Globalisation: a life of its own guyana the wider world by Dr Clive Thomas Stabroek News January 21, 2001 Origins Trading in foreign exchange developed as a result of international trade in goods and services. On the one hand, buyers of foreign goods needed foreign currency to make payments. On the other, those selling goods to foreigners acquired foreign currency as payment. To facilitate this international trade, a foreign exchange market developed through which such transactions could be settled. Later on this market also facilitated international investment. That is, foreign direct investment in productive enterprises. As we saw over the past two weeks, as a result of globalisation international currency transactions now bear little or no relation to international trade in goods and services. It is estimated by some that as little as two per cent of global foreign exchange transactions are linked to the movement of goods and services. Finance therefore, no longer complements trade and investment. What happens now? The straightforward answer is that trading in foreign currency has become an end in itself. It is no longer as it was - a means towards an end. It has, in other words, taken on a life of its own. Flows of finance across national borders are weakly related, if at all, to international trade and investment. These funds are referred to as 'hot-money,' because they are very liquid and respond solely to the possibilities of short-term speculative gains. They flow into a country quickly, if there is a speculative gain to be made. And, just as quickly they flow out of a country if a gain can be made elsewhere, or if the threat of a loss arises. Flexible exchange rates As we saw in an earlier article, the possibility of making a gain (or avoiding a loss) depends on the spread between interest rates in different countries and the likely movement of their exchange rates. In our present global system exchange rates are not fixed. They are flexible and respond to the daily demand and supply of currencies. This facilitates the process of hot-money flows. Furthermore, the removal of foreign exchange controls and the advent of computerized banking have made these transactions extremely easy. The players Who are the main players in the global financial markets? These can be classed into five broad groups. One is the individual investors. Such persons are by definition wealthy enough to have funds to speculate with. Another is the institutional investors. The third is the company or firm, and the fourth covers financial institutions. The fifth is the government. The government is not only a borrower and lender in the market, but a regulator as well. The most dramatic development under globalisation has been the rise of the institutional investor. This investor group has emerged over the past fifteen years as a key player, to the point where it dominates the global financial world. Some of the institutional investors, or fund managers as they are also called, hold assets in excess of US$1 trillion. The leading fund managers are found in Europe, the United States and Japan. In recent years there has been a wave of mergers and acquisitions among these funds. We have already noted that this has also occurred in other economic sectors. Like those other sectors, it has led to the rapid consolidation of the industry, with a few mega-firms controlling the bulk of global assets. New instruments Two decades ago the syndicated commercial bank loan typified international finance. In the 1970s, as the commercial banks received a flood of short-term funds, a lot of this was lent out to the developing countries. This was to be the start of the debt crisis. In recent times however, financial investments have become far more varied. There are now such instruments as financial derivatives, international bonds, Eurobonds, Global Depository Receipts (GDRs), mutual funds, pension funds, and equity investments. Next week we shall review some of these investments. We shall also report on the financial crises that have accompanied the globalisation of finance. For now we observe that finance, which developed as a facilitator of trade and investment, has become a machine driven by the search for profit derived from the pure buying and selling of money, with no other objective in mind. This characteristic, of taking on 'a life of its own' is something that recurs in several other globalisation processes. We shall return to this as the series progresses. It is useful to note that by saying that the process takes on 'a life of its own,' we are invoking the very important concept of 'functional autonomy.' This was first elaborated in the science of psychology. It means that, an activity may be started with one purpose in mind. As it is done repetitively, however, another motive emerges and this new motive sustains the activity without any reference to the original motive . Follow the goings-on in Guyana in Guyana Today