The BIS’ Layered Globalization Glee

The Bank for International Settlements hailed globalization’s “profoundly positive” results the past half-century in its annual report, due to the “deeply symbiotic” connection between trade and financial openness. It acknowledged inequality and instability with the process, which can be better governed and managed as an economic development strategy both domestically and globally. The proliferation of foreign assets and liabilities and currency hedging, often through banks following cross-border customers, can be divided into three increasingly complex layers moving from simple commodities sale and associated credit to direct transactions for balance sheet purposes. Around half of trade is invoiced in dollars and one-quarter in euros, and basic letters of credit are used in one-sixth of deals. As the global value chain and FDI have deepened in recent decades, more specialized products like derivatives have spread, and in the final phase since the 1980s purely financial engineering supercharged integration so that emerging market international exposure almost doubled to 180 percent of GDP. Developing economies represent half of the worldwide manufacturing chain, with China alone taking one-fifth. As with multinational companies in commerce, global banking groups dominate finance with vast country and regional networks unable to be reflected accurately in nation-based reporting and statistics. Emerging markets’ inward investment contains both debt and equity flows, with the latter implying long-term commitment and the former short-run intra-firm borrowing and speculation. Their exposure has jumped toward offshore money centers as treasuries became more sophisticated and allocations did not involve plan and equipment outlays.

Since the financial crisis a decade ago globalization has been “in check” due in part to lingering trade weakness, but conventional measures of assets and liabilities to output overstate the correction as developing market openness has continued “unabated,” the report insists. Pullback has centered on cross-border bank loans, particularly from Europe, as portfolio fixed-income and stock volume increased. “Deglobalization” is debunked by careful definitions of the prevailing data, which shows lenders in forty jurisdictions reporting a 20 percent drop in cross-border claims from 2007-13 on a balance of payment basis, which can double count and ignore local lines of the consolidated unit. Scrubbing the numbers by bank nationality, Europe’s retreat is  pervasive but can be attributed largely to cyclical deleveraging needed to meet stricter BIS capital and liquidity rules. Financial linkages also transfer technology and boost inclusion by allowing low-income borrowers access to new channels, but can favor capital over traditional labor returns to create wealth disparities. In historical experience cross-border credit flows have been pro-cyclical to amplify booms and busts, and the dollar has soared in risk aversion periods as well to harm emerging market accounts. Since the 2008 crash global monetary policy has also been ultra-sensitive to US Federal Reserve moves, and in addition to building foreign reserves macro-prudential tools have been a crucial defense, and joint regulatory approaches have been forged between geographic and functional financial system blocks. Currency swap mechanisms and tax harmonization can go further, especially with long-run interest rate correlation so tight in recent years. In a sampling of 35 countries, 25 had close spillovers from Fed rate and quantitative easing decisions, and simultaneous shocks could add another layer to the future one-world story.