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increasingly difficult to differentiate the domestic financial systems of the
developed countries from the wider international one. (The highly suc-
cessful German securities exchange, Deutsche Börse, is today itself a large
listed multinational company with over 90% of its share capital owned by
non-Germans.) Thus, unrestricted and efficient access to the global capital
GLOBALIZATION AND MONETARY SOVEREIGNTY 119
market, rather than the ability of governments to manipulate parochial
monetary policies, is becoming increasingly important for development.
Yet owing to the unwillingness of foreigners to hold their currencies,
developing countries find their local financial systems largely isolated from
the global system. Their interest rates tend to be much higher than those
in the international markets, and their financial operations extremely short,
not longer than a few months in most cases. In consequence, they remain
dependent on dollars for any long-term credit available to them, which
forces them to run foreign exchange risks in those operations. Their un-
wanted currencies make the capital flows they so badly need dangerous:
Both locals and foreigners will sell them en masse at the earliest whiff of a
devaluation, since devaluation makes it more difficult for a country to ser-
vice its foreign debts. These problems are grave obstacles to development
in an environment of advancing globalization. Monetary nationalism in
developing countries operates against the grain of the process, and thus
makes future financial problems even more likely.
Spontaneous Dollarization
The transformation of developing economies to developed ones,
driven by the climb to higher and higher value-added work in the global
workshop, requires significant investments. These can easily be financed by
the rapidly growing international financial system witness the remarkable
recent expansion of U.S. and European private equity capital restlessly seek-
ing investment opportunities. Yet the presence of extreme foreign exchange
risk the risk of periodic national currency collapse, in which investments
can suddenly lose half or more of their value creates a serious obstacle for
the flow of finance from international financial markets. There is therefore a
huge chasm between the opportunities afforded by globalization and the
monetary systems in place across most of the developing world, which are
based firmly on the isolating principles of monetary nationalism.
This situation is not stable. Financial globalization is eroding the power
of national central banks to sever the connections between the domestic
and international financial markets. Transferring financial resources across
the world has become fast, cheap, and easy, and people in the developing
countries are taking ample advantage of this.
120 GLOBALIZATION AND MONETARY SOVEREIGNTY
As we noted earlier, capital flight is not a modern phenomenon. Even
during the heyday of economic sovereignty in the middle decades of the
twentieth century, people could move money abroad in many ways. Argen-
tines have long been masters of this process. Roughly 90% of Uruguayan
bank deposits are in dollars, with Argentines accounting for the lion s
share. All sorts of schemes have long been used to move money to the
United States, including buying expensive jewelry for pesos in Buenos
Aires and returning it for dollars in New York. Venezuelans are using
credit cards to exploit the difference between the official and black market
dollar price of the bolivar; for example, flying to Aruba, buying $5,000
worth of gambling chips on credit (the maximum allowed by the
Venezuelan government), and cashing in the chips for dollars, which they
can then sell at a hefty profit back home on the black market. Others use
bolivars to buy Venezuelan securities on foreign exchanges, which they
then redeem for U.S. treasury notes deposited in offshore accounts. Yet
others borrow bolivars, buy Venezuelan government dollar bonds at the
official exchange rate, and then sell them at black-market rates, effectively
taking free dollars from the Venezuelan reserves.7
Today, people in developing countries are increasingly bringing interna-
tional currencies into their local markets and, in most cases, are doing so
with the connivance of their own central banks. As international money
transfer has become increasingly easy, the ability of developing country
central banks to isolate their countries monetarily has become highly lim-
ited. They face an uncomfortable choice: either to allow people to operate
in an international currency in their domestic markets, or accept that their
country s already scarce financial resources will fly abroad. The choice is
not an easy one. Allowing domestic banks to receive deposits and grant
loans in foreign currency dramatically reduces the grasp of the central
banks over the supply of money, interest rates, and other financial levers
they use to implement monetary policies. If, for example, the central bank
tries to lower interest rates relative to those prevailing in the domestic dol-
lar markets, depositors will immediately shift their deposits from the local
currency to dollars. This limits the central bank s ability to manipulate in-
terest rates.
In the early part of this decade, dollar and euro deposits in develop-
ing countries represented at least 25% of total deposits in each of the
GLOBALIZATION AND MONETARY SOVEREIGNTY 121
developing regions of the world, and in some of them their share was
above 50%.8 When these deposits are deducted from total deposits, the
fragility of the local currencies becomes evident. While a ratio of de-
posits to GDP of 60% is generally considered healthy in a developing
country, the ratio of domestic currency deposits to GDP is only about 15%
in South America, 19% in the formerly communist countries of Eastern [ Pobierz całość w formacie PDF ]
