We live in a world where the power of financial flows to change economies, and lives, is enormous. With the click of a mouse, funds can be moved around the world electronically in huge quantities.
The global financial system, the nearest thing we have to a borderless world, sees flows of tens of billions of dollars, pounds, yen and euros every day. Daily turnover in the world's currency markets is $1,210 billion (£640 billion). That, leaving aside weekends and public holidays when the markets are closed, is roughly $302,500 billion (£159,000 billion) annually.
These are big numbers. To put them in perspective, the UK's annual gross domestic product is around £1,200 billion.
The fastest growing financial market sector is derivatives trading. Trading in derivatives, financial instruments derived from a basic financial instrument, was $600 billion (£330 billion) a day at the latest estimate, and is rising rapidly. The size and the power of global financial flows are not in doubt. On September 16 1992, "Black" Wednesday, when the UK government was trying to keep the pound within the European exchange rate mechanism (ERM) the authorities were overwhelmed by the markets. The speculators amassed enough funds aimed at driving the pound down to make Britain's entire foreign exchange reserves look puny. The pound was forced out.
Emerging economies can also find themselves on the wrong side of the vagaries of short-term capital movements. In the 1990s, international investors favoured the so-called mini-tiger economies of Asia, such as Thailand, Taiwan, South Korea and the Philippines. There were long-term capital flows into these countries but also plenty of shortterm speculative capital, chasing stock market returns. When this capital suddenly took flight, apparently on fears that the level of risk had increased, it created the problem investors had feared - the Asian financial crisis of 1997-8.
The 9/11 attacks on the United States, and in particular on the World Trade Centre in New York, were deliberately aimed at destabilising the global financial system. For terrorists, the best way of damaging the world economy was to attempt to cut off the flows of funds that keep it going.
But how much do we know about these flows? And to what extent are they necessary and beneficial, and to what extent damagingly destabilising, particularly where poorer countries are concerned? Does the global financial system, with its increasingly sophisticated instruments, have the effect of containing economic shocks - as the Federal Reserve Board chairman Alan Greenspan has claimed - or are such shocks more likely to be amplified by freely-flowing capital? Can we learn to predict and give early warnings of financial crises?
These are some of the questions that will be addressed by an ambitious new £5 million ESRC research programme. The World Economy and Finance Programme, under its director Professor John Driffill of Birkbeck College, University of London, is a multidisciplinary programme with two main aims.
"Does the international financial system work in a way that is good or bad for poor countries?"
The first is to advance understanding of the ways in which financial markets and financial policies influence global issues such as poverty, development, growth and transition from planned to market-based systems. The second will be to analyse the central issues for economic policymakers in an era of generally low inflation, increasingly integrated financial markets, and changing demographics and trade patterns.
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