Transcript Document

Regional Security Implications
of the
Global Financial Crisis
Council for Security Cooperation in the Asia Pacific
7th General Conference, Jakarta
16-18 November 2009
Charles Wolf, Jr.
Roadmap
• Global Financial Crisis (GFC): Sources, Consequences,
Remedies
• Regional Security Effects and Implications:
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–
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–
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Macroeconomic conditions and security
Defense budgets
Development budgets
Foreign assistance and foreign investment
Proliferation
Terrorism, piracy, threats to law and order
Regional security organizations
• Concluding Remarks
A8462b-2 06/09
Numbers & questions
Processes & participants
GFC (1): Processes, Participants, Scale;
Sub-Prime Mortgages, Lending, Securitizing,
Debt Ratings, “Undue Diligence,”
Credit Tightening, and Consequences
(1)
Motivation of
“ownership
society”, Freddie
Mac, Fannie Mae,
loose monetary
policy, low rates,
diluted quality of
borrowers and of
mortgages
107, mainly in U.S.,
some other
countries
(2)
(3)
Lending
practices of
mortgagers,
promotional
efforts and
weak credit
scrutiny by
lenders, further
erosion of
mortgage
quality
Packaging,
“slicing and
dicing,”
derivatives
through mixing
and matching
sub-prime and
prime
mortgages;
collateralizing,
securitization of
CDOs/SIVs by
issuers
106, banks,
investment
banks, Bear
Stearns, Merrill,
Lehman Bros,
Citigroup,
erroneous and
omitted balance
sheet entries due
to AAA-ratings,
lax FASB rules
104,
Countrywide,
Home Equity,
commercial
banks, S&Ls,
laxity of credit
scrutiny
(4)
(5)
(6)
Rating
agencies
(Moody’s,
Fitch’s,
S&P),
insurers
(AIG,
Prudential,
etc.)
Marketers,
distributors;
leveraging
(30:1),and
leveraged
sellers
Leveraged
buyers
102, banks,
AAA ratings,
conflicts of
interest (i.e.,
“clients” are
rated!),
inadequate
analytic
ability and
inherent
difficulty of
risk assessments
105, banks,
investment
banks,
foreign and
U.S. banks,
e.g., UBS,
Deutsche
Bank,
Merrill,
Citigroup,
Goldman
106, U.S.
and global
banks,
central
banks,
SWF’s,
“bandwagon”
effects
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GFC (2): Principal Sources and Contributors
(Culprits ?)
• Macroeconomic policies and imbalances:
– Monetary policy (US): loose, permissive
– Structural imbalances: US (I>S), China (S>I)
• Ineffectual regulation in US:
– Too little regulation? too much? wrong and confused?
– Between 2000-2008, full-time US government financial
regulatory staff grew by 26%, regulatory budgets by 21%
($2.3 billion) !
A8462b-4 06/09
GFC (3):Principal Contributors
• Politically-mandated, subsidized (“sub-prime”)
housing )mortgages
• Securitization, complex derivatives (credit default
swaps, “moral hazard”)
• Rating agencies
• Leveraging (30-40 times!)
• Ineffective corporate governance
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GFC: Consequences and Remedies
• “Coupling” between crises in US, Europe, Asia-Pacific
– GFC emanating from US, reinforcement by financial
institutions, businesses, governments in Europe, Japan, China,
& ROW
– Is coupling generally close, loose, moderate?
– Factors boosting coupling: trade, foreign investment, equity
markets
– Factors diminishing it: expanded domestic markets, transaction
costs, protectionism
• Regulatory reform: more, less, or different?
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–
–
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Efficient markets require ample, transparent, timely information
Important to reduce information asymmetries
Corporate governance: boards, disclosures, procedures
Redefining Tier I capital (from 4% to 8%, perhaps with further
boost for “too-big-to-fail” banks?)
• Should regulatory focus be national, regional, or international? (IMF,
BIS, World Bank, G-8, G-20. G-77)?
A8462b-6 06/09
Roadmap
• Global Financial Crisis (GFC): Sources, Consequences,
Remedies
• Regional Security Effects and Implications:
–
–
–
–
–
–
–
Macroeconomic conditions and security
Defense budgets
Development budgets
Foreign assistance and foreign investment
Proliferation
Terrorism, piracy, threats to law and order
Regional security organizations
• Concluding Remarks
A8462b-7 06/09
Regional Security Effects(1):
Macroeconomics and Security
• Extensive (inconclusive) literature on relations between
economic conditions and internal/external security (e.g., Marx,
Tocqueville, Machiavelli, Hoffer, Deng, Huntington; “realists”
vs.”idealists”)
• Relevant variables include poverty,economic levels and
growth, unemployment, inequality, expectations,
informational access, etc.
• One familiar model: instability/insecurity likely to increase
if/as economy contracts, unemployment and inequality rise
• GFC adversely affects some/all of these variables
A8462b-8 06/09
Regional Security Effects (2):
External Assistance & Investment
• Foreign aid likely reduced: slower growth in donor countries,
larger debt burdens and other fiscal claims: “stimulus”
outlays, health and energy programs,etc.
• Foreign investment flows uncertain: entrepreneurial
incentives vs. asset protectionism; resource investments vs.
technology investments
--China’s investors (e.g. CIC, CITIC, CNOOC, other
banks and companies),likely to be very
active for “resource security”, high tech, other needs
• Trade effects also uncertain: protectionism, short- vs. midterm effects
A8462b-9 06/09
Regional Security Effects(3): Proliferation
• Heightened risks:
– Potential sources may be deliberate or inadvertent
(e.g., DPRK, Iran, Pakistan??)
– Potential buyers may be in Asia, or Middle East
– Dangers from possible links between piracy and
proliferation; between proliferation and terrorism
• Proliferation Security Initiative: 94 participating countries,
whether to strengthen and how?
A8462b-10 06/09
Regional Security Effects(4):
Defense Budgets
• Asia-Pacific defense budgets: under pressure from GFC
• But likely different effects within region:
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–
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–
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China: +18% (2009), 2010 (?)
Japan: 0% change (‘09). ‘10 (DPJ uncertainty)
Indonesia: -15% (2008), decrease in ‘09, 2010??
South Korea: +4% (2008), +4% (‘09), 2010 (?)
Australia: + 5% (2008), uncertain ‘09, ‘10
• GFC effects and A-P political/security conditions
A8462b-11 06/09
Regional Security Effects(5): Development
Effects
• Mixed results from preliminary examination of 2008-2010
health, education, infrastructure budgets of China, Japan,
Indonesia, South Korea, Australia
• Aggregate government revenues decreased or barely
constant (“coupling” effects)
• But “stimulus” packages in all 5 countries exceed decreases
of development outlays
– China’s stimulus 13% of GDP !
– Japan’s stimulus 3.1% GDP
– Korea, Australia, Indonesia 1-3% GDP
A8462b-12 06/09
Regional Security Effects (6):
Multilateral Security Organizations
• ARF, CSCAP, SCO, 6-Party Talks, EAS,
bilateral/trilateral links (US-Japan-Korea, USIndonesia)
• Is there a useful role for overarching regional
organization? G-20, or subset?
A8462b-13 06/09
Roadmap
• Global Financial Crisis (GFC): Sources, Consequences,
Remedies
• Regional Security Effects and Implications:
–
–
–
–
–
–
–
Macroeconomic conditions and security
Defense budgets
Development budgets
Foreign assistance and foreign investment
Proliferation
Terrorism, piracy, threats to law and order
Regional security organizations
• Concluding Remarks
A8462b-14 06/09
Concluding Remarks (1)
• “Game-changing” global trends will affect regional security
• Enhanced political-economic-security roles of China, India,
Indonesia, Brazil, South Korea, other countries: a “pluralistic”
(rather than “multipolar’) world
• US role perhaps diminished (relatively), but still largest
power center (e.g. largest global market, but with likely
smaller net imports)
• Japan with DPJ may be more active in A-P, (or less? or
unchanged?)
• Europe’s role may be diminished, but perhaps enhanced if
viewed as “balancer”?
A8462b-15 06/09
Concluding Remarks (2)
• These “game-changers” perhaps imply that effective
solutions/management of specific regional security issues
(preceding charts), will depend more on A-P institutions, and
ad hoc coalitions possessing two characteristics:
---motivation based on priority national interests
---willingness to share burdens (costs) along with
decision making
• “Smart Power” as collective, prudent combinations of “soft”
and “hard” power
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