Geography Reference
In-Depth Information
that it enables investors to diversify their portfolios, that it spreads risk more
broadly, and that it promotes intertemporal trade. Capital mobility implies that
firms can smooth consumption by borrowing money from abroad when domestic
resources are limited and dampen business cycles. Conversely, by investing
abroad, firms can reduce their vulnerability to domestic disturbances and achieve
higher risk-adjusted rates of return. Advocates of unfettered capital flows hold that
such mobility creates opportunities for portfolio diversification, risk sharing, and
intertemporal trade, all important criteria for the IMF. The major problems con-
cerning capital mobility in this view center upon the asymmetry of information in
financial markets and ''moral hazard,'' reliance upon the state (or IMF) to bail
them out during crises. Yet neoclassical theory is flawed in several respects, not
the least of which is an inadequate appreciation of politics and space, the ways in
which national, class, gender, and other non-market relations shape and constrain
flows of money, even electronic money, and information, and how the intersec-
tions of capital and nation-states play out unevenly across the globe. Capital flight,
for example, can generate financial chaos as much as it harmonizes investments.
Central to this issue is the relative degrees of influence and power that global
capital and individual nation-states exhibit at varying historical conjunctures.
The rise of EFTS has fundamentally undermined the traditional role of national
monetary policy. National borders mean little in the context of massive move-
ments of money around the globe: it is far easier to move $1 billion from New
York to Tokyo than a truckload of grapes from California to Arizona. Under
Bretton-Woods, national monetary controls over exchange, interest, and inflation
rates were essential to financial and trade stability; today, however, those same
national regulations appear as a drag on competitiveness and have lost much of
their effectiveness. In the U.S., for example, the Federal Reserve changed the
reserve ratio of banks as well as the prime inter-bank loan rate multiple times in
the 1990s and the 2000s, only to find that its control over the national money
supply had diminished to the point of near irrelevance. The New York Federal
Reserve's Foreign Exchange Office, the operational arm of the Treasury Depart-
ment's Exchange Stabilization Fund, likewise attempted repeatedly to stabilize the
U.S. dollar against other currencies, with mounting difficulty.
Thus, EFTS not only changed the configuration and behavior of financial mar-
kets but also their relations to the nation-state. Raymond Vernon's (
1971
) classic
work Sovereignty at Bay argued convincingly that the nation-state (as classically
conceived), sovereignty and the national economy were on their death-bed, victims
of multinational corporations and international capital. Advocates of this per-
spective, of course, have long exaggerated claims that the nation-state was dying to
the point of asserting that a seamlessly integrated ''borderless'' world was in the
making. The brave new world of digital finance, however, lends credence to Ver-
non's predictions in ways he or his advocates may not have anticipated. Classic
interpretations of the national state rested heavily upon a clear distinction between
the domestic and international spheres, a world carved into mutually exclusive
geographic jurisdictions. State control in this context implies control over territory.
In contrast, the rise of electronic money has generated a fundamental asymmetry
