Written and published in newspaper/magazine in the last part of 2008
Globalisation or Biswayan or Bhubonayan in local parlance are the words which are very familiar nowadays. According to some commentators there is nothing new in it as globalisation of capital is ingrained in capitalism. But as the present phase is new, there are some new features. Amongst these features, a radical structural change in the finance capital is one of most striking features. The deregulation of capital is the buzz-word in this phase of globalization process beginning from the eighties. The use of new instruments in financial market has created the scope for a handful of financial institutions to extract profit to the range of million-trillion dollars. This trade which is dependent on market sentiment has already gone beyond the control of any kind of existing regulatory mechanism. In the face of the growth of this trade in meteoric speed, global regulatory institution like IMF too is facing difficulties. This capital is not being directed towards productive investment. The players from underdeveloped or developing countries are not noteworthy stake-holder in this trade. The liberalized economy and the policy of taking more foreign debt for servicing outstanding debt will result in havoc in the economy of those countries in case of any dwindle or collapse in the global financial system. Profit and more profit, and for that no long-term productive investment but to make investment for quick instantaneous profit is rule of the day. Enormous growth of this quick profit market has already made the market volatile. The imbalances in the financial market may result in the situation like cyclonic storm to crash the market and formant deeper crisis in the already imbalanced global economy. Prior to analysing this situation in detail, let us see what the new financial instruments are and how they are operated.
Derivative is one such instrument which is derived from other financial assets like stock-equity or share, bond, interest rate, currency exchange rate, index of share-market or consumer price etc. Trading occurs on the derived price or value of the financial assets. The instruments like option, futures and swap are together termed as derivative. These are the agreements between the counterparties and are dependent on the present market price or value of the assets and the market sentiment. The agreement is stroke between the parties on the basis of a mutually agreed future speculative price of the asset and this price is called strike-price. For example, the option buyers get the right (not obligation) to sell or buy at the strike price and if the option buyer applies his option, then option writer is compelled to buy (put option) or sell (call option). The profit, loss or ineffectiveness of this agreement depends on the future market price of the asset on which the agreement is made. The option buyer pays premium to option writer for the right he obtains through the agreement. Future is the agreement to buy or sell the financial asset through the exchange centre at a future specified date and is related with the rise and fall of the market price of the asset. Swap is also a type of agreement and most common agreement is on trading or exchange of floating rate interest payment with fixed rate interest rate payment instead of exchanging the loan itself. To increase the rate of profit, the part of the total investment to buy a particular security or stock can be made on credit through brokerage firm. In that case, a part of total money required to buy the asset on present market price must always remain in the account of the buyer and this amount is called maintenance requirement. If total value on the market price reaches to such a level that the amount of money in the buyer’s account becomes less than maintenance requirement, then the brokerage firm will call the buyer to deposit the rest amount of margin money to his account and this is termed as margin call or the brokerage firm may also get this margin money by selling some stock without prior permission from buyer. In the complex and vast derivative market, hedging, arbitraging and speculation play an important role. Hedging is a form of investment which reduces the risk of another investment. If a hedger thinks that the market price of security is less than what it should be, then while buying the put option of this security, the hedger can buy a call option of another security related with this security to reduce his risk. This type of trading or exchange is called arbitraging. In the derivative market, trading or exchange may be through exchange centre or directly in between the parties over the counter (OTC). Derivative trading especially the OTC derivative has already reached to such a high that no institutions even the institution like IMF has any effective regulatory control over it. As a result, any unfavourable event in the market may crash the global financial market at any moment with the cascading effect of collapse of the whole global economy. In this phase of globalization, every country is vigorously pursuing the policy of capital account liberalization and as a result the whole global economy is increasingly coming under the grip of global financial capital. In this scenario, on the one hand, the existence of national capital has become difficult to identify and on the other the rapidly increasing ratio of debt burden to real income of the corporate sectors marks the structural crisis of capital. This ratio has increased from four to six times in last few years.
When the derivative market was not matured enough like today, we saw the Argentinean crisis of 1987. During that crisis, Argentines were vigorously pleading the financial institutions and queuing at the institution’s doorstep to allow them to withdraw their deposited money, but they were being denied to that and as a result disturbances were spread throughout the country. Not only the withdrawal of money from share market by FIIs, but also the selling pressure of derivative futures on stock index caused rapid downfall of share market. We saw the 1997 Korean crisis which spread throughout south-east
Asia through contagion effect. Future trading was not so matured in Korean market prior to July 1997. From July 1997, Futures volume registered a rapid increase and in the month of August itself market crashed due to selling pressure of futures. On December 1997, could come out of the crisis with the help of conditional bail-out loan from IMF. The IMF conditionality is also making a bad impact on the real economy of debtor countries. India is also treading the path of liberalization following the IMF dictation ingrained in the conditionality of bail-out loan extended to relieve India from balance of payment crisis appeared due to rise in oil-prices and due to that, recurrence of deeper crisis in vulnerable economy is looming large. IMF loan conditionality leads the debtor countries out of the frying pan into the fire. Argentina
Due to debt-restructuring and 1998 Russian crisis, the Long term capital management (LTCM ) incurred a heavy loss of 4.4 billion US dollar from institutional investors, 1.6 billion dollars from its partners, 700 billion dollar from Union Bank of
and 2.1 billion dollars from other investors. Just prior to this loss, LTCM was an important market player in capital management. Just before the August 1998 crisis, with less than 5 million equity capital and within a very short time, LTCM registered 60000 trading of the volume of 125 billion dollar and out of this, it recorded 500 billion notional exchange traded derivative in the balance sheet and 1 trillion dollar notional O.T.C. derivative out of the balance sheet. Due to the pressure of dissociation of the derivative players linked with LTCM & increasing margin calls etc, LTCM had to face an extreme crisis of liquidity and its impact was reverberated in global capital market. To overcome this crisis, IMF arranged supply of capital for LTCM from private sector who imposed terms & condition for the control on that capital. Switzerland
At present, the financial market has become farther globalised. The derivative market has grown manifold and new instruments have become in vogue. There was no existence of credit derivative in the year 2001, but by 2005 credit derivative trading has increased to the level of 17.3 trillion dollar. Banks are failing to asses what amount of assets are lying with whom & where. On May 2006, the first ten Hedge-Fund managers have recorded the business volume of 157 billion dollar. In the year 2005, the first ranking 26 Hedge-Fund managers have earned 363 million dollar. Financial market is growing much faster than real economy. Financial assets are many times higher than annual economic production in the developed countries and Share & Bond market is growing very fast. The intermediate trading in finance has become more complex & vast than the direct transactions of deposit & withdrawal of Banking. Bank assets of US has become 53% in 2004 from 54% in 1970 whereas assets of financial institution has become 257% of GDP in 2000 from 111% in 1980, in the case Germany : Bank asset 121% in 1970 and 146% in 2004 and financial asset 182% in 1980 and 353% in 2000, in the case of UK : Bank asset 51% in 1970 and 262% in 2004 and financial asset 110% in 1980 and 377% in 2000 and in the case of Japan : Bank asset 66% in 1970 and 168% in 2004 and financial asset 157% in 1980 and 260% in 2004 respectively. The total investment of institutional investors of developed countries has risen from 16536.7 billion dollar in 1993 to 30627.3 billion dollar in 2001. Out of this, the growth of insurance companies is from 6177.3 to 9686.8 billion dollar, that of pension fund is from 4914.3 to 8454.7 billion dollar, investment fund is from 3538.4 to 9455.6 for the companies and from 1756.2 to 2831 billion dollar for others. Moreover, the ever increasing derivative market especially the OTC derivative market due to the information computer technology, the dependence on the selected few financial institution as global players and the ineffectiveness of all regulatory bodies including IMF have made the market so vulnerable that any slightest of change in the market sentiment or bankruptcy of any company like the recent ENRON episode may create a Tsunami like panic in the financial system and large-scale downfall or collapse of the global economy. The present era of globalization has let loose the demon of greed, but lost the Aladin’s lamp. Additional pains to this situation of financial market are the growing deficit-budget of
, the centre of world economy and the increasing price-hike of petroleum and other mining products. America
On the other hand, the structure of the policy-making body of IMF- World Bank is such that the LDC & developing countries do not have any control on policy making process of these institutions and moreover these institutions are also now facing difficulties as regulator. The amount of capital the world bank extends to the developing countries is less than what it gets back from those countries. Net transfer from 1991 and net disbursement from 2002 show negative trend. Many countries heading towards market economy has already come out of the IMF- supervision by returning the loan taken from IMF. IMF has lost the capability to provide bail-out capital to any country reeling under economic crisis and as a result since last few years, IMF has been dependent on global private creditor companies for extending bail-out capital.
The developing countries are increasingly getting integrated with global market, but the companies of these countries have very little stake in the vast trading of the financial market. Much hullabaloo on nationalism for TATAS becoming global player bears no significance as all are under the control of global finance capital and they all don’t have much national character. Moreover there is a continuous outflow of capital from developing countries. For the aid of every one dollar, ten dollar goes out of the developing countries. An outflow of capital of about 500 US dollar occurs every year. Large oligopolies evade heavy amount of Tax-payment by doing the trades within their subsidiaries and by managing the trade-routes through the regions where there is very low or no tax. This undeclared asset is of the range of 460 billion US dollar. Had this undeclared asset been brought to tax-net, it could have been spent for poverty-alleviation. This type of trade within the subsidiaries of same company is now 60% of total trade. The tax heaven with no or little tax has risen from 25 in 1970 to 72 in 2004 and the trade through these routes has increased by 50%. The trans-national companies open their subsidiaries in those Tax-heavens.
In this circumstances, any incident shaking the confidence of global market investors may lead to collapse of the market in cyclonic speed and consequently with the collapse the global economy, the developing countries who are treading the path of liberalization and IMF – dictation instead of the policy of minimizing the internal inequalities within various regions and communities will be hard hit. Scarcity and price hike of essential commodities and means of subsistence, contraction of sources of income, high income inequality, famine – epidemic and severe unemployment will lead to complete chaos worldwide. Loss of control and crisis of capital will increase the imperialist rivalry and aggression. Capital will try to revitalize itself by revamping war machinery industries as profitable destination and through death & destruction and will try to raise its victory flag on the heap of human dead bodies. If the forces of alternative economy and socialist-restructuring can raise their head from within this total chaos, then only the famous saying of Romain Rolland “ where order is injustice, disorder is the beginning of justice” will be proved meaningful.
References – (1) Safeguarding financial stability – Garry J. Schinasi
(2) Asian financial crisis, the role of derivative securities trading & foreign investment.—Eric Glysel, Junghoon Seon.
(3) Why a global economic deluge looms – Gabriel Kolko ( The World Resurgence)
(4) Social watch.com & many other websites.
Arup Baisya e-mail : email@example.com