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Session 5: Economic and Financial Flows in a Globalised World - Coggle…
Session 5: Economic and Financial Flows in a Globalised World
Balance of Payments
An economic indicator that tracks all transactions between individuals, firms or governments of a given country and the rest of the world within a given time period.
3 Main Parts
Current Account - registers payments for imports and exports for trade in goods and/or services, plus incomes and transfers of money to and from abroad made by individuals.
Financial Account - records financial inflows and also covers claims on or liabilities to non-residents, especially in regard to financial assets; direct investments, portfolio investments and reserve assets.
Capital Account - records all transfers of capital to and from abroad.
Helps to understand comparative position of a country in relation to others.
Can lead to global imbalances.
Global Imbalances
Shown in large and persistent deficits or surpluses in the current, capital or financial account balances.
If large imbalances exist for extended periods, pose problems and threats to stability of global economy.
Disruptive adjustments may need to be made.
Can be market forces or corrected by government actions.
e.g. 2008 financial crisis which led to global recessions
Countries experienced falling GDP, large budget deficits and current account deficits.
Focus shifted between financial sector instability and sovereign creditworthiness concerns.
Effected private and public sectors.
2 main imbalances
Public vs private sector spending - government were forced to inject money into the public sector as banks weren't lending; should have led to an increase in private spending but this didn't happen and private demand still needed to recover. Public recovered quicker than private. Imbalance between public (high) and private (low) spending.
Surplus vs deficit countries - surplus countries (like Germany) needed to spend more due to large current account surpluses, which meant they forced deficit countries into tackling their deficits through household, firm and government saving more and spending less.
There are problems with trying to reduce debt quickly...
Risks lower demand and recession.
Risks financial shocks.
e.g. Germany and China had large current account surpluses which forced deficit countries to cut spending and save more, which led to lower demand, less investment and longer recessions.
2 main strategies to deal with excessive public/private debt
Reduce debt quickly: to pay down debts and restore fiscal balance fast, but risks causing a slump in demand, lower investment and deeper recessions.
Reduce debt slowly: to avoid shocking the economy and maintaining a steady level of demand, but risks further financial shocks and longer instability if debt remains too high.
Reducing imbalances and maintaining accounts at sustainable levels is the core policy of global economic agenda.
Surplus
Current account surplus means exporting more than importing goods/services traded.
Incomes and money from abroad that exceed amount of money paid or transferred to foreign markets.
e.g. China
Having more surplus countries could make deficit countries borrow and/or sell assets which would reduce their spending.
Should be limited in time and in account otherwise could seriously damage economy of some countries and/or decrease circulation of money in the economy with negative effects on economic growth.
Can cause both economic and political/social problems
Foreign Direct Investments
Form of investment made by companies to establish plants and offices in other countries in order to produce or sell products and services in countries globally.
Multinationals - companies that have operations in at least two different countries.
Important to global economy, but controversial.
500 largest multinationals account for 25% of global production and 50% of global trade.
Aimed at securing operational control and are different from portfolio investments whereby financial assets are bought and sold.
""A giant problem; The superstar company"
(The Economist, 2016)
Rise of superstar companies
Long-established and ermerging-market champions (samsung) dominate markets.
High-tech giants have built massive empires on technology.
Benefits of superstars
Produce innovative products improving consumer lives
Provide significant "free" services
Problems from superstars
Reducing competition - small firms can't grow or survive.
Use of darker management practices - tax avoidance, lobbying etc...
Concentration trends
Mergers and acquisitions have doubled since 90s
Top 5 banks hold 45% of assets.
Start-up creation is declining, more firms are dying than being born.
Why?
High-tech firms grow more valuable with more users and data.
Larger firms benefit from more tax codes, regulations and lobbying than smaller firms.
Can lead to oligopolies, and political influence.
Backlash
Disenchantment with pro-business policies contributes to political movements like Brexit.
Protectionism and nativism could harm living standards.
Policy Solutions
Address tax avoidance
Reinvent antitrust for the digital age
Monitor acquisitions of startups by large firms.
Make it easier for consumers to move data between platforms.
Prevent tech firms from unfairly privileging their own platforms.
Ensure diverse ways for users to authenticate online.