How to ride the wave of financial globalization

 How to ride the wave of financial globalization-Will the recent sharp fall in stock prices from the United States lead to a new crisis ... How to deal with unstable world finance, what will happen to the world economy in the future (Summary of proceedings)

Minutes summary

In the midst of globalization, stable economic management is an important policy issue. At the 20th highlight seminar, Professor Hiroyuki Ito, Dean of the Faculty of Economics at Portland State University in the United States and an expert in international finance, and Senior Researcher Willem Sobeck, who also specializes in international finance, will give a lecture. Discussing whether a new crisis has begun in the global market, where the turmoil is similar to that at the beginning of 2016 due to the fall in stock prices originating in the United States, how we see the current situation, and whether there is a solution. Was done.

Greetings from the President

Atsushi Nakajima (Chairman of RIETI)

Ten years have passed since the global financial crisis triggered by the Lehman shock, and the crisis has had various impacts on the global economy, which has become more connected due to globalization. The scars of the Lehman shock have healed, but globalization continues, and policy management is becoming more difficult in a situation where not only economic activities but also money is becoming more globalized. Moreover, the stock price has recently become unstable since it originated in the United States, and there are some who are concerned about the arrival of a new crisis. In light of these circumstances, in this highlight seminar, I would like to consider how difficult it is to ride the wave of globalization and achieve stable economic management, and whether there is any way to overcome it.

How to ride the wave of financial globalization

Hiroyuki Ito (RIETI Visiting Researcher / Professor of Economics, Portland State University)

Unstable financial markets

Stock prices continue to be unstable in the Dow Jones Industrial Average, which has caused global stock price volatility. In addition, there are political and geopolitical risks. For example, the US-China trade war, Britain's withdrawal from the European Union (EU) without agreement, and the expansion of Italy's budget deficit may lead to euro instability.

In addition, there are financial risks. The first is the flattening of the yield curve. This suggests that short-term interest rates will fall and the US economy will soften in the future. Regarding the stall of the U.S. economy, in the first place, only the U.S. economy has been extremely overheated for the past few years, which has led to monetary tightening since the end of 2015, and the policy interest rate has also dropped from 0 to 2 to 2.25%. It has been pulled up. In addition, the current price-earnings ratio (PER) has stopped at around 30 which is higher than the average, so it is expected that the stock price will continue to decline in the future.

Personally, I think that financial instability is likely to occur from emerging market economies rather than from developed countries such as the United States. This is because many emerging market nations have a large amount of debt denominated in dollars, and when US interest rates rise and the dollar strengthens, and emerging market currencies become relatively cheap, when viewed in their own currencies. This is because the debt burden of If this happens, financial instability may occur, such as the bankruptcy of a company or the appearance of bad debts in banks. Now that the economies of developing countries account for 60% of the world's gross domestic product (GDP), the state of developing countries does not necessarily mean that the economies of developed countries will not ignite.

Financial liberalization and developing countries

Large-scale financial liberalization occurred in Latin America in the late 1970s and in East Asia in the early 1990s. As a result, capital flowed in from overseas, an investment boom occurred, and a bubble-like situation arose. As a result, the current account balance usually deteriorates after the economy improves. After the financial liberalization of developing countries, most foreign loans are denominated in dollars rather than in their own currency, and there are potential risks.

In fact, if interest rates rise due to a shift in US monetary policy, or if the US dollar strengthens for some reason, the currencies of developing countries will appear to be overpriced, resulting in speculative selling. Central banks in developing countries, on the other hand, try to sell foreign currencies (that is, the dollar) to maintain their currency exchange rates, but usually face a currency crisis with a sharp decline in foreign exchange reserves. And the pattern of calming the crisis with an emergency loan from the International Monetary Fund (IMF) was experienced during the Latin American debt crisis of 1982 and the Asian currency crisis of 1997-1998.

Financial liberalization facilitates the inflow of capital as well as the outflow. In that case, in order to maintain a fixed exchange rate system or stabilize the economic system, international settlement currencies such as the dollar will be required, and holding foreign currency reserves will be insurance in the event of financial instability. It was the IMF's role to provide that insurance.

However, emergency loans (conditionality) received from the IMF require strict austerity policies, and crisis countries experience a recession. In addition, the IMF often reflects the views of governments and financial institutions in the United States and Western countries, so receiving conditioning can lead to a sense of defeat in the Western countries. Therefore, after the Asian crisis, many developing countries began to consider having their own insurance without relying on the IMF, and decided to keep the current account surplus as much as possible, keep the currency at a low level, and increase foreign currency reserves. I came to take it. This was a convenient policy for developing countries, which matched export-led economic development.