Krzysztof Rybiński: Globalization versus financial markets
Address by Mr Krzysztof Rybiński, Deputy President of the National Bank of Poland, at the "Index"
Students' Association for Capital Markets and the Department of Capital Markets series of seminars,
Cracow University of Economics, Cracow, 20 April 2006.
* * *
Ladies and Gentlemen,
Whilst preparing for today's address, I entered "globalne, Kraków" into the Google search engine. The
following websites, among others, have been found: the website of the Regional Examination Board
that provides information on lower secondary school graduation exams, the TVP3 regional service that
informs of an increase in the number of Ryanair flights from Cracow, Wrocław and Poznań, and the
website of the most beautiful cities of Europe, where Cracow is duly mentioned next to Florence and
London. The Google search has found 97,400 websites containing the sought phrase in 0.49 seconds.
A similar attempt for other cities has resulted in the following: Poznań 75,000, Gdańsk 68,900,
Białystok 20,500, Warszawa 163,000 and Wrocław 306,000. A search for "global London" results in
236 million websites, "global Berlin" - 67.6 million, "global Bangalore" - 12 million websites, and
"global Krakow / Kraków / Cracow" - 3.6 million websites.
Obviously, the results are incomparable - for numerous reasons. The English language is much more
popular than Polish - it is the online lingua franca and at the same time spoken in India and the UK.
Moreover, whilst searching for "globalne, Kraków" one would have to enter the words in various
declinations. Nonetheless, this exercise shows that Cracow and the entire Poland have fast become a
part of the global economy. Dissemination of information and telecommunication technologies is
bound to drive the acceleration of the globalization process, which will in turn enhance labour
productivity. At the same time, a search for "derivatives" gives 55 million websites, "global markets" -
287 million, "currencies" - 97 million and "stocks" - 244 million. This shows that financial markets are
global. Let us consider the reasons behind and the effects of globalization of financial markets.
Globalization on financial markets
Globalization of financial markets is part of a wider phenomenon of globalization of national
economies. The rapid growth of the international trade in goods and services, which has been in
progress since the beginning of the 1960s, has entailed an increase in capital flows. Between 1970
and 2000 the value of world exports of goods and services increased twenty-five fold, accompanied by
a fifty-fold increase in Foreign Direct Investment (FDI) (Chart 1 and Chart 2). Many countries, having
realized that the FDI is an important factor that accelerates the economic growth, have introduced
changes to their legal regulations, aimed to attract foreign capital (Table 1). The globalization process
on the financial markets started following the decline of the Bretton Woods system. Globalization of
the financial markets exhibited a pronounced acceleration in the 1980s and 1990s. Since 1973,
international trade has been growing on average by 11% per annum (from 22% of the GDP in 1973 to
over 40% of the GDP in 2002), whereas the capital flows1 increased from 7% of the global GDP in
1973 up to over 20% of the GDP in 2002.
Chart 1: World exports of goods and services, 1960-2002
USD billion
7 000
6 426.9
6 414.1
6 000
5 000
4 000
3 500.3
3 000
2 031.2
1 610.6
2 000
1 511.9
824.7
1 000
385.4
316.4
130.1
0
0
0
1960 1970 1980 1990 2000 2002
Exports of goods Exports of services
Source: UNCTAD
Chart 2: Foreign Direct Investment
USD billion
1 600
1393
1 400
1 201
1 200
1 000
824
800
711
647
651
600
400
243
209
200
55 54
13
14
0
1970 1980 1990 2000 2001 2002
Inflows Outflows
Source: UNCTAD
BIS Review 60/2006
Table 1: Changes in national legal regulations regarding FDI, 1992-2002
1992 1995 1999 2002
Number of countries which introduced legal 43 64 63 70
changes regarding investments
Number of legal changes, of which: 79 112 140 248
- changes favouring FDI 79 106 131 235
- changes more restrictive for FDI 0 6 9 12
Source: UNCTAD
Along with an increase in the value of international trade, enterprises have become active participants
of the FX market. Between 1989 and 2004 the turnover in the global spot FX market increased by
nearly 100% (Chart 3).
Chart 3: Average daily net turnover in the global spot FX market
USD billion
700
621
568
600
494
500
394
387
400
317
300
200
100
0
1989 1992 1995 1998 2001 2004
Source: BIS
An increase in international capital flows and the development of information and communication
technologies have triggered portfolio investments on international markets. On the other hand,
enterprises and banks have increasingly frequently raised capital abroad. For instance, between 1989
and 2000, the value of cross-border investments in shares increased over twelve-fold, whereas
between 1994 and 2005, the value of debt securities issued on foreign markets increased six-fold
(Chart 4 and Chart 5). Non-bank financing of enterprises has also gained in significance. In 1980,
enterprises raised USD 4.5 trillion on the capital market, whereas in 2004, the figure stood at over
USD 60 trillion (Chart 6).
Chart 4 : Cross-border investments in shares, 1989-2002
USD trillion
30
25.9
25
21.3
18.7
20
16.8
15.0
13.5
11.9
15
11.2
10.5
9.7
10
8.0
5.7
5.1
10.9
5
9.4
2.1 2.4
7.5
3.0 7.1
5.5
4.8
1.5
1.4
2.1
0.6 1.0
0
1989 1992 1995 1997 1998 1999 2000 2001 2002
Purchase of domestic security by a foreign investor (CAGR - 16%)
Purchase of foreign security on investors' local exchange (CAGR - 22%)
CAGR ― Compounded Average Growth Rate.
Source: McKinsey Global Institute.
Chart 5: Debt instruments outstanding in the international financial market
USD billion
16 000
14 000
12 000
10 000
8 000
6 000
4 000
2 000
0
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Bonds issued in the international market
Debt instruments issued in the international market
Chart 6: Volume and structure of global financial assets (USD trillion)
USD billion
250
209
200
58.5
150
33.4
118 119
96
35.4 35.7
100
60.6
25.0
69
20.1 21.4
53 14.4
20.0
50 20.2 30.7 29.8
16.4
13.1
10.6
5.4
15.9 56.4
12
2.2 11.7
36.5
31.9 32.1
1.7
20.0
14.3
2.8
0
1980 1993 1996 1999 2003 2004* 2010**
Bank deposits (CAGR* - 7,8%)
Government debt securities (CAGR - 6,9%)
Private debt securities (CAGR - 10,2%)
Equity securities (CAGR - 8,6%)
CAGR - Compounded Average Growth Rate.
* - preliminary data.
―
** forecast by McKinsey Global Institute.
Source: McKinsey Global Institute.
As opposed to green-field investments, the portfolio capital is very mobile and, depending on the
situation (macroeconomic or political) it may move easily among local markets. This may lead to high
instability on the FX market causing significant exchange rates fluctuations. One of the methods of
hedging against the risk of currency appreciation or depreciation is taking positions in derivatives. A
dynamic growth of the derivatives market is the result of an increase in the cross-border flows in the
financial markets. Between 1995 and 2004, the turnover on the global derivatives market grew nearly
two-fold, whereas during the same period the activity on all exchange-traded derivatives grew almost
three-fold (Chart 7).
Chart 7: Average daily net turnover in global derivatives market, 1995-2004
USD billion
5 000
4 657
4 500
4 000
3 500
3 000
2 500 2 180
2 000
1 382
1 292
1 221
1 500
1025
959
853
1 000 688
489
265
151
5000
1995 1998 2001 2004
OTC FX derivatives market OTC interest rate derivatives market
Exchange-traded derivatives
Reasons for globalization of financial markets
The key factors that brought about the aforementioned changes in capital flows and in the structure of
the global financial market comprise the following:
• liberalization of national financial markets and the related growing competition among
financial institutions,
•
technological progress in IT and telecommunications,
•
faster flow of information and its standardisation,
• globalization of national economies in their various aspects (commerce, institutions,
ownership structure, capital and knowledge).
The liberalization of national financial markets has eliminated restrictions in the operations of both
domestic and foreign financial entities. Regulations regarding the range of services performed by the
banks and other financial institutions have been changed. Legal framework has been established to
facilitate the activities of non-banking financial institutions. Last but not least, restrictions on
nonresidents' access to domestic financial markets have been reduced or removed. However, the factor of
the greatest significance from the point of view of globalization of financial markets was the
liberalization of capital flows. First and foremost, it consisted in the removal of restrictions that
impaired free capital flow among countries, including in particular:2
•
removal of restrictions related to FDI and trade in goods and services with non-residents,
•
transition of the developed countries to the floating exchange rate regimes, establishing
of the euro area, and other supranational integration initiatives,
•
reduction of tax on cross-border transactions (Chart 8).
In some countries, liberalization of capital flows and financial markets ensued from the implementation
of stability programmes recommended by the World Bank and the International Monetary Fund. As a
consequence, a group of countries named emerging markets have appeared on the world economic
map. These countries play a vital role both in the global financial system and in the global economy.
Chart 8 Customs tariff rates in the developing countries, applicable to
Most-FavouredNations (MFN)
%
25
22.2
19.7
20
17.9
14.1
15
11.4
11
9.9
10
5
0
1980-1983 1984-1987 1988-1990 1991-1993 1994-1996 1997-1999 2000-2001
Source: UNCTAD.
The technological progress in IT and telecommunications, in particular the dynamic growth of the
Internet and database systems, has significantly impacted the globalization of financial markets.
Technological changes would not have been possible without a huge reduction in the cost of computer
memory and data transmission. At present, the cost of manufacturing of a microprocessor is nearly
1,000 times lower than it was 30 years ago, and the cost of data transmission (1 byte over a distance
of 1 km) is over a hundred-fold lower. Modern technologies have enhanced the capacity of creating
and marketing new, less expensive goods and services. The increased computing power has
facilitated valuation of complex financial instruments, such as options, swaps and convertible bonds,
which has contributed to a rapid development of derivatives market.
The development of IT and telecommunications has streamlined prompt acquisition and processing of
information necessary for operations on the financial market. Information used on the financial market
has become as much of a commodity as any other (e.g. washing powder). It is produced according to
specific standards and is comparable (the format of data on inflation, balance of payments or quarterly
performance of a listed company are presented in a similar manner, irrespective of the country that
publishes the data).
Today, we all take it for granted. Whereas only in 1997, when I became the chief economist
responsible for the analysis of the Polish economy with a large international financial institution,
releases of the macroeconomic data were not scheduled. Data on inflation or output simply appeared
in information services at certain times. The NBP used to send the data on the balance of payments
by fax to those analysts who requested for them. When, as the first financial markets economist in
Poland, I launched a weekly macroeconomic service for customers, an analysis, which was one or two
pages long, would be put on the pre-programmed fax machine, and it was not until the afternoon that
the transmission was accomplished. At present, nearly every bank in Poland has its chief economist
supported by a team of analysts who send hundreds or thousands of e-mails every morning, which
reach tens of thousands of investors worldwide (banks, investment funds, arbitrage funds, company
managements, wealthy private banking customers, decision-makers and central bankers). At present,
the management of a large fund may receive hundreds of e-mails daily that contain analyses of listed
companies, currencies, or macroeconomic and political developments. Nowadays, the problem does
no longer involve access to information, but pertains to the excessive amounts of information and
analyses that must be skilfully selected.
In response to these - and other - challenges3 international standards have been elaborated in the
recent years. Not only the quantity, but also the quality of information and the comparability of data
have been increasingly appreciated. In addition, unification of principles that govern the functioning of
individual financial market areas has been a precondition for the development of effective competition
in the international financial system. Uniform and commonly applicable standards lower the cost of
acquisition and analysis of information and reinforce the financial system stability. The most significant
standards include, inter alia, the following:
•
the principles of effective banking supervision, drawn up by the Basel Committee on Banking
Supervision (BCBS),
•
international accounting standards, over 100 countries have adopted or based their own
accounting standards on the International Accounting Standards (IAS) or the International
Financial Reporting Standards (IFRS),
• ―
master agreements on executing transactions on the interbank market ISDA, ISMA,
•
statistical methodologies elaborated by, inter alia, the IMF, the BIS, and the WB that ensure
compliance of the data gathered with the statistical guidelines and their international
comparability,
• the principles of best practice, elaborated by professional associations of financiers.
The development of the modern financial market infrastructure has also covered regulatory changes
(e.g. the bankruptcy law) and the establishment of modern transactional systems, payment systems,
settlement systems, risk management systems, and information services - such as Reuters or
Bloomberg. Stock exchanges and brokers have created modern trading platforms which enable
prompt offer-matching, executing transactions and straight through processing. Development of the
infrastructure has removed barriers to further market globalization. For instance, a factor that impeded
the FX market development in the 1990s was the settlement risk. In response to that, the banks that
were the most active on the FX market created CLS - a new settlement system that operates based
on the payment versus payment principle.4 The new, supranational system has significantly reduced
the credit risk and liquidity risk of FX operations, and thus increased banks' activity on the FX market.
At present, 15 currencies are settled in the CLS Bank. The system has also lowered costs incurred by
the banks, as it helped decrease the number of payment instructions and the value of funds
transferred in local payment systems.5
In view of the fast progressing globalization of financial markets, it seems reasonable to raise
the question whether the world has benefited from the globalization of financial markets, or
whether it has become more risky.
The effects of globalization of financial markets are diverse. The openness of economies and free
capital flows induce investors to deposit their funds where they can generate the highest rate of return,
which prompts financial institutions to execute transactions on new, poorly developed and non-liquid
markets. It favours the increase in the liquidity of financial markets6 and the decrease in the cost of
transactions.
Globalization has a significant impact on the lower cost of capital acquisition by enterprises. They
increasingly often use forms of raising capital alternative to the bank loan, especially the issue of
securities on the financial markets. The reasons behind this phenomenon are the decreasing
expectations of investors as to the expected rate of return that compensates the assumed risk. At the
same time, better transparency of enterprises (monitoring of the senior management, supervision over
shareholders, and making them subject to the market discipline) entails a decrease in the agency
costs that result from the mismatch of investment objectives between the management and the
shareholders. As a consequence, enterprises can more easily raise funds for financing their
initiatives.7 Large companies are more inclined to promote regulations and laws that improve the
transparency of financial markets and reduce the asymmetry of information among market
participants. In addition, institutional reforms that improve the market transparency and the quality of
communicated information are implemented, under the influence of investors. The deregulation that is
taking place removes artificial market entry barriers and facilitates their smooth operation. Thus,
globalization stimulates the financial market development, which in turn gives enterprises easier
access to capital. Higher availability of funds may impact investments and in this way stimulate the
economic growth.8
Introduction of the euro has eliminated the FX risk and contributed to abolition of investment limits
related to the items of securities portfolio denominated in foreign currency. This has lowered the cost
of raising capital from 0.5 to 3 percentage points. At the same time, the convergence of those costs
took place among the EU-15 within the same economy sectors.9
The global financial market enables business entities, including banks, to raise funds for business
development from a larger number of investors than it would have been possible on domestic markets.
For instance, in many smaller EU countries, a significant number of bank transactions is carried out
with foreign partners.10
Access to the international capital market for banks and other financial institutions translates not only
to the possibility of development, but also to the pressure on improvement of efficiency. The growing
efficiency and better risk management improves the security of deposits placed with banks. Foreign
competition is also an important catalyst for dissemination of financial innovations.11 Moreover,
domestic banks that compete with foreign banks exhibit more interest in introducing new accounting
standards and financial reporting requirements, so that better quality of information on the companies
financed allows them to extend more profitable loans. Domestic financial institutions are becoming
more efficient, due the new technologies and best practice provided to the market by foreign
companies.
Integration of financial markets worldwide enables better risk diversification. Residents do not have to
invest their savings in their own country and thus they are not exposed to the business cycle risk. They
are free to invest in many countries and could obtain a better ratio of expected return to assumed risk.
Globalization of financial markets also entails new challenges and threats. The lack of transparency,
resulting from asymmetry, raises the risk of speculative bubbles and herd behaviour of investors.
Uneven access to information in the global markets environment may lead to a negative selection in
the financing of the enterprise sector and the moral hazard in a situation where the bankruptcy of a
given institution would jeopardize the banking sector.12
Economic reforms and opening the country to international trade in the emerging markets attract
foreign capital, which, however, in the case of deteriorating economic situation, is withdrawn quickly.
This invokes FX crises, which, as a result of an increase in interest rates, may turn into bank crises.13
Additionally, international links of institutions and the speed of transmission of information among
markets streamline the spreading of such crises over other economies. International financial crises
that started in Thailand in 1997, in Russia in 1998 and in Brazil in 1999 and subsequently spread over
to other countries in the region and even as far as to other continents, may serve as an example.
Frederic Mishkin gives other examples of threats posed by globalization.14 Financial liberalisation
reduces the number of instruments which discipline the banking activities. This has led to credit booms
in many countries, often financed by foreign entities and in foreign currencies. Credit booms have thus
become a frequent source of banking crises.15 Banking crises, on the other hand, have generated
significant costs for the economy, inter alia, through the necessity of liquidity injections to some banks
or through limiting the supply of loans to companies.
Increased share of foreign capital in local financial markets raises their sensitivity to the developments
on foreign markets. For instance, an increase in interest rates in another country may cause an
outflow of short-term capital, and in consequence lead to an increase in interests rates and a decrease
in liquidity on a local market. Banks operating on the global financial market are subject to higher
competition, also due to the fact that investors compare the banks' performance results on an ongoing
basis. As noticed by Raghuram Rajan, banks nowadays focus more than ever on maintaining their
income on a high level, at the cost of assuming higher risk.16 Financial instruments traded by banks
are becoming increasingly complex and thus less liquid and carrying higher risk.
The effect of globalization is the establishment of international financial conglomerates. In the case of
an economic crisis, the conglomerates may channel it through to other markets. Such companies
could be very important for the stability of the financial system in a country or region. Their bankruptcy
may evoke a crisis, even in a steadily growing economy and even in the situation when the financial
problems have stemmed from a foreign market. The lack of standard procedure for solving problems
of international financial institutions impairs prevention and solving of financial crises. The existing
safety net established by national economic authorities is frequently a source of moral hazard for large
financial institutions,17 which apply less restrictive policy of financing business entities, expecting that
when problems arise, the taxpayers of a given country will pay part of the bill.
Last but not least, an unfavourable effect of globalization is the centralisation of risk management and
sometimes even of liquidity management at the bank group level. The process results in transferring
operations from small, local markets to more developed ones. This phenomenon has been observed
e.g. in Poland. Owners of foreign banks operating in Poland more and more often decide to transfer
their activity on the zloty market and the FX options market to London (Chart 9). It reduces the liquidity
of the domestic market, and the zloty exchange rate becomes ever-more dependent upon investment
decisions of non-residents.18
Chart 9: Turnover in the zloty market and the zloty currency options, by entity (April 2004)
%
100
29.85
32.82
80
45.00
61.08
60
30.72
40 61.20
5.59
34.62
20
36.46
33.33
20.38
8.95
0
Spot market FX swap market Outright-forward FX option market
market
Transactions between non-residents (offshore market)
Resident - non-resident transactions
Transactions between residents
Source: NBP and BIS.
Does globalization really take place: well-known economic puzzles
The data and mechanisms presented above illustrate the fast progressing globalization of financial
markets. Nevertheless, numerous studies have shown phenomena that should not occur in a situation
of growing commercial and financial links. For instance, if there existed a global financial market,
capital should flow from the developed countries to the developing ones. This is, however, not the
case, as noted by Robert Lucas19, and the "Lucas puzzle" named after the author was formulated.
There have been numerous works that attempted to resolve this puzzle. One of the most recent works,
which presents a panel analysis of nearly a hundred countries in the period 1970-2000, has shown
that the prevailing reason for the lack of capital flow from wealthy to poor countries are institutional
factors.20 or instance, improving the quality of operation of institutions in Peru to catch up with
Australia would mean a four-fold increase in foreign investment, and improving the quality of operation
of institutions in Turkey to catch up with the UK would increase foreign investment by 60%.
Another puzzle, which over some time made challenging the fact that globalization of financial markets
was actually taking place possible, was the "Feldstein-Horioka puzzle."21 Both authors in their famous
work of 1980 estimated the correlation between the national savings rate and the investment rate in
the years 1960-1974 at 0.89. This correlation for the years 1990-1997 was estimated at 0.60, and
having included South Korea - at 0.76. Despite a pronounced fall, the correlation between the national
savings and investment remained high.22 his constituted a peculiar puzzle, as in the global world of
finance there were no good reasons for which investments were to be financed with residents' savings
rather than with loans drawn on the global financial market. As in the case of the "Lucas puzzle",
numerous works have been written to explain this phenomenon. In the most recent work by Martin
Feldstein regarding this subject,23 the newly estimated correlation rate gradually decreased over
subsequent decades to reach a mere 0.19 in the decade ending in 2002. The decreases regard
mostly smaller countries, but the estimates for large countries also show that the correlation rate fell
from 0.92 down to 0.59. Therefore, it seems that over 10 recent years the process of globalization of
financial markets exhibited a pronounced deepening.
One may wonder why the recent years have witnessed acceleration and deepening of the
globalization process, given that some phenomena that are universally deemed the reasons behind
globalization, started a few decades ago. It seems that apart from the - growing for a few years now -
role of the global financial markets and the liberalization of commerce, new factors have emerged,
such as taking advantage of the technological progress in the ICT and joining the global economy by
China and India. Thomas Friedman, author of the famous book entitled "The World Is Flat: A Brief
History of the Twenty-First Century",24 hows how radical the changes in the organization of the
manufacturing process and service performance have been over the recent years, as a result of, inter
alia, the use of new communication technologies, such as the Internet, mobile phones, or the
appearance of such techniques of gaining and processing information as the Google search engine. I
may share my personal thought with you. I have just completed my work on the first draft of a paper
discussing global imbalances. Owing to the Internet and new websites providing specialist information
and knowledge in the area of economy, it took me three months to write the article. I worked on it only
in my free time, of which I do not have much as the deputy president of the central bank. Ten years
ago, over a three-month period, I would probably not have been able to collect even half of the
literature, not to mention the ongoing monitoring of speeches delivered at all important conferences
dedicated to global imbalances. It goes without saying that progress in the ICT has contributed to the
deepening of the globalization process and significantly enhanced labour productivity in many sectors.
Global imbalances
One of the manifestations of globalization in recent years are global imbalances. In 2005, the US
current account deficit approached 6.5% of the GDP, and many forecasts of investment banks point to
its further increase in 2006 and 2007.25 The negative net investment position of the world's largest
economy has moved towards 30% of the GDP in 2005 and, according to all available forecasts, it is
bound to deteriorate at a high rate.
The large current account deficit in the US is related to the negative savings of households and a
strong growth in real property prices. These phenomena have occurred in the recent years not only in
the US but also in all Anglo-Saxon countries.26 Moreover, the current account deficit in the US is
financed in a great measure by purchases of American debt securities by the Asian central banks. It
entails a significant increase in the exchange reserves of the said banks. For instance, the reserves of
the People's Bank of China went up from USD 166 billion in December 2000 to USD 819 billion in
December 2005 and over USD 850 billion in March 2006. It means that China is now ahead of Japan
- the country most abundant in foreign reserves, whose reserves amounted to USD 847 billion in
December 2005. The Chinese foreign reserves are expected to exceed USD 1 trillion (a thousand
billion) in 2006.27 n the years 2004-2005, the current account deficit in the US was in ever-greater part
financed from purchases of American bonds by public institutions that managed foreign reserves in
oilexporting countries.
Chart 10: The US current account deficit and the geographic structure of the deficit-financing
capital inflow (current account surplus), 1980-2005.
800
Other Asian
600
countires
400 Euro area
200
USA
0
billion
-200
Japan
USD
-400
China
-600
-800
OPEC
-1 000
countries
1980 1983 1986 1989 1992 1995 1998 2001 2004
Source: MFW, World Economic Outlook.
The situation where the world's largest economy and at the same time the issuer of the global reserve
currency has such a large savings deficit financed in such an unusual way has triggered a hot
economic debate on the two following issues. Firstly, attempts are being made to explain how global
imbalances have come into being. Secondly, both academic economists and strategists with
investment banks are trying to assess the possible scenarios of further developments. Are global
imbalances a regular phenomenon in the global economy and can they increase further without any
harm to the outlook for the long-term global growth? Can a radical adjustment of these imbalances
occur - and if yes, what will be the mechanism of such an adjustment and what will its consequences
for the global growth be?
Let us begin with the presentation of the main hypotheses that explain the phenomenon of global
imbalances. In 2003, three economists presented a hypothesis that an informal Bretton Woods regime
had been reactivated.28 The original Bretton Woods system was established after WWII and consisted
in a formal commitment of its participant countries to maintain foreign exchange rates, determined
against a gold parity, at a specific level, with acceptable deviations not exceeding 1 percent. The
system ceased to exist in 1971, after president Nixon had taken a decision that the US would no
longer exchange dollars for gold according to the parity determined. The nature of the reactivated
Bretton Woods, often called Bretton Woods 2, is well conveyed in the motto used by the authors of this
concept:
"(...) if I had an agreement with my tailor that whatever money I pay him returns to me on the
very same day as a loan, I would have no objection at all to ordering more suits from him"
(Jacques Rueff, 1965, after Dooley et al. (2003).
The hypothesis of the existence of an informal Breton Woods 2 says that a system has been
established in which it is profitable for the Asian countries to finance the US current account deficit,
because it enables them to increase their exports to this market. Thus, it supports the economic
growth of the Asian countries and makes it possible for them to create new jobs, which is particularly
important in China, where - according to various estimates - each year between 10 and 20 million of
jobs must be created, due to migration of the population from rural areas to cities. In order to maintain
the competitiveness of their exports, the Asian countries intervene on the FX market, thus preventing
appreciation of their currencies. The purchased US dollars are invested in American bonds, and thus
the American current account deficit is financed.
Another hypothesis that explains the mechanism of occurrence of global imbalances has been
formulated by the current Chairman of the Federal Reserve, Ben Bernanke.29 His major concept is