A.T.Berdina
Doctoral student of DBA
IBS
Kazakh Economic
University named after T.Ryskulov
Globalization in the
financial sector: the leading
trends and implications
A key trend in the evolution of the global
economy is its internationalization, the modern phase of which (from about
1980) is called the globalization. Particularly intense globalization
transforms the capital markets (loan and equity), that is the world's financial
markets, but it is unlikely that in the next decade because of objective barriers
the pace of globalization will not be as high as 80 – 90s of the last century.
The main directions of the evolution of
financial globalization
The
process of globalization of the world economy and the financial sector is
developing in two main directions. One of them is its distribution breadth,
which is reflected in the rapid growth of quantitative parameters
characterizing the pace of global trade, the volume of foreign direct
investment and the scale of international financial loans.
According to the World Bank - WB (The World Bank
- WB), the value characterizing a ratio of world trade to the total gross
domestic product (GDP), increased during the period 1985 - 1994 two times more
than in 1960 - 1976 years, and three times as compared to the previous decade
(1975 - 1984).
In following years, turnover continued to grow
faster than total GDP, although the rate of increase of its growth was not as
fast as before in 2000 - 2010 years, including forward-looking assessment of
the International Monetary Fund - IMF (The International Monetary Fund - IMF)
in 2010, which was published in October 2009 (however, due to the development
of the global crisis later it was radically revised), the figure of the average
annual growth of world trade has remained at the same level on which the
corresponding figure was for the period 1990-1999 (for 2000-2010 - 0.5
percentage points against the increase in the 1990 – 1999 ), while in 1990 – 1999 the value of annual
growth has increased, compared to the 1980 - 1989 years, almost in half. The
average annual percentage of exports of goods and services in world GDP
increased from 18.5% in 1980 – 1989 to 29.2% in 2000 - 2010, in other words 1.6
times total, and in 2008 it comprised historically the maximum value- 33.5%.
The growth of foreign direct investment (FDI)
has rapidly increased in the world economy. The average annual rate of increase
in the flow of investments in 1986 - 1990 years was estimated in the value of
23.6%, in 1991 - 1995 - 22.1% and in 1996 - 2000 it increased to 39.4%, the
growth rate of the volume of accumulated FDI in the same years, respectively,
averaged 15.1%, 8.6% and 16.0%. The share of FDI inflows in global GDP
increased from 0.8% in 1981 - 1983 to 1.6% in 1991 - 1993, 2.0% and 4.0% in
2000, that is during this period, the increase was a total of 5 times. However,
due to the economic downturn in a number of countries in the years 2001-2004
the downward trend of the share began to dominate, which as a result of the
global crisis was restarted at the end of the 2000s. In 2007, the ratio of the
"FDI / World GDP" was 3.6%, which was 4 percentage points lower than
the corresponding values of 2000, and in 2008 this figure dropped
to 2.8% and was one and a half times below the level of 2000. The absolute amount
of foreign direct investment shifted mainly along the same path and for the
same reasons as the amount relative to GDP. In 2007, it amounted to 1979
billion USD, which exceeded the figure of 2000 and 1990 by more than half -
almost 10 times (in 2008 - a decrease of up to 1697 billion USD) (for
comparison : increase of world exports value of goods and services,
respectively, 2.2 and 4.0 times). But the total amount of FDI stock was at the
end of 2007 15.7 trillion USD (in 2008 - 14.9 trillion dollars), an increase in
relation to 2000 by 2.5 times and in relation to 1990 by 8.1 times. One of the
most impressive results of the modern evolution of the world economy was the
globalization of financial markets. The basis of the international market of
loan capital is Euro market incurred in 60s. In this market, commercial banks
provide deposit and loan business in the euro currency, the currency which is
foreign to the States on whose territory they are located. The total volume of
the international credit market grew from $ 10 billion in 1960 to $ 2,395
billion in 1985 (net - volume, respectively: 2 billion and 1480 billion).
In subsequent years, the scope of international
credit and financial operations continued to grow steadily. The aggregate
amount of international bank lending increased in comparison to 2000:
•
in the year (net result of operations for the year) by 6.1 times, including on
the non-banking sector by 19.1 times (in other words excluding bank loans to
each other)
•
based on the end of the year (the sum of outstanding claims) - 3.0 times
(non-banking sector by 3.1 times);
•
the amount of net annual emissions of international debt securities of all
types of borrowers has increased over the same period by 2.4 times, and the
value of outstanding over-indebtedness on these securities at the end of the
year - 3.6 times.
The total amount of all the components of
international funding reached 47.3 trillion USD at the end of 2010 (at the end
of 2008 - 46.4 trillion dollars) and, accordingly, increased compared to 2000
by 3.2 times from 1990 to 6 times. Taking into account the Bank's investments
in securities and other assets abroad, as well as bank loans to residents in
foreign currencies, the total value of all international funding was at the end
of 2010 - 60.1 trillion USD (in 2008 - 58.9 trillion dollars) - an increase in
2007 compared with 2000 (18.6 trillion dollars) by 3.2 times and compared with
1990 (9,2 trillion. dollars) by 6,5 times. Share of annual international
funding in global GDP increased from 3.5% in 1990 to 14.7% in 2007, and the
magnitude of this funding, based on the year-end in relation to GDP,
respectively, from 35.1% to 87.0%, in other words two and a half times. The
average annual share of world trade in total GDP for the period 2000-2010 is much
higher than the corresponding figures relating to two other types of
international economic activity, namely the share of international funding by
3.1 times, the share of foreign direct investment, even by 10.8 times. This
indicates that, despite the slow pace of development, trade in goods and
services in its volume indicators continues to significantly dominate the field
of international economic relations. However, for the indicators characterizing
the dynamic aspects, the trade is for the most part significantly behind other
forms of transnational economic relations. In this case, indicators of the
international debt financing, in all cases, higher than in the values
relating to foreign direct investment.
Emphasis is placed on changes in
the ratio between the two main segments of the international financial market
of bank loans and securities. The share of the former fell from almost 4/5 of total funding in 1990
to less than 30% in 2001. Several smaller, but significantly, the share of foreign bank assets in
total financial resources to non-residents decreased in the same time, based on
the year-end.
The trend described above, was the result of the
rapid development of the process of securitization of financial markets, that
is, replacement of traditional bank loans with emissions of security. Issue
of Euro notes grew in 2007 compared
with 1990:
·
in terms of annual emissions of 17.9 times, and together
with the placement of shares to foreign markets - 19.2 times;
·
the value of the debt at the end of the year - 14.3 times
(during the growth of bank loans in the same period, respectively, only 7.4 and
3.9 times).
However,
in the subsequent turmoil in global stock markets has significantly slowed the
growth (about the impact of the global crisis of the late 2000s will be
discussed below), and in 2007 the two sectors of the international financial
market shared it in exactly (the share of bank loans in annual business volume
amounted to 56.4% and at the end of the year - 52.0%). That proportion remains,
with all the fluctuations of the market, apparently, in the grand total for the
foreseeable future. This is primarily due to the fact that the main driving
force of securities transactions are predominantly speculative motives, and
therefore due to the increasing volatility of the stock markets, these
operations will be run against the tangible limits. At the same time, bank
lending to a greater extent is due to the relatively stable needs of the real
sector of the economy. Another direction of financial globalization - is, so to
speak, the motion in depth, there are important institutional changes that
occur on the one hand, and the remaining barriers to cross-border movement of
capital on the other - in the establishment of cooperation between financial
institutions in different countries, up to complete their merger. As a result
the national financial (stock) markets become interrelated parts, in fact, a
single, integrated global market.
The rapid development of the process of
universalization of the global financial market, the spread of securitization,
the rapid expansion of derivative (productive) financial instruments (foreign
exchange, interest rate, financial futures and options, the operation
"swap", etc.), all this led to the fact that gradually lost its
former crisp lines of demarcation between the individual segments of the
international capital market, even higher level of its dynamism and mobility
increased. There was a very capacious reservoir of foreign exchange liquidity
and virtually boundless financial resources of the world, which can be used by
the authorities and private businesses for investment, stimulation of economic
growth, social development.
Despite the uncertainty of predictions of
further development of the world economy, globalization process in most of the
60 leading countries, which have so far managed to refrain from protectionism,
continue. However, 90% of company leaders expect to
increase protectionist measures in the event that the second wave of the crisis
occurs in global economy.
The third annual publication of "Ernst
& Young",about globalization, based on the two initial studies – study
of "Ernst & Young", entitled "Globalization level index»
(Globalization Index), which aims to determine the rating of 60 largest
economies in the world on the basis of their degree of globalization (as a
percentage of GDP) and through a survey of thousands of senior executives of
companies around the world held at the end of 2011 about the ongoing processes
of globalization and the growth forecast of global and regional estimates of
GDP for the next four years. While according to "Ernst & Young"
forecast in 2012, the growth of global GDP will be only 3%, the study
"level index of globalization" again predicts continued globalization
- both this year and in the future, up to 2015. First of all, it concerns the
average size of emerging markets such as Vietnam, Malaysia, Mexico, and
Colombia, as well as the smaller European countries, including Belgium,
Denmark, Slovakia and Austria. The only major markets where the slight decline
in the pace of globalization is forecasted for the nearest 3 years are the UK
and the U.S. This is due to the fact that in both countries immigration rules
are introduced that will affect the market of foreign labor. Over the past two
decades, the global trend of globalization stopped only once - in 2009, when
the financial crisis reached its peak. However, more than half of the
respondents believe that the deterioration of the economic situation will lead
to a flurry of mutual protectionism. James Turley, a Chairman and Chief
Executive Officer of "Ernst & Young" company pointed out:
"While the process of globalization continues, despite the slowdown in
economic growth around the world, the threat of rising protectionism persists.
Business and government will have to continue to defend the idea of
globalization as a positive force that promotes the creation of
economic and social benefit, trying not to slip into protectionism. "
Positive dynamics of emerging markets (primarily
the BRICS) continues to offset the weak economic performance of rare-developed
economies. "Ernst & Young" predicts that the combined GDP of the
emerging markets will grow by 5.3% in 2012.
Therefore, developing countries will continue to
outpace developed in terms of economic growth and their share of world GDP will
increase. In terms of GDP (calculated by the method of PPP) emerging markets
can catch up with the developed in 2014, and in the next few years will account
for about 70% of the total world growth, more than half of which are in turn -
on China and India.
Less
positive is the prospect for Europe, for which the "Ernst &
Young" forecasts mainly low growth, even if the crisis will be overcome,
as well as for the U.S., whose economy according to "Ernst &
Young" forecast at best grow by modest 2.5%.
CEOs
are concerned about the near future of their companies. Taking into account the
decline in growth rates, increased competition, the high complexity of the
organization of operations and a shortage of skilled human resources, there is
the possibility of crisis onset in the key markets. It does not allow companies
to build optimistic forecasts. Surveyed executives are also more pessimistic
than most analysts who make economic forecasts. Preserving optimism about the
medium-term growth prospects in emerging markets, a little more than half of
those surveyed senior executives of companies still believe that there is a
high probability that the global economy will slide back into crisis by the end
of 2012. According to almost two-thirds of respondents, there is likely a new
wave of the global financial crisis, due to defaults in the euro zone.
Moreover, almost 90% of respondents expect an intensification of protectionist
measures in the event of a repetition of the global economic crisis.
In addition beyond the prospects of rising
protectionism, the sovereign debt crisis in the euro area and slowing global
economic growth threaten the new credit crisis, which could begin if the level
of confidence in the interbank market will reduce lending. John Ferraro,
Director of Operations, "Ernst & Young", comments on the
difficult situation in which the business is: "This frightening prospect
raises a lot of problems for the companies, not all of which are flexible,
possess quick response and human resources to address them. Our study, which is
the basis of reports, has identified four fundamental problems that companies
will have to overcome in the coming years. They are complex and, in all
likelihood, will not be solved quickly, but, in our opinion, flexibility, quick
reaction and thinking outside the box help companies find new solutions for
them”. These are the following problems:
1) Successful operating in the emerging markets is
becoming more difficult than ever. With rising costs, increased competition
and slower growth - albeit still high compared with the growth in the developed
economies - operate successfully in high growth becomes more difficult.
Companies will have to put aside established approaches, set entirely new
strategies for rapid results, and more broadly to look for investments in
emerging markets from the perspective of an interested party.
2) There is no universally optimal size of the
organization. As companies develop new markets with very different
perspectives of further development and business conditions, they are faced
with the increasing complexity of the operating structure. Companies will need
to integrate the network with the logical partitioning of markets on the group
to reconsider approaches to outsourcing, as well as explore the benefits of a
strategy to attract third-party provider in the region, located relatively
close to the region where the company is based (near-sourcing).
3) The policy has become more important and thus
become less predictable. A major concern is uncertain, constantly
changing policy, in particular growing protectionism. Companies should
cooperate with the authorities, ensuring the right decisions; enhance local
knowledge of effective coordination at the international level, as well as to
establish strong relationships with the tax authorities.
4) Good people are hard to find. Companies
around the world are increasingly facing difficulties in finding suitable
candidates for available positions. A strategy can help to solve this problem a
strategy which concentrates best specialists on the most promising markets,
career guidance staff, corresponding to the rate of the market, and the
revision of the model of foreign workers labor.
According
to the "Ernst & Young", long-term success in an increasingly
ambiguity, requires companies to make a paradigm shift. In particular, they
need to understand that working in many markets, which differ greatly from each
other and which are rapidly changing, it is necessary to pay particular
attention to performance and compliance to high operational standards. Also
highly flexible business models are necessary, that enable companies to
effectively respond to new opportunities and threats. It is also important to
understand that the approach to leadership, welcoming cultural and ideological
diversity is becoming increasingly important for success in the ever-changing
conditions.
In the study, "The index level of
globalization", the results of which were used in the preparation of this article
analyzed the degree of globalization of leading 60 economies in the world with
20 basic indicators, covering key aspects of the international business
integration. The rating is assigned based on the following five criteria:
openness to trade, capital movements, exchange of technology and ideas,
movement of labor and cultural integration. The index indicates the relative
rather than the absolute level of globalization. The degree of integration of
the country in the field of trade, investment, technology transfer, labor
movements and cultural integration with other states is estimated as a
percentage of its gross national income, not as the absolute value of exchanged
assets. That is why the index reflects the degree of integration into the
global economy on the basis of observed or available data within the country.