Globalism - part II (v1.0)

This essay is a continuation of the essay on globalism part I. This essay focuses on institutions, rules and markets that glue the world together and without it, globalism would not be possible. Many of them also form the backbone of the rules based global order that came together after World War II.

 The hard work of gluing together the world happens quietly in many global organizations that the general public may not know much about. These organizations have real teeth. While high profile forums like G7, G20, BRIC, APEC, QUAD, ASEAN, COP, Partners in the blue pacific (PBP), Global South, and Davos world economic forum are more prominent in the news, these forums are more coordination/strategy/talk shops of groupings of countries or special interest groups than institutions with real teeth. But agreements reached in a forum may be allocated resources by countries so they can have a significant impact. I will ignore these institutions here.

 The internet is a highly distributed globe straddling network system with no central control. There are a number of crucial bodies that regulate the internet and world wide web. The IETF defines standards for the internet. The ICANN/IANA issues IP addresses and domain names. The W3C defines standards and guidelines for the world wide web. The world wide web is the collection of web pages you see when online. The internet is the network interconnected computers on which the world wide web runs and the conduit through which emails and data passes.

 International law is the set of guidelines, norms, and standards usually forming the default behavior between states. International law is enforced through institutions such as the International court of Justice, the International criminal court, and other international tribunals and courts. International law can also be enforced by anuthorities formed by treaty regimes and by non-authorities such as individual states and the international community. It establishes normative guidelines and a common conceptual framework for states across a broad range of domains, including war and diplomacy, economic relations, and human rights. The sources of international law applied by the community of nations are listed in Article 38(1) of the Statute of the International court of justice which is considered authoritative in this regard. A treaty is defined in Article 2 of the Vienna Convention on the law of Treaties (VCLT) as "an international agreement concluded between States in written form and governed by international law.

 The International Criminal Court (ICC) is an intergovernmental organization and international tribunal seated in The Hague  It is the first and only permanent international court with jurisdiction to prosecute individuals for genocide, crimes against humanity, war crimes, and the crime of aggression.  As of November 2019, 123 states are signatories. A further 31 states have signed but not ratified. Israel, Russia, Sudan, and US are not signatories.

 International arbitration is arbitration between companies or individuals in different countries, usually by including a provision for future disputes in a contract. Arbitration agreements and arbitral awards are enforced under the United Nations Convention on the recognition and enforcement of foreign arbitral awards. The International center for the settlement of investment disputes (ICSID) also handles arbitration, but it is limited to investor state dispute settlements.

 Financial regulation is a form of regulation or supervision, which subjects financial institutions to certain requirements, restrictions, and guidelines, aiming to maintain the stability and integrity of the financial system. At the international level, there is the International Organization of Securities Commissions (IOSCO), the International Association of Insurance Supervisors, the Basel Committee on Banking Supervision, the Joint Forum, and the Financial Stability Board, where national authorities set standards through consensus-based decision-making processes. The FSB promotes international financial stability; it does so by coordinating national financial authorities and international standard-setting bodies as they work toward developing strong regulatory, supervisory, and other financial sector policies. It fosters a level playing field by encouraging coherent implementation of these policies across sectors and jurisdictions.

 The U.S. dollar is widely accepted as the global currency for international trade. the US dollar is used for international trade because it is the world's principal reserve currency since the end of World War II. The dollar is backed by the safest of all paper assets (relative to any other currency) - US treasuries - and is still the most redeemable currency for facilitating world commerce. The dollar's strength is the reason governments are willing to hold the dollar in their foreign exchange reserves. The preeminent role of the US dollar in the global economy has been supported by the size and strength of the US economy, its stabilty and openness to trade and capital flows, and strong property rights and rule of law. 

 The foreign exchange market (forex, FX, or currency market) is a global decentralized or over the counter (OTC) market for the trading of currencies. This market determines foreign exchange rates for every currency. It includes all aspects of buying, selling, and exchanging currencies at current or determined prices. In terms of trading volume, it is by far the largest market in the world, followed by the credit market. The main participants in this market are the large international banks.

 

SWIFT is a Belgian cooperative and a key global system. The Swift messaging network is a component of the global payments system. Swift acts as a carrier of the "messages containing the payment instructions between financial institutions involved in a transaction" However, the organization does not manage accounts on behalf of individuals or financial institutions, and it does not hold funds from third parties. It also does not perform clearing or settlements functions. After a payment has been initiated, it must be settled through a payment system such as STEP2 or TARGET2 in Europe. In the context of cross-border transactions, this step often takes place through correspondent bank accounts that financial institutions have with each other.  As of 2018, around half of all high-value cross-border payments worldwide used the Swift network, and in 2015, Swift linked more than 11,000 financial institutions in over 200 countries and territories, who were exchanging an average of over 32 million messages per day (compared to an average of 2.4 million daily messages in 1995).

 The global credit and bond market is a vast and complex ecosystem that encompasses various financial instruments and institutions. It plays a crucial role in facilitating the flow of funds between borrowers and lenders, enabling economic growth and development^. Most developed countries also run national deficits and the international bond markets are crucial for them. For example, the US treasuries are the most internationally widely traded government bond.  

 Cross border stock market listings are increasing where companies in one country (example China) list in another country (example the NY stock exchange) to spread ownership and generate capital. There is also an increase in international mutual funds that gather capital from one country to invest in another. 

 Marine insurance is vital for international shipping. International shipping cannot function without it. Lloyds of London is a giant in this field. Lloyds is a British insurance and reinsurance market. The global marine insurance market was valued at 26.5 billion dollars in 2021.

 Central Banks on occasion coordinate with each other on monetary policy. I believe there was some of it during the pandemic as the whole world seized up. Some believe there is a need for a global financial safety net. Central bank digital currency (CBDC), a central bank-issued digital currency that complements cash and coins, are an emerging trend.

 The EU is a bold experiment in cross border integration between a large number of countries in Europe. It is a supranational political and economic union of 27 member states. The EU member states use a common currency (EURO), free movement of people, and free flow of goods, and impose fiscal rules member states should follow. The European Council and European Parliament are key governing organizations in the EU. 

There are four key organizations that play an outsized role in globalism (WTO, IMF, World Bank and UN). I will discuss these next in some depth.  

Without development, instability and war becomes far more likely. When the world bank was first set up post World War II, its initial focus was rebuilding war torn Europe. Today the World bank’s mission has changed substantially. Development and reducing poverty are by far the major focus. The world bank mainly borrows from conventional financial institutions on favorable terms. The world bank is located in Washington DC. The World Bank focuses on specific projects. Its method is granting loans and grants and focuses on the poorer countries. The president of the world bank is always from the US and the US president makes the appointment. The world bank has been a magnate for the best and the brightest in economic development. In the 2000’s the then world bank head Dr Kim initiated new approaches to reduce poverty beyond just funding conventional projects including going into environment, health, etc. Some of them are controversial. The reality is in today’s world it is not just capital infusion for conventional projects that helps reduce poverty but many other things too. Ajay Banga is the current head of the world bank. Some examples of projects are: 

• Supply safe drinking water
• Build schools and train teachers
• Increase agricultural productivity
• Manage forests and other natural resources
• Build and maintain roads, railways, and ports
• Extend telecommunications networks
• Generate and distribute energy
• Expand health care 

The IMF was set up after World War II. It is located in Washington DC. Its focus is Policy advice and financing for member countries in economic difficulties and to help them achieve macroeconomic stability. It makes loans typically to members who cannot find alternate sufficient financing for affordable terms. It also implies imposing discipline on the member (which could be unpopular – does IMF get the blame?) to assure the international community that the loan will not default. IMF collects lots of data to make good lending decisions. It provides practical help to members. It typically lends to countries with balance of payment difficulties (and thus helps stabilize that country’s currency). Member countries give funds to the IMF to lend in line with their economy’s size. The US contributes 125 billion dollars (17% of total). The head of the IMF is always from Europe. The current head of the IMF is Kristalina Georgieva. 

Established in 1995, The World Trade Organization formalized the post war drive to reduce tariffs and promote freer trade. The most important single fact about a free market is that no exchange takes place unless both parties benefit. That is the core premise of free trade. Free trade gets resources to the right place. Free trade lets people specialize. Free trade expands the market. Large markets make large production runs economical. Thise result in faster economic growth. Globalism part I though shows some of the down sides. Most often though protectionism is used for political or security reasons and not economic reasons. The next best thing to free trade is a trade agreement from an economic standpoint. But agreements can take a long time to nail down. The WTO helps foster trade agreements with as large a number of countries as possible (example Uruguay round of trade talks) and enforces the agreements and resolves disputes. A different option outside the WTO umbrella are bilateral or trilateral or multilateral agreements.  Examples are NAFTA (North Americas), TTP (Pacific) and TTIP (Atlantic). 

It is interesting to analyze WTO’s TRIPS treaty (intellectual property treaty) that was very successful. Firstly, nations with the most economic power unanimously supported TRIPS. Secondly powerful domestic constituents got behind TRIPS Thirdly major economic powers were able to persuade other nations to gain their support for TRIPS. Fourthly TRIPS proponents were worried about compliance. Fifthly there was no ready alternative to TRIPS unlike the WTO antitrust agreement (which failed). Some people feel though that the low hanging fruits have already been picked by the WTO and future treaties would be harder and more contentious. 

The UN was chartered in 1946 and rose from the ashes of its failed predecessor: The League of Nations. Today it has 193 nations. The focus today is human rights, sustainable development, and humanitarian aid. The UN does a lot of peacekeeping operations (at least one a year). Initially it had unarmed observers. The first armed mission was in 1956. Most of the peacekeeping operations are in Africa and middle east. It has many specialized agencies including FAO (food/agriculture), ICAO (aviation), UNESCO (education), IAEA (nuclear), IDO (industrial development), ODC (drugs/crime), ILO (labor), IMO (maritime), UNWTO (tourism), ITU (telecom), WMO (meteorology), WHO (health), UNHCR (refugees) and international court of Justice. The annual budget exceeds 5 billion dollars (not including 8 billion for peace keeping). Each country is assessed an amount. The US pays 22%. In the general assembly each country has one vote. The general assembly elects the members of other UN groups including the non-permanent security council members. The general assembly appoints the UN secretary general. The UN security council is much more powerful and has 15 members. The permanent members are China, France, UK, US and Russia each of whom have veto power. Getting the permanent members to all agree is tough. The security council can mandate action (others can just recommend). Use of force is only sanctioned by the security council.