SASKIA
SASSEN
We
might expect today’s global financial market to be generally unlike other
current and past markets and to approximate, and even enact, key principles of
neoclassical market theory. The effort of this chapter is to understand the
limits of this electronic, transjurisdictional, globally interconnected market,
and to lay bare its modes of embeddedness and its conditionalities. The argument
is that while today’s global capital market is indeed a complex formation
markedly different from earlier global financial markets, this does not
necessarily mean that it is totally disembedded. The new technologies have had
a deeply transformative effect that I specify below. One research strategy to
capture the specificity of the technical transformation along with the possible
embeddedness of this market is to explore the existence of imbrications with
non-digital environments and conditions that shape and give content to
technical features and to the effects of technology. Such imbrications would
then signal the limits of the technological transformation.
To
examine the validity of this point it is actually important to show that the
current market for capital is different from earlier phases in this market, in
good part due to the specific capacities associated with the new computer
centered interactive technologies. The first section, ‘The Global Capital
Market Today’ then examines in what ways this market is different. In the second
section, ‘Continuing Utility of Social Agglomeration,’ I argue that even as it
is different, it remains deeply embedded and conditioned by non-market and
non-digital dynamics, agendas, contents, powers.
The
global market for capital would seem to be as close an approximation to the
neoclassical model of the market as has been possible yet. Because it is
The
author thanks Cambridge University Press for allowing the reprinting of this
paper. The paper was originally prepared for presentation at the Conference Inside
Financial Markets (Konstanz, May
2003).
increasingly
an electronic market, with pervasive use of cutting edge computer applications,
it is open to millions of simultaneous investors and conceivably able to
maximize the chances that market participants have basically instantaneous
access to the same information no matter where they are. This should then
ensure that supply and demand forces are in full operation, guided by
information universally available to participants. Since it is a market centered
in an industry that produces dematerialized outputs, these can respond ‘freely’
to demand-supply forces, in that they experience little if any distance
friction or other obstacles to circulation which can distort the operation of
these forces. Crucial to this possibility is the fact that growing numbers of
governments have been persuaded or led to deregulate the industry and its
markets, thereby enhancing the operation of supply and demand forces, rather
than being encumbrances to their operation. Further, as a global, deregulated,
and electronic market, it has particular capabilities for overriding existing
jurisdictions.
In brief, one might posit that this is as close an approximation
to the model of supply and demand as one might hope for: a market that is not
encumbered by geography, weight, unequal access to information, government
regulation, or particularistic agendas given its highly technical character
and the participation of millions of investors. Has the ultimate market
arrived?
Insofar as an economic analysis of markets excludes firms,
states, and courts from its explanatory variables, the global market for
capital would seem to be a good case through which to explore these assumptions
and propositions. In saying this, one of my assumptions is that today’s global
market for capital is actually distinct and needs to be differentiated from
earlier cases of worldwide financial markets. There is by no means agreement on
this. In what follows
I
briefly explain
the main reasons for my asserting that it is different. Some of these
differences with past financial markets and with other types of markets today
are in turn the features that conceivably would seem to make this market one of
the closest approximations to the economists’ model of the market.
There has long been a market for capital and it has long
consisted of multiple, variously specialized financial markets (Eichengreen
and Fishlow 1996). It has also long had global components (Arrighi 1994).
Indeed, a strong line of interpretation in the literature is that today’s
market for capital is nothing new and represents a return to an earlier global
era at the turn of the twentieth century and, then again, in the interwar
period (Hirst and Thompson 1996).
And yet, I will argue that all of this holds at a high level of
generality, but that when we factor in the specifics of today’s capital market
some significant differences emerge with those past phases. There are, in my
reading, two major sets of differences. One has to do with the level of formalization
and institutionalization of the global market for capital today, which is
partly an outcome of the interaction with national regulatory systems that
themselves gradually became far more elaborate over the last hundred years (see
generally
Hall
and Biersteker 2002). I will not focus on this aspect here (but see Sassen
1996: ch. 2, 2001: ch. 4). The second set of differences concerns the transformative
impact of the new information and communication technologies, particularly
computer based technologies (henceforth referred to for short as digitization).
In combination with the various dynamics and policies we usually refer to as
globalization they have constituted the capital market as a distinct
institutional order, one different from other major markets and circulation
systems such as global trade.
One
of the key and most significant outcomes of digitization on finance has been
the jump in orders of magnitude and the extent of worldwide interconnectedness.
Elsewhere I have posited that there are basically three ways in which
digitization has contributed to this outcome (Sassen 2001: 110-26, 2005). One
is the use of sophisticated software, a key feature of the global financial
markets today and a condition that in turn has made possible an enormous amount
of innovation. It has raised the level of liquidity as well as increased the
possibilities of liquefying forms of wealth hitherto considered non-liquid.
This can require complex instruments; the possibility of using computers
facilitated not only the development of these instruments, but also enabled the
widespread use of these instruments insofar as much of the complexity could be
contained in the software. It allows users who might not fully grasp either the
mathematics or the software design issues to be effective in their deployment
of the instruments.
Second,
the distinctive features of digital networks can maximize the implications of
global market integration by producing the possibility of simultaneous
interconnected flows and transactions, and decentralized access for investors.
Since the late 1980s, a growing number of financial centers have become
globally integrated as countries deregulated their economies. This non-digital
condition raised the impact of the digitization of markets and instruments.
Third,
because finance is particularly about transactions rather than simply flows of
money, the technical properties of digital networks assume added meaning.
Interconnectivity, simultaneity, decentralized access, all contribute to
multiply the number of transactions, the length of transaction chains (i.e. distance
between instrument and underlying asset), and thereby the number of
participants. The overall outcome is a complex architecture of transactions.
The
combination of these conditions has contributed to the distinctive position of
the global capital market in relation to other components of economic
globalization. We can specify two major features, one concerning orders of
magnitude and the second the spatial organization of finance. In terms of the
first, indicators are the actual monetary values involved and, though more difficult
to measure, the growing weight of financial criteria in economic transactions,
sometimes referred to as the financialization of the economy. Since 1980, the
total stock of financial assets has increased three times faster than the aggregate
gross domestic product (GDP) of the twenty-three highly developed countries
that formed the Organization for Economic Cooperation and Development (OECD)
for much of this period; and the volume of trading in currencies, bonds, and
equities has increased about five times faster and now surpasses it by far.
This aggregate GDP stood at US$30 trillion in 2000 while the worldwide value of
internationally traded derivatives reached over US$65 trillion in the late
1990s, a figure that rose to over US$80 trillion by 2000, US$168 trillion by
late 2001, and US$192 trillion in 2002. To put this in perspective we can make
a comparison with the value of other major high-growth components of the global
economy, such as the value of cross-border trade (ca. US$8 trillion in 2000),
and global foreign direct investment stock (US$6 trillion in 2000) (Bank for
International Settlements 2002). Foreign exchange transactions were ten times
as large as world trade in 1983, but seventy times larger in 1999, even though
world trade also grew sharply over this period.1
As
for the second major feature, the spatial organization of finance, it has been
deeply shaped by regulation. In theory, regulation has operated as one of the
key locational constraints keeping the industry, its firms and markets, from
spreading to every corner of the world.2 The wave of deregulations
that began in the mid-1980s has lifted this set of major constraints to
geographic spread. Further, since today it is a highly digitized industry, its
dematerialized outputs can circulate instantaneously worldwide, financial
transactions can be executed digitally, and both, circulation and transactions,
can cut across conventional borders. This raises a host of locational issues
that are quite specific and different from those of most other economic sectors
(Budd 1995; Parr and Budd 2000). The large scale deregulation of the industry
in a growing number of countries since the mid-1980s has brought with it a
sharp increase in access to what were still largely national financial centers
and it enabled innovations which, in turn, facilitated its expansion both
geographically and institutionally. This possibility of locational and
institutional spread also brings with it a heightened level of risk, clearly a
marking feature of the current phase of the market for capital.
Though
there is little agreement on the subject, in my reading these current
conditions make for important differences between today’s global capital market
and the period of the gold standard before the First World War. In many ways
the international financial market from the late 1800s to the interwar period
was as massive as today’s. This appears to be the case if we measure its volume
as a share of national economies and in terms of the relative size of
international flows. The international capital market in that earlier period
was large and dynamic, highly internationalized, and backed by a healthy dose
of Pax Britannica to keep order. The extent of its internationalization can be
seen in the fact that in 1920, for example, Moody’s rated bonds issued by about
fifty governments to raise money in the American capital markets (Sinclair
1994). The depression brought on a radical decline in the extent of this
internationalization, and it was not till very recently that Moody’s was once
again rating the bonds of fifty governments. Indeed, as late as 1985, only
fifteen foreign governments were borrowing in the US capital markets. Not
until after 1985 did the international financial markets re- emerge as a major
factor.3
One
type of difference concerns the growing concentration of market power in
institutions such as pension funds and insurance companies. Institutional
investors are not new. What is different beginning in the 1980s is the
diversity of types of funds and the rapid escalation of the value of their
assets. There are two phases in this short history, one going into the early
1990s and the second one taking off in the later 1990s. Just focusing briefly
on the first phase, and considering pension funds, for instance, their assets
more than doubled in the United States from $1.5 trillion in 1985 to $3.3
trillion in 1992. Pension funds grew threefold in the United Kingdom and
fourfold in Japan over that same period, and they more than doubled in Germany
and in Switzerland. In the United States, institutional investors as a group
came to manage two-fifths of US households’ financial assets by the early
1990s, up from one-fifth in 1980. Further, the global capital market is increasingly
a necessary component of a growing range of types of transactions, such as the
diversity of government debts that now get financed through the global market:
increasingly, kinds of debt that were thought to be basically local, such as
municipal debt, are now entering this market. The overall growth in the value
of financial instruments and assets also was evident with institutional
investors whose assets rose as a share of GDP (Table 1.1).
Besides
the growth of older types of institutional investors, the late 1990s also saw a
proliferation of institutional investors with extremely speculative investment
strategies. Hedge funds are among the most speculative of these institutions;
they sidestep certain disclosure and leverage regulations by having a small
private clientele and, frequently, by operating offshore. While they are not
new, the growth in their size and their capacity to affect the functioning of
markets certainly grew enormously in the 1990s and they emerged as
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Table 1.1. Financial Assets of Institutional Investors, 1990-7,
Selected Years and Countries (bn USD)
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Source: Based on OECD,
International Direct Investment. Statistical Yearbook 1999, table 8.1.
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a
major force by the late 1990s. According to some estimates they numbered 1,200
with assets of over $150 billion by mid-1998 (Bank for International
Settlements 2000), which was more than the $122 billion in assets of the total
of almost 1,500 equity funds as of October 1997 (United Nations Conference
1998). Both of these types of funds need to be distinguished from asset management
funds, of which the top ten are estimated to have $10 trillion under
management.4
A second set of differences has to do with the properties that
the new information technologies bring to the financial markets, already
briefly addressed earlier. Two sets of properties need to be emphasized here:
one, instantaneous transmission, interconnectivity, and speed; and the other,
increased digitization of transactions and the associated increase in
capacities to liquefy assets. Gross volumes have increased enormously. And the
speed of transactions has brought its own consequences. Trading in currencies
and securities is instant thanks to vast computer networks. Further, the high
degree of interconnectivity in combination with instantaneous transmission
signals the potential for exponential growth.
A third major difference is the explosion in financial
innovations, also partly discussed above. Innovations have raised the supply of
financial instruments that are tradable—sold on the open market. There are
significant differences by country. Securitization is well advanced in the
United States, but just beginning in most of Europe. The proliferation of
derivatives has furthered the linking of national markets by making it easier
to exploit price differences between different financial instruments, that is,
to arbitrage.5 By 1994 the total stock of derivatives sold over the
counter or traded in exchanges had risen to over US$30 trillion, a historical
high; this had doubled to US$65 trillion only a few years later, in 1999.
One indicator of this growing importance of cross-border
transactions is the value of cross-border transactions in bonds and equities as
a percentage of GDP in the leading developed economies. Table 1.2 presents this
information for a handful of these countries and shows the recency of this
accelerated increase. For instance, the value of such transactions represented
4% of GDP in 1975 in the United States, 35% in 1985 when the new financial era
is in full swing, but had quadrupled by 1995 and risen to 230% in 1998. Other
countries show even sharper increases. In Germany, this share grew from 5% in
1975 to 334% in 1998; in France it went from 5% in 1980 to 415% in 1998. In
part, this entails escalating levels of risk and innovation driving the
industry. It is only over the last decade and a half that we see this
acceleration.
The drive to produce innovations is one of the marking features
of the financial era that begins in the 1980s. The history of finance is in
many ways a long history of innovations. But what is perhaps different today is
the intensity of the current phase and the multiplication of instruments that
lengthen the distance between the financial instrument and actual underlying
asset. This is reflected, for instance, in the fact that stock market
capitalization and
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Table 1.2.
Cross-border Transactions in Bonds and Equities, (*) 1975 to 1998, Selected
Years and Countries as a percentage of GDP
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|
Note: (*) Denotes gross purchases and sales of securities between
residents and non-residents. Source: Bank for International Settlements (BIS), Annual Report 1999,
April 1998-June 1999: 10.
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securitized
debt, before the financial crisis of 1997-8, in North America, the European
Union, and Japan amounted to $46.6 trillion in 1997, while their aggregate GDP
was $21.4 and global GDP was $29 trillion. Further, the value of outstanding
derivatives in these same sets of countries stood at $68 trillion, which was
about 146% of the size of the underlying capital markets (International
Monetary Fund 1999).
Today,
after considerable deregulation in the industry, the incorporation of a growing
number of national financial centers into a global market, and the sharp use of
electronic trading, the actual spatial organization of the industry can be
seen as a closer indicator of its market-driven locational dynamics than was
the case in the earlier regulatory phase. This would hold especially for the
international level given the earlier prevalence of highly regulated and closed
national markets; but also in some cases for domestic markets, given barriers
to interstate banking, for example, in the United States.
There
has, indeed, been geographic decentralization of certain types of financial
activities, aimed at securing business in the growing number of countries
becoming integrated into the global economy. Many of the leading investment
banks have operations in more countries than they had twenty years ago. The
same can be said for the leading accounting, legal, and other specialized
corporate services whose networks of overseas affiliates have seen explosive
growth (Johnston, Taylor, and Watts 2002; Taylor et al. 2002). And it can be
said for some markets: for example, in the 1980s all basic wholesale foreign
exchange operations were in London. Today these are distributed among London
and several other centers (even though their number is far smaller than the
number of countries whose currency is being traded).
But
empirically what stands out in the evidence about the global financial markets
after a decade and a half of deregulation, worldwide integration, and major
advances in electronic trading is the extent of locational concentration and
the premium firms are willing to pay to be in major centers. Large shares of
many financial markets are disproportionately concentrated in a few financial
centers. This trend toward consolidation in a few centers also is evident
within countries. Further, this pattern toward the consolidation of one leading
financial center per country is a function of rapid growth in the sector, not
of decay in the losing cities.
The
sharp concentration in leading financial markets can be illustrated with a few
facts.6 London, New York, Tokyo (notwithstanding a national economic
recession), Paris, Frankfurt, and a few other cities regularly appear at the
top and represent a large share of global transactions. This holds even after
the September 11 attacks that destroyed the World Trade Center (albeit that
this was not largely a financial complex) in NY and were seen by many as a
wake-up call about the vulnerabilities of strong concentration in a limited
number of sites. Table 1.3 shows the extent to which the pre-September
11
levels of
concentration in stock market capitalization in a limited number of global
financial centers held after the attacks. Table 1.4 shows the foreign listings
in the major markets, further indicating that location in a set of financial
markets is one of the features of the global capital market, rather than a
reduced need for being present in multiple markets. London, Tokyo, New York,
Paris (now consolidated with Amsterdam and Brussels as Euronext), Hong Kong, and
Frankfurt account for a major share of worldwide stock market capitalization.
London, Frankfurt, and New York account for an
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Table 1.3. The Ten
Biggest Stock Markets in the World by Market Capitalization
(bn USD)
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Note: Euronext
includes Brussels, Amsterdam, and Paris; 2001 figures are year end figures. Source: Compiled from
the BIS 2001 Annual Report: 92, with calculations of percentages added.
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Table 1.4. Foreign
Listings in Major Stock Exchanges
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Note: Euronext
includes Brussels, Amsterdam, and Paris; 2001 figures are year end figures. Source: Compiled from
the BIS 2001 Annual Report: 86, with calculations of percentages added.
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enormous
world share in the export of financial services. London, New York, and Tokyo
account for over one-third of global institutional equity holdings, this as of
the end of 1997 after a 32% decline in Tokyo’s value over 1996. London, New
York, and Tokyo account for 58% of the foreign exchange market, one of the few
truly global markets; together with Singapore, Hong Kong, Zurich, Geneva,
Frankfurt, and Paris, they account for 85% in this, the most global of markets.
This
trend toward consolidation in a few centers, even as the network of integrated
financial centers expands globally, also is evident within countries. In the
United States for instance, New York concentrates the leading investment banks
with only one other major international financial center in this enormous
country, Chicago. Sydney and Toronto have equally gained power in continentally
sized countries and have taken over functions and market share from what were
once the major commercial centers, respectively Melbourne and Montreal. So have
Sao Paulo and Mumbai, which have gained share and functions from respectively
Rio de Janeiro in Brazil and New Delhi and Calcutta in India. These are all
enormous countries and one might have thought that they could sustain multiple
major financial centers. This pattern is evident in many countries.7
Consolidation of one leading financial center in each country is an integral
part of the growth dynamics in the sector rather than the result of losses in
the losing cities.
There
is both consolidation in fewer major centers across and within countries and a
sharp growth in the numbers of centers that become part of the global network
as countries deregulate their economies. Mumbai, for instance, became
incorporated in the global financial network in the early 1990s after India
(partly) deregulated its financial system. This mode of incorporation into the
global network is often at the cost of losing functions which these cities may
have had when they were largely national centers. Today the leading, typically
foreign, financial, accounting, and legal services firms enter their markets to
handle many of the new cross-border operations. Incorporation in the global
market typically happens without a gain in their global share of the particular
segments of the market they are in even as capitalization may increase, often
sharply, and even though they add to the total volume in the global market.
Why is
it that at a time of rapid growth in the network of financial centers, in
overall volumes, and in electronic networks, we have such high concentration
of market shares in the leading global and national centers? Both globalization
and electronic trading are about expansion and dispersal beyond what had been
the confined realm of national economies and floor trading. Indeed, one might
well ask why financial centers matter at all.
The
continuing weight of major centers is, in a way, countersensical, as is, for
that matter, the existence of an expanding network of financial centers. The
rapid development of electronic exchanges, the growing digitization of much
financial activity, the fact that finance has become one of the leading sectors
in a growing number of countries, and that it is a sector that produces a dematerialized,
hypermobile product, all suggest that location should not matter. In fact
geographic dispersal would seem to be a good option given the high cost of
operating in major financial centers. Further, the last ten years have seen an
increased geographic mobility of financial experts and financial services
firms.
There
are, in my view, at least three reasons that explain the trend toward
consolidation in a few centers rather than massive dispersal.
The
Importance of Social Connectivity and Central Functions
First,
while the new communication technologies do indeed facilitate geographic
dispersal of economic activities without losing system integration, they have
also had the effect of strengthening the importance of central coordination and
control functions for firms and, even, for markets.8 Indeed for
firms in any sector, operating a widely dispersed network of branches and
affiliates and operating in multiple markets has made central functions far
more complicated. Their execution requires access to top talent, not only
inside headquarters but also, more generally, to innovative milieus—in technology,
accounting, legal services, economic forecasting, and all sorts of other, many
new, specialized corporate services. Major centers have massive concentrations
of state of the art resources that allow maximization of the benefits of the
new communication technologies and to govern the new conditions for operating
globally. Even electronic markets such as NASDAQ and E-Trade rely on traders
and banks which are located somewhere, with at least some in a major financial
center. The question of risk and how it is handled and perceived is yet another
factor which has an impact on how the industry organizes itself, where it
locates operations, what markets become integrated into the global capital
market, and so on.
One
fact that has become increasingly evident is that to maximize the benefits of
the new information technologies firms need not only the infrastructure but a
complex mix of other resources. In my analysis organizational complexity is a
key variable allowing firms to maximize the utility/benefits they can derive
from using digital technology (Sassen 2001: 110-26). In the case of financial
exchanges we could make a parallel argument. Most of the value added that these
technologies produce for advanced service firms and exchanges lies in so-called
externalities. And this means the material and human resources— state of the
art office buildings, top talent, and the social networking infrastructure that
maximizes connectivity. Any town can have fiber optic cables, but this is not
sufficient for global social connectivity (Garcia 2002).
A
second fact that is emerging with greater clarity concerns the meaning of
‘information’. There are two types of information. One is the datum, which may
be complex yet is standard knowledge: the level at which a stock market closes,
a privatization of a public utility, the bankruptcy of a bank. But there is a
far more difficult type of ‘information’, akin to an interpretation/
evaluation/judgment. It entails negotiating a series of datums and a series of
interpretations of a mix of datums in the hope of producing a higher order
datum. Access to the first kind of information is now global and immediate from
just about any place in the highly developed world thanks to the digital
revolution. But it is the second type of information that requires a
complicated mixture of elements—the social infrastructure for global
connectivity— which gives major financial centers a leading edge.
It
is possible, in principle, to reproduce the technical infrastructure anywhere.
Singapore, for example, has technical connectivity matching Hong Kong’s. But
does it have Hong Kong’s social connectivity? At a higher level of global
social connectivity we could probably say the same for Frankfurt and London.
When the more complex forms of information needed to execute major
international deals cannot be gotten from existing data bases, no matter what
one can pay, then one needs the social information loop and the associated de
facto interpretations and inferences that come with bouncing off information
among talented, informed people. It is the weight of this input that has given
a whole new importance to credit rating agencies, for instance. Part of the
rating has to do with interpreting and inferring. When this interpreting
becomes ‘authoritative’ it becomes ‘information’ available to all. The process
of making inferences/interpretations into ‘information’ takes quite a mix of
talents and resources.
In
brief, financial centers provide the social connectivity that allows a firm or
market to maximize the benefits of its technical connectivity.
Global
firms and markets in the financial industry need enormous resources, a trend
which is leading to rapid mergers and acquisitions of firms and strategic
alliances among markets in different countries. These are happening on a scale
and in combinations few would have foreseen as recently as the early 1990s.
There are growing numbers of mergers among respectively financial services firms,
accounting firms, law firms, insurance brokers, in brief, firms that need to
provide a global service. A similar evolution is also possible for the global
telecommunications industry which will have to consolidate in order to offer a
state of the art, globe-spanning service to its global clients, among which are
the financial firms.
I
would argue that yet another kind of ‘merger’ is the consolidation of electronic
networks that connect a very select number of markets. There are a number of
networks connecting markets that have been set up in the last few years. In
1999 NASDAQ, the second largest US stock market after the New York Stock
Exchange (NYSE), set up NASDAQ Japan and in 2000 NASDAQ Canada. This gives
investors in Japan and Canada direct access to the market in the United States.
Europe’s more than thirty stock exchanges have been seeking to shape various
alliances. Euronext (NEXT) is Europe’s largest stock exchange merger, an
alliance among the Paris, Amsterdam, and Brussels Bourses. The Toronto Stock
Exchange has joined an alliance with the NYSE to create a separate global
trading platform. The NYSE is a founding member of a global trading alliance,
Global Equity Market (GEM) which includes ten exchanges, among them Tokyo and
NEXT. Also small exchanges are merging: in March 2001 the Tallinn Stock
Exchange in Estonia and its Helsinki counterpart created an alliance. A novel
pattern is hostile takeovers, not of firms, but of markets, such as the
(failed) attempt by the owners of the Stockholm Stock Exchange to buy the
London Stock Exchange (for a price of US$3.7 billion).
These
developments may well ensure the consolidation of a stratum of select financial
centers at the top of the worldwide network of thirty or forty cities through
which the global financial industry operates.9 Taking an indicator
such as equities under management shows a similar pattern of spread and
simultaneous concentration at the top of the hierarchy. The worldwide
distribution of equities under institutional management is spread among a large
number of cities which have become integrated in the global equity market
along with deregulation of their economies and the whole notion of ‘emerging
markets’ as an attractive investment destination. In 1999 (the latest year for
which data are available), institutional money managers around the world
controlled approximately US$14 trillion. Thomson Financials (1999), for
instance, has estimated that at the end of 1999, twenty-five cities accounted
for about 80% of the world’s valuation. These twenty-five cities also accounted
for roughly 48% of the total market capitalization of the
world
which stood at US$24 trillion at the end of 1999. On the other hand, this
global market is characterized by a disproportionate concentration in the top
six or seven cities. London, New York, and Tokyo together accounted for a third
of the world’s total equities under institutional management in 1999.
These
developments make clear a second important trend that in many ways specifies
the current global era. These various centers do not just compete with each
other: there is collaboration and division of labor. In the international
system of the postwar decades, each country’s financial center, in principle,
covered the universe of necessary functions to service its national companies
and markets. The world of finance was, of course, much simpler than it is
today. In the initial stages of deregulation in the 1980s there was a strong
tendency to see the relation among the major centers as one of straight competition
when it came to international transactions. New York, London, and Tokyo, then
the major centers in the system, were seen as competing. But in my research in
the late 1980s on these three top centers I found clear evidence of a division
of labor already there. They remain the major centers in the system today with
the addition of Frankfurt and Paris in the 1990s. What we are seeing now is an
additional pattern whereby the cooperation or division of functions is
somewhat institutionalized: strategic alliances not only between firms across
borders but also between markets. There is competition, strategic
collaboration, and hierarchy.
In
brief, the need for enormous resources to handle increasingly global operations
in combination with the growth of central functions described earlier, produces
strong tendencies toward concentration and hence hierarchy even as the network
of financial centers has expanded.
National
attachments and identities are becoming weaker for global firms and their
customers. This is particularly strong in the West, but may develop in Asia as
well. Deregulation and privatization have weakened the need for national
financial centers. The nationality question simply plays differently in these
sectors than it did even a decade ago. Global financial products are accessible
in national markets and national investors can operate in global markets. For
instance, some of the major Brazilian firms now list on the NYSE, and bypass
the Sao Paulo exchange, a new practice which has caused somewhat of an uproar
in specialized circles in Brazil (Schiffer 2002). While it is as yet
inconceivable in the Asian case, this may well change given the growing number
of foreign acquisitions of major firms in several countries after the 1997-8
crisis. Another indicator of this trend is the fact that the major US and
European investment banks have set up specialized offices in London to handle
various aspects of their global business. Even French banks have set up some of
their global specialized operations in London, inconceivable a decade ago and
still not avowed in national rhetoric.
One way of describing this process is as what I call an
incipient and highly specialized denationalization of particular institutional
arenas (Sassen 2004). It can be argued that such denationalization is a
necessary condition for economic globalization as we know it today. The
sophistication of this system lies in the fact that it only needs to involve
strategic institutional areas—most national systems can be left basically
unaltered. China is a good example. It adopted international accounting rules
in 1993, necessary to engage in international transactions. To do so it did
not have to change much of its domestic economy. Japanese firms operating
overseas adopted such standards long before Japan’s government considered
requiring them. In this regard the ‘wholesale’ side of globalization is quite
different from the global consumer markets, in which success necessitates
altering national tastes at a mass level. This process of denationalization has
been strengthened by state policy enabling privatization and foreign
acquisition. In some ways one might say that the Asian financial crisis has
functioned as a mechanism to denationalize, at least partly, control over key
sectors of economies which, while allowing the massive entry of foreign
investment, never relinquished that control.10
Major
international business centers produce what we could think of as a new
subculture, a move from the ‘national’ version of international activities to
the ‘global’ version. The long-standing resistance in Europe to M&As,
especially hostile takeovers, or to foreign ownership and control in East Asia,
signal national business cultures that are somewhat incompatible with the new
global economic culture. I would posit that major cities, and the variety of
so-called global business meetings (such as those of the World Economic Forum
in Davos and other similar occasions), contribute to denationalize corporate
elites. Whether this is good or bad is a separate issue; but it is, I would
argue, one of the conditions for setting in place the systems and sub-cultures
necessary for a global economic system.
The
explosive growth in financial markets in combination with the tight
organizational structure of the industry described in the preceding section,
suggest that the global capital market today contributes to a distinct
political economy. The increase in volumes per se may be secondary in many
regards. But when these volumes can be deployed, for instance, to overwhelm
national central banks, as happened in the 1994 Mexico and the 1997 Thai
crises, then the fact itself of the volume becomes a significant variable.11
Further, when globally integrated electronic markets can enable
investors rapidly to withdraw well over US$100 billion from a few countries in
South East Asia in the 1997-8 crisis, and the foreign currency markets had the
orders of magnitude to alter exchange rates radically for some of these
currencies, then the fact of digitization emerges as a significant variable
that goes beyond its technical features.12
These
conditions raise a number of questions concerning the impact of this
concentration of capital in markets that allow for high degrees of circulation
in and out of countries. Does the global capital market now have the power to
‘discipline’ national governments, that is to say, to subject at least some
monetary and fiscal policies to financial criteria where before this was not
quite the case? How does this affect national economies and government policies
more generally? Does it alter the functioning of democratic governments? Does
this kind of concentration of capital reshape the accountability relation that
has operated through electoral politics between governments and their people?
Does it affect national sovereignty? And, finally, do these changes reposition
states and the interstate system in the broader world of cross-border
relations? These are some of the questions raised by the particular ways in
which digitization interacts with other variables to produce the distinctive
features of the global capital market today. The responses in the scholarly
literature vary, ranging from those who find that in the end the national state
still exercises the ultimate authority in these matters (Gilbert and Helleiner
1999; Andrew, Henning, and Pauly 2002) to those who see an emergent power
gaining at least partial ascendance over national states (Panitch 1996).
For
me these questions signal the existence of a second type of embeddedness: the
largely digitized global market for capital is embedded in a thick world of
national policy and state agencies. It is so in a double sense. First, as has
been widely recognized, in order to function these markets require specific
types of guarantees of contract and protections, and specific types of
deregulation of existing frameworks (Graham and Richardson 1997; Garrett 1998;
Picciotto and Mayne 1999). An enormous amount of government work has gone into
the development of standards and regimes to handle the new conditions entailed
by economic globalization. Much work has been done on competition policy and on
the development of financial regulations, and there has been considerable willingness
to innovate and to accept whole new policy concepts by governments around the
world. The content and specifications of much of this work is clearly shaped
by the frameworks and traditions evident in the North Atlantic region. This is
not to deny the significant differences between the United States and the
European Union for instance, or among various individual countries. But rather
to emphasize that there is a clear western style that is dominant in the
handling of these issues and second, that we cannot simply speak of
‘Americanization’ since in some cases Western European standards emerge as the
ruling ones.
Second,
in my reading, today the global financial markets are not only capable of
deploying the raw power of their orders of magnitude but also of producing
‘standards’ that become integrated into national public policy and shape the
criteria for what has come to be considered ‘proper’ economic policy.13
The operational logic of the capital market contains criteria for what leading
financial interests today consider not only sound financial, but also economic
policy. These criteria have been constructed as norms for important aspects of
national economic policymaking going far beyond the financial sector as such.14
These
dynamics have become evident in a growing number of countries as these became
integrated into the global financial markets. For many of these countries,
these norms have been imposed from the outside. As has often been said, some
states are more sovereign than others in these matters. Some of the more
familiar elements that have become norms of ‘sound economic policy’ are the new
importance attached to the autonomy of central banks, anti-inflation policies,
exchange rate parity and the variety of items usually referred to as ‘IMF
conditionality’.15 The IMF has been an important vehicle for
instituting standards that work to the advantage of global firms and markets
generally, very often to the detriment of other types of economic actors (e.g.
Ferleger and Mandle 2000).16
Digitization
of financial markets and instruments played a crucial role in raising the
orders of magnitude, the extent of cross-border integration, and hence the raw
power of the global capital market. Yet this process was shaped by interests
and logics that typically had little to do with digitization per se, even
though the latter was crucial. This makes clear the extent to which these
digitized markets are embedded in complex institutional settings. Second, while
the raw power achieved by the capital markets through digitization also
facilitated the institutionalizing of certain finance-dominated economic criteria
in national policy, digitization per se could not have achieved this policy
outcome.
The
vast new economic topography implemented through the emergence and growth of
electronic markets is but one element in an even vaster economic chain that is
in good part embedded in non-electronic spaces. There is today no fully
virtualized market, firm or economic sector. Even finance, the most digitized, dematerialized,
and globalized of all sectors has a topography that weaves back and forth
between actual and digital space. This essay sought to show that these features
produce a double type of embeddedness in the case of today’s global and largely
digitized market for capital.
One
of these is that the globalization itself of the market has raised the level of
complexity of this market and its dependence on multiple types of non-digital
resources and conditions. Information technologies have not eliminated the
importance of massive concentrations of material resources but have, rather,
reconfigured the interaction of capital fixity and hypermobility. The complex
management of this interaction is dependent in part on the mix of resources and
talents concentrated in a network of financial centers. This has given a
particular set of places, global cities, a new competitive advantage in the
functioning of the global capital market at a time when the properties of the
new information and communication technologies could have been expected to
eliminate the advantages of agglomeration, particularly for leading and
globalized economic sectors, and at a time when national governments have lost
some authority over these markets.
In
theory, the intensification of deregulation and the instituting of policies in
various countries aimed at creating a supportive cross-border environment for
financial market transactions, could have dramatically changed the locational
logic of the industry. This is especially the case because it is a digitized
and globalized industry that produces dematerialized outputs. It could be
argued that the one feature that could keep this industry from having a very
broad range of locational options would be regulation. With deregulation that
constraint should be disappearing. Other factors such as the premium paid for
location in major cities should be a deterrent to locate there and with the new
developments of telecommunications there should be no need for such central
locations.
The
second type of embeddedness is that at the same time, these new technologies
have raised the orders of magnitude and capabilities of finance to thresholds
that make it a sector distinct from other major sectors in the economy. The
effect has been a financializing of economies and the growing weight of the
operational logic of financial markets in shaping economic norms for
policymaking. This is significant in two ways. No matter how globalized and
electronic, finance requires specific regulatory conditions and hence depends
partly on the participation of national states to produce these conditions. The
other is that this participation has taken the form of introducing into public
policy a set of criteria that reflect the current operational logic of the
global market for capital. The formation of a global capital market has come to
represent a concentration of power that is capable of influencing national
government economic policy, and by extension other policies.
The
organizing effort in this essay was to map the locational and institutional
embeddedness of the global capital market. In so doing, the paper also sought
to signal that there might be more potential for governmental participation in
the governance of the global economy than much current commentary on globalization
allows for given its emphasis on hypermobility, telecommunications, and
electronic markets. But the manner of this participation may well be quite
different from long-established forms. Indeed, we may be seeing instances where
the gap between these older established conceptions and actual global
dynamics—particularly in the financial markets—is making possible the emergence
of a distinct zone for transactions and governance mechanisms, which although
electronic and cross-border in some of its key features, is nonetheless
structured and partly located in a specific geography. By emphasizing the
embeddedness of the most digitized and global of all markets, the market for
capital, the analysis presented here points to a broader conceptual landscape within
which to understand global electronic markets today, both in theoretical and in
policy terms.
1.
The foreign
exchange market was the first one to globalize, in the mid-1970s. Today it is
the biggest and in many ways the only truly global market. It has gone from a
daily turnover rate of about US$15 billion in the 1970s, to US$60 billion in
the early 1980s, and an estimated US$1.3 trillion today. In contrast, the total
foreign currency reserves of the rich industrial countries amounted to about 1
trillion in 2000.
2.
Wholesale finance
has historically had strong tendencies toward cross-border circulation,
whatever the nature of the borders might have been. Venice based Jewish bankers
had multiple connections with those in Frankfurt, and those in Paris with those
in London; the Hawala system in the Arab world was akin to the Lombard system
in western Europe. For a detailed discussion see Arrighi (1994).
3.
Switzerland’s
international banking was, of course, the exception. But this was a very
specific type of banking and does not represent a global capital market, particularly
given the fact that it was a basically closed national financial system at the
time.
4.
The level of
concentration is enormous among these funds, partly as a consequence of mergers
and acquisitions driven by the need for firms to reach what are de facto the
competitive thresholds in the global market today.
5.
While currency
and interest-rates derivatives did not exist until the early 1980s and
represent two of the major innovations of the current period, derivatives on
commodities, so-called futures, have existed in some version in earlier
periods. Famously, Amsterdam’s stock exchange in the seventeenth century—when
it was the financial capital of the world—was based almost entirely on trading
in commodity futures.
6.
Among the main
sources of data for the figures cited in this section are BIS (the Bank for
International Settlements in Basel); IMF national accounts data; specialized
trade publications such as Wall Street
Journal’s WorldScope, MorganStanley Capital International, The Banker,
data listings in the Financial Times
and in The Economist
and, especially for a focus on cities, the data produced by Technimetrics,
Inc., now part of Thomson Financial.
7.
In France, Paris
today concentrates larger shares of most financial sectors than it did ten
years ago and once important stock markets like Lyon have become ‘provincial’,
even though Lyon is today the hub of a thriving economic region. Milano
privatized its exchange in September 1997 and electronically merged Italy’s ten
regional markets. Frankfurt now concentrates a larger share of the financial
market in Germany than it did in the early 1980s, and so does Zurich, which
once had Basel and Geneva as significant competitors.
8.
This is one of
the seven organizing hypotheses through which I specified my global city model.
(For a full explanation see Sassen 2001, preface to new edition.)
9.
We now also know
that a major financial center needs to have a significant share of global
operations to be such. If Tokyo does not succeed in getting more of such
operations, it is going to lose position in the global hierarchy
notwithstanding its importance as a capital exporter. It is this same capacity
for global operations that will keep New York at the top levels of the
hierarchy even though it is largely fed by the resources and the demand of
domestic (though state-of-the-art) investors.
10.
For instance,
Lehman Brothers bought Thai residential mortgages worth half a billion dollars
for a 53% discount. This was the first auction conducted by the Thai
government’s Financial Restructuring Authority which conducted the sale of $21
billion of financial companies’ assets. It also acquired the Thai operations of
Peregrine, the failed Hong Kong investment bank. The fall in prices and in the
value of the yen has made Japanese firms and real estate attractive targets for
foreign investors. Merril Lynch’s has bought thirty branches of Yamaichi
Securities, Societe Generale Group 80% of Yamaichi International Capital
Management, Travelers Group is now the biggest shareholder of Nikko, the third
largest brokerage, and Toho Mutual Insurance Co. announced a joint venture with
GE Capital. These are but some of the best known examples. Much valuable
property in the Ginza—Tokyo’s high priced shopping and business district—is now
being considered for acquisition by foreign investors in a twist on
Mitsubishi’s acquisition of Rockefeller Center in New York City a decade
earlier.
11.
The new financial
landscape maximizes these impacts: the declining role of commercial banks and
the ascendance of securities industry (with limited regulation and significant
leverage), the greater technical capabilities built into the industry, and
aggressive hedging activities by asset management funds. Rather than counteracting
the excesses of the securities industries, banks added to this landscape by
accepting the forecast of long-term growth in these economies (thus also adding
to the capital inflow and to the fairly generalized disregard for risk and
quality of investments), and then joining the outflow. Furthermore, at the
center of these financial crises were institutions whose liabilities were
perceived as having an implicit government guarantee, even though as
institutions they were essentially unregulated, and thus subject to so-called
‘moral hazard’ problems, that is, the absence of market discipline. Anticipated
protection from losses based on the IMF’s willingness to assist in bailing out
international banks and failed domestic banks in Mexico encouraged excessive
risk-taking. It is not the first time that financial intermediaries with
substantial access to government liability guarantees posed a serious problem
of moral hazard, in the United States savings and loan crisis being an earlier
instance (Brewer, Evanoff, and Jacky 2001).
12.
Global capital
market integration, much praised in the 1990s for enhancing economic growth,
became the problem in the East Asian financial crisis. Although the
institutional structure for regulating the economy is weak in many of these
countries, as has been widely documented, the fact of global capital market
integration played the crucial role in the East Asian crisis as it contributed
to enormous over-leveraging and to a boom-bust attitude by investors, who
rushed in at the beginning of the decade and rushed out when the crisis began
even though the soundness of some of the economies involved did not warrant
that fast a retreat. The magnitude of debt accumulation, only made possible by
the availability of foreign capital, was a crucial factor: in 1996 the total
bank debt of East Asia was $2.8 trillion, or 130% of GDP, nearly double that
from a decade earlier. By 1996 leveraged debt for the median firm had reached
620% in South Korea, 340% in Thailand and averaged 150-200% across other East
Asian countries. This was financed with foreign capital inflows that became
massive outflows in 1997 (Bank for International Settlements 2000).
13.
I (1996: ch. 2)
try to capture this normative transformation in the notion of privatizing certain
capacities for making norms that in the recent history of states under the rule
of law were in the public domain. Now what are actually elements of a private
logic emerge as public norms even though they represent particular rather than
public interests. This is not a new occurrence in itself for national states
under the rule of law; what is perhaps different is the extent to which the
interests involved are global.
14.
This is not to
deny that other economic sectors, particularly when characterized by the
presence of a limited number of very large firms, have exercised specific types
of influence over government policymaking (Dunning 1997).
15.
Since the
Southeast Asian financial crisis there has been a revision of some of the
specifics of these standards. For instance, exchange rate parity is now posited
in less strict terms. The crisis in Argentina that broke in December 2001 has
further raised questions about aspects of IMF conditionality. But neither
crisis has eliminated the latter.
16.
One instance here
is the IMFs policy that makes it cheaper for investors to provide short-term
loans protected by the IMF at the expense of other types of investments. The
notion behind this capital standard is that short-term loans are generally
thought to have less credit risk, and as a result the Basel capital rules weigh
cross-border claims on banks outside the OECD system at 20% for shortterm
loans—under one year, and at 100% if over a year. This encouraged shortterm
lending by banks in developing countries. Borrowers, given lower rates, took
short-term loans. The result was the accumulation of a large volume of repayment
coming due in any given year. Thus Basle risk weights and market risk do not
interact properly as a signal. According to the Basle weight risks, it was
safer to lend to a Korean bank than to a Korean conglomerate as the latter
would incur a 100% weight capital charge, compared to 20% for a bank. The
official position was thus to extend more loans to the banks than to the
conglomerates.
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