There are various flows, both human and non-human, and some which are older than others. The epitome of globalisation is finance, and often the flow of finance takes the form of electronic signals through cables which span great distances (and borders). Over the years more has been done to reduce barriers with the flow of money. It can be argued that reducing barriers and increasing freedom makes barriers redundant. Flows can threaten the integrity of territories and financial markets are very volatile – some more disruptive than others.
The Cayman Islands, ranking fifth in the world’s leading financial centre after Hong Long, New York and London, is a small island which seems distant from the hustle of city life. The Caymans are only one of a number of offshore financial centres (OFCs) where a significant portion of the world’s financial flows are channelled. In 2004 Hurricane Ivan wreaked havoc on the Cayman Islands and destroyed a good portion of their telecommunications infrastructure.
The ERM (Exchange Rate Mechanism) in Europe is another indicator of financial time. In 1992 there was a crisis as, after delaying entry into the ERM, the Pound Sterling value was entering too high – to retain its high value the UK Government attempted to buy the stock, but, this failed and the Pound Sterling value dropped, costing several billion pounds.
Global financial interests today have the ability to destabilise major economies, as well as developing ones.
Communication technologies play a massive role in facilitating power and reach of finance. The collection of interconnected devices through fibre optic, satellites and more, the flow of money can be considered an ethereal flow.
Deregulation of economies and banks also helps with the flow of money, which has gradually been replaced by forms of control.
Financial flows and architecture
Finance moves seamlessly across borders and the globe. It needs to flow and does flow in order to make a return on investment. The fast flows can cause instability and panic, or a loss in confidence. Keeping control on finances, especially what leaves, is therefore regulated.
For over a century discussions of national economic policy identified tensions between free trade and state regulation. At the beginning of the 20th century many were adopting free trade and lack of regulation, before becoming heavily regulated, and now becoming free.
The architecture is built around state policy, markets and consumers. Governments set standards and their idea of the market, but also seek to promote free trade and flows. There has to be agreement as well about how markets and businesses are regulated. You have to consider the interests of all parties.
Bretton Woods, USA (1940s)
In July 1944, finance ministers from the major Western countries met in Bretton Woods, USA. Their aim was to create an architecture after the World War which relied on state power and regulation – private bankers were almost wholly excluded. Markets were subordinate to the state in a managed international financial system.
The reason for this is due to the impact of the 1930s Depression which deeply affected the USA. The economies became destabilised and unemployment rose, which, some argue caused dissatisfaction and possibly encouraged the possibly of war and atrocities.
This meeting was a breakthrough in managing global economies as a means to safeguard the wealthiest nations.
The result, the system of fixed but adjustable exchange rates which lasted until the 1970s. the IMF and World Bank have lasted much longer. The IMF would regulate any disequilibrium in the markets.
The Bretton Woods system gave national territories scope to establish a set of policies in relation to international markets, rather than being a victim to them. There were national and controlled inflows and outflows. There were international flows in nations as these are important for trade and development, however, the agreement was largely state-led and regulated.
In the 1970s it collapsed as people were taking advantage of loopholes and escaped regulation. The ‘Euromarkets’ developed in which the dollar deposits and loans were made outside the USA, by banks from a variety of countries – the Euromarkets essentially were stateless and they grew from around $US 11 billion (1964) to $US 2.8 trillion (1989). A new architecture was then argued for.
The collapse of the Bretton Woods System demonstrated a change in international finance. The growing liberation of flows throughout the 1970s changed the flows of stateless finance. There was also a shift from state fixed exchange rates to flexible exchange rates, which signalled a shift in power from states to markets.
Neoliberalism is a significant international political project which aims at transforming key agreements that were established after WW2. It encompasses opening up a flow of international finance, to remove controls and restrictions, and to provide autonomy from the government and central bank to supervise and regulate.
- No barriers to encourage free flow of private finance, including short term in loans and equities, and long term in foreign direct investment (FDI).
- Encourages financial integration and can mean greater benefits as people have access to more and more varied sources of finance.
- Developing countries can benefit as the cost of the workforce and production is generally lower, so wealthier nations would want to invest as it promotes their production. The flow will be from the abundance of private finance to the capital poor developing nations.
- People will subscribe to the ethos of neoliberalism – rules are monitored and regulated by private financial organisations as well as international institutions like the IMF. Should national economic policy be seen to break the rules, then investors will withdraw investment. Private finance invests in secure territories.
- Capital seems to flow from the poorer nations to richer – the richer nations primarily invest in the short term in order to make profits. Short term flows are damaging as they expose developing nations.
- Developing nations, in order to attract FDI, need to be more appealing at the expense of their own population (referred to as Blandishments). Each nation will try to offer higher returns on private investment, trying to better its neighbours. Less tax means less to spend on national services like healthcare or school.
- Increasing government expenditure and relying on deficit financing (as well as raising taxes) would fall foul of the rules laid out by the IMF.
- Reintroducing controls is near impossible, like in Malaysia in 1998. Malaysia reintroduced controls on inflows and outflows, but FDI left, like the US investor Morgan Stanley.
- Financial markets are as much political as economical, shaped by unequal relations of power.
- Private sectors, investment banks, pension and mutual funds, multinational corporations and G7, G8, G10 and IMF make the architecture and move money.
Making markets in flows; continuing importance of certain territories
Key financial centres play a key role in maintaining fiscal flows. London and New York are dominant areas and places where leading private fiscal institutions concentrate their operations and transactions.
Markets in global finance rely heavily on technology and a reliable infrastructure, which is why they are located in certain locations. Digitalisation of the marketplace as proliferated the financial markets around the world. The digitalisation somewhat distances the investors from their investment, and creates a sense of distance from the larger sums. These large sums can wield considerable power over territories.
Impact if digitalisation
- Sophisticated software which facilitates the way financial markets operate – real time dashboards, customised news and updates which are relevant to them. There are innovations in the market and software such as derivatives which are designed to safeguard firms against unexpected rises in interest. Software makes finance processes easier and quicker, and this enables growth.
- Technology allows the interweaving of financial flows and territories. It intensifies interconnectedness and makes interdependencies inevitable. People can track the cost of corporate bonds or debt. Market innovation and trading can intensify due to the ease created by technology. Data can also predict and provide realistic figures which take moments to calculate. This data can encourage one to make a deal or hold back on investment, again, promoting or discouraging trade.
- The way people make financial transactions has transformed from the traditional cheque and transactions which could take days to process – now these processes are faster. Same day payments, credit cards and contactless are all encouraging people to consume and spend. PayPal and payments online also encourages spending and investment, which would not have been possible some decades ago.
Digitalised finance is making a difference in the world, where flows are real time and everything can happen in an instant. Digitalisation has dispersed financial flows, affecting the nature of interdependencies between territories. However, it has also consolidated existing financial centres remaining significant. This is the case for New York, Tokyo and London.
Equities are financial instruments that form part of the global stock markets and exchange. They are a major subnet of global financial markets, and together New York, Tokyo and London comprise of 68% of the world’s capitalisation of stock! This demonstrates the clear concentration of finance, and power. Likewise, the same three territories account for just under 60% of the foreign exchange market, another key global financial market.
So why are the current financial markets the same as before? This is because of history, the long standing reputation and more. The culture of global finance has been strongest in these regions. All the current features of the financial flows and centres call for more face to face meetings and an active workforce. Together with the institutions regulating their activities, they require a physical presence to work through the complexities of the global finance markets. The more dematerialised and digitalised finance becomes, and the increasing ability to flow, the greater need for territories, but in a special location.
Financial centres act functionally, and financial markets require making, which involves people, organisations like banks and technology. They also are placed in territories with symbolic value as well, like the City of London which symbolises the power of private finance and it is reinforced by private banks locating there. To be a global player in global finance you still ned the right name and location.
Financial flows and the making of territories
The power shift after the collapse of the Bretton Woods Agreement in the 1970s has caused the emergence of new financial territories like Offshore Financial Centres (OFC) and they can transform the financial flows. As the shift from the state to the markets meant that any attempt by the state to regulate the flows was seen as unfavourable. Organisations and markets could simply switch operations to less regulated territories like the OFCs. OFCs therefore have become an intrinsic part of the circuits of global finance.
The attempt to create a liberal architecture for global finance meant that flows were put above territories. It also unintentionally created the emergence of new financial territories, ones which assisted with the collapse of the Bretton Woods Agreement. These new territories were richer due to the relaxed regulation. This highlighted the tensions between some territories as some were more desirable than others due to regulation.
However, OFCs are hard to regulate and control private finance. Previous state regulations post war blocked the flow of capital and encouraged those to move operations elsewhere. Financial territories originally sought out regions with low tax regimes, but recently, territories wishing to become an OFC lower taxation and establish a jurisdiction which encourages private financial flows. The attractiveness of OFCs is primarily their tax advantages both for the wealthy and businesses. These centres also offer confidentiality and often political stability, which, protects these agents from regulation.
The concept of bank secrecy was first legislated in 1934 by the Swiss Confederation, home of one of the original OFCs, and made it a crime for bank employees to reveal client names. Subsequent OFCs adopted this policy, although most have to reveal names upon criminal investigation. The expectation was for OFCs to disappear as the financial architecture moved from the state to the markets, however, this did not happen. OFCs accounted for around 8% of global financial flows in 2003.
Making finance, making identities
Amongst the most mature financial centres like London, USA, and Germany are two OFCs from the Caribbean, the Cayman Islands and the Bahamas. OFCs such as these rely on global financial flows, such as international banking activity is 518 times greater than the islands GDP! A lot of these financial centres receive billions in foreign assets every year.
Small island OFCs like the Caymans charge a small amount on being part of these global financial flows, and if there is a lot of flow they can make a lot of money. The OFCs can offer secrecy, zero direct taxes and importantly an innovative regulatory environment. As a result, the OFC is shaping a unique territory from the global flow.
Another example of this is the British Virgin Islands (BVI) which is described as one of the world’s leading offshore corporate domicile. Its legislative framework is based on the needs of the private sector, including zero tax, capital gains or estate taxes for offshore entities. It is a popular and long established (1984) region for financial flows. It was created as a financial centre after the termination of the double tax treaty between the US and the BVI. Over 350000 International Business Companies (IBC) have been incorporated.
The BVI had to amend its identity in order to withstand the influences of the volatile, hyperactive and otherwise immaterial flows of money. This brought stability to the region and of course attracted investment. The International Business Companies legislation made it possible to incorporate a new kind of investment model, one which meant no tax and also did not require boards of directors met on tax haven soil as before.
There are a range of influences on the creation of OFCs, which includes non-technological and non-economic factors like legislative power. Although financial flows may pass through anywhere, this does not mean that all territories are shaped in the same way.
Through a mix of financial flows and historical connections, the BVI identity is unique and distinctive. Part of and present in global flows, the BVI depends on its historical colonial ties and the introduction of the IBC Ordinance established the islands as an OFC. Its statutes which rely on British common law tradition. State building was also important in creating the identity and encouraging investment. History, legality, material and culture play a role in creating an identity and making nations attractive and enable money to flow and stay put.
OFCs have become essential in the global financial system and demonstrate the complexity of the global economies and markets. The political economy of global finances is still very much under the control of the powerful Western nations. Private sector banks HQ’s are often located in the consolidated financial centres, with satellite offices around the world (including OFCs) to maintain control and presence. These offices maintain the flow of finance and have the ability to reach further places.
Making finance, making responsibilities
If nations have extended their control too far off places, they must take responsibility for their actions. Although most global financial organisations have their main offices in the most powerful financial centres, they have branches or subsidiaries located in OFC jurisdiction or otherwise. The purpose of these branches is to keep the flow of finance and to exert presence. Movement via OFCs keeps taxation to a minimum. Many corporations want to reduce taxation; however, this choice has an impact. Tax avoidance raises the issue of responsibility.
Barnett et al (2008)
Uses the work of Iris Marion Young as a way of reminding us that the borderlines on a map do not delimit our idea of responsibility in a globalised world. Maps and legal jurisdictions show how say the British Empire was responsible for a third of the world. In the case of finance and tax avoidance is helpful to identify the notion of responsibility.
‘the scope for justice’ and responsibility follows the flows of people and finance, not just restricted to one boundary. Global finance spans a lot of nations and across borders, and the current architecture is a result primarily from Western nations and investors avoiding tax. Tax avoidance can seriously impede development, especially of the world’s poorest. The current global economy makes it near impossible to hold corporations to account and make them pay their taxes, the way they are set up internationally means they can avoid them altogether, which means they are more profitable at the expense of the citizens. Although tax avoidance demonstrates the skill of such corporations to generate profit. The forms of aggressive tax avoidance are a consequence of systematic failures of global tax policies, causing slower rates of development and greater disparity. The lack of political intervention undermines the integrity of the tax system.
Some argue there is a responsibility of the citizen and corporation to pay what they are due, after all taxes go toward healthcare, services and infrastructure which they and their employees rely on. In the world of entangled flows means that responsibility is far reaching than ever before. Tax loss totalled US$ 255 billion in 2005 due to offshore accounts and assets, and the financial architecture facilitates (and promotes) this.
The Millennium Development Goals, which aim to reduce poverty and social disparity in the world, cannot be accomplished if the global financial system continues to favour the rich above the poor and allow the rich to abuse the system.
OFCs have proven to be part of organised crime and terrorism, and due to the relaxed regulation, this continues to happen. During the 1980s the USA tried to regain control, at least in the form of pursuing criminal activity. In 1989 the Financial Action Task Force (FATF) pressed all OFCs to cooperate with law enforcement and to take proactive measure to ‘know’ their clients. This increased regulation in fact encouraged more to use them as it bettered their reputation.
The Organisation for Economic Co-operation and Development (OECD) challenged the OFCs in 1996 as it campaigned against harmful tax competition. Low tax rates were challenged as they were damaging.
However, this action to shame the OFCs failed for two reasons;
- Switzerland, a member of the OECD, and some others used OFCs
- The USA changed its stance on OFCs and said they were welcome provided the low taxes applied to the residents as well as non-residents.
As a result, the force largely made revision on tax laws and regulations. Although, some OFCs were able to put off some implementation by saying they would only enact these revisions if Switzerland did too. Similar problems arose as well with the EU Savings Tax Directive, which was intended to require EU and associated territories like the UK to supply information on citizen’s interest earnings to their nations tax authorities. This had to be modified to give some financial centres the option of applying a withholding tax (a tax on interest taken by the host country, regardless of the account holders circumstances) as a means to not lose business to Switzerland.
The modest results of the onshore centres, and attempts to deal with the OFCs, demonstrate the problems of tax losses due to financial flows show a weakness of the whole system, not just its components.
Global inequalities are a result of a myriad of decisions, actions and inactions. Finance and banking is one of the biggest employers, and every account decision, no matter how small, impacts other decisions. All parties are implicated in the system, some more accountable than others, and some exploit the system.
There are still systematic territorial concerns regarding finance, which, is far reaching and is a complex, entangled web of interdependencies and responsibility. The flows and power of the territories vary and are far from equal. New York would be able to exert greater control than say Malaysia. This means that some nations developments not form their own freewill, but do to the demands of finance. The process of shaping and re-shaping nations through financial flows is strengthened as much by the actions of the IMF as much as the private investors.
Many of the major economic powers are beneficiaries of the finance industry, like the World Bank or IMF. The UK has particular prominence in these institutions. These members are cautious in changing the system or increasing regulation.
Organisations like Oxfam or Tax Justice Network are trying to challenge the system in order to reduce social disparity as the current system is exploited to benefit the rich.
What is the future of financial flows?
Finances need to flow to make profit, however with the global reach of finance it needs to settle and move. There needs to be buildings to create a sense of presence, it needs people, buildings and other instruments to build trust and to encourage the flow of money.
In recent history the financial market has concentrated on a select few locations due to historical ties, politics and resources. however, the power of finance is consolidated in some key locations, which retains the balance of power. This is despite the ethereal nature of money and finance. The selection of location is often because information, expertise and contacts are most concentrated in some key areas. Where finance flows and settles is the outcome of decision makers, which includes private organisations, corporations and international organisations like the IMF. No matter who sets them, it has become apparent that rules and regulations are needed to avoid crisis.
Overtime the movement of finance has shifted from the state to the markets, but is still somewhat regulated. The development of ICT enabled finance to move faster and further and this developed some hubs of global financial centres. Finance has changed as well from simply trade to FDI in developing nations. Finance now circulates at a global level, although that is not to say that everyone is part of this architecture.
OFCs and the consequences of financial liberalisation bring into perspective thee inequalities of the new system. Although we may regard some aspects of the world as unchanging and stable, the human flow of finance is not stable, rather it is dynamic.