment and started to work towards this direction with the World Trade Organisation and the OECD. In March of 1995, it adopted a communication on a ‘level playing field for direct investment worldwide’79. The European Union favours the opening up of these markets for the benefit its own industry. In fact, the differentials between the wages in the EU countries and central and eastern European countries have been exploited by the EU industries. For example factory wages in Germany in 1993 ranged around 25$ per hour. While, in Poland factory wages ranged from 2$. Indeed, many labour activities of western European industries are relocated in low wage economies. Thus, western companies have the advantage to undertake the design, management and marketing of a product in a developed country and manufacture the product in a developing one80. Thus, it is obvious that they are saving large amounts of production costs and this is a fine motive for investing abroad.

74 ECMI, The new capital markets in Central and Eastern Europe, Springel,2001, p.XV 75 C.Gentle, After globalisation, St. Martin’s press, 1006, p.132 76 T. Fischer, The United States, the European Union and the ‘Globalisation’ of world trade, Qorum Books, 2000, p.141-Claude Trichet, alternative 77 IMF, World Bank Group, Statement of Jean governor of the Fund for France at the joint annual discussion, Press Release no.53, Septeber 29, 2002, p.4 78 C.Jentle, After Liberalisation, Macmillan Press, 1996, p.129 79 L.Neal, D. Barbezat, The economics of the European Union and the Economies of Europe, Oxford University Press, 1998, p.84 80 C.Jentle, After Liberalisation, Macmillan Press, 1996, p.31,32


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b. The codes of the OECD The codes of the OECD for the liberalisation of capital movements constitute the main legal way put into force by this organisation for the opening up of new markets. Through these codes the member states accept legally binding obligations. In fact they also give the directions to emerging economies in order to relax or abolish their controls in international capital transactions. The OECD favours the opening of the emerging markets since there are a number of allocative benefits for the country. According to the OECD’s point of view, these countries allow assets and liabilities being diversified and thereby promote an optimal allocation of resources within the constraints set by the existence of externalities, regulatory distortions and transaction costs. While, allowing foreign companies to establish themselves in their territory it is expected to bring greater competition and increase the efficiency in domestic enterprises. A country may thus be compelled to open up its market so as not to be left out of the process of financial integration which is becoming increasingly globalised81. The OECD states that the major motive for the opening of the markets of developing countries is to help their economic growth. Without doubt, the liberalisation of capital can contribute to the reduction of poverty. Increased international trade and investment is a reason to improve the efficiency of public social protection systems. Moreover, there tends to be a positive association between sustained trade liberalisation and improvements in core labour standards. Finally, OECD supports the view that openness to foreign competition is more likely to increase the demand for improved, rather than lower, environmental standards82. However, ‘all the dramatic progress in the liberalisation of capital movements in recent years cannot be credited to the OECD codes. Major driving forces are undoubtedly to be found in market pressures and in adoption of enlightened policies by member countries…’83. Hence, we shall also try to examine the motives for the opening up of emerging markets from the behalf of the OECD in relation to its member-states’ interests. As it is stated in the Codes of OECD ‘the case for free capital movements rested on the desirability of facilitating international trade, allowing direct investment with its associated transfers of skills and technology as a stimulus to growth, and providing enterprises and individuals with greater financing and investment opportunities by giving them access to markets abroad’84. In order to give to its members ‘greater financing and investment opportunities’, the OECD supports the opening of emerging markets. In fact, these markets constitute new fields of action for the western industries and boost the economies of the state which opens its market and of the western markets which export and invest. Therefore, an economic motive for the OECD countries to open up new markets is the opportunity to invest in emerging nations. In fact, a multilateral agreement on Investment was negotiated in 1995 under the auspices of the OECD. ‘The OECD conducted the negotiations

81OECD, Liberalisation of Capital Movements and Financial Services in the OECD Area, 1990,p.31 82 OECD, Open Markets Matter, The benefits of Trade and Investment Liberalisation, 1998, p.12-15 83 OECD, Liberalisation of Capital Movements and Financial Services in the OECD Area, 1990,p.3 84 Ibid, 1990,p..9


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because many emerging nations were hesitant to liberalise their financial markets (…) and make them more transparent’85. In this new economic environment of open markets ‘the average individual saver is now in a position to reduce his holdings of cash and place his liquid assets in interest-bearing money market instruments, and institutional investors can more easily diversify their portfolios in terms of currencies, risks and maturities86’. While, there is a growing number of foreign bank branches and subsidiaries and securities companies can operate in a whole range of securities markets in the field of these new emerging economies. In fact, ‘several commercial bankers have confessed that their involvement in lending to Mexico and South Korea had been coloured by the fact that, as OECD members, loans to both sovereigns could be booked without the necessity of holding risk capital as a cushion against potential losses’87. Furthermore, by favouring the opening of new markets, the OECD helps the competition among foreign and domestic firms. It gives the opportunity to foreign participation in activities such as lead management of bond issues, membership in securities exchanges, participation in government debt issuing groups and pension fund management88. These are new areas in the merging markets whereas western economies can expand. Besides, there is a strong link among international organisations such as the OECD, the IMF and the World Bank, which deal with the opening of new markets. For example, Article 1 d. of the OECD code in 1997 states that ‘Members shall endeavour to extend the measures of liberalisation to all members of the International Monetary Fund’. A reason of this connection is the fact that they are consistent by the same member-states, mostly western capitalist countries. Their policies are of course influenced by the governmental policies and interests of their member states. This argument can be justified by the joint statement from the IMF, World Bank and World Trade Organisation on the Doha Development Agenda, submitted to the OECD Council Meeting at ministerial level on May 16, 200289. ‘…Any increase of protectionism by any country is damaging…How can leaders in developing countries or in any capital argue for more open economies if leadership in this area is not forthcoming from wealthy nations…South-south trade in the 1990’s grew faster than world trade and now accounts for more than a third of developing country export. Yet the barriers to this trade are higher still than to trade with industrial countries. Most of the benefits of liberalisation derive from action at home. Sound trade policies are rarely contingent on the policies of others…We must move beyond rhetoric, firmly resist protectionism, whatever its form or justification, and promote policies that foster economic growth and prosperity’. But, on the other hand does market openness affect national sovereignty? Are there also political reasons for the opening up of markets in order to control the local governments? There are concerns that increasing trade and investment flows may erode the capacity of governments to exercise national sovereignty. That is to decide appropriate policies for their country on issues such as safety, trade, investment matters or consumer protection90.

85 T. Fischer, The United States, the European Union and the ‘Globalisation’ of world trade, Quorum Books, 2000, p.134, From plan to market: World Development Report 1996, p.213 86 OECD, Liberalisation of Capital Movements and Financial Services in the OECD Area, 1990,p.50 87 Global Financing Reports, Thomson Financial, July –September 1999, issue 7, ‘Designing world’s financial architecture’ by A.Crossman, p.3 88 OECD, Liberalisation of Capital Movements and Financial Services in the OECD Area, 1990,p.51 89 Copy of the statement is included in the Appendix, http://www.oecd.org/pdf/M00029000/M00029686.pdf 90 OECD, Open Markets Matter, The benefits of Trade and Investment Liberalisation, 1998, p.16


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However, in the above question, the OECD answers that ‘ an agreement such as the WTO is essentially an exercise of the national sovereignty rather than a surrender of it…The rules do require the countries to prepare implement and administer national regulations that affect foreign goods, services and investment in a transparent, non-arbitrary and non-discriminatory way. But that is because governments have taken a sovereign decision to abide such rules91’. Certainly, through international liberalisation negotiations the democratic governments represent their citizens and accept or not to enter into this procedure. Nevertheless, we believe that this is only the one side of the coin, since the policy independence was the case in a handful of developed countries. ‘The innovation has always been for revolutionary Mexico or Peronist Argentina to restrict the free movement of capital’92. We shall try to present the other side in the following chapter and particularly in the chapter referring to the US’ role in the opening of new markets. c. IMF , World Bank’s Working Papers

i. Legal ways put into force for the liberalisation of capital markets Unlike the OECD, the IMF refers directly to money and finance. The IMF has been often characterised as ‘Bank of the last resort’ to developing countries. In practice it aims to the free convertibility of the currency and the freeing of capital flows and financial services to keep access to foreign investors93. Besides, the IMF and the World Bank together have become very influential in affecting the economic policies of many developing countries and support the opening up of the emerging markets. There is a number of legal ways put into force for this purpose by both organisations. According to the World Bank the reforms that should be made to the former communist countries under its supervision, include: strengthening legal institutions and the rule of law, improving the financial system, its security, openness and oversight, reform of the tax system, improving market access, better but smaller government, more privatisation, more investment in people (training) and plant (modernisation and innovation), and a true, sustained willingness to join the world economy94. Under these circumstances, the GATT members achieved non-discriminatory tariffs on manufacturing goods from the average of 40 per cent that prevailed in 1948 to the less than 4 per cent average that prevailed when most Uruguay Round commitments were implemented by 200095. ii. The member-states’ influence to the organisations’ policies

The legal ways put into force for the opening up of new markets deal also with the necessary infrastructure in the emerging world. In fact, the Asian crisis in 1998 threatened seriously the US and EU economies. That was the reason why Tony Blair asked for greater openness and accountability of international institutions and the IMF in particular. His statements were

91 OECD, Open Markets Matter, The benefits of Trade and Investment Liberalisation, 1998, p. 17 92 Wider Working Papers, United Nations’ University, R. Zevin, Are world financial markets more open? If so why and with what effects? ,October 1989, p.57 93 J.Dalhuisen, International Commercial Financial and Trade Law, Hart Publishing 2000, p.780 94 T. Fischer, The United States, the European Union and the ‘Globalisation’ of world trade, Quorum Books, 2000, p.134, From plan to market: World Development Report 1996, p.85-132 95 OECD, Open Markets Matter, The benefits of Trade and Investment Liberalisation, 1998, p.118


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also supported by President Clinton. By late October 1998, G-7 officials had reached an agreement to create a new $90 billion fund that the IMF could use ‘to ensure the stability of the international financial system’96. By these statements it is obvious how the governments of the member states influence the organisations’ policies. The governments of the most developed member states can strongly influence the IMF or World Bank’s decisions and take advantage of the opening up of new markets for their own benefit. However, IMF article states that ‘Although direct foreign direct investment sometimes raises concerns about foreign ownership and control, such investment can bring considerable benefits, including technology transfers and more efficient business practices. Also, because foreign direct investment flows are less prone to sudden reversals in a panic than bank loans and debt financing, they do not generate the same acute programmes of financial crisis as do sharp reversals of debt flows. Thus, liberalising inward direct investment should generally be an attractive component of a broader programme of liberalisation’97. The governments of the world’s major economies are highly involved in the IMF and World Bank’s activities. Mr.Dadush, director of the new Trade Department of the World Bank, said that Europe's Everything But Arms initiative, the U.S. Africa and Growth and Opportunity Act, and other initiatives by Japan, Canada, New Zealand and Norway, have significantly improved market access for some of the poorest countries, but important problems remain. The Bank is encouraging rich countries to address these problems now, without waiting for the outcome of protracted negotiations through the World Trade Organization (WTO)98. iii. The motives for the opening of new markets Indeed, we can distinguish between the motives for the opening up of new markets that are stated by the IMF and World Bank and the motives of the major member-states which lie beneath. a. The motives stated by the IMF and World Bank On the first place, the IMF and the World Bank state that they favour the opening up of the merging markets for the benefit of the developing states. They provide for them all the goods needed for the market transformation in order to fight poverty and speed up the rhythms of growth. One element which contributed to the capital account liberalisation in the developing world was the widespread failure in the periphery of populist policies adopted in the 80’s. Furthermore, the collapse of the Soviet Union gave free market ideologies a larger field of influence. Finally, the decline in Cold War tensions resulted to greater fluidity in private international capital99. Mr.Gordon Brown, Chancellor of the Exchequer of the United Kingdom and Chairman, International Monetary and Financial Committee of the IMF, suggests in an IMF conference the capitalistic model for free markets in the developing world: ‘I think you will see in the communique also a recognition of the importance of the resumption of the multilateral trade talks so that we can open up markets to developing countries in a way that has not been done before. Almost all the speakers around the table emphasized that point, the importance of the development aid budgets, the importance we attach to the Poverty Reduction Strategy Papers and the praise we give to

96 T. Fischer, The United States, the European Union and the ‘Globalisation’ of world trade, Quorum Books, 2000, p.134, From plan to market: World Development Report 1996, p.235 97 IMF, Liberalising capital movements, February 1999,p.11 98 Word Bank Press Release No.2003/094/S, Rich Countries should show the way on trade, Lawrence MacDonald, 2003 99IMF Working paper 8847, M.Obstfeld, A.M.Taylor, Globalisation and capital markets, p.56


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IMF and World Bank cooperation to make these an essential instrument of poverty reduction and development100’. The same motives can be also found in the speech of Jean-Claude Trichet, alternative governor of the Fund for France at the joint annual discussion in 2002. ‘The IMF and the World Bank should encompass their trade approach in a broader and comprehensive trade and development agenda. The IMF should also make proposals for concrete support, more specifically for managing the transitory negative effects of opening up markets. The Poverty and Growth facility has to play a strong role, which means it is critical to ensure that the facility is maintained’101. But which exactly are the motives of the IMF and how they service the G-7 countries? ‘What the financial economy views as good for the global economy is good for the global economy and should be done’ is supposed to be the main guideline of the IMF102. It is interesting to mention the comments of the Chief Economist at the World Bank and winner of Nobel prize for economics in 2001, Joseph Stiglitz. ‘The IMF may not have become the bill collector of the G-7 but worked hard to make sure that the G-7 lenders got repaid…The billions of dollars which it provides are used to maintain exchange rates at unsustainable levels for a short period, during which the foreigners and the rich are able to get their money out of the country at more favourable terms’103. Indeed, the World Bank and the IMF incite developing countries to open their markets by providing them with loans to undertake investment projects. It is also interesting to see how these organisations perceive the feedback from the countries where they promote the market openness. The success of East Asian countries was presented as a result of successful liberalisation, while, on the other hand the failure of the sub-Saharan Africa was translated as a failure of state control economy104. However, perhaps these opposite results show the debtor’s inefficiency to direct the emerging economies. As it is pointedly stated ‘a market economy requires not only liberal regulation and private ownership, but also adequate institutions. For this reason transition can be executed only in a gradual manner, since institution building is a gradual process based upon new organisations, new laws, and the changing behaviour of various economic entities’105. b. The motives of the member states

As regards to the motives of the member states of the IMF and the World Bank, they favour the opening up of new markets because the size of the ‘world’s economic pie’ is increasing rapidly through the open market process. The opportunities it affords to firms and consumers are dramatically increasing106. Certainly, the opening of new markets gives to the industry and individuals of the developed countries the freedom of choice: whether this is over what to buy and sell and at 100 Transcript of a Press Conference After a Joint Meeting of The International Monetary and Financial Committee of the IMF And the Development Committee of the World Bank Sunday, April 29, 2001 Washington, http://www.imf.org/external/np/tr/2001/tr010429a.htm 101 IMF, World Bank Group, Statement of Jean-Claude Trichet, alternative governor of the Fund for France at the joint annual discussion, Press Release no.53, Septeber 29, 2002, p.4 102 Joseph Stiglitz, Globalisation and its discontents, Penguin books, 2002,p.195 103 Joseph Stiglitz, Globalisation and its discontents, Penguin books, 2002,p.208-9 104Isil Cerem Cenker, MA Thesis entitled: Last Resort of the Lender?: An Assessment of the World Bank’s recent interest in social capital, Central European University, 2001, p.8 105 G. Kolodko, Ten years of post-socialist transition. Lessons for policy reforms, The World Bank Policy Research Working Paper 2095, Washington DC, The World Bank, 1999, footnote from Isil Cerem Cenker, MA Thesis entitled: Last Resort of the Lender?: An Assessment of the World Bank’s recent interest in social capital, Central European University, 2001, p.11 106 OECD. Open Markets Matter, The Benefits of trade and investment liberalisation, 1998, p.31


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what price, where to obtain inputs, where and how to invest, or what skills to acquire. While, open trade and investment helps firms tap into worlds markets, increase their sales potential, realise economies of scales and spread the fixed costs of research and development over a wider customer base107. As, it has been showed by the everyday practice: ‘Consumers in developed countries benefit because they can buy garments for themselves and their families more cheaply. Producers also benefit because developing countries moving up the income ladder typically spend their export proceeds by buying more sophisticated manufactured products such as chemicals, computers and machinery from developed countries’108. Moreover, foreign direct investment abroad is increasing rapidly and creates also secondary capital flows: exports of machinery and other capital goods, demand for manufactured production inputs, the provision of expertise and specialised services (for instance, finance, accounting, software design, advanced communications, consulting engineering) which are usually supplied by the source country109. The fact that market integration hastens economic interdependence between developed and developing world leads to greater political interdependence. State sovereignty is being influenced by globalisation in various issues such as environmental, consumer safety, social equity and cultural diversity issues110. In particular, the governments are obliged to follow international environmental rules about industrial pollution. They should also enforce laws about consumer protection. For this purpose the International Health Organisation publishes occasionally articles about forbidden substances which are not meant to be used in order to protect consumers’ welfare. Also, an agreement on sanitary and phytosanitary measures was agreed in Uruguay Round in order to complement market access liberalisation in agricultural and food products111. In addition, not only governments of developed countries but also multiethnic corporations influence the regulatory system of the host countries whether they are developing or developed. For example, as concerns to labour regulatory framework, multiethnic corporations such as Nike have imposed their own regulation about labour conditions in eastern countries which are nearest to the western standards. Or, as concerns to cultural diversity issues multiethnic corporations ask from their employees to sign that they accept cooperating with people from different cultural background and race. The above examples present only the light kind of ‘interference’ in the national laws, regulations and practices of developing countries. Through these policies the major economies manage to control them in a more effective way. However, they are able to control not only their decision on economic issues but also to political issues. The investment agreements and the loans given by the IMF and the World Bank to developing countries can be used as mechanisms of political pressure to developing countries in order to accept a specific political policy. Finally, we shall justify this last argument in the next chapter which is about the role of the US as an important promoter of the opening up of new markets. 107 Ibid, p.39,40 108 Ibid,p.42 109 Ibid,p.50 110 Ibid, p.113 111 OECD, Open Markets Matter, The benefits of Trade and Investment Liberalisation, 1998, p.116


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D. The success of the coalition for the liberalisation of capital markets i. The role of the US as an important promoter of the liberalisation of capital movements and opening of new markets The US has been the major promoter of the liberalisation of capital movements and opening up of emerging markets worldwide. It poses great influence to the decisions of the international organisations involved in this process such as the OECD, the IMF and the World Bank or even the EU. In his speech in the World Economic Forum in 2000 the ex-President of the US, Bill Clinton, had stated ‘We have to reaffirm unambiguously that open markets are the best engine we know of how to lift living standards and build shared prosperity’112. However, many object to this point of view and state that ‘globalisation has dramatically increased inequality between and within nations’113. In this chapter we shall try to explore the economic and political motives of the US adoption of this liberal point of view and enforcement of the opening of new markets. Firstly, it is interesting to see how closely connected the US is to the IMF and the World Bank. In fact, the general lines of the debt strategy, which avoided explicit debt reduction, were mainly determined by the US government. Under the Brady Plan, which was designed by the US, the Fund and the World Bank provided encouragement and financial support notably to Mexico where major policy reform were being undertaken at the end of 80’s. Furthermore, the Fund’s role in the future depends mainly on the attitudes of its main shareholders and particularly the US114. Except the direct influence by providing funds to the IMF and the World Bank, there are also various indirect influences to the economic policies of these organisations. One of the main links among the US and the World Bank and IMF is that they are both Washington-based institutions. The location of the heart of these organisations is the capital of the US, Washington, just a few quarters away from Pentagon, White House and Treasury. In addition, the employees of the IMF and World Bank use American English as their working language and are mostly informed by the American mass media115. Furthermore, the fact that the Bank policies are influenced by the US can be also based on the fact that most of the staff which possesses high positions is graduates of North American Universities116 and thus it can be argued that they usually reflect the American model on foreign and economic policy issues. After having achieved the control of these organisations the US tries to pursue economic and political goals through them. Given the facts that the United States remains the single economy of the world that is a global superpower with world wide political and military interests its external economic relations are of great concern to a large number of domestic and foreign interests. In fact, the economic policies of the United States and other

112 http://www.worldbank.org/research/bios/akraay/GIGFTPJEGFinal.pdf 113 Jay Mazur, Labour’s new internationalism, Foreign Affairs, Jan/Feb 2000 113 http://www.worldbank.org/research/bios/akraay/GIGFTPJEGFinal.pdf 114 The Fitzroy Dearborn Encyclopedia of Banking and Finance, C.J.Woelfel, 1993, Article by W.M.Corden, p.479 115 Isil Cerem Cenker, MA Thesis entitled: Last Resort of the Lender?: An Assessment of the World Bank’s recent interest in social capital, Central European University, 2001, p.16 116 ibid., p.15


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governments’ efforts to guide, control, change, benefit from, and exploit the multitude of economic transactions117 result to their influence to the international organisations. However, there are also a number of national institutions that pursue the same economic goals. Indeed, the US have promoted the ‘open door’ multilateralistic philosophy by channelling ‘support’ funds not only through the World Bank group but also through the US Export Import Bank, the Agency for International Development and the Inter-American Development Bank. Such funds have been used to help promote the movement of private capital into foreign outlets118. The existence of so many lending institutions within the United States demonstrates the initiative taken by the US for the opening up of emerging markets. The decision making process in the United States for the economic policy involves domestic economic goals, domestic political pressures and foreign policy priorities. The broad principles that motivate that policy are given briefly by S.Cohen and R.Meltzer119. These principles refer to commitment to economic growth, full employment and price stability at home, belief in the virtues of a liberal global economy guided by free market principles and a commitment to private enterprise. Moreover, they include the pursuit of the national security designs of a global superpower which have been especially strict after the September 11th. In addition, another motive is the political responsiveness to domestic interest groups, which are probably the best organised and financed in the world today and which seek to influence certain sectors of international economic policy. In order to understand the basis of the economic motives of the US to promote financial liberalisation and opening of new capital markets it would be useful to see how the interests of the US private sector are reflected in the US foreign economic policy. Indeed, these interests constitute a major motive for the US decisions in this field. The private sector is attempting to influence US international economic policy on behalf of one or more of the following, occasionally overlapping constitutions: the industrial and agricultural sector, the labour, the consumers, foreign firms and governments. Moreover, efforts to influence international economic policy are conducted among others by trade associations, labour unions, coalition groups, lobbyists and consultants120. As it is supported by the followers of neo-liberalism ‘a pluralist democracy accepts the argument that the private sector should have a major say in the determination of policy guidelines on how it is supposed to interact with the economies of other countries’121. There are far fewer highly classified secrets in the commercial policy than there are in the national security policy sector. An experienced trade lobbyist therefore does not find it inordinately difficult to glean a general sense of mood and direction in the policymaking process, nor to make a good guess as to the process of bureaucracy in generating consensus on a given issue122. Having taken these considerations into account it is easy to understand the role of the private sector and particularly the major industries to the US economic policy making. ‘A simple axiom is (…): if a special interest group is big enough, persistent enough, sufficiently well-organised, and sufficiently articulate and truthful, it eventually will secure some accommodation in

117 S.Cohen, R.Meltzer, United States International Economic Policy In Action, Praeger, 1982,p.2 118 W.F.Monroe, The new internationalism, Strategy and Initiatives for US Foreign Economic policy, Lexington Books, 1976, p.98 119 S.Cohen, R.Meltzer, United States International Economic Policy In Action, Praeger, 1982,p.3 120 S. Cohen, The making of United States International Economic Policy,Praeger, 1988, p.123 121 Ibid, p.125 122 Ibid, p.125


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the form of trade policy or legislation’123. As a logic consequence, the opening of new opening markets which is pursued by the US industry in order to achieve new field of action constitutes therefore a goal pursued by the US foreign economic policy. An example of the increasing US exports is that of the agricultural sector. As it is stated by the US department of Agriculture: ‘The United States is the world’s largest agricultural exporter, with exports of agricultural, fish, and wood products valued at $70.5 billion in 1996. The United States is also the largest supplier of food assistance to the needy in other countries. USDA helps developing countries pursue sustainable agricultural development with agricultural education and technical assistance programs. Much of the economic strength of American agriculture comes from our farmers’ and ranchers’ ability to find and take advantage of new markets overseas. Among industry sectors, agriculture is now the leading positive contributor to the U.S. trade balance. USDA’s Foreign Agricultural Service monitors world trade and helps to increase exports of U.S. agricultural products. Recent trade agreements, including the North American Free Trade Agreement and the Uruguay Round Agreement on Agriculture, have opened the door for new export opportunities’124. Furthermore, as it was mentioned above, a major motive for the opening up of new markets is the pursuit of economic growth and full employment in the US. Through the World Bank’s articles it is easy to appreciate the US wins from trade with developing countries which have opened up their markets. It is obvious that greater integration of developing countries in international trade and capital markets brings a variety of benefits for the US. For every additional $1 billion in exports, 20,000 new jobs are created in the United States, according to the US Government. US gains from trade with developing countries tend to be larger than from trade with industrial countries, while, in 1996 developing accounts for over one third of the market for US exports. From 1991 to 1995, developing countries provided markets for close to three quarters of the total increase in word exports, acting as a ‘locomotive’ to help pull the US out of recession125. Indeed, the work of the World Bank as a market builder promotes the US exports and creates jobs. ‘The World Bank’s partnership with the private sector in Alabama creates not only export opportunities but procurement opportunities as well. This means both income growth and new jobs for Alabama’, stated Richard Frank, managing director for the private sector at the World Bank126. As regards to the political motives for the opening up of new markets, political science distinguishes between hard power and soft power. According to professor’s Joseph Nye speech in the LSE127, hard is the power to coerce while soft is the power to attract. US foreign policy since World War II has ultimately rested on military strength, conventional and nuclear. An increasing important second pillar has been international economic prosperity which is expressed in such forms as aid and trade liberalisation128. Thus, we could consider the loans for the opening up of emerging markets as soft power. Indeed, the US uses this economic independence that is created among their economy and the new capital economy in order to achieve their political goals. 123 Ibid, p.135 124 http://www.usda.gov/yourusda/fastext.htm 125 A table on top US export markets in developing countries is included in the Appendix. World Bank news release, World Bank Programs Promote US Export Growth, Job Creation in Alabama, David Theis, http://www.worldbank.org/html/extdr/extme/1133.htm 126 World Bank news release, World Bank Programs Promote US Export Growth, Job Creation in Alabama, David Theis, http://www.worldbank.org/html/extdr/extme/1133.htm Part of the article is included in the Appendix 127 127 J.Nye, lecture in the LSE, ‘The paradox of the US foreign policy’, January 2003 128 S. Cohen, The making of United States International Economic Policy,Praeger, 1988, p.27


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In this point it is interesting to see why the US seems to have preferred to provide with great financial support mostly Asia than to Central and Eastern European countries. Segmentation strategy is risky and the US considers that the emerging economies in the newly independent states could one day become part of ‘Fortress Europe’129. This in fact shows the political criteria hidden behind its international economic policy. An example of this kind of policy from the very recent past is that of Turkey. Turkey’s complete liberalization of the capital account took place in August 1989 and towards the end of the 1990s found itself confronted with a serious low growth-high inequality syndrome.130 For this purpose it received many loans by the World Bank and the IMF. This economic independence of the emerging market of Turkey to the loans of these institutions were used by the US government so as to put political pressure to Turkey to form an alliance with them in order to overthrown Saddam Hussein in Iraq. As it is put by an Economist article : ‘With the Bush administration apparently determined to take on Saddam, Turkey’s economy is set to suffer in the short term anyway. Better then to shake hands with the Americans and get some money. {…} In the event, the United States have agreed to give Turkey $6 billion in grants and $24 billion in loan guarantees. The last remaining hitch was that Turkey, as of February 26th, was still resisting American demands that the package be supervised by the IMF131’. Similar information is also given by prior article of the Financial Times: ‘ The US yesterday (25/2/2003) warned Turkey it would cancel a multi-billion dollar aid package if Ankara did not immediately allow the US army to deploy troops intended for an attack against northern Iraq. The dispute with Turkey, one of Washington’s closest allies in the region and a vital staging post for military action, blew up over Turkish demands for $92bn in economic assistance as its price for cooperation. The US is offering $4bn-$6bn in aid plus roughly $20bn in loan guarantees’132. Finally, as it is clearly understood, the US attempts to promote its political and military interests by using its economic strength and taking advantage of its influence on IMF and World Bank. In concluding, given the increased global interdependence, the US tries to achieve the maximum benefit for its superpower status by creating new markets whose states are tied both economically and politically to their policy. ii. Why did the coalition for the liberalisation of capital movements succeed? Indeed the coalition for the liberalisation of capital movements and opening up of new markets has succeeded in imposing the neo-liberal economic model in most economies worldwide. An extract from an article about the pressure put in India by the World Bank in order to open its capital accounts describes the members that consist this coalition in a pointedly way. ‘The question is: where is the political coalition to support such a strategy? At present, there seems to be a polarisation. Political and industrial elites are gathering inside Fortress India, and throwing up nationalistic walls. Outside, the liberal reformers are massing to lay siege with fancy weapons acquired from the economic arms trade - the heavy artillery stamped with the initials of the World Bank, the World Trade Organisation and the IMF, the small-arms fire of business school textbooks, and the missiles of international finance. The Trojan horse on the inside is likely to be much

129 T. Fischer, The United States, the European Union and the ‘Globalisation’ of world trade, Quorum Books, 2000, p.134, From plan to market: World Development Report 1996, p. 128 130Ziya Öni, Domestic Politics Versus Global Dynamics: Towards a Political Economy of the 2000 and 2001 Financial Crises in Turkey”. Turkish Studies, Vol.4, No.2 ( 2003, forthcoming), p.4 131 Turkey and the United States, The end of the dance, The Economist March 1st 2003, p.25 132 US issues aid threat in Turkey troops row, Leyla Boulton, James Harding, Financial Times, 26/2/2003


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the same policy coalition which supported liberalisation in East and South East Asia - the technocrats with U.S. degrees, the new businessmen attracted by cheap capital and decontrol, and political opportunists. How to stop them? ’ 133 In this section we shall try to explain the reasons which lead to the success of the coalition’s goals. In fact we shall focus on three reasons that we consider the most important. Briefly, the neo-liberal economic model found new ground to expand after the collapse of the Soviet Union. Secondly, the promoters had the economic and political means to impose the new model in the developing world. Finally, in this new economic environment, the coalition had the support of the local governments which were willing to open up their capital markets. As regards to the US international economic policymaking process ‘it cannot be understood as the simple pursuit of the single-minded pursuit of power any more than it can be understood as the simple pursuit of capitalist ideology’134. In the section referring to the EU policy we also examined the promotion of the neo-liberalist economic model. It is clear though that the collapse of the Soviet Union which represented the socialist economic model gave new ground for the capitalist economic theory and practice to expand. In contrast to the socialist model whose policy was seeking to protect domestic industries by tariff barriers and import restrictions, the liberalist schemes include elimination of protectionist measures, rationalisation of the income tax structure and abolition of wealth tax on financial assets.135 Nowadays, almost all the state economies which where tied to the Soviet Union decided to change ‘camp’ in order to survive in the new economic world order. As an example we have already mentioned the opening up of the markets of eastern European countries such as Poland and Hungary which also managed to enter the European Union by fulfilling all the necessary economic criteria. In fact, even Russia started implementation of reforms at the end of 1991 and it achieved material progress in shaping a market economy136. Furthermore, the second reason of success for the opening up of new markets and the liberalisation of capital movements is the fact that the promoters have the economic and political means to impose the new neo-liberal economic model in the developing world. The IMF, World Bank, OECD and EU have the means to put economic pressure to any developing country to accept the opening of its market by promising the reinforcement of its economy with loans. Also, another way of putting political and economic pressure is the signing of trade deals of exports and imports, banking and financial services after the opening of the new capital market. In order to examine the means used by the developing countries in imposing the opening up of the emerging markets we could follow the evolutions in the Uruguay round agreements. The main objective of these agreements is the elimination of tariffs and the development of the world trade organisation system. In fact, developing countries are assisted in many ways in order to open up their markets. They have been specifically targeted as beneficiaries in many special treatment clauses included in the Uruguay Round.

133 Crisis as Conquest: Learning from East Asia by Jayati Ghosh and C.P. Chandrasekhar; Orient Longman, Tracts for the Times No. 12, 2001; pages 137, Rs.150. http://www.flonnet.com/fl1803/18030700.htm 134 S.Cohen, R.Meltzer, United States International Economic Policy In Action, Praeger, 1982,p.9 135 J.Russel, The emerging financial market in India, in Globalisation of capital markets , Kluwer, 1996,p.204 136 D. Vasiliev, Chairman of the Board of Directors Investor Protection Association Capital market development in Russia, p.1, http://lnweb18.worldbank.org/eca/eca.nsf/Attachments/Vassiliev/$File/VassilievPaper.pdf


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Most significantly, the difficult circumstances faced by these countries are recognised in the Ministerial Decisions on Measures in Favour of Least-Developed Countries which gives them special treatment with regard to all aspects of all the agreement and requires regular reviews of their needs. In some cases reviews of special treatment given are also required in order to encourage the gradual integration of all developing countries into the WTO legal framework. Further, advanced telecommunications infrastructure and essential technical assistance is provided through international and regional programmes by organs such as the International Telecommunications Union, the UN Development Programme and the World Bank.137 Indeed, all these methods mentioned above were extremely helpful for the expansion of the capitalistic economic model and the opening up of emerging markets worldwide. The fact that the coalition possesses such forceful means of implementation of the new economic system is one of the main reasons for its success to liberalise capital movements. On the other hand, the developing countries through the opening of their markets ‘secure a share in the growth of international trade that is commensurate with their economic development needs’138. Their governments take a realistic and crucial decision to open their markets and enter the system of global economy in an ever shrinking world. The benefits of an open market are now well recognised by the local governments. Openness to foreign direct investment can contribute to growth by stimulating domestic investment, improving efficiency and productivity. Openness to capital flows may also increase opportunities for portfolio risk diversification and consumption smoothing through borrowing and lending. Studies by Frankel and Romer (1999) and Irwin and Tervio (2002) have shown that countries that are more open to trade have higher incomes. While, a recent study by the World Bank (2002) suggests that the countries that have opened themselves the most to trade in the last two decades (the ‘new globalisers’) have, on average, grown the fastest139. Under these circumstances, the developing countries take the decision to enter the global economic arena and take advantage of the benefits of an open market economy. Nevertheless, in a global economy which is constantly changing the tying of the local currency to a robust economy is almost always preferable to economic isolation. In concluding, all these three reasons, the collapse of the socialist economic model, the possession of effective measures by the coalition for liberalisation and the choices of the governments of the developing countries lead to the vast increasing number of open markets and liberalisation of capital movements throughout the world. E. Epilogue-Conclusions Financial globalisation is the integration of economies and societies through trade, investment, finance, information and labour flows140. The opening of emerging markets is indeed one of the most important aspects of financial globalisation. Τhe purpose of this

137 Guide to the Uruguay round, Part Five, Developing countries in the WTO system,p.2 http://www.wto.org/english/docs_e/legal_e/guide_ur_deving_country_e.pdf 138 Ibid,p.4 139 Policy research working paper 2922, World Bank, Does globalisation hurt the poor?, P.R.Agenor,p.3-5 140 Policy research working paper 2922, World Bank, Does globalisation hurt the poor?, P.R.Agenor,p.38


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paper has been to examine the motives of liberalisation of capital movements and opening of emerging markets in particular. The motives were mostly separated in economic and political. There was also a separation between motives which are officially stated by the organisations which have the first role in the process and motives of the governments which have the major influence. The motives as presented officially by the IMF, OECD and World Bank refer to the openness for the benefit of developing countries, the fight of poverty and the speeding up of the rhythms of growth of developing countries. However, the economic motives of the countries with the greatest economies were in brief to increase the size world’s economic pie rapidly through the open market process. In particular, this openness gives to their industries the opportunity to invest in emerging nations, diversify the portfolios in terms of currencies and risks while, the number of foreign bank branches and securities companies is increasing. Furthermore, the opening of new capital market leads to the increase of foreign direct investment and the results are obvious in the everyday life of the western people. The consumers benefit since they buy imported products more cheaply and the producers also benefit since their exports are expanding. On the other hand, the political motives for the market openness refer to the expansion of the capitalistic economic model and neo-liberal ideology which rules both the US and European economic policy. It contributed to the creation of a single European market. In the other side of the Atlantic, the newly opened capital markets were used as points of pressure for military goals. The most recent example was that of Turkey which was promised loans through the IMF in order to form alliance with the US to the Iraq war. In this point we could make the separation of the effects of the opening of markets to those which refer to the developed and those which refer to the developing countries. The later are economic growth, full employment and price stability while, the former are rather ambiguous. Without a doubt, the risks taken by the developing countries in order to open their capital markets are significant. Klein and Olivey (2001) for instance, analysed the effects for capital account liberalisation on growth and financial depth for a cross-section of countries over the period of 1986-95. They found that countries with open capital accounts experienced a larger increase in financial depth than countries with closed capital accounts, and through that channel, higher rates of economic growth. However, this positive effect appears to be significant only for industrial countries, not for developing countries141. Furthermore, as it is described in a World Bank working paper there are various negative effects of market openness in developing countries. ‘Openness to global capital markets has brought greater volatility in domestic financial markets, particularly in countries whose financial systems were weak to begin with and economic policies lacked credibility. Large reversals in short term capital flows have led to severe financial crises and sharp increases in unemployment and poverty in the short run. Similarly, trade liberalisation has led in some countries to reduced demand for unskilled labour and lower real wages in the short run combined with a low degree of inter sectoral labour mobility, job losses and income declines have often translated as into higher poverty rates.

141 Policy research working paper 2922, World Bank, Does globalisation hurt the poor?, P.R.Agenor,p.3-4, footnote 1


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As a result, there have been growing concerns about the negative effects of globalisation, and an increasingly polarised debate on the plight of the world’s poorest-namely, whether many of the 1.2 billion people who still live on less than $1 a day are sharing in the benefits of greater integration among economies and instead are disproportionately hit by short-run crises and economic downturns’142. After taking all these considerations into account, the idea that markets are not only economic institutions but also political and cultural seems more believable. For this reason, we consider that markets should be combined with other institutions so as to pursue not only economic efficiency but also democracy, social justice and human dignity. Thus, we agree that it is of major importance to reconstitute safety nets where they previously existed and extend them where necessary for the poorest peoples and countries and we take for granted that without some form of equity and respect for human rights, political stability is not possible and without political stability investment and growth cannot be sustained143. We definitely are of the same mind with the view of eastern European analysts who declare that they stand for the benefit more from a cooperative approach to the solution of economic problems than from a purely self- interest approach144. Indeed, in this new era of global possibility a vision sustained by moral values should be considered as essential for international cooperation, stability and growth. In concluding, as it has been many times stated145, the challenge remains to reinforce sustainable economic growth to the wider benefit of societies through liberalisation rather than as end in itself.

142 Ibid,p.6 143M.Sojka, S.Zamagni, What markets can and cannot do: the problem of economic transition in central-eastern European countries, nova spes international foundation press, 1992, p.13 144Ibid, p.16 145 OECD, Open Markets Matter, The benefits of Trade and Investment Liberalisation, 1998, p.115

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