"Mobility of Capital"

Lecture #12: “Mobility of Capital”
Erik Andersson

Introductory Note: Today we will discuss the mobility of real and financial capital.

Productive capital
FDI (foreign direct investment)
→ productive intentions

Speculative capital
Portfolio investment
→ speculative intentions
→ seeks to take advantage of favourable policies around the world


Transnational Corporations (TNCs)

- Mobile/flexible, globalized production networks
- Fordism: productivity gains through scientific control and centralisation
o Institutional symbiosis with the welfare state
o This symbiosis secured a bottom level of demand for major companies.
- The crisis of the 1970s changed economic thinking.
o Institutional symbiosis became untenable.
o People no longer bought products produced in their own countries. Instead, they bought the cheapest products available.
- Post-Fordism: productivity gains from competition and alliances

Today’s mobility of productive capital
- Mergers and Acquisitions (M&As) vs Greenfield FDI
- Outsourcing: commodification of capacity
- Results: Investment in capacity drops
- Uniform national institutional adaptation (EPZ/SEZ/EFZ, labour laws, company laws, taxes, tariffs, etc.) in competition for FDI, (again skill formation in dialectical relation to global industry
- Feminization of work.
- Strategic, flexible and irrelevant workers.
- Geography of networked of production;
High MVA – in OECD
Low MVA – close to OECD
Outside – the rest
- China, India, Korea, a.o. moving upwards fast!
- TNCs forced to utilize openings and opportunities of globalization.
- Thus outsourcing, building factories in China, etc.
- Owners force CEOs to set up shop in China and/ or to take advantahe of openings and opportunities of globalization.

The globalization of finance, i.e. portfolio mobility
- There is a strong motive driving capital mobility.
- Foreign exchange turnover 2000 billion USD/day + equity, bonds, derivatives, etc.

The US dollar’s central role
- Confidence, liquidity and transactional networks
- Non-economic reasons to hold/support the dollar as a reserve currency:
o Access to western economic interaction
o Support American hegemony
- The euro, yen and other currencies are big today too.
- The US dollar weakened under Bush because of:
o Low interest rates after 9/11 in order to stimulate demand for US production and investment
o Double deficit (trade and budget deficit) is financed by China and other southern states.
o Investment and demand are not big enough
o The US depended on China and Asia finance the war on terror and US domestic consumption.
o The double deficit helped produced the housing boom from 2001-2007 which was stimulated and inflated by low interest rates.
o Credit crisis, 2008-2009
- This was made possible through a long history of financial deregulation and globalization.


History financial globalization
- 1944: Bretton Woods
- 1957: Rome Treaties establish the European Economic Community; Bretton Woods regulatory structures begin to deflate
- 1962: General Agreement to Borrow made in order to pool gold reserves
- 1972/3: Crumbling of Bretton Woods; no link between gold reserves and national currencies
- 1976: Meeting in Jamaica to question IMF and World Bank
- 1979: The US central bank raised interest rates in order to stem inflation in the US; the debt trap closed on countries with investments in US dollars; this is the first time the globe is effected by a national undertaking in the US
- 1980s: Reaganomics + arms race; lower taxes to increase consumption; deregulation of national capital markets (when everyone does this a transnational market is established); ICT (Information and Communication Technologies); Globalization
- 1987 and beyond- Crises + Post Cold War euphoria; 1992ERM; 1994-5 Mexico; 97 Asia; 98 Russia, Brazil; 2000 IT-bubble; 2001 Argentina
- Today: Institutionalized global market with stability problems > FSF, SDDS – IMF a “reputational intermediary”
o Contagion effects- if everyone is moving out of Asia, you move out too
o Trades move with the herd

The (mobility) logic of financial markets
- No products (in traditional sense) > fast turn-over
- Prices according to expectations > which must be fulfilled
- One discourse
- Rating/IMF (”reputational intermediaries”)
- Legitimizes itself with ”allocating resources to where they are most needed” or ”greasing the wheels of production”
- In reality, the financial market is bigger than the actual market.


Effects
- Booms and crashes
- Productivity pressure (to fulfil expectations)
o This led to a drop in capacity investment after 2000.
- Market discipline (exerted on states/politicians, trade unions, companies)
- Institutional adaptation and streamlining

Current crisis
- Speculative Economy
o Loans/claims=assets > MBS > derivatives Credit Default Swaps, SIVs
- Productive Economy
o Private homes > loans > consumption > current account deficit + Asian trade surplus

Remedies
- Bonus caps / regulation for financial bosses
- More money to the IMF (but only a trickle so far)
- Rich world swearing allegiance to the IMF
- FSF (Financial Stability Forum) becomes FSB (Financial Stability Board)
- Fiscal and monetary stimulus packages
- Bailouts of financial institutions of systematic importance

Mobility of Capital

- Financial Capital ó Post-Fordist Production → Big impact on globalized and globalizing
economies