- Email: [email protected]
Global financial challenges for the new millenium
GLOBAL FINANCIAL CHALLENGES THE NEW MILLENIUM Manuchehr
FOR
Shahrokhi
During the past decade we have witnessed a great deal of changes, many triumphs and tragedies. We have seen the rush to privatization and marketization of many centrally-planned economies, removal of trade barriers, trade pacts and economic unions, to integration of financial markets. Some of these changes have had dramatic impacts on the financial community and global economy. New technologies-especially in computers, electronics, and communications-have changed the global economy’s landscape. The impact of such changes will be even more dramatic in the future. The Internet and multimedia have and are putting their marks on almost everything including, banking and financial services, education, marketing, engineering, sciences, medical technology, geography, art, and even zoology. We have witnessed financial crises, monetary and otherwise, that are so rampant all over the world, from Chile, to Mexico, to the Asian Tigers: Thailand, Indonesia, Malaysia, South Korea, Hong Kong, the Philippines, and Singapore. These are the same countries that were considered as positive role models for the emerging markets only six months earlier. One impact of crises like the so-called Asian Contugont or Flu (as if such crises were developed overnight by some flue virus and are to disappear in a few days with no long-lasting impact!) would be the changing of the Asian Century to the Pacific Cenhuy, a long awaited title for the new millenium not to mention a trillion dollars loss due to the devaluation of currencies and financial securities. These are infrastructural carcinogenic diseases that require long-term therapy and they are definitely not flues. These economies have been afflicted with multiple diseases including, mismanagement, cronycapitalism, corruption, liquidity, capital flight, speculation, fiscal, monetary, and of course the crisis of confidence. The national and international finance and politics, what I call finapolicyl (Rubin-Summers-Greenspan-Camdessuss (IMF) diplomacy with the debt-ridden country officials) have taken the center stage. Even though the growth rates in the global trade and investment have outpaced the growth rate in the GDP worldwide in the past three to four decades,
Manuchehr Shahrokhi, School of Business, California State Unvewty, Tel: 209-278-4058; Fax 209-278-4911 (4886), [email protected]. Global Finance Journal, 9(l): l-4 ISSN: 1044-0283
Fresno,
CA 93749-0007;
Copyright 0 1998 by JAI Press Inc. All rights of reproduction in any form reserved.
2
GLOBAL FINANCE JOURNAL
9(l), 1998
in relative terms, the world trade is less globalized now as compared to the beginning of the 20th Century. While we have seen benefits of globalization, we have also witnessed its drawbacks and the widening gap between the rich and poor. The world is taking a new order and financial economics is among the driving forces behind such dramatic changes. I would like to remind my colleagues of the role and responsibility of scientists as succinctly put forth by Freeman Dyson, the Nobel Laureate physicist and philosopher: “The failure of science to produce benefits for the poor in recent decades is due to two factors working in combination: the pure scientists have become more detached from the mundane needs of humanity, and the applied scientists have become more attached to immediate profitability.“’
The new World Trade Organization shall face major challenges as global trading expands, competition intensifies, and a new devalued Asian export machine floods the global marketplace with cheap products. [Contrary to what GATT and WTO have worked so hard to achieve over a half a century]. Trade war and protectionism on a regional or global basis may bring in new barriers to trade and investment. The forecast for economic growth has already been reduced by half and some on Wall Street are debating the impacts of a “deflation” on a worldwide basis. To properly address the global or regional currency and financial crises, the debate should focus on alternative ways of bringing the crisis under control and finding permanent solutions. Alternatives including the monetary, fiscal, and infrastructural and their applicability should be evaluated, identified, and implemented. A case study would be the financial crises of the mid-1990s in Argentina and Mexico; two different policy solutions and two different results.3 The purposes of such studies should include learning from the crises and finding ways to avoid them. Predicting solely on a non-scientific basis, one would detect trend growth, emphasis, and importance in the following areas which are fertile grounds for scholarly work and intellectual contributions by academics and practitioners: l
l
l
l l
l
l
l
Globalization of markets in all forms is here to stay and its pace shall accelerate. Technology shall have material impacts on the global economy at macro and micro levels. The Net, E-Commerce, and digital economy shall change our consumption and investment patterns and behavior globally. Global economy especially financial markets shall be more consolidated. Monetary issues such as the Euro and its impact and implications shall have material change on many of our policies and transactions. The use of ‘Currency Boards’ shall become more widespread in the emerging markets. Investing via mutual funds, country funds, ADRs, and similar instruments shall become more widespread globally. Financial engineering and development of exotic instruments shall become more global.
Challenges for the Nezu Millenium
l
3
Financial education and the use of multimedia, the Net, and other technological advances and equipment shall enhance our ability to learn and educate. Knowledge is power and the new information technology is a new and extremely efficient force. We must utilize it.
The new global economy demands new thinking and new strategies. Instead of trying to find reasons for the “crash of civilization,” new thinking and strategies should focus on the commonality of global issues and challenges. Our competitive base should be on technology and economic as well as on culture and diversity. We must accept that culture and diversity are among the most important assets of the human kind and they are not liabilities. With the globalization of the world economy, as its main energy source and lubricant, the field of finance shall face new challenges. New markets, instruments, institutions, mechanisms, and relationships shall be developed. It was just like yesterday when I embarked the Global Finance JournaZ, and I cannot believe that we are already in Volume 9. Over the past nine years, we have published over one hundred articles in various areas of global businessfinance. The word global had a different meaning in 1989. In that year, the Berlin Wall crumbled and only two years later the former USSR collapsed, and a new era in global economy was born. GZobaIization, a buzz word that is here to stay, had a different (foreign) meaning to it in 1989. During the past decade, the GIobal Finance Journal and the Global Finance Conference(the 5th annual meeting will be held in Mexico City in late April 1998) have played a very small but important roles in advancing our understanding of global financial issues. They have provided forums for presentation of ideas, theories, hypotheses, concepts, and findings of empirical investigations. The Global Finance Journal has published articles that have provided conceptual foundation for new products or instruments. The cases that come to my mind, include, the unbundling article by John Finnerty and synthetic barter article by Jack Marshall. Both the Journal and the Conference have been successful because of many reasons: First, the timing was right and the demand for such outlets was high. Second, the editorial board of the Journal and the Program Committees of the Conference are the ‘Who’s who’ in global business-finance. Third, authors and participants have put their trust in and supported in both the Journal and the Conference. Last, but not least, the high standards and integrity of both mediums have earned them the respect of the academic and financial communities. In Volume 9, Number 1, we have eight papers. Lubecke, Doo Nam, Markland, and Kwok apply the neural network methodology to the forecasting of foreign exchange rates and show that their composite model has better results when compared to more traditional forecasting techniques. Poon and Duett empirically examine the impact of stochastic interest rates on currency futures option valuation and compare its pricing accuracy with a constant interest-rate model. Goswami and Shrikhande discuss an economic rationale for the use of interest rate swaps by non-financial firms and how the use of such instruments could cut cost of fixed and flexible exchange rates. Najand and Noronha, using a state space modeling’ show causal relations among stock returns, inflation, real activ-
4
GLOBAL FINANCE JOURNAL
9(l), 1998
ity, and interest rates in the Japanese economy. Byers, Fraser, and Shockley confirm that lender identity, particularly its credit rating, affects borrower returns from loan agreement announcements. Mishra, McConaughy, and Clements examine the capital market and political factors affecting the level of acquisitions in the U.S. by firms in a much smaller country, such as Hong Kong. Evans and Dadzie examine the relationship between governance structure and credit risk at rural banks in Ghana and show that the loan default rates vary according to the type of manager. Constand and Pace reexamine the corporate ownership and governance structures in Japan and provide additional information on the keiretsu. I am confident you will find these articles of interest and they would provoke new thinking and new ideas for submission to the Journal and/or presentation at the Conference. The summary of all published articles in the Global Finance Journal (Volume l-8) and detailed information about the Global Finance Conference and its proceedings (l-4) may be obtained via our website: craig.csufresno.edu/ globalfinance or by contacting the editor’s office at Craig School of Business, California State University, Fresno, CA 93740-0007. Telephone: (209) 278-4058 and Facsimile: (209) 278-4911 or 278-4886.
ACKNOWLEDGEMENT Numerous individuals have contributed time and effort to help get this issue of the Global The contribution of the following individuals are especially acknowledged: Tracey Aleman, Rakesh Bharati, David Ely, Richard Kish, Francis Lees, Arvind Mahajan, James McDonald, Reza Motameni, Tarun Mukherjee, Charles Nelson Lawrence Schkade, Moon Song, Adrian Tschoegl, and Alan Tucker. Thank you all.
Finance Journal published.
NOTES 1. 2. 3.
Finapolicy = A finance driven diplomay Freeman Dyson, Imagined World, in Business Week, June 16,1997. Saving Asia, 101, The Wall Street Journal, January 12,1998, page A20
FOR
Shahrokhi
During the past decade we have witnessed a great deal of changes, many triumphs and tragedies. We have seen the rush to privatization and marketization of many centrally-planned economies, removal of trade barriers, trade pacts and economic unions, to integration of financial markets. Some of these changes have had dramatic impacts on the financial community and global economy. New technologies-especially in computers, electronics, and communications-have changed the global economy’s landscape. The impact of such changes will be even more dramatic in the future. The Internet and multimedia have and are putting their marks on almost everything including, banking and financial services, education, marketing, engineering, sciences, medical technology, geography, art, and even zoology. We have witnessed financial crises, monetary and otherwise, that are so rampant all over the world, from Chile, to Mexico, to the Asian Tigers: Thailand, Indonesia, Malaysia, South Korea, Hong Kong, the Philippines, and Singapore. These are the same countries that were considered as positive role models for the emerging markets only six months earlier. One impact of crises like the so-called Asian Contugont or Flu (as if such crises were developed overnight by some flue virus and are to disappear in a few days with no long-lasting impact!) would be the changing of the Asian Century to the Pacific Cenhuy, a long awaited title for the new millenium not to mention a trillion dollars loss due to the devaluation of currencies and financial securities. These are infrastructural carcinogenic diseases that require long-term therapy and they are definitely not flues. These economies have been afflicted with multiple diseases including, mismanagement, cronycapitalism, corruption, liquidity, capital flight, speculation, fiscal, monetary, and of course the crisis of confidence. The national and international finance and politics, what I call finapolicyl (Rubin-Summers-Greenspan-Camdessuss (IMF) diplomacy with the debt-ridden country officials) have taken the center stage. Even though the growth rates in the global trade and investment have outpaced the growth rate in the GDP worldwide in the past three to four decades,
Manuchehr Shahrokhi, School of Business, California State Unvewty, Tel: 209-278-4058; Fax 209-278-4911 (4886), [email protected]. Global Finance Journal, 9(l): l-4 ISSN: 1044-0283
Fresno,
CA 93749-0007;
Copyright 0 1998 by JAI Press Inc. All rights of reproduction in any form reserved.
2
GLOBAL FINANCE JOURNAL
9(l), 1998
in relative terms, the world trade is less globalized now as compared to the beginning of the 20th Century. While we have seen benefits of globalization, we have also witnessed its drawbacks and the widening gap between the rich and poor. The world is taking a new order and financial economics is among the driving forces behind such dramatic changes. I would like to remind my colleagues of the role and responsibility of scientists as succinctly put forth by Freeman Dyson, the Nobel Laureate physicist and philosopher: “The failure of science to produce benefits for the poor in recent decades is due to two factors working in combination: the pure scientists have become more detached from the mundane needs of humanity, and the applied scientists have become more attached to immediate profitability.“’
The new World Trade Organization shall face major challenges as global trading expands, competition intensifies, and a new devalued Asian export machine floods the global marketplace with cheap products. [Contrary to what GATT and WTO have worked so hard to achieve over a half a century]. Trade war and protectionism on a regional or global basis may bring in new barriers to trade and investment. The forecast for economic growth has already been reduced by half and some on Wall Street are debating the impacts of a “deflation” on a worldwide basis. To properly address the global or regional currency and financial crises, the debate should focus on alternative ways of bringing the crisis under control and finding permanent solutions. Alternatives including the monetary, fiscal, and infrastructural and their applicability should be evaluated, identified, and implemented. A case study would be the financial crises of the mid-1990s in Argentina and Mexico; two different policy solutions and two different results.3 The purposes of such studies should include learning from the crises and finding ways to avoid them. Predicting solely on a non-scientific basis, one would detect trend growth, emphasis, and importance in the following areas which are fertile grounds for scholarly work and intellectual contributions by academics and practitioners: l
l
l
l l
l
l
l
Globalization of markets in all forms is here to stay and its pace shall accelerate. Technology shall have material impacts on the global economy at macro and micro levels. The Net, E-Commerce, and digital economy shall change our consumption and investment patterns and behavior globally. Global economy especially financial markets shall be more consolidated. Monetary issues such as the Euro and its impact and implications shall have material change on many of our policies and transactions. The use of ‘Currency Boards’ shall become more widespread in the emerging markets. Investing via mutual funds, country funds, ADRs, and similar instruments shall become more widespread globally. Financial engineering and development of exotic instruments shall become more global.
Challenges for the Nezu Millenium
l
3
Financial education and the use of multimedia, the Net, and other technological advances and equipment shall enhance our ability to learn and educate. Knowledge is power and the new information technology is a new and extremely efficient force. We must utilize it.
The new global economy demands new thinking and new strategies. Instead of trying to find reasons for the “crash of civilization,” new thinking and strategies should focus on the commonality of global issues and challenges. Our competitive base should be on technology and economic as well as on culture and diversity. We must accept that culture and diversity are among the most important assets of the human kind and they are not liabilities. With the globalization of the world economy, as its main energy source and lubricant, the field of finance shall face new challenges. New markets, instruments, institutions, mechanisms, and relationships shall be developed. It was just like yesterday when I embarked the Global Finance JournaZ, and I cannot believe that we are already in Volume 9. Over the past nine years, we have published over one hundred articles in various areas of global businessfinance. The word global had a different meaning in 1989. In that year, the Berlin Wall crumbled and only two years later the former USSR collapsed, and a new era in global economy was born. GZobaIization, a buzz word that is here to stay, had a different (foreign) meaning to it in 1989. During the past decade, the GIobal Finance Journal and the Global Finance Conference(the 5th annual meeting will be held in Mexico City in late April 1998) have played a very small but important roles in advancing our understanding of global financial issues. They have provided forums for presentation of ideas, theories, hypotheses, concepts, and findings of empirical investigations. The Global Finance Journal has published articles that have provided conceptual foundation for new products or instruments. The cases that come to my mind, include, the unbundling article by John Finnerty and synthetic barter article by Jack Marshall. Both the Journal and the Conference have been successful because of many reasons: First, the timing was right and the demand for such outlets was high. Second, the editorial board of the Journal and the Program Committees of the Conference are the ‘Who’s who’ in global business-finance. Third, authors and participants have put their trust in and supported in both the Journal and the Conference. Last, but not least, the high standards and integrity of both mediums have earned them the respect of the academic and financial communities. In Volume 9, Number 1, we have eight papers. Lubecke, Doo Nam, Markland, and Kwok apply the neural network methodology to the forecasting of foreign exchange rates and show that their composite model has better results when compared to more traditional forecasting techniques. Poon and Duett empirically examine the impact of stochastic interest rates on currency futures option valuation and compare its pricing accuracy with a constant interest-rate model. Goswami and Shrikhande discuss an economic rationale for the use of interest rate swaps by non-financial firms and how the use of such instruments could cut cost of fixed and flexible exchange rates. Najand and Noronha, using a state space modeling’ show causal relations among stock returns, inflation, real activ-
4
GLOBAL FINANCE JOURNAL
9(l), 1998
ity, and interest rates in the Japanese economy. Byers, Fraser, and Shockley confirm that lender identity, particularly its credit rating, affects borrower returns from loan agreement announcements. Mishra, McConaughy, and Clements examine the capital market and political factors affecting the level of acquisitions in the U.S. by firms in a much smaller country, such as Hong Kong. Evans and Dadzie examine the relationship between governance structure and credit risk at rural banks in Ghana and show that the loan default rates vary according to the type of manager. Constand and Pace reexamine the corporate ownership and governance structures in Japan and provide additional information on the keiretsu. I am confident you will find these articles of interest and they would provoke new thinking and new ideas for submission to the Journal and/or presentation at the Conference. The summary of all published articles in the Global Finance Journal (Volume l-8) and detailed information about the Global Finance Conference and its proceedings (l-4) may be obtained via our website: craig.csufresno.edu/ globalfinance or by contacting the editor’s office at Craig School of Business, California State University, Fresno, CA 93740-0007. Telephone: (209) 278-4058 and Facsimile: (209) 278-4911 or 278-4886.
ACKNOWLEDGEMENT Numerous individuals have contributed time and effort to help get this issue of the Global The contribution of the following individuals are especially acknowledged: Tracey Aleman, Rakesh Bharati, David Ely, Richard Kish, Francis Lees, Arvind Mahajan, James McDonald, Reza Motameni, Tarun Mukherjee, Charles Nelson Lawrence Schkade, Moon Song, Adrian Tschoegl, and Alan Tucker. Thank you all.
Finance Journal published.
NOTES 1. 2. 3.
Finapolicy = A finance driven diplomay Freeman Dyson, Imagined World, in Business Week, June 16,1997. Saving Asia, 101, The Wall Street Journal, January 12,1998, page A20