Market Integration & Intl. Financial Institutions

Objectives of Market Integration

• Explained the role of international financial institutions in creating a global economy.
• Narrated a short history of global market integration in the twentieth century.
• Identified the attributes of global corporations.

Role of International Financial Institutions

• Based on Joseph Stiglitz's (1998) discussion on financial institutions in the context of East Asia.
• Includes macroeconomic and microeconomic policy, financial restructuring, and corporate governance.
• Focuses on preventing crises by controlling capital flows, acknowledging the importance and limitations of information, and defining the Role of the World Bank.

Macroeconomic and Microeconomic Policy

• Aims to restore market confidence through policies.
• Exchange rate devaluation typically makes exporting more attractive.
• Crisis may lead to corporate failures and bankruptcies of financial institutions.
• Remedies for credit shortfalls may be a key determinant of exports.

Financial Restructuring

• Challenges includes limited technical, legal, and institutional capacity.
• A smaller number of healthy banks are available to take over weak banks.
• Banking systems may become more complex, blending state and private banks.
• State banks may have implicit guarantees for depositors.
• Government announcements about not guaranteeing private banks can trigger runs on those banks.
• Strengthening the financial sector should enable it to more effectively promote economic growth.

Corporate Governance

• Strengthening the financial sector is crucial, alone it will not suffice.
• Governments should correct tax, regulatory, and banking practices that encouraged high debt-equity ratios.
• Discouraging high debt-equity ratios can be achieved through tax and regulatory policies.

Preventing Crises by Controlling Capital Flows

• A robust policy regime minimizes the long-term consequences of economic fluctuations.
• Prevent crises by setting up mechanisms for orderly workouts.
• Financial systems should buffer the economy against shocks instead of magnifying them.

The Importance and Limitations of Information

• Monitoring and surveillance will be especially challenging in a world with increasing private-to-private capital flows.
• The merit of a market economy is that dispersed information is aggregated through prices and incentives, eliminating the necessity of centralized information collection.

The Role of the World Bank

• Functions as a development institution focused on project lending and structural reforms.
• Aims to enhance long-run development and poverty alleviation.
• Has the responsibility, along with its partners, to minimize the suffering of the poor and vulnerable during adjustment.
• Financial crises often lead to large increases in unemployment with devastating consequences for the poor persisting well past the initial crisis.

Short History of Global Market Integration

• A brief history of corporations and their role in influencing economic governance.
• There are three periods: trade and exchange, colonialism and imperialism, and American, Japanese, and European corporations.

Three Periods of Global Corporations

• Trade and Exchanges (17th Century):
  • Characterized by early corporations like the East India Company.
  • The East India Company (1600–1708 as English East India Company, 1708–1873 as United Company of Merchants of England Trading to the East Indies) exploited trade with East and Southeast Asia and India.
• Colonialism and Imperialism (19th Century):
  • Terms like "Imperialism" comes into use
  • The economic and political media used "Imperialism" terminology during the U.S. and Spanish War (1898).
  • Financial capitalist Rodelf hilfredging (1910) discuss the new phase of capitalism
  • Commercial capital was more favorable to increasing state power.
  • Wholesale, overseas, and colonial trade sought state protection and readily depended on privileges.
• American, Japanese, and European Corporations:
  • International companies emerged post-1900.
  • The Security and Exchange organization (SEC) was founded in 1933.
  • Investing companies law of establishment in 1940 in the U.S.
  • After World War II, capital investments grew through U.S. loans under the Marshall Plan (European Recovery Program, ERP), an American initiative to aid Europe.
• Corporations Time Graph:
  • A history from 1600 (East India Company) to 2100.
  • Germany and Japan's economies grew after 1970.
  • Globalization began after the fall of the Soviet Union.
  • Multinational corporations (MNCs) or Multinational Large Corporations (MNLs), or multinational enterprises (MNE) are key global players.

Different Types of Corporations

• International Companies:
  • Engage in importing and exporting without investing outside their home country.
• Global Companies:
  • Invest in and have a market presence across many countries.
  • Market products and Services to each individual local market.
• Multinational Companies:
  • Invest in other countries but do not coordinate product offerings.
  • Adapts products and services to individual local markets.
• Transnational Companies:
  • Complex organizations with investments in foreign operations.
  • They possess a central corporate facility while delegating decision-making, research and development, and marketing powers to each individual market.

Session Summary

• The discussion encompassed the role of financial institutions in the global economy.
• Topics covered: the history of corporations, and the classification of global corporations.
• This covers economic dimensions of globalization, political dimensions will be discussed next session.

Understand market integration through international financial institutions. Explore their roles, macroeconomic policies, and crisis prevention. Learn about the World Bank's role and the history of global market integration.