U.S. President George W. Bush recently said, “The U.S. economy is faced with an unprecedented challenge, and the world must respond with unprecedented measures.” That’s why the United States is now under a full policy mobilization order. The cooperation and intervention of the central banks of six major countries, the Federal Reserve’s loan to Bear Stearns and the American International Group (AIG), and the banning of short stock selling are all part of this. The U.S. financial crisis has had a serious global impact as well as on the American market. Since the crisis started, the world’s biggest concern has become the ‘International economic situation.’ The whole world has taken into account the fluctuation of America’s market, and has acted upon their economic decisions. In fact, America has been at the heart of the global economy for the past 60 years. Various countries have also unhesitatingly accepted American economic ideas such as a big market and small government. However, recent reality may be not that positive. For example, the bigwigs on Wall Street were well aware that ordinary borrowers were lacking the means to repay mortgages, and yet they endlessly created derivatives in order to make huge profits. Also, it has a big effect on global market in turn.
Today, the Sookmyung Times will report the cause of problem in terms of globalization in the global market.
The global economy has been rapidly globalizing since the World Tourism Organization (WTO) was established in 1992. That’s because national barriers have disappeared due to trade liberalization and changes in the elements of production. Moreover, going digital might help the world become globalized by making trade open to and smooth for everyone, from governments to households and companies. According to statistics about the scale of capital movement in the world, the figures take on a new aspect, having increased by almost five ~ six times in 2000 compared with those of the 1980s. This is a result of several events in the financial world, such as taking up side jobs, expanding and converting into securities. Financial organizations had a chance to charge into a globally competitive format, accelerating unification in the financial market. Combining the development of telecommunication with an appeasement policy regarding financial regulation and capital liberalization from 1990 onwards, the global financial market especially has been incorporated with increasing speed.
According to further statistics, the scale of direct investment by foreigners abruptly increased to 40% over the annual average from the middle of the 1990s, and then, in 2000, the figure increased by over $1,000 billion, which meant 19.8% of the total Gross Domestic Product (GDP) of the world. Besides, intra-industry trade rather than inter-industry trade has seemed to increase. This means that international companies have increasingly placed more emphasis on the export of component parts rather than end products, and international commercial formations have been changed, based on competitive superiority through going by trade.
The World Focused on American Capital
In fact, the biggest factor to explain the recent financial situation is that international capital has been focused on America with its globalization of capital and enterprises. Its stock was more than $12,000 billion, occupying 51% of that of the 42 countries involving in securities exchange. Regarding the scales of institutional investors, investment companies, pension funds, insurance companies etc., the USA has possessed 50% of those, and one professor in America asserted that the USA held 70% hegemony of the international financial market while European countries like Great Britain and Germany got the other 30%. The reason global capital is focused on the USA is that the American market has been superior in terms of profitability and stability, which is to say that the American economy has lasted over the long term and continued to boom since the 1990s.
Such phenomena have created problems not only in the U.S.A. but also all over the world, even in Europe. "The globalization of the crisis means we need a globalization of responses," said C. Fred Bergsten, the director of the Peterson Institute for International Economics. "But most of the responses will be national. For all the institutions we have, we don't have the right institutions to do this." That is particularly true in Europe, which has an effective central bank but lacks a unified legislature or treasury to coordinate or finance a rescue of the banking system. So far, economists say, “Europe's response to the crisis in its banks has been mostly marked by denial and dissension. From London to Berlin, governments are clinging to a piecemeal approach. The British and the Germans have resisted a broader solution, because they fear they will end up rescuing their neighbors.” "Taxpayers won't agree to bail out the banking systems of other countries," said Thomas Mayer as well, the chief European economist at Deutsche Bank in London. He added, "Not even in Europe, where you have a neutral framework, could you get people to cooperate on a joint effort."1)
Besides, it is also questionable whether the U.S. government bailout funds are enough to contain the financial crisis. It could be that $700 billion is enough to take care of bad loans that have already surfaced, but it may not be enough to cover hidden and additional insolvency. Kenneth Rogoff of Harvard University warned that one to two trillion U.S. dollars was needed as emergency capital. Economists have suggested that there are two preconditions for the U.S. financial crisis to be resolved. First, the housing market, which has been slowing down with no end in sight, has to rebound. The second condition is international cooperation, which, fortunately, is going well.
** Mortgage: the pledging of a property to a lender as a security for a mortgage loan.
** The Dow: The formal name is the Dow Jones Industrial Average. The Dow is one of several stock market indices, and the average consists of 30 of the largest and most widely held public companies in the United States.
** Derivative: financial instruments whose values depend on the value of other underlying financial instruments. The main types of derivatives are futures, forwards, options and swaps.
** Market liquidity: a business, economics or investment term that refers to an asset’s ability to be easily converted through an act of buying or selling without causing a significant movement in the price and with minimum loss of value.
** Foreign Exchange Market: the market for currencies. Transactions in this market typically involve one party purchasing a quantity of one currency in exchange for paying a quantity of another.
KIM JINWON [The Effect of Internationalization on the Economic Growth of Major States in the USA], INHA Graduate School.