economic and financial globalization what the numbers … · 2018. 11. 27. · economic and...

ECONOMIC AND FINANCIAL GLOBALIZATION

What the Numbers Say

Foreword by Marcel A. Boisard

Paul H. Dembinski (Leading contributor)

Translation by Kevin Cook

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without prior permission in writing from the United Nations.


What the Numbers Say

Foreword by Marcel A. Boisard UN Assistant Secretary-General

Executive Director of UNITAR

Paul H. Dembinski (Leading contributor)Professor at University of Fribourg

Director of Observatoire de la Finance

Translation by Kevin Cook

UNITED NATIONS

New York and Geneva, 2003

Observatoire de la FinanceObservatoire de la Finance

5


In a world in which figures are increasingly seenas the most effective way of expressing and per-ceiving socioeconomic reality, it is important torecall the context in which they are compiled andto make quite clear their meaning and signifi-cance. The ‘Observatoire de la Finance’ has beenworking towards such clarification over the pastfew years. Together with UNITAR, the ‘Observa-toire de la Finance’ is undertaking to bring togeth-er in a single publication the main statistical dataon the global economy and global finance, placingthem in something of a historical perspective, anddiscussing their conceptual significance and sta-tistical accuracy.

The results of this work are compiled in a refer-ence book which will certainly appeal to thosewho seek more than ready-made ideas, preferringto develop their own views on the process of eco-nomic and financial globalization, based on pre-cise figures and concepts. National andinternational civil servants, decision-makers inthe private sector, teachers, students and mediastaff will all find in this book the quantitative datathey need to assess the importance of moderntrends and phenomena.

Today’s increasingly complex world places newchallenges before public and private decision-makers regarding the joint stewardship of thefuture of our planet and its inhabitants. In thiscontext, new international and cross-bordermeans of sharing this common global or regionalresponsibility will have to emerge in the years tocome. With this aim in mind, UNITAR has set uptraining programmes in an attempt to developnew skills in the countries where they are mostneeded. In line with these efforts, this book willprove a valuable source of information and aneffective training tool, especially for thoseinvolved in capacity-building programmes on

debt and financial and management, and interna-tional economic relations.

UNITAR is grateful to Professor Paul H. Dembin-ski, Director of the ‘Observatoire de la Finance’,and to his staff for producing this study. The ideasand conclusions expressed in the book are, ofcourse, entirely those of the author and do notnecessarily reflect the views of UNITAR or theUnited Nations.

Marcel A. Boisard

UN Assistant Secretary-General

Executive Director of UNITAR

Foreword

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5

9

13

14

20

28

34

37

38

46

52

54

60

65

66

74

78

84

92

99

100

108

112

116

122

TABLE OF CONTENTSForeword by Marcel A. Boisard

Introduction

1. The context of the global economy1.1 Population

1.2 Telecommunications

1.3 Transport flows

1.4 Mail traffic

2. Main players2.1 The economically active population

2.2 Major corporations

2.3 Small and medium-sized enterprises

2.4 Public budgets and deficits

2.5 The International Monetary Fund: reserves and interventions

3. The economy and trade3.1 National product and value added

3.2 Inflation

3.3 Development indicators

3.4 International trade

3.5 Foreign direct investment

4. Money and finance4.1 International debt

4.2 Foreign exchange regimes and exchange rates

4.3 Interest rates

4.4 Money and monetary aggregates

4.5 Central banks and their international reserves

7

5. Capital markets5.1 Stock market capitalization

5.2 Stock market prices and indexes

5.3 Capital raised on stock markets

5.4 The bond and credit market

5.5 Derivatives

5.6 Foreign exchange transactions

User’s guide Abbreviations

Grouping of countries

List of figures

Bibliography and sources

127

128

134

140

144

150

156

161

163

165

167

173


8


9


Introduction“If we don’t count something, it gets ignored. If wecount it, it gets perverted.”

David Boyle, 2001, p11

The rocky road to independence

The purpose of this book is to help readers devel-op a well-founded, independent view of the glob-al economy and global finance. It is not asynthesis or a set of ready-made answers, nor is itsimply one more noisy opinion which, while lay-ing claim to scientific objectivity, is in fact voicedin defence of some political ideology. Such opin-ions are to be found on both the right and the left,among out-and-out believers in laissez-faire aswell as fervent advocates of national or global reg-ulation. This book is in no sense polemical, but isintended to help readers weigh up, in the light ofthe available statistics, the many conflicting argu-ments in what is now a worldwide debate on glob-alization.

In order to develop an independent, critical viewof globalization, one must endeavour to rise abovethe heaving swell of information and conceptualdata, so that the mind can fasten onto somethingsolid. Information – and this is particularly true ofeconomic and social statistics – is a fragile struc-ture whose relevance will very much depend onthe circumstances in which it has been compiled.Paradoxically, for all the precision and objectivityseemingly inherent in quantitative expressions ofeconomic, financial or social realities, they arebased on methodological and in some cases insti-tutional choices which affect the accuracy, impar-tiality and solidity of the results. Now thatquantification is often seen as the be-all and end-all, figures are often taken to mean more than theydo, and incautious writers drag them beyond thelimits of their relevance - like “factoids” in whichseemingly rational arguments are used to trigger

off in those who read them impulses of fascinationor fear which are fundamentally irrational andemotive.

Any independent, well-founded view of globaliza-tion – one that does not let itself be misled bytoday’s sophisticated “spin” techniques – requiresboth a conceptual and a quantitative frame of ref-erence. This book provides a structure for this,based on two principles: a transnational outlook,and clarity of method.

As the term suggests, globalization is a planetaryprocess - yet most statistics are domestic. Anyproper frame of reference for globalization mustmove beyond the purely domestic viewpoint andsee things at least in regional, if not global, terms.That is why this book avoids classifying or com-paring individual countries, and focuses insteadon global and regional trends. When individualcountries are occasionally mentioned, it is by wayof example, or because they are simply too impor-tant to be ignored. The raw materials for this glob-al outlook are the figures provided by majorinternational agencies. Rather than seek data atdomestic level, the authors used those producedby the UN’s Division of Economic and SocialAffairs, the World Bank, the Organization for Eco-nomic Cooperation and Development (OECD),UN specialized agencies, and private sources.

The principle of clarity of method is harder toenunciate, for it concerns the very philosophy ofmeasurement. The frame of reference proposed inthis book is based on 25 key concepts which areeach approached from two angles, one conceptu-al, the other statistical. This is because there is aconsiderable difference between a concept basedon a corpus of theory and a statistical series thatbears the same name. Each of the 25 conceptsadopted has been subjected to the same three-stage process.


10


The first stage (“Concepts and definitions”)involves getting the concepts clear – finding outwhat the concept means and, if necessary, listingits main accepted meanings.

The second stage (“Methods and problems ofmeasurement”) looks at how the concept has beenoperationalized so that the reality it refers to inabstract terms can be quantified. This stage bringsto light any over-simplifications, errors in gather-ing data, inconsistencies between the methodsused by the various sources and so on. The inten-tion here is to give the alert reader a clear idea ofthe epistemological limitations of statistics andthe caution with which they must be treated.

Finally, the third stage involves figures. The ideahere is to look closely at the available statisticalseries and put them in something of a historicalperspective so that changes over time becomeclear. This section (“Recent trends”) does notclaim to extract the full wealth of information inthe accompanying tables and charts. All it does ispoint out a number of facts so that readers areencouraged to find their own way through the for-est of data. Comments on recent trends refer toeither long-term developments or more specificevents, depending on the case.

To help readers draw their own conclusions freely,the data is presented in as raw a form as possible.The statistical series presented here have not been“dressed up”, and only exceptionally have theyundergone statistical transformations to smoothout the series or transpose them into real terms sothat the “background noise” of inflation is elimi-nated. Moreover, this decision to focus on nomi-nal values was determined by the need to set up a common reference framework for both the economy and the financial sector (in finance onlynominal figures are used).

What we learned from the exercise

When the project was first launched it seemed rel-atively simple, and we expected to get it finishedin a matter of months. In practice, things turned

out very differently. Throughout the project wewere confronted with unforeseen situations whichtaught us a great deal about things that lay beyondthe confines of the project proper.

The first thing we noticed concerned the state ofeconomic, financial and social statistics. Large-scale economic and social quantification is arecent phenomenon which did not really getgoing until the mid-1970s. Although we have afairly uniform database for the thirty countriesthat are members of the OECD, statistics becomescarce as soon as we move beyond this group ofrich countries. We thus know a great deal aboutthe creation and use of about three quarters ofglobal product and the living conditions of thepeople that produce it – who represent just undera third of the world’s population. In other words,there is nothing global about our statistics, eithergeographically or demographically. There aremany reasons for why coverage is so unbalanced,but in any case it continues to bias most people’sview of the globalized economy.

The second thing we noticed concerned the own-ership of the figures. In this era of virtual technol-ogy, information is no longer a freely availablegood, but has become a commodity which isbought and sold at a price. The limitations of thisview of information become apparent once accessto knowledge about the global economy and howit works becomes commercialized. Most govern-ment agencies compile such figures to serve thepublic interest and the common good, but theyalso take advantage of their special position to sellaccess to the information, often at a high price.

What has driven the agencies in question to behave in this way is the reluctance of nationalgovernments to increase their budgets, forcingthem to find their own sources of funding.

From the outset our project received strong sup-port from the private company Thomson Finan-cial, which gave us free access to its on-linestatistical services, particularly Datastream. Publicagencies such as the OECD, the IMF and the

11


World Bank, not to mention the IFC, were notice-ably less accommodating. Even with deductions,the charges for access to information were in somecases several thousand US dollars a year.

This raises the fundamental issue of access tostatistics that are in the public interest. A relatedissue is the increasingly specialized nature of themethodological debates on which the figures arebased. Worldwide, it seems likely that only a fewhundred statisticians possess the relevant knowl-edge in these crucial areas, and that only they arecapable of using the figures they produce proper-ly. These experts know the limitations, subtleties,strengths and weaknesses of figures. Most of themare officials in northern countries or in interna-tional organizations. This suggests that, as regardsboth access to statistical information and theskills needed in order to make proper use of it, atwofold gulf is opening up between (a) the gov-ernments of northern countries and those whocan pay the asking price, and (b) the governmentsof southern countries, civil society and intellectu-als, who lack the necessary resources or skills orboth. As things now stand, the governments ofrich countries are favoured on both counts, whichenables them to remain one step ahead of civilsociety and the southern countries. This asymme-try of information, which is also an asymmetry ofunderstanding, cannot fail to have major implica-tions when global interests are at stake.

The fourth thing we noticed was the extent towhich statistical measurements are rooted insocial institutions. The statistics presented hereclaim to cover economic activity as a whole, yetthe measuring instruments and key concepts usedin thinking about the economy are reflections ofsocial institutions in northern countries. Nor sur-prisingly, in countries that do not share this insti-tutional tradition, statistics obtained on such abasis can only cover a part of economic and socialreality – the part that fits into the western con-ceptual framework. Whether we are talking aboutbusinesses, employment or unemployment,money or the financial sector, it is clear that whole

sections of socioeconomic life in the southerncountries are not covered by these concepts or bymeasurements based on them. It should beemphasized that the economy – as defined andcaptured by mainstream economic thinking – per-forms a very different function in society aswhole, depending on which country and whichsociety we are looking at. We would therefore dowell to realize that the way in which our statistics- and above all our concepts, and hence econom-ic “science” as a whole – relate to reality variesfrom time to time and from place to place. Inother words, in the interests of both honesty andrelevance, it is vital to bear in mind that the frameof reference used here only covers part of theeconomy, and that there is no way of telling exact-ly what it does and does not include. Paradoxi-cally, despite the seeming precision of our figures,we are groping in the dark. This conclusion raisesthe much more fundamental issue of how formal-ized, Western-style economic activity relates tosociety as a whole. Is the relationship a comple-mentary one, a symbiotic one, or a parasitic onethat will ultimately exhaust and kill off one of thepartners?

The fifth thing we noticed concerns the way inwhich the figures relate to the country and, moregenerally, the government. The series presented inthis book are of two kinds. Most relate to a givencountry, and are drawn up by and for that coun-try’s authorities. Firstly, such figures contribute toa balance of power, for they serve as a basis and aframe of reference for subsequent actions or deci-sions. The balance of power between those whoproduce the figures and those whose activities aremeasured is one of the essential aspects of socioe-conomic information. International statistics arethus compiled when there is a great deal at stakeor when there is a need to reach a well-foundeddecision. The second category of figures providedhere is of private origin, particularly the financialfigures that players require in order to make deci-sions. Here the link with a given country is a gooddeal less clear.

12


The project team

Many people have worked to make this projectpossible. First of all, our thanks are due to themembers of the Board of the Observatoire de laFinance Foundation. Next, despite what wereoften epic clashes with the suppliers of the data,our thanks are due to the professionals responsi-ble for producing them. They repeatedly providedadditional information and drew our attention toimportant details in the methodological docu-ments.

The director of the project enjoyed the unswerv-ing support of Dr Alain Schoenenberger (lecturerat the Universities of Geneva and Neuchâtel andan expert on public finance) and Pietro GiorgioGawronski (an economist on the staff of theCouncil of the Republic of Italy). Both of themfollowed the project through from start to finishand made useful contributions to the sectionsdealing with their respective fields of expertise.

The statistical side of the project was handled byClaudio Bologna (an econometrist and statisticianon the staff of Eco’Diagnostic who was temporar-ily seconded to the Observatoire de la Finance).He organized and updated the database, and usedit to generate the charts and tables that are suchan essential feature of this book. He also wrote thearticle on development indicators.

Other contributions to the project were made bysociologist Prof. Jean-Michel Bonvin on demo-graphic variables, and Christophe Perritaz (thenworking at the University of Fribourg) ontelecommunications and transport. A number oftrainees were working at the Observatoire de laFinance during the project, including CyrilArnold (an economist who made an extremelyvaluable contribution to the statistical side of theproject), Caroline Bauman and François-XavierBelottini.

The text was finalized by Ms Corine Devanthéry,Ms Isabelle Dembinski and Ms Nati Garcia.

Paul H. Dembinski

Directeur de l’Observatoire de la Finance

Professeur à l’Université de Fribourg


13I. The context of global economyI. The context of global economy

1.1 Population

1.2 Telecommunications

1.3 Transport

1.4 Mail traffic

14


CONCEPTS AND DEFINITIONS

As defined for statistical purposes, the total popu-lation of a country includes all its inhabitantsregardless of nationality, with the exception ofillegal immigrants, as well as refugees who havenot settled permanently in their host country andare still counted as part of the population of theircountry of origin. Thus defined, the population isrenewed by mechanisms that help to increasenumbers (such as birth and immigration) orreduce them (such as death and emigration).Knowledge of the size of the population, its rate ofgrowth and its distribution by age group is essen-tial in order to assess a country's productivecapacity and the resources that will be required tosatisfy its citizens' needs. At a time when the population is aging, a key aspect is the rate of

dependency, i.e. the proportion of dependent per-sons aged less than 15 or above the legal retire-ment age in relation to the working-agepopulation.

The state of a given population is thus examinedon the basis of its structural components - age,gender, urban or rural location, income level,employment status - and its movements, i.e. itsdynamic dimension which is analysed by suchfactors as the migration balance, the birth rate, thedeath rate and the rate of natural growth. Fore-casts of medium-term and long-term populationchanges can be made on the basis of individualcalculations of these various ratios.

1.1 Population

METHODS AND PROBLEMS OF MEASUREMENT

Population may appear to be a precise, unambigu-ous concept which lends itself easily to statisticalanalysis according to the principle "one person =one statistical individual". However, counting thepopulation is an extremely complex matter. Thequality of demographic figures depends on thereliability of the methods used and on the amountof funding made available to gather the data.

Four methods are used to count the population:

• censuses, which are intended to be as exhaustive aspossible but by definition exclude all residents whodo not have an official place to live, i.e. refugees whohave not settled in the country permanently, illegalimmigrants and people with no fixed abode (indeveloping countries the total number of people inall three categories can be quite considerable).

• official birth, marriage and death statistics

• population surveys

• population registers which record the number ofpeople coming to live in, or leaving, a given area.

The most reliable method is the census. However,the quality of the data and the frequency withwhich they are gathered vary considerably fromcountry to country. Most countries only hold afull census once every ten years; in the interven-ing period the population is estimated on thebasis of demographic models. This inevitablyleads to underestimates or overestimates, even inindustrialized countries. However, such errors canbe particularly serious in developing countries,where censuses are held less often and are of poor-er quality. In some countries, particularly in urbanareas, the population may be underestimated byas much as 20%.

World Bank data show that 16 out of 148 coun-tries did not hold a census between 1988 and

15

© Observatoire de la Finance, 2002; [www.obsfin.ch] Primary data: WorldBank, World Development Indicators; UNPD, World Population Prospects; ILO, Economically Active Population 1950-2010Grouping of countries: Fig. A cf ILO

13%7%

4%

3%

3%

5%

5%8%

74% 77%

70%

46%

27%31%

38%

0

1 000

2 000

3 000

4 000

5 000

1950 1960 1970 1980 1990 2000 2010 1950 20100%

20%

40%

60%

80%

100%

Asia and OceaniaAfricaLatin America and CaribbeanNorth AmericaEurope

2000 = 100%Millions ofpeople

China

Indonesia

Brazil

United States

India

Russian Federation

Japan

Pakistan

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

1950 1960 1970 1980 1990 1995 2000 2010 1950 2010

0

450

900

1 350

1 800

2 250

2 700

3 150

3 600

4 050

Pakistan

Japan

RussianFederation

India

United States

Brazil

Indonesia

China

1950 = 1Millions ofpeople

1.1.B. Population of most populous countries, in millions and as an index: 1950-2010

1.1.A. World population by continent, in millions, in per cent and as an index: 1950-2010

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1998. In those countries, population estimatesare based on birth and death rates and the migra-tion balance, calculated from population sampleswhich are often very small. However sophisticat-ed, models based on such material are bound tobe flawed.

The reliability of demographic data also dependson how well people trust the authorities. Somegovernments do not hesitate to use censuses as ameans of keeping the population, particularlyethnic minorities, under control. The confiden-tiality on which an effective census depends isnot always observed, since the bodies that gatherthe data are not independent. In such cases theresults are less accurate than they might be andhence less suitable for international comparison.

In dynamic terms, demography is one of the areas inwhich forecasts are most reliable. Observed trendsare lasting and forecasts are usually solid (except intimes of sudden change, such as baby booms, babycrashes and war). This means that demographerscan risk making predictions over several decadeswith only a small likelihood of error.

If they only cover people already born at thepoint when the forecast begins, demographicforecasts, which assume a stable death rate andextrapolate on the basis of the current migrationbalance, are usually reliable. It is thus possible tocalculate with an acceptable degree of accuracythe extent to which the population will have agedwithin, say, fifty years. Such figures are extremelyvaluable when planning retirement systems, butneed to be backed up by less reliable forecastsabout the number of people that will be born dur-ing the period concerned. Here, extrapolationsbased on the present birth rate will be less trust-worthy, for the future is full of uncertaintieswhich may seriously affect people's confidenceand hence the fertility rate.

Paradoxically, the difficulties are greater whenattempting to count the population at a givenmoment in time. Despite these difficulties, fore-casts that set out the various possible scenarioson the basis of refined demographic models aregreatly prized by policymakers.

RECENT TRENDS

1. Population explosion in developing countries (Fig.A and B)

Population growth is much slower in industrial-ized countries than in developing ones. From1950 to 2010, Europe and North America's shareof the world population will have fallen from 17%to 10% despite a considerable absolute increase(from some 320 million in 1950 to over 500 mil-lion in 2010). In contrast, a population explosionbegan in Asia in 1950, and Africa and Latin Amer-ica followed suit some decades later. These threecontinents, which contain the majority of theworld’s most disadvantaged countries, will together account for 90% of the world's popula-tion in 2010 (77% in Asia alone). The commonestexplanation for these differing trends involves the

notion of demographic transition, according towhich each country shifts from a traditional high-equilibrium situation of high fertility and highmortality to a modern low-equilibrium one inwhich fertility and mortality are much lower. Thetransition from one situation to the other maytake one or two centuries. This demographic dis-equilibrium between tne North and the South isparticularly worrying because it is accompaniedby a symmetrical disequilibrium in income, illus-trated by wealth statistics which are in inverseproportion.

Similar variations can be observed at nationallevel. In some countries population growth hasreached extremely high levels, particularly Pak-istan (whose population will have increased

17

© Observatoire de la Finance, 2002; [www.obsfin.ch] Primary data: WorldBank, World Development Indicators; UNPD, World Population Prospects; ILO, Economically Active Population 1950-2010Grouping of countries: Fig. D cf WB; Fig. C cf ILO

98%

40%

64%

32%

38%

27%20%

30%

40%

50%

60%

70%

80%

90%

100%

110%

120%

1950 1960 1970 1980 1990 2000 1950 2000

0

650

1 300

1 950

2 600

3 250

3 900

4 550

5 200

5 850

6 500

More developed Less developed

0 to19 years 0 to19 years

20 to 64 years 20 to 64 years

65 years and over 65 years and over

% of the population in 2000

2000 = 100%

regions regions

28%

63%

9%

39%

56%

4%

67%

15%

63%

6%

32%

18%

0%

20%

40%

60%

80%

0-14 years 15-64 years 65 years and over

0-14 years 15-64 years 65 years and over

High income Low and middle income

1960 1970 1980 1990 2000

1.1.D. Population by age group and by level of development, in per cent, 1950-2000

1.1.C. Population by level of development, in millions, by age group and as an index: 1950-2000

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fivefold between 1950 and 2010) or India (whosepopulation will have more than tripled), whereasother countries will have seen their populationdecline (a disastrous example being Russia). Thisshows that demographic transition is not a uni-form phenomenon to which all countries areinvariably subject, but that the rate at which itoccurs, and indeed its very occurrence, depend onnumerous religious, political, economic and otherfactors. In countries at war or in regions strivingto achieve independence, and in countries withstrong fundamentalist religious movements, ahigh birth rate is interpreted as an instrument ofpower. In economically depressed countries, onthe other hand, citizens' confidence wanes, andthis is reflected in a noticeable decline in the birthrate.

2. Aging of the population in developed countries(Fig. D)

Aging of the population is a phenomenon whichchiefly affects developing countries. Contrary towhat is commonly thought, it is due to a signifi-cant fall in the proportion of young people ratherthan an explosion in the number of old people.The curves indicating changes in the populationover 65 are much the same in developed anddeveloping countries, and the proportion of oldpeople is actually increasing faster in developingcountries. However, there is a very great differ-ence in the 0-19 age group, in which the devel-oped countries have suffered from a seriouspopulation deficit since 1970. Aging of the popu-lation in this part of the world is thus due to amarked reduction in the number of young peoplerather than a disproportionate increase in thenumber of old ones. Since 1970 developing coun-tries have also seen a fall in the relative proportionof young people aged 0-14, but this reversal oftrend is less pronounced than in rich countries.

3. Increasingly urban population (Fig. E and F)

The rate of urbanization increased in all conti-nents between 1950 and 2000. This growth hasbeen particularly spectacular in Latin America

and sub-Saharan Africa. It is reflected in the emer-gence of vast megalopolises, especially in devel-oping countries (where inadequate census-takinghas undoubtedly caused the phenomenon to beunderestimated). Since the infrastructure in suchcountries is unable to cope with influxes of thissize, people are reduced to abject poverty. Finally,conditions in the interior of continents show thatEurope and America have become more uniform-ly urbanized than Africa and Asia, where largerural economies still exist (especially in southernAsia and sub-Saharan Africa).

19

© Observatoire de la Finance, 2002; [www.obsfin.ch] Primary data: WorldBank, World Development Indicators; UNPD, World Population Prospects; ILO, Economically Active Population 1950-2010Grouping of countries: Fig. E et F cf WB

10%

20%

30%

40%

50%

60%

70%

80%

90%

1960 1965 1970 1975 1980 1985 1990 1995 2000

World European Union Latin America and Caribbean Europe and Central Asia Middle East and North Africa East Asia and PacificSub-Saharan Africa South Asia

Urban population

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1965

Rest of EuropeEU

South America Africa AsiaNorthAmerica

Urban Population

Countries ranked according to % of urban population in 2000

1.1.F. Urban population growth, by continent and by country, in per cent, 1965 and 2000

1.1.E. Urban population, in per cent of total population, 1960-2000

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Telecommunications make globalization possible.From a conceptual point of view, telecommunica-tions include the entire range of instruments thatallow data to be transmitted intangibly from onepoint to another. The speed of transmission ofinformation has always been a key factor not onlyin military supremacy, but also in efficient gov-ernment. Thus, in the course of history, numerousmethods have been devised to enable informationto circulate more quickly than its physical carrier.Fire or smoke signals may be considered the mostancient form of telecommunications.

Until the mid-nineteenth century, informationcould circulate more rapidly than matter onlyover distances that did not exceed the range ofhuman sight or hearing. Beyond that, it travelledat the same speed as its carrier (sheets of paper,messengers, pigeons). The breakthrough occurredabout a century and a half ago, when variations inelectric current began to be used to code informa-tion. The first steps towards the development oftelecommunication technology in the modernsense of the term were taken in 1833, whenSamuel Morse first used the telegraph to transmitcoded information. This combined use of trans-mission technology and a coding system was thefirst link in a long chain of innovations and

improvements which were to culminate in mod-ern telecommunication technology.

With distance dead, telecommunications allowthe creation of remote, real-time linkups, feed-back loops and networks. The relative distancebetween the various components is no longer aproblem. These real-time linkages are the key tothe globalization process. Some of them are in theform of structured organizations, of whichtransnational corporations are the best known;others are more volatile, such as remote partner-ships or joint ventures; still others are in the formof trade networks or over-the-counter (OTC)markets. All these arrangements depend on thetechnical ability to communicate and interactwithout regard for distance – thanks to telecom-munications.

To obtain a clearer picture of the magnitude, den-sity and geographical structure of the network inwhich information now circulates, one must lookat (a) indicators that describe the telecommunica-tion infrastructure and (b) indicators concerningtraffic. It would also have been interesting to dis-tinguish between the contents of communications(voice or data), but for technical reasons this isnot possible.

1.2. Telecommunications


In the final decade of the twentieth century, pro-found changes took place in the global telecom-munication sector. These changes can be summedup in three key phrases:

• a radical technological change due to the emergenceof mobile telephony and the Internet;

• privatization and deregulation;

• internationalization of telecommunication compa-nies.

These three changes have greatly complicated the gathering and consolidation of data, in comparison with the days when telecommunica-tions around the globe were controlled by nation-al monopolies.

21

© Observatoire de la Finance, 2002; [www.obsfin.ch] Primary data: ITU, World Telecommunication Indicators Database; OCDE, Perspectives des communications de l'OCDE; World Bank, Global Economic Prospects and the Developing Countries; Telegeography, Packet Geography 2002. Grouping of countries: Fig. A cf Telegeography

2001 (100%)

41 820 Mbps 19% 0.5% 1 172 Mbps

5 916 Mbps 29% 0.7% 152 Mbps

Mbps = megabytes per second

162 250 Mbps 74%

13 258 Mbps 64%

14 140 Mbps 6% 0.0% 68 Mbps

949 Mbps 5% 0.3% 63 Mbps

767 Mbps 0.3% 0.2% 445 Mbps

170 Mbps 0.8% 0.3% 69 Mbps

United States and Canada

Europe

Africa

1999 (100%)

Latin America and Caribbean

Asia and Pacific

1% 3% 4% 6% 7% 8%9%

11%

12%38% 38% 40% 41% 41% 42% 40% 38% 37% 35% 32% 31%30%

29%

27%62% 62%60% 59% 59% 58% 59% 59% 59% 59% 60% 59%

57%53%

46%

15%8%

4%2%1%0

200

400

600

800

1 000

1 200

1 400

1 600

1 800

1965 1970 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999

Television sets

Main telephone lines

Personal computers

Mobile telephone subscribers

Millions

1.2.B. Access to telecommunication networks, in millions of units and in per cent, 1965-1999

1.2.A. Band width of international Internet circuits in megabytesper second, in 1999 and 2001

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For years the International TelecommunicationUnion (ITU) has gathered statistical informationon the telecommunication sector and related ser-vices from the 189 states and 650 companies thatare ITU members. Its work is limited to publictelecommunications, and therefore excludes net-works that are not automatically connected topublic networks, broadcasting, and the manufac-ture of telecommunication equipment.

Despite attempts to standardize statistical infor-mation, it will be some time before the ITU'sWorld Telecommunication Indicators Databasecan provide an exhaustive and readily comparablepicture of global public telecommunications.Since the database is based on countries, it cannotprovide regional or global aggregates or data onspecific markets. These gaps are filled by privatecompanies such as Telegeography Inc.

Drawing up global historical series is difficult, fortwo reasons. The first reason is the absence of agenerally accepted unit of measurement: somecountries measure traffic in minutes, others innumbers of calls, and others in pulses. Even if themost commonly used unit is the "connectionminute", the number of countries supplying datavaries over time and according to the type of traf-fic. In any case, a fourth unit - band width - couldsoon become the new measurement standard. Thesecond reason is the strategic importance of infor-mation on levels of telecommunication traffic,which explains the reluctance of operators - par-ticularly private ones, or those about to become so- to publish data on traffic at a time when compe-tition in the sector is so fierce.

Experts distinguish between three levels oftelecommunication traffic: international, nationaland local. As Swisscom in Switzerland has done in2002, some countries or operators are tending tomerge these categories for technical or economicreasons. The most detailed statistics concern

international traffic, because - traditionally, butthings are changing - it involves two operatorsand gives rise to cross-border financial settle-ments. In 1999 data on international traffic wereavailable for 192 countries; the equivalent figuresfor national and local traffic were 128 and 100respectively.

Another way of looking at telecommunicationtraffic is to analyse the turnover of companies inthe sector. In that case one is no longer measuringtraffic in the physical sense of the term, but mon-etary aggregates relating to all types of telecom-munication services without distinction. Thisapproach also takes account of pricing policies,which may vary from operator to operator; on theother hand, the point of reference shifts from thecountry of operation to the operator's nationality,disguising the geographical distribution of theservices paid for. Drawing up global statisticalseries on turnover in the telecommunication sec-tor also raises the question of which reference cur-rency and methods of conversion to use; the ITUuses the US dollar and end-of-year rates ofexchange for other currencies.

Data on the expansion of telecommunication net-works are of better quality than data on traffic.They indicate the number of lines or connectingdevices. However, the significance and accuracyof these data will depend on local habits of useand regulation. For example, the differencebetween the number of telephone lines and thenumber of subscribers is due to the number ofpublic telephones. In some developing countries,the latter are far more important than in devel-oped countries. Another example is television:some countries record the number of TV sets,whereas others simply record the number ofhouseholds with TV licences. Such difficultiesgreatly complicate the international interpretationand comparison of these statistics.

23

© Observatoire de la Finance, 2002; [www.obsfin.ch] Primary data: ITU, World Telecommunication Indicators Database; OCDE, Perspectives des communications de l'OCDE; World Bank, Global Economic Prospects and the Developing Countries; Telegeography, Packet Geography 2002

16% 18% 19% 19% 20% 20% 19% 18% 17% 16% 15% 15% 15% 15% 15%

8%

15% 15%16% 18%

22%25%

29%33%

36% 39% 41% 42% 42%27%25% 24%

23%21% 20% 20% 19% 20%

47%

40%37% 36% 34% 34% 33% 32% 31% 29%

11%

29%30%31%29%31%

29%

23%24%25%26%27%

0

200

400

600

800

1 000

1 200

1 400

1 600

1965 1970 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999

NAFTA EU

Rest of OECD Non-OECD

Millions

porpour 100 hab.

0

20

40

60

80

100

120

1965

1970

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

1965

1970

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

1965

1970

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

NAFTA EU Rest of OECD Non-OECD

Telephone lines

PCs per 100 inhabitants

Mobile telephones per 100 inhabitants

per 100 inhabitants

1.2.D. Density of telecommunication systems by region, in unitsper 100 inhabitants, 1965-1999

1.2.C. Access to telecommunications by region (all types of system), in millions of units and in per cent, 1965-1999

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RECENT TRENDS

1. Internet capacity is growing explosively (Fig. A)

Since 2000, the total capacity of the internationalInternet network to transmit information (bandwidth measured in megabytes per second) hasexceeded that of the international telephone net-work. The development of the Internet at interre-gional level is further consolidating the keyposition of the United States, where 99% of inter-regional transmission capacity is located. For his-torical reasons - unlike in the telephony sector,where the costs of international cables are bornejointly by both parties - Internet circuits connect-ed to the United States are entirely paid for by theforeign party. This asymmetry has had a majorimpact on the geographical distribution oftelecommunication earnings, especially sinceband width - and probably interregional traffic -has tripled each year since 1999.

2. Mobile telephony all around the globe (Fig. B, C and D)

Until the early 1990s it was usual to analyse theexpansion of a network in terms of the number ofsubscribers. Things changed fundamentally dur-ing the 1990s, particularly with the advent ofmobile telephony. However, there are still majordifferences even on the terrestrial network. In themost highly developed countries the number ofsubscriptions is 127 per 100 inhabitants, whereasin the non-OECD countries it is 27 per 100.

3. The structure of traffic is hardly changing, butcharge rates are (Fig. E)

Telecommunication traffic has three main compo-nents: traffic within the same switching area (localtraffic), traffic between national switching areas(national traffic) and international traffic, whichhas two statistical dimensions depending on thecharging method: outgoing and incoming traffic.Full information on the subject is only availablefor a very limited number of countries, and therelative distribution of local, national and interna-tional traffic varies over time and from country to

country. These differences are due to many fac-tors, including social habits and the amount ofcontact with other countries, as well as techno-logical and charging arrangements. In most coun-tries Internet traffic is charged at local rates, sincebeyond that level it is handled by dedicated, non-telephone circuits. In countries for which full his-torical data are available, the share of local trafficis between 35% and 45% of total connection min-utes, national traffic seldom accounts for morethan 60%, and international traffic may rangefrom negligible to 10%.

Traditionally, the cost of a telephone call depend-ed on distance. However, at least in the OECDcountries, there has in recent years been anincreasing tendency to "postalize" telephonecharge rates. Just as for postal services, the costsof telephone services are now much the same,regardless of distance. Local calls are thus tendingto become more expensive in relative terms, whileinternational calls are getting cheaper. There aretwo explanations for this. Deregulation is forcingoperators to adapt their prices to actual costs,while the "last kilometre" remains the mostexpensive section of the link-up, and charges rateshave been increased accordingly.

4. An increasing technology gap (Fig. G)

Capital expenditure, or investment in telecommu-nication infrastructure, has varied over the yearsbetween 0.5% and 1% of GDP, with a slight ten-dency to increase since the early 1990s. The sametrend can be observed in most countries that pro-vide the relevant data. However, if the sameexpenditure is analysed per capita, the contrastsbecome much more apparent. The non-NAFTAmembers of the OECD are at the top of the leaguetable with some USD 140 of capital expenditureper head of population; next comes NAFTA withUSD 86, followed by the rest of the world withabout USD 10 per capita. Even if the gap betweenthe OECD and the rest of the world is graduallyclosing in terms of share of GDP, it is still very

25

© Observatoire de la Finance, 2002; [www.obsfin.ch] Primary data: ITU, World Telecommunication Indicators Database; OCDE, Perspectives des communications de l'OCDE; World Bank, Global Economic Prospects and the Developing Countries

66%

66%

66%

66%

66%

66%

67%

67%

67%

67%

67%

67%

66%

66%

59%

58%

63%

63%

63%

64%

64%

65%

63%

62%

61%

56%

58%

58%

57%

57%

57%

51%

51%

51%

51%

53%

53%

53%

31%

31%

30%

30%

30%

29%

28%

28%

27%

27%

27%

27%

28%

27%

34%

35%

37%

37%

36%

36%

35%

35%

36%

38%

38%

42%

40%

40%

40%

40%

40%

43%

43%

44%

45%

45%

45%

45%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%19

8319

8419

8519

8619

8719

8819

8919

9019

9119

9219

9319

9419

9519

9619

9719

98

1991

1992

1993

1994

1995

1996

1997

1998

1999

1991

1992

1993

1994

1995

1996

1993

1994

1995

1996

1997

1998

1999

SWITZERLAND - JAPAN - SPAIN - HONDURAS

Outgoing international in minutes Incoming international in minutes

National in minutes Local in minutes

0

50

100

150

200

250

300

1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000

1990 USD

1.2.F. Changes in the price of a three-minute transatlantic call, in constant USD, 1940-2000

1.2.E. Distribution of telephone traffic by switching area, in per cent

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large in absolute terms, i.e. in terms of totalinvestment, which determines a country's capaci-ty to benefit from technological progress.

5. Higher telecommunication earnings in non-OECDcountries (Fig. H)

Between 1975 and 1999, telecommunicationoperators saw their earnings increase in nominalterms by a factor of 10.8, while global GDP hadmultiplied by 3.7. This means that the telecom-munication sector's share of the economy tripled.In 1975, 48% of earnings went to operators basedin the United States, but this figure had fallen to36% by 1999. Over the same period, the share ofearnings received by operators based in EuropeanUnion countries fell from 33% to 27% of the total.Non-OECD countries saw their share of earningsrise from 5% to 16%. However, operators based inOECD countries may be shareholders in operatorsbased elsewhere and may therefore enjoy a shareof non-OECD earnings.

27

© Observatoire de la Finance, 2002; [www.obsfin.ch] Primary data: ITU, World Telecommunication Indicators Database; OCDE, Perspectives des communications de l'OCDE; World Bank, Global Economic Prospects and the Developing Countries

0

20

40

60

80

100

120

140

160

180

1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999

NAFTA

EU

Rest of OECD

Non-OECD

USD per capita

48%

36%

33%

27%

14%

21%

5%

16%

0

50 000

100 000

150 000

200 000

250 000

300 000

350 000

1975 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 1999

Non-OECD

Rest of OECD

EU

NAFTA

Millions of USD

1.2.H. Turnover of telecommunication operators by region, in millions of USD and in per cent, 1975-1999

1.2.G. Investment in telecommunication infrastructure, in USD per capita,1975-1999

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Like mail traffic and telecommunications, trans-port of people and goods is a key aspect of global-ization. It helps explain the development of thespatial organization of human activity, from urbangrowth to the internationalization of productionwithin multinational corporations.

Transport can be analysed from three relatedangles:

• expansion of the network, measured in kilometres orthe number of regular lines or connections, orinvestment in expansion;

• the available fleet, i.e. transport capacity;

• transport flows and volumes.

The first two approaches are very useful but high-ly specialized. From an economic point of view,transport flows are the most meaningful, and givea clearer picture of the amount of transport in theglobalization process.

Transport of people and goods involves anextremely wide variety of carriers, ranging fromautomobiles (private cars, lorries, buses, etc.) totrains, ships, barges, pipelines and aircraft. Tomake things even more complicated, each of thesecarriers can be subdivided into domestic andinternational transport.

1.3. Transport flows


The units of measurement most commonly usedto quantify traffic are passenger kilometres fortransport of people and ton kilometres for trans-port of goods. These are not natural units, and inorder to use them it is necessary to know not onlythe total number of passengers (or tonnes) butalso the distance covered by each. This definitiondemonstrates how difficult it is to measure thevarious modes of transport, some of which (suchas international air transport) are highly regulat-ed, whereas others (such as private cars) are total-ly uncontrolled. As a result, transport data aredetermined with the help of surveys and estimatesof average distances travelled, rather than bystatistics in the strict sense of the term.

The less regulated a given mode of transport is,the more incomplete the data concerning it willbe. To make matters worse, there is an almost totallack of statistics on domestic transport in most

developing countries. This makes it impossible to speak of global transport statistics; all that one cando is discuss selected aspects, with varyingdegrees of accuracy:

• Air transport statistics are calculated by the Interna-tional Civil Aviation Organization (ICAO) on thebasis of information supplied by its 185 membercountries. These data cover transport of both peopleand goods and distinguish between domestic andinternational traffic.

• The International Railway Union has only 45 mem-bers. It provides data about its member countries,but is unable to supply global information.

• The International Road Transport Union does notkeep statistics of its own, but uses data compiled byother organizations such as the WTO or Eurostatinstead.

• Statistics on maritime transport of goods are gath-ered by UNCTAD, which has published the Reviewof Maritime Transport since 1968.

29

© Observatoire de la Finance, 2002; [www.obsfin.ch] Primary data: UNCTAD, Annual Review of Maritime Transport; European Commission, EU Energy and Transport in Figures; ICAO, Statistical Yearbook ;IRU, World Transport Statistics; UIC, Rail Traffic Statistics

100

200

300

400

500

600

700

800

900

1 000

1970 1975 1980 1985 1990 1995 2000

Maritime freight (tonnes)

Air freight (tonnes)

Air freight (tonne-kilometres)

Air passengers (number)

Air passengers (passenger-kilometres)

1970 = 100

1.3.A. Comparative trends in air and maritime transport, as an index, 1970-2000

EU United States Japan ChinaRussian

Federation

3 676 6 216 723

(79%) (86%) (55%)

402 239 90

(9%) (3%) (7%)

281 23 389

(6%) (0%) (30%)

50 22 31

(1%) (0%) (2%)

32 1 5

(1%) (0%) (0%)

241 767 76

(5%) (11%) (6%)

Car

Bus and coach

Rail

Tram and underground railway

Sea vessel

Aircraft (domestic/inter-EU)

- -

594 172

370 81

5 72

12 1

80 56

1.3.B. Distribution of passengers transported, by type of carrier, in billions of passenger-kilometres, 1999

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30


• The European Conference of Transport Ministers isthe only organization with the resources to cover thefull range of carriers, but it does this only for oneregion - the European Union. In 2001 the EU pub-

lished a highly interesting booklet entitled EU Ener-gy and Transport in Figures 2001, which contains anumber of international comparisons based on stan-dardized definitions.

RECENT TRENDS

1. Predominance of maritime freight (Fig. A)

In the absence of readily comparable data on railand road transport, only sea and air transport canbe compared globally. In the space of thirty yearsthe volume of air transport has increased fivefold,whereas the volume of transport by sea has scarce-ly doubled. Despite this differing trend, it shouldnot be forgotten that maritime transport stillaccounts for 99.5% of the total volume transport-ed by sea and air, with only 0.5% travelling by air.In 2000, 5.2 billion tonnes of goods were trans-ported by sea.

The geographical distribution of maritime trans-port has changed profoundly over the last thirtyyears. In 1970, 64% of total tonnage was loaded indeveloping countries, but by 1999 this figure hadfallen to 51%. The share of goods unloaded indeveloping countries rose from 17% in 1970 to28% in 2000. There are several reasons for thisdevelopment, including the relative stagnation oftrade in raw materials and ores, changes in trans-port costs, and finally structural changes in thecomposition of global trade flows.

2. In Europe, road transport leads the field (Fig. C)

The only truly complete statistics on transport arethose concerning the European Union. They showthat the number of ton kilometres travelled in theEU doubled between 1970 and 1999, which moreor less matches the trend (in tonnes) in globalmaritime transport. This long-term trend concealsmajor structural changes, especially the increas-ing predomination of road transport (45%), fol-lowed by inland waterways (40%), within the

Union. In the space of thirty years both of thesecarriers have increased their share by twenty percentage points, and other carriers, particularly therailways, have seen their shares decline. The pre-domination of road transport is also reflected inthe number of passenger kilometres travelled;over the last thirty years its share has risen slight-ly and is now almost 80% of the total.

3. Widely differing levels of transport (Fig. B, D and E)

The amount of goods transported varies enor-mously from region to region. Thus there is ahuge contrast between China (3,000 per capitaton kilometres) and the United States (19,600 percapita ton kilometres). The European Union andthe Russian Federation are in between theseextremes, with 7,600 and 14,000 per capita tonkilometres respectively. Factors such as level ofdevelopment, land area and type of resources helpto shed light on, if they do not actually explain,the various countries' demand for transport. Forexample, the large share of transport by oilpipeline in both the United States and Russia(17% and 33% of total ton kilometres respective-ly) is due to the remoteness of the oil fields (Alas-ka and Siberia) and their importance to theircountries' economies.

4. The greenhouse effect and the Kyoto protocol

The continuing expansion of transport and theuse of fossil fuels is having a tangible impact onthe environment (particularly the ozone layer)and on the climate in general. The Earth Summitin Rio de Janeiro in 1992 recommended that

31

© Observatoire de la Finance, 2002; [www.obsfin.ch] Primary data: UNCTAD, Annual Review of Maritime Transport; European Commission, EU Energy and Transport in Figures; ICAO, Statistical Yearbook ;IRU, World Transport Statistics; UIC, Rail Traffic Statistics.

5% 3%

8%

4%

21%

8%

35%

40%

5%

10%6%

13%

8%

74%79%

31%

45%

1 338

1 892

2 294

2 959

2 148

3 012

4 042

4 790

0

1 000

2 000

3 000

4 000

5 000

1970 1970 1980 1990 1999

1999 1970 1980 1990 1999

EU: Goods transport in billions of tonne-kilometres

EU: Passenger transport in billions of passenger-kilometres

Total TotalRoad CarSea (inter-EU) Bus and coachRail RailInland waterways AirPipelines Tram and

underground railway

1970

1999

1.3.C. Distribution of flows of passengers and goods within the EU, by type of carrier, 1970-1999

Tra

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32


emissions of greenhouse gases be measured. TheKyoto protocol, which entered into force in 2002despite the refusal of the United States to ratify it,distributes objective quotas for reduction of emis-sions among the various regions of the world.However, there is still a long way to go before thetargets set out in the protocol can be met.

33

© Observatoire de la Finance, 2002; [www.obsfin.ch] Primary data: UNCTAD, Annual Review of Maritime Transport; European Commission, EU Energy and Transport in Figures; ICAO, Statistical Yearbook ;IRU, World Transport Statistics; UIC, Rail Traffic Statistics

3 2924 5643 439

3 569

1 796 1 562

1 471

641

7 312

991

6 948

3 348

5 453

2 381 441

954

0

5 000

10 000

15 000

20 000

25 000

EU United States Japan China Russian Federation

Road

Rail

Sea and inland waterways

Pipelines

Tonne-kilometres per capita

28%

37%

18%

17% 33%15%

51%

55%

41%

50%

11%

33%

7%

44%

8%

43%

3%

1.3.E. Distribution of goods transported, by type of carrier, in tonne-kilometers per capita, 1999

905670

1 288

981

227

1 941216

240

2 0101 231

1 020

1 254

1 499

301

548

140

0

1 000

2 000

3 000

4 000

5 000

6 000

EU United States Japan China Russian Federation

Road

Rail

Sea and inland waterways

Pipelines

Billions of tonne-kilometres

28%

37%

18%

17%

33%

15%

51%

55%41%

50%

11%

33%

7%44%

8%

43%

3%

1.3.D. Distribution of goods transported, by type of carrier, in billions of tonne-kilometres, 1999

Tra

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flo

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34



Mail services are responsible for delivering lettersand parcels. Before the development of telecom-munications, letters were the only way to sendinformation over long distances. Traditionally,therefore, mail services have played an importantpart in eliminating distance - a phenomenonwhich has developed to an unprecedented degreein recent years thanks to telecommunications.The Universal Postal Union (UPU) was set up in1874, six years after the International Telegraphic

Union. Today the UPU has 189 member countriesand is still the only source of information on glob-al traffic in letters and parcels. Statistics on trafficdensity, the types of message delivered and thekinds of senders and recipients of letters andparcels provide a picture of how information cir-culates around the world and what kinds of rela-tionship mail services enable the various playersto establish.

1.4. Mail traffic


The member countries of the UPU send it infor-mation on traffic, classified in one of two ways:either by speed of delivery, or according towhether or not the item sent is a letter or smallparcel weighing less than 2 kg. The UPU mergesthis information into a single set of statistics, com-bining priority delivery with items under 2 kg andordinary delivery with other items. This provides

a fairly reliable picture, but above all a unifiedone, of global mail traffic, although there havebeen a number of gaps in the supply of data. Forexample, some countries failed to send in any fig-ures in a given year (e.g. Switzerland and Canadain 1997) and some regions underwent profoundpolitical changes (such as the collapse of theUSSR).

RECENT TRENDS

1. Mail traffic: a Northern phenomenon (Fig. A)

In the twenty years between 1980 and 2000, mailtraffic underwent two profound changes. First,developing countries' share of world domestictraffic fell from 33% in 1980 to 19% in 2000. Sec-ond, the relative share of international traffic intotal global mail traffic fell from 2.7% to 1.9%. Inother words, the last twenty years have seen anexpansion of domestic mail traffic in the devel-oped countries. However, if differences betweenregions are disregarded, it can be seen that mailtraffic has grown at the same rate as world popu-lation, since in the space of twenty years the num-ber of consignments per inhabitant of the globe

has remained almost unchanged (76 a year in2000, as against 75 in 1980).

2. The postal network (Fig. C)

Postal statistics make it possible to determine theextent to which mail services have become avail-able to people in various countries. In 2000, aver-aged across the globe, two thirds of the world'spopulation were able to receive mail at home,which also means that they had a recognisedaddress which could be reached by the postal net-work. However, this average figure must be treat-ed with caution, for it conceals major disparitiesbetween countries (as reflected by a mean

deviation of 36%). Top of the league is the

35

© Observatoire de la Finance, 2002; [www.obsfin.ch] Primary data: Universal Postal Union, Postal Statistics; Universal Postal Union, Annual Report. Grouping of countries: Fig. A et C cf UPU

0

5

10

15

20

25

30

35

40

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

0

60

120

180

240

300

360

420

480

World

Industrializedcountries

International traffic

Domestic traffic

Billions of consignments

WORLD 62% ( 36%) 62% ( 37%) 64% ( 38%)

OECD 90% ( 15%) 97% ( 5%) 96% ( 7%)

NAFTA 84% ( 10%) 82% ( 15%) 93% ( 5%)

EU 95% ( 9%) 98% ( 2%) 95% ( 10%)

NON-OECD 55% ( 36%) 55% ( 38%) 58% ( 39%)

Rest of Europe 96% ( 5%) 96% ( 5%) 96% ( 6%)

Latin America and Caribbean 56% ( 30%) 57% ( 30%) 64% ( 29%)

Africa 29% ( 27%) 25% ( 28%) 22% ( 26%)

Asia and Pacific 55% ( 36%) 60% ( 35%) 64% ( 37%)

In brackets: countries' mean deviation from the regional average.

1993 1996 2000

1.4.B. Distribution of consignments bytype of contents in 1995 and forecasts for 2005

19%

20%

55%

48%

19% 25

%

22%

22%

55%

49%

24%

25%

53%

36%

19%

19%

21% 18

%

12%

11%

14%

8%

26%

21%

28%

44%

26%

33%

61% 57%

65%

68%

50%

55%31%

44%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1995

2005

1995

2005

1995

2005

1995

2005

1995

2005

1995

2005

Asia and

PacificAfrica

Eastern

Europe

WesternEurope

andNorth

Latin

AmericaWorld

Ads and commercial mailInterpersonal correspondenceFinancial correspondence

America

1.4.C. Population having mail delivered at home, in per cent, in 1993, 1996 and 2000

1.4.A. Number of mail consignments inthe world and in industrializedcountries, 1978-2000

Ma

il t

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ic

36


European Union, where 95% of the populationhave mail delivered at home; at the bottom isAfrica, where the equivalent figure is less than oneperson in four. Asia and Latin America are aroundthe global average, although here again there arevery significant deviations from this average fig-ure.

3. The future of mail services (Fig. B)

In 1996 the UPU asked 94 national mail servicesto forecast the amount and type of mail traffic in2005. Apart from information on the contents ofconsignments, this study revealed three maintrends:

• The share of consignments from businesses tohouseholds seems likely to increase significantly,mainly at the expense of consignments betweenhouseholds (both domestically and internationally).Although this trend will be seen in every region, itwill be particularly marked in Latin America, Asiaand the Pacific.

• In 1995 international interpersonal communicationsaccounted for 48% of global traffic, but it is forecastthat this figure will fall to 39% by 2005, probablyowing to the ease of communicating through theInternet. This reduction by almost ten percentagepoints is forecast for every region, and will be com-pensated for by an increase in business mail andadvertisements. The same applies to domestic inter-personal communications, with advertisementsincreasing by 5 percentage points.

• Once the main medium of interpersonal communi-cation, mail services are more and more clearlybecoming a network for the dissemination of busi-ness communications and information, which areexpected to account for 65% of mail traffic by 2005(over 70% in the developed countries and LatinAmerica), as against 58% in 1995.


37II. Main playersII. Main players

2.1 The economically active population

2.2 Very large businesses

2.3 Small and medium-sized entreprises


2.5 The International Monetary Fund:

reserves and interventions

38



A country's population can be divided into threecategories based on its relationship to the labourmarket: employed, unemployed and non-active.This classification largely depends on the institu-tional framework as determined by the country'slabour laws and social policy. As regardsemployed people, there is a sharp distinctionbetween industrialized countries (where labourlegislation is highly developed) and developingones (where it is much less so). For example,informal employment is the exception in industri-alized countries and is treated as illegal, whereasin developing countries it is widespread. Such dif-fering ideas about what employment actually isand what part labour legislation should play havemajor implications when it comes to counting thenumber of jobs. International comparisons ofsuch institutionally dissimilar realities musttherefore be carried out with the utmost caution.

Things are even worse when it comes to unem-ployment and inactivity. Rates of registration ofjob seekers by unemployment insurance agenciesare influenced by factors such as how strict theconditions of eligibility are and how generous thebenefits are. If applicants are required to havebeen registered for a long time, people who losetheir jobs may not be able to get unemploymentbenefit. If benefit is only provided on conditionthat applicants accept active label market policies,or if unemployed people can be forced to accept apoorly paid or less skilled job, some will prefernot to apply rather than submit to what they seeas humiliating conditions. If benefit is only pro-vided for a limited period, people who reach theend of their entitlement will no longer be official-ly recorded as unemployed and will join the ranksof the non-active. Finally, people in informalemployment are not officially recorded asemployed, but as non-active. Southern Italy, with

its vast underground economy and low rates ofemployment, illustrates the difficulties of count-ing jobs in countries where the informal sector ishighly developed.

Labour market statistics depend on each country'sspecific institutional framework, and to a signifi-cant extent this explains the differences in data onemployment, unemployment and inactivity.Accordingly, such data do not provide a true pic-ture of reality, but merely a glimpse of it as creat-ed by labour market institutions and policies.Quite apart from problems of counting, differ-ences in legislative and institutional frameworkscreate major difficulties when it comes to interna-tional comparisons of both labour stocks andlabour flows.

Standardized definitions have been adopted inorder to ensure that data can be compared inter-nationally. In this connection, the classic defini-tions used in surveys of the economically activepopulation are based on recommendations by theThirteenth Conference of Labour Statisticiansheld by the International Labour Organization(ILO) in 1982. They apply to the working-agepopulation, which conventionally includes every-one aged 15 and over. In this connection,employed people are defined as those who, duringthe week of the survey, have done at least onehour of paid work (or have a job from which theyare temporarily absent). Unemployed people mustmeet the following three criteria during the weekof the survey: they must be out of work; they mustbe prepared to find work within two weeks; andthey must have actively sought work in the previ-ous four weeks. Non-active people are people whodo not have a job and are not seeking one. Thelabour force comprises employed and unem-ployed people. By excluding the non-active, it

2.1 The economically active population

39

© Observatoire de la Finance, 2002; [www.obsfin.ch] Primary data: ILO, Key Indicators of the Labour Market; ILO, Economically Active Population 1950-2010; World Bank, World Development IndicatorsGrouping of countries: Fig. A et B cf ILO

Economicallyactive population

32%30%

27%

24%22%

20%18%

0

1 000

2 000

3 000

4 000

5 000

6 000

2010 2000 1990 1980 1970 1960 1950 1950 1960 1970 1980 1990 2000 2010

Less developed regions More developed regions

More developed regions, as % of world population

Total population

Millions of people

1950 1960 1970 1980 1990 2000 20101950 1960 1970 1980 1990 2000 2010

10 to 14 years

55 years and over

15 to 24 years 25 to 54 years

78% 78% 78% 80% 81% 81% 82%

68%72%

77%81%

84% 85% 86%

71% 69%68% 67%

64% 63% 60%

67%65%

60% 59%55% 54%

52%54%

51%49%

46% 45% 44%42%

39%37%

34%

28%26% 25%

24%

32%

28%

24%

17%15%

13%10%

3%2%

0% 0% 0% 0% 0%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Less developed regions

More developed regions

Activity rate

2.1.B. Economic activity rate by age group and by level of development, in per cent, 1950-2010

2.1.A. Population and economically active population by level of development, in millions and in per cent 1950-2010

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makes it possible to obtain the clearest possiblepicture of the amount of labour available in thecountry concerned.

These various categories are used to calculate thefollowing rates for the population concerned:

• the economic activity rate: the labour force(employed plus unemployed people) as a percentageof the working-age population;

• the employment rate: the percentage of people whoactually have jobs;

• the unemployment rate: unemployed people as apercentage of the labour force (rather than the work-ing-age population).

These data are then broken down by gender, levelof skills, nationality, marital status, etc.

Economic activities carried out by employed peo-ple are classified by sector (agriculture, industryand services) or with the help of a more refinedsystem known as the International StandardIndustrial Classification (ISIC). This sectorial jobclassification is based on the place of work ratherthan the kind of work; accordingly, someoneworking as a secretary in an agricultural or indus-trial business will be classified in the sector wherethe business mainly operates.


The main challenge when it comes to counting ishow to eliminate institutional differences. Thedata compiled by the ILO are gathered at nationallevel, where the most commonly used sources arepopulation and business censuses, administrativedata (especially from social security agencies andemployment offices) and labour force surveys.However, each of these methods has its draw-backs. Counts based on population censuses arebound to be imprecise, since the questions aboutwork are extremely vague. Business censuses onlytake account of the employed population, andhence provide no information about unemployedor non-active people. The data provided by socialsecurity agencies and employment offices areover-dependent on institutional factors. Labourforce surveys would appear to be the most reliablesource. However, despite the ILO's efforts to stan-dardize methods, there are still very great differ-ences between countries, and these are majorobstacles to international comparison. For exam-ple, definitions of the working-age population vary according to the age of retirement, whicheach country determines separately (within theEuropean Union it ranges from 60 to 67 years). In

failing to take account of the legal age of retire-ment, as well as work carried out by childrenunder 15, standardization of national data on thebasis of a conventional definition of the working-age population as everyone aged 15 and over leadsto serious distortions.

Other difficulties concern the counting of infor-mal employment which, since it is irregular, isoften overlooked by surveys that gather data overa limited period (a day or a week). Furthermore,people are less willing to report such employmentto official investigators; as a result, economicactivity rates are seriously underestimated incountries where informal employment is com-mon. For similar reasons, it is very difficult tocompare rates of female employment, since inmany countries women work as unpaid homehelps and are not treated as part of the labourforce. The same is even more true of child labour.

Finally, no satisfactory solution has been found tothe problem of the length of time worked. Accord-ing to conventional ILO definitions, people whohave worked for one hour during the period of thesurvey are recorded as economically active in

41

© Observatoire de la Finance, 2002; [www.obsfin.ch] Primary data: ILO, Key Indicators of the Labour Market; ILO, Economically Active Population 1950-2010; World Bank, World Development Indicators; OCDE Per-spectives de l’emploi de l’OCDE 2001. Grouping of countries: Fig. C cf OCDE; Fig. D cf ILO

0%

2%

4%

6%

8%

10%

12%

1965 1970 1975 1980 1985 1990 1995 2000

OECD

EU

Japan

United States

32%

78%

23%

73%

16%

67%

12%

61%

10%

57%

37%

9%

42%

11%

45%

14%

44%

17%

41%

18%

31%

14%

35%

17%

39%

19%

44%

22%

49%

25%

0%

25%

50%

75%

100%

Less

deve

lope

dre

gion

s

Mor

ede

velo

ped

regi

ons

1950 1960 1970 1980 1990

Services

Industry

Agriculture

Less

deve

lope

dre

gion

s

Less

deve

lope

dre

gion

s

Less

deve

lope

dre

gion

s

Less

deve

lope

dre

gion

s

Mor

ede

velo

ped

regi

ons

Mor

ede

velo

ped

regi

ons

Mor

ede

velo

ped

regi

ons

Mor

ede

velo

ped

regi

ons

2.1.D. Economically active population by economic sector and by level of development, in per cent, 1950-1990

2.1.C. Unemployment rates in industrialized countries, in per cent, 1965-2000

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exactly the same way as ones who have workedfor 40 hours or more. This method of calculationbiases the figures in favour of countries wherepart-time work is common. It should be men-tioned here that the European Union is currentlyworking to develop employment statistics basedon full-time equivalents, which would eliminatethis distorting factor. At this stage, however, thereis no likelihood of this method being extended todeveloping countries.

Classification by economic sector, which is basedon the same sources, also raises a number of prob-lems. First of all, the fact that many countries donot use the ISIC complicates international com-parison. Secondly, since sectorial classification isbased on the place of work, the role of services inthe economy is underestimated; many agricultur-al and industrial businesses include services jobswhich are not recorded as such. Finally, sectorialclassification is governed by different rules in dif-

ferent countries. For example, members of thearmed forces, self-employed people and homehelps are not always recorded. When the armedforces are included, they are classified under theservice sector, which is thus overestimated incomparison with countries where the armedforces are not included. Similarly, if home helpsare disregarded, the agricultural sector (wheresuch jobs are more common) is underestimated.Finally, some censuses exclude the unemployed,whereas others include the whole labour force.

There are thus two main kinds of probleminvolved in calculating the economically activepopulation: ways of defining people's employ-ment status (which vary considerably from coun-try to country), and counting methods. Thismeans that labour market statistics can only beinterpreted and compared internationally with theutmost caution.

RECENT TRENDS

1. Changes in the economically active population(Fig. A)

In both developed and developing countries, theeconomic activity rate remained stable (at around50% of the total population) throughout the peri-od 1950-2000. In absolute terms, however, bothof these variables grew much faster in developingcountries. As a result, rich countries' share of thetotal economically active population has declinedconsiderably, and will have fallen to just 18% by2010.

2. Economically active population and age groups(Fig. B)

A breakdown of the data by age group reveals twothings. Firstly, in the developed countries, theeconomic activity rate in the 25-54 age groupincreased regularly from 1950 to 1990 and thenstabilized, whereas in all other age groups the rate

of employment declined considerably (and childlabour disappeared almost entirely). These figuresreflect the increase in the number of years spent ineducation during the period concerned, as well asthe creation of retirement and early retirementschemes which enabled older people to stopworking without getting into financial difficulties.Secondly, in poor countries, the economic activityrate increased only slightly in the 25-54 age groupand declined in other age groups, although lessmarkedly than in the rich countries. In poorcountries there is less age discrimination in thelabour market; weak social security systems andeconomic constraints have ensured that rates ofemployment among younger and older peopleremain relatively high.

3. Unemployment (Fig. C)

International unemployment figures are very

43

© Observatoire de la Finance, 2002; [www.obsfin.ch] Primary data: ILO, Key Indicators of the Labour Market; ILO, Economically Active Population 1950-2010; World Bank, World Development Indicators Grouping of countries: Fig. E et F cf ILO.

47% 54% 44%

46%

35%38%39%46%12%15%

62%8% 6% 5%

50%65%

56%54%

61% 62%

95%

94%92%

85% 88% 65%

53%38%50%35%

493

136 146

507

173193

546

230252

615

292341

700

345

455

0

200

400

600

800A

gric

ultu

re

Indu

stry

Ser

vice

s

Agr

icul

ture

Indu

stry

Ser

vice

s

Agr

icul

ture

Indu

stry

Ser

vice

s

Agr

icul

ture

Indu

stry

Ser

vice

s

Agr

icul

ture

Indu

stry

Ser

vice

s

1950 1960 1970 1980 1990

More developed regions Less developed regionsMillions ofpeople

35% 37% 39% 42% 44% 36% 37% 38% 39%36%

65% 63% 61% 58% 56% 64% 64% 63% 62% 61%

25%

31%

23%

31%

50%

1950 1960 1970 1980 1990 1950 1960 1970 1980 1990

More developed regions Less developed regions

Women

Men

Agriculture

Industry

Services

2.1.F. Male-female distribution in the economically active population and by economicsector, by level of development and in per cent, 1950-1990

2.1.E. Economically active population in each economic sector, in millions, distributed by level of development in per cent, 1950-1990

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difficult to interpret in the long term. Ways ofassessing unemployment vary from country tocountry (and over time within countries), andthis is reflected in the way that the numbers ofunemployed are counted. Figure C - whichappears to indicate that unemployment is a specif-ically European problem which the United Stateshas solved - is therefore misleading, since unem-ployment is recorded very differently on the twosides of the Atlantic. It is a faulty extrapolation tosuggest, on the basis of such charts, that the Euro-pean labour market is unusually inflexible.

4. Sectorial distribution (Fig. D and E)

In developed countries there has been a majorshift towards the tertiary sector, at the expense ofagriculture, which lost over two thirds of its jobsbetween 1950 and 1990. These countries nowaccount for just 5% of the world's agriculturalworkers, but they include 38% of its industrialworkers and 35% of its service workers (i.e. twicetheir share of the population). In contrast, thedeveloping countries are still largely agricultural,with over half of their economically active popu-lations employed in this sector in 1990. Eventhere, however, there is a shift away from agricul-ture towards industry and services.

5. Employment of women (Fig. F, G and H)

Employment of women has increased morenoticeably in the developed world than it has inthe most disadvantaged regions. In the developedcountries, the share of female employment hasgrown considerably in the service and industrialsectors but has fallen in agriculture, while in thedeveloping countries the proportion of womenhas increased slightly in all three sectors. Femaleeconomic activity rates have continued to expand,the most spectacular rates of growth being in the25-49 age group. The greatest fall has been in the10-14 age group (from 23% to 8% over the periodconcerned). In the rich countries, the ratio of mento women has generally tended to balance out inthe long term, approaching equality over the peri-od 1950-2000. This trend is most noticeable in

the 15-54 age group in developed countries(where there is still a marked discrepancy amongolder people) and the 10-20 age group in devel-oping ones (where division of labour by gender isstill very common above the age of 20). Devel-oped countries have thus seen a spectacularincrease in female employment and in the servicesector, but this process - which some would con-sider a feature of modernization - has scarcely gotunder way in developing countries.

45

© Observatoire de la Finance, 2002; [www.obsfin.ch] Primary data: ILO, Key Indicators of the Labour Market; ILO, Economically Active Population 1950-2010; World Bank, World Development Indicators Grouping of countries: Fig. G et H cf ILO.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

10-14 years 15-19 years 20-24 years 25-49 years 50-64 years 65 years and over

1950 1960 1970 1980 1990 2000 2010Activityrate

1.0

1.5

2.0

2.5

3.0

10-1

4

15-1

9

20-2

4

25-2

9

30-3

4

35-3

9

40-4

4

45-4

9

50-5

4

55-5

9

60-6

4

65+

10-1

4

15-1

9

20-2

4

25-2

9

30-3

4

35-3

9

40-4

4

45-4

9

50-5

4

55-5

9

60-6

4

65+

More developed regions Less developed regions

1950

1960

1970

1980

1990

2000

2.1.H. Number of economically active men per economically active woman, by agegroup and by level of development, 1950-2000

2.1.G. Female economic activity rates, by age group, 1950-2010

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Even though mainstream economists would denythis, the focal reference of the economic theory isan idealized vision of a market in which there isperfect competition and an infinite number ofindividual businesses battle for the favours of anequally innumerable crowd of buyers. In practice,things are very different. In each sector or indus-try there is a finite number of businesses that dif-fer from one another, above all in size. Thesebusinesses pursue different strategies and have avariety of mutual relationships ranging from com-petition through various degrees of dependence tooutright cooperation. Study of existing businessesand their dynamics is thus essential in order tounderstand how effectively competition operatesand hence, indirectly, how efficient the economyis.

Major corporations play a particularly importantpart in the global economic structure, owing tothe resources that they can muster and the lengthof the timeframe on which they can base theirdecisions. They have an undeniable influence onthe way in which smaller businesses upstream ordownstream of them operate, as well as on thecountries and regions where their subsidiaries arelocated.

There are four main features that distinguishmajor corporations from other businesses:

• Their securities are usually listed on stock marketsand very liquid, which gives them preferential accessto financial markets, and hence to finance onextremely favourable terms. The price they pay forthis is close supervision by stock market authorities.

• They are high-profile companies which polish andprotect their images and reputations with the help ofadvertising and marketing campaigns. Their brandnames or other identifying features enable them tointeract directly with the consumers of their prod-ucts and services, and in doing so they can often by-

pass distributors. In this way they can differentiatethemselves from their competitors and dominate themarkets they are in.

• They spend considerable amounts on R & D for newgenerations of products or services. In fact, whatthey are trying to do is control the speed of innova-tion. Each business does what it can to match thespeed of innovation to its own investment cycle andso optimize its profitability.

• They are able to set up worldwide networks of sub-sidiaries. This enables them not only to choose newsites to suit their needs, but also to optimize theirglobal activities and skills.

In industrial society, the strength of major corpo-rations lay in their ability to take full advantage oftheir production facilities (economies of scale)and hence charge lower prices than their smallercompetitors could ever achieve. In post-industrialsociety, in which services have a greater part toplay, the nature of these advantages has changed.The strength of major corporations now lies lessin economies of scale than in their ability to carryout parallel activities which, even though theyresult in different products or services, make useof the same basic skills (economies of scope).

2.2 Major corporations

47

© Observatoire de la Finance, 2002; [www.obsfin.ch] Primary data: Thomson Financial, Datastream Advance; WorldBank, World Development Indicators; ILO, Economically Active Population 1950-2010

33%

6%

11%

1%

11%

59%

0%

10%

20%

30%

40%

50%

60%

70%

80%

Economically active population GDP (courrent USD) Capitalization

144 poorest countries

800 largest businesses

100% of the economically active population

= 3.0 billion people

100% of global GDP =

30 489 billion USD

100% of global capitalization =

32 258 billion USD

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

50 100 150 200 250 300 350 400 450 500 550 600 650 700 750 800

Stock marketcapitalizationAssets

Jobs

Equity capital

Turnover

800 largestcorporations

Corporations classified in descending order of stock market capitalization

100% =

2.2.B. Concentration of the 800 largest corporations, 2000

2.2.A. Major corporations and the poorest countries: a comparison, 2000

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How can the "size" of a business be measured?There is no single answer to this question, whichcan be approached from various angles accordingto context:

• from the market point of view: in terms of marketshare

• from the macroeconomic point of view: in terms ofvalue added

• from the financial point of view: in terms of its bal-ance sheet or level of capitalization

• from the operational point of view: in terms of itsturnover

Identifying major corporations raises seriousmethodological problems. Even though mostcountries hold business censuses from time totime, the respondents are anonymous and hencecannot be identified. One must therefore resort toprivate sources such as the financial press andother media, which make use of financial databas-es such as Reuters, Standard & Poor's, Dow Jones,Worldscope and Thomson Financial to producelists which in some cases have built up almostmythical reputations. In 1954, the Americanmonthly Fortune published the first-ever leaguetable of America's 500 largest industrial compa-nies. More than 40 years later, this was replacedby a list of the largest global businesses. The entirefinancial press has since followed suit. Over theyears the Financial Times, Business Week andmany others have got into the habit of publishingregular league tables of businesses based on spe-cific criteria, at both national and global level.

Like databases, these league tables are not alwayseasy to use. The first problem is the choice of clas-sification criteria. Published lists are based on apriori criteria which vary from publication to pub-lication. As for databases, a major obstacle may bethe limited number of processing options, asdetermined by the supplier. Once the criteria havebeen identified, it is important to know just whatdata the supplier has focused on and to determinehow serious the gaps are.

The raw data for the published lists essentiallycome from reports which the businesses submit tothe supervisory authorities. Unfortunately, stan-dards for the presentation of accounts and addi-tional information vary from one jurisdiction tothe next. Even such basic figures as the balance-sheet total will differ in content depending onwhether they are drawn up in accordance with theGenerally Accepted Accounting Principles (Unit-ed States), the International Accounting Stan-dards (Europe) or whatever. The same applies toadditional information such as the number ofemployees, which quoted businesses in the Unit-ed States publish at their own discretion, whereasin most European countries this is compulsory.

The information presented here comes from adatabase made available free of charge by Thom-son Financial. The world's 800 largest industrialcompanies (on the basis of capitalization) and 100largest financial institutions have been includedin our analysis.

RECENT TRENDS

1. Considerable macroeconomic influence (Fig. A)

Since company reports do not mention valueadded, the influence of a given corporation on theeconomy cannot be calculated directly. However,

if it is assumed that a business's turnover equalsthe value added at every point of the chain(including upstream), turnover can be said to give a picture of the activities that are directly or

49


0%

20%

40%

60%

80%

100%

1 -

10

11-

20

21-3

0

31-4

0

41-5

0

51-6

0

61-7

0

71-8

0

81-9

0

91-1

00

1 -

10

11-

20

21-3

0

31-4

0

41-5

0

51-6

0

61-7

0

71-8

0

81-9

0

91-1

00

Stock market capitalization

Assets

Jobs

Equity capital

Turnover

Financial corporations Non-financial corporations

Corporations classified in descending order of stock market capitalization

2.2.C. The 100 largest industrial and financial corporations: comparison of concentration, 2000

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50


indirectly controlled by major corporations. Thusthe total turnover of the world's 800 largest non-financial businesses is equivalent to 33% of glob-al product. Clearly, this is an approximate figurewhich does not take account of such things ascross transactions. However, it does give a gener-al idea of the influence of major corporations onthe structure of the global economy. For example,individual studies have shown that value added inmajor corporations is equivalent to one third oftheir turnover. Thus the 800 largest businesses arethought to produce about 11% of global GDP, toemploy about 1% of the working population (30million people) and to account for almost 60% ofglobal stock market capitalization. At the otherend of the scale, 11% of global GDP is producedby 144 of the poorest countries employing onebillion people. Stock market capitalization inthese countries accounts for 6% of global one.

2. The largest financial and industrial corporations(Fig. B and C)

The available data enable us to compare thedegree of concentration within, and between, var-ious groups of businesses. Thus, among the 800largest non-financial businesses (800 = 100%), thegreatest degree of concentration concerns capital-ization (with 80 businesses accounting for 50% ofthe total), whereas at the other end of the scale200 of them account for 50% of total employ-ment. However, these figures are incomplete andshould therefore be used with caution. Theseorders of magnitude illustrate the degrees of con-centration achieved and raise questions about theunderlying factors: are these businesses really soefficient, or is it simply a case of short-term think-ing by financial markets?

The emergence of global financial groups is arecent phenomenon. At present the sum of thebalance-sheet totals of the 100 largest financialgroups is fairly close to that of the 100 largestindustrial businesses, with which they have closelinks (even if banks are lending less, they are stillfighting for the best clients). It is therefore very

likely that loans to the largest businesses accountfor a considerable share of the balance sheets ofthe largest financial institutions.

3. A fast-growing but unstable group

Of the 800 largest businesses quoted on the stockmarket in 2001, only 558 were quoted in 1990.The others are new arrivals or the result of super-mergers, which were very common in the 1990s.Typical examples of fast-growing businesseswhich were already quoted in 1990 are Nokia andDell Computer, which increased their levels ofcapitalization more than a thousandfold in thespace of ten years and are now about twentiethand sixtieth in this highly volatile league table.

4. The mysteries of productivity and capitalization(Fig. D and E)

Labour and capital are the two factors of produc-tion that help to create value added. While labourcan be crudely quantified in terms of numbers ofpeople employed, the balance-sheet total is only avery imperfect indicator of the amount of capitalused. However, for want of anything better, com-parison of these two figures for the 800 largestbusinesses reveals two things: (a) in the few busi-nesses located in the centre of Fig. E, capital andlabour appear to be following the same trend, sug-gesting a certain degree of complementaritybetween the two factors; (b) each of the business-es located along the two axes relies heavily on oneof the two factors (either labour or capital), whichsuggests substitution rather than complementari-ty.

On the other hand, the relationship between stockmarket performance and turnover is not so clear,since a company's stock market performancedepends on financial data and medium-termprospects rather than its contribution to GDP (forwhich turnover is a very imperfect indicator).

51


0

70

140

210

0 70 140 210 280 350

Turnover in billions of USD

Capitalization inbillions of USD

0

75 000

150 000

225 000

300 000

375 000

450 000

0 100 200 300 400 500 600 700

Number of employees

Assets inbillions of USD

2.2.E. Relationship between jobs and balance-sheet totals for the 800 largest industrial corporations, 2000

2.2.D. Relationship between turnover and capitalization for the 800 largest industrial corporations, 2000

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CONCEPTS AND PROBLEMS OF MEASUREMENT

While only Western civilization has producedmajor corporations, there are small businesses allover the world. Any definition of small and medi-um-sized enterprises (SMEs) must therefore takethe diversity of legal, cultural, social, economic,sociological and ethnographic contexts intoaccount. Things become even more difficult if weattempt to classify the very smallest businesses(micro-enterprises), which are informal, oftenshort-lived and located at the boundary betweendomestic and the formal economy.

In economic terms, a "business" can be said toexist as soon as an activity gives at least one per-son a lasting means of subsistence. However, thiseconomic definition has no universal legal basis.The OECD countries regularly hold business cen-suses which are mainly based on national legisla-tion (particularly tax and employment legislation),and the resulting definitions and statistical seriesare far from coherent at international level. In

developing countries the term "unit of activity" isoften used to describe entities that resemble busi-nesses, but censuses are rare, especially as theinformal economy is so large.

In 1996, after years of procrastination, the Euro-pean Union proposed three criteria to distinguishSMEs from large enterprises (even though thisdefinition is not actually used in censuses):

• size: the number of people employed must notexceed 250, the balance sheet must be less than 27million euros, and turnover must be less than 40million euros

• management: the main owners (shareholders) mustbe directly involved in the business's day-to-dayactivities

• independence and power: an SME must not holddominate the market it is in, and must also be inde-pendent (i.e. no major business must hold more than25% of its capital).

2.3 Small and medium-sized enterprises

TRECENT TRENDS

1. Is small beautiful?

In the early 1980s the OECD countries discoveredsmall and medium-sized enterprises through thework of David Birch, who showed that they hadcreated jobs after the 1974 oil crisis while majorcorporations were cutting back on them. Thismessage was repeated ad infinitum around theglobe; SMEs are now often considered synony-mous with innovation, growth, job creation andflexibility, and in every country in the world thereare government schemes to boost them and helpthem compensate for their small size. From a sta-tistical point of view, however, things may not beso clear, following the announcement that thenumber of SMEs which are in fact subsidiaries ofmajor corporations has greatly increased.

2. Very different population trends (Fig. A and B)

Even among the OECD countries, the distributionof businesses by size is very different in the coun-tries of North America (where major corporationsaccount for nearly 50% of jobs) and the rest(where the equivalent figure is between 20% and40%, except in the Czech Republic). The samedifferences are found at the opposite end of thescale: in North America only one fifth of jobs areprovided by businesses with fewer than 20employees, whereas in Spain and Portugal busi-ness with fewer than 10 employees account formore than one third of jobs.

53


45% 49% 51% 48% 46% 45%

62%67%

20% 20%

8%

11%

19%21%

17% 18%

18%13%

18% 18%

47%40%

30% 32%37% 37%

20% 20%

16% 15%

45% 48%

0%

25%

50%

75%

100%

CzechRep.

Germany Switzerland Ireland Poland France Portugal Spain Canada UnitedStates

0 - 49 0 - 19

50 - 249 20 - 99

250 and over

100 - 499

500 and over

Czech Rep.Switzerland

Canada

United States

Germany

Ireland

Netherlands

Portugal

Spain

Hungary

PolandFrance

Sweden

Denmark

80%

84%

88%

92%

96%

100%

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%

SMEs with fewer than 20 employees

SMEs with fewer than 10 employees

Share in total business population

Share of total jobs

2.3.B. Share of micro-businesses in total jobs and in business population, selected countries , in 1996

2.3.A. Distribution of total jobs by size of business, 1996

Sm

all

an

d m

ed

ium

-siz

ed

en

terp

rise

s

54



The modern state performs three main economicfunctions:

• It provides public goods and services whose techni-cal characteristics are such that they cannot be pro-duced and sold by the private sector.

• It uses appropriate instruments to alter the distribu-tion of wealth between individuals if society deemsthe distribution effected by market forces to beunfair.

• It helps to stabilize economic fluctuations by con-trolling unemployment and inflation.

It is not easy to define the limits of the state. In thebroad sense, the public sector includes all institu-tions that take political decisions. This meansgovernment bodies at all levels, social securityagencies and public enterprises. In practice, cer-tain institutions are not easy to classify. For exam-ple, although private insurance schemes thatperform a social security function are normallytreated as part of the public sector, this is not nec-essarily the case when they provide non-compul-sory services with tax incentives from the state.Similarly, production companies that supply com-mercial goods or services tend to be consideredpart of the private sector even if they are state-owned.

Public spending is payment for services which itis the government's duty to provide, such as pay-ing teachers or financing national defence. It canbe classified in more than one way. The economicclassification distinguishes between the purchaseof goods and services, remuneration of produc-tion factors and transfers to third parties, to pub-lic enterprises and establishments or to othercommunity bodies. The functional classificationbreaks down spending according to the govern-ment function to which it is allocated (publicsafety, teaching, health, etc.). Current expenditure

is likewise distinguished from capital spending onequipment, buildings and infrastructure.

Public revenue comprises payments that the statereceives in order to help finance its activities. Amajor part of this is taxation. Taxes may bedefined as compulsory levies on economic agentsfor the benefit of government. Compulsory socialsecurity contributions may be considered equiva-lent to taxes. The state also has other revenue,including duties and income from the sales ofgoods or services.

Governments work on the basis of a budget whichindicates foreseen spending on the various gov-ernment programmes and the revenue needed tofund them. A deficit is an excess of spending overrevenue, and always relates to a given governmentbody. The term "deficit" usually means a negativebalance between current revenue and spending.However, in addition to current spending (whoseimpact is, by definition, limited to the currentyear), the state has investment spending whoseimpact extends beyond the budget year. Thestate's financing needs - the financial deficit - aredetermined by adding the balance of capitalspending and revenue to the current balance.When studying public debt, reference is oftenmade to the notion of a primary deficit (or sur-plus), defined as the balance of the financialaccount, minus interest payments. This gives abetter picture of a country's ability to withstand adeficit without spiralling into debt.

The state's gross debt is the sum total of its finan-cial commitments arising from successive finan-cial deficits. To calculate net debt, one mustdeduct the value of financial assets, but not thevalue of public infrastructure used in carrying outpublic tasks. Classic debt indicators, such as thedebt/GDP ratio, are based on gross debt.


55

© Observatoire de la Finance, 2002; [www.obsfin.ch] Primary data: WorldBank, World Development Indicators; IMF, Government Finance Statistics Yearbook

0%

10%

20%

30%

40%

50%

100 1 000 10 000 100 000

Asia

EU

USA and Canada

Per capita GDP in USD

Current incomeas % of GDP

Portugal

Italy

Germany

United States

China

Kuwait

India

Singapore

AustraliaGreece

Yemen

United Arab Emirat

Vietnam

Tadzhikistan

Belgium

Pakistan

Denmark

Mongolia

Thailand

Maldives

0%

10%

20%

30%

40%

50%

100 1 000 10 000 100 000

Africa

South America

Rest of Europe

Per capita GDPin USD

Current income as % of GDP Lesotho

Burundi

Sierra LeoneSudan

Kenya

South AfricaUruguay

Nicaragua

Mexico

Haiti

Bahamas

Croatia

Russian Federation

Norway

Switzerland

Slovenia

MoldovaIceland

Bulgaria

Argentina

Bolivia

Colombia

Hungary

Morocco

Albania

2.4.B. Public revenue as a percentage of GDP in relation to per capita income, 1998

2.4.A. Public revenue as a percentage of GDP in relation to per capita income, 1998

Pu

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nd

de

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ts

56


RECENT TRENDS

1. The importance of the public sector increases withincome (Fig. A and B)

Public finance is usually analysed in relation toGDP. This enables the size of government to becompared with that of the national economy andallows price increases to be taken into account.

However, the picture is distorted if price increases in the government sector are significantly differ-ent from those measured by the implicit priceindex of GDP. The relative amount of fundingneeded for current government activities (otherthan investment and social security) is indicated


The way in which the public sector is organized,taxes are collected and public disbursements areeffected varies considerably from country to coun-try. There are major differences in the definitionand statistical significance of concepts such aspublic budgets or deficits. Defining the limits ofthe public sector is difficult in all countries. Theproblems concern the way in which activities areaccounted for and recorded, and the way in whichfinancial relationships between the various publicbodies are taken into account. Nevertheless, thequality of reporting on public finances is a majorcontributing factor to transparency in this sectorand a guarantee of a smoothly operating democ-racy. Indeed, there are those who claim that thequality of democratic institutions is reflected inthe accuracy of public accounting.

At international level, the International MonetaryFund (IMF) has been trying since the mid-1980sto organize what is extremely disparate nationalinformation into a single framework and so createan internationally comparable database on publicfinance. To the IMF, the public sector consists ofgovernments and public enterprises (includingcentral banks). State revenue includes taxation,income from ownership of assets, income fromthe sale of goods and services, and transfers, butdoes not include social security contributions.Transfers include sums received from other states,international organizations or private institutions(for example in the form of development aid or irrecuperable contributions to investment), as

well as payments between the various tiers of government (especially in federal countries). TheIMF does not treat social security contributions astaxation, because the contributors receive some-thing in return - although often much later - inthe form of social services if the insured "risk"(sickness, old age, etc.) occurs.

The OECD's approach to public revenue statisticsis different. It treats social security contributions(which are usually levied on income fromemployment) as taxation, since the contributionsand the services received in return for them arenot necessarily equivalent and social securityschemes are specifically designed to redistributewealth between the rich and the poor and/orbetween generations.

For the time being, the available international fig-ures are mostly those relating to central govern-ment, since these are relatively trustworthy andreadily accessible. The same is true of budget bal-ances or public debt. On the other hand, it is dif-ficult to draw a clear boundary between centralgovernment and other public bodies, owing totransfers between the various tiers of government.The IMF normally assigns revenue to the bodythat has the main power of decision as to what thetax base and rates of taxation are and how the rev-enue is used. Despite their inadequacies, IMFpublic finance statistics are the fullest set of dataavailable on the subject.

57


0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%

Asia

EU

USA and CanadaPublic spending onhealth, as % of GDP

Public spending on education,as % of GDP

Germany

France

Denmark

GreeceBelgium

Finland

Portugal

Sweden

Brunei

Japan

Saudi Arabia

Uzbekistan

Cambodia

Yemen

IndonesiaArmenia

India

China

New Zealand

Rep. ofKorea

Jordan

AustraliaMalaysiaUSA

average

Ave

rage

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%

Africa

South America

Rest of EuropePublic spending on health, as % of GDP

Public spending on education,as % of GDP

Nicaragua

Colombia

Costa Rica

Argentina

BrazilParaguay

Guatemala

Norway

Switzerland

Czech Rep.

EstoniaLatvia

Bulgaria

Romania

Iceland

Namibia

Botswana

Tunisia

Kenya

Ivory Coast

Burundi

Sierra Leone

Zambia

South Africa

aver

age

average

2.4.D. Public spending on health and education as a percentage of GDP, 1998

2.4.C. Public spending on health and education as a percentage of GDP, 1998

Pu

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58


by current revenue as a percentage of GDP.Whereas the revenue accruing to the central gov-ernments of United States, Canada and Switzer-land is around 20% of GDP, the equivalent figurefor the countries of the European Union, Norwayand Iceland is between 30% and 40%. The same istrue of the Central and Eastern European coun-tries, which have inherited a considerable amountof government apparatus. On the other hand, thefigures for the Asian countries are lower (between10% and 30%). In dynamic terms, however, theeconomic importance of the state appears toincrease with per capita income, as expressed byWagner's law on the development of governmentactivity. The same "law" appears to hold true forthe African countries, but not for those in LatinAmerica.

2. Health and education: the two pillars of develop-ment (Fig. C and D)

Health and education are two major functions ofall governments, and activities in these areas areessential to the welfare of the population and thedevelopment of the economy. Seen in relation toGDP, these two categories of spending reveal thatthe OECD countries - particularly those in the EU- spend a far greater share than average on healthand education. In those countries the amount ofresources devoted to health is underestimated in

public spending figures, since a not insignificantproportion of activities is often funded from extra-budgetary sources (donations, development aidand funds provided by social security institutions,households and businesses).

3. Bearable debt (Fig. E and F)

A high level of debt may, because of the cost ofservicing it, significantly reduce governments'room for manoeuvre in financing their activities.Public debt has greatly increased all over theworld owing to the growing, persistent deficits ofthe 1970s and 1980s. The proportion of countrieswith comparable central government statistics

and levels of debt exceeding 60% of GDP hastripled in 20 years.

A high level of debt is particularly dangerouswhen persistent deficits have to be serviced atinterest rates exceeding the country's rate of eco-nomic growth. The interest rate determines thecost of the debt to be paid by the state, while therate of economic growth determines the rate atwhich the revenue needed to service the debtincreases. In most countries the costs of debtexceeded the average rate of growth between 1995and 1999. In countries with a high debt differen-tial or level of debt, there is a serious risk that thesituation will get out of hand. In a large numberof developing countries, the macroeconomic sta-bilization programmes set up by the IMF and theWorld Bank are designed to control - as far as pos-sible - explosive growth in the level of public debt.

59


28 3138 4137 38 35

30 31 31 3023 26

21 20 19 21 18 19 17 18 16 15 1621 24 21 21

1213

1113

16 15 1818

20 19 2119

2425 27

2324 28 26

26 25 28 27 2826

2724

18

13

21 0 3 4

46 8 8

1215

15 1211

9 7 9 16 14 15 16 1515

1518

15

22

21 2

2 22

2 25

76

5 67 7

57

5 77 9 10

88

119

65%

63% 72

%73

%67

%66

%59

%56

%53

%52

%47

%38

%37

%32

%31

%32

%34

%31

%31

%27

%28

%24

%22

%23

% 30%

32%

28% 33

%

28%

27%

21% 23

%29

%26

%31

%33

%34

%32

%33

%31

%34

%38

%42

%38

% 39%

48%

43%

41%

39%

42%

40%

41% 37

% 36%

32% 29

%

2% 6% 4% 5% 7% 7%10

%13

%13

%20

% 21%

23%

18%

18% 15

% 12%

15%

25%

22%

23%

24%

22% 21

%20

%24

%

5% 4% 4% 4% 3% 3% 4% 3% 3%8%

11% 8% 8% 9%

12%

11% 9%

11% 8%

11%

11%

13%

14% 11%

11%

15%

14%

24%

0

10

20

30

40

50

60

70

80

90

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

Greater than GDP

High, <100% of GDP

Moderate, <60% of GDP

Low, <30% of GDP

Number of countries

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

-35%

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

0% 20% 40% 60% 80% 100% 120% 140% 160%

Asia Africa

South America Rest of Europe

EU USA and Canada

Gross debt as % of GDP

Annual growth in GDP minus the real rate of interest

Bolivia

ColombiaPeru

Sierra Leone

Jamaica

Cameroon

Mongolia

Kirghizstan

Lebanon

Jordan

IsraelSri Lanka

Georgia

Thailand

Moldova

Estonia

LithuaniaChina

Algeria

Belgium

Greece

USA

South Africa

Denmark

Zimbabwe

2.4.F. National indicators of debt viability, average values, 1995-1999

2.4.E. Level of public debt as a percentage of GDP, by group of countries, 1972-1999

Pu

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60



The statutes of the International Monetary Fund(IMF) were adopted at the Bretton Woods confer-ence in summer 1944. They formally took effectin December 1945, but the IMF did not com-mence operations until 1947. As Article 1 of thestatutes recalls, the IMF was set up in order to"promote international monetary cooperationthrough a permanent institution which providesthe machinery for consultation and collabora-tion". The aim of this collaboration was to stabi-lize exchange rates and so prevent competitivedepreciation, thereby creating favourable condi-tions for a well-balanced increase in trade andhence in income and unemployment. At the sametime, the statutes introduced mechanismsdesigned to reduce the scale and duration of bal-ance-of-payment problems in member countries.The creation of the IMF was thus part of a view ofthe global economy in which monetary instabilitywas potentially as harmful as protectionism andneeded to be curbed in the same way. This viewbore the marks of the painful experience andpolitical fall-out of the 1930s depression.

The global economic order sketched out at theBretton Woods conference was to be built on threeinstitutional pillars: (1) a world organization topromote free trade in goods and services - origi-nally the General Agreement on Tariffs and Trade(GATT), and now the World Trade Organization(WTO); (2) a bank to facilitate the funding ofreconstruction and development (the Internation-al Bank for Reconstruction and Development,now known as the World Bank); and (3) a "cen-tral banks' central bank" - the IMF - to maintainexchange rate stability. The institutional missionof the IMF can thus only be understood withexplicit reference to the context in which it wasfirst established.

The IMF's financial power is based on the contri-butions (quotas) paid by member countries inproportion to their respective shares of globalproduct. The rich countries' contributions to IMFresources are thus larger, as is their decision-mak-ing power, which is based on each country’s finan-cial contributions. As a result, the OECDcountries enjoy a comfortable majority within theIMF (as well as the World Bank).

The IMF was originally set up to ensure thesmooth running of a system of fixed exchangerates based on the US dollar, which was on thegold standard – the so-called dollar exchange sys-tem. Under this arrangement - in which the dollarwas the linchpin of the system - all convertiblecurrencies were effectively tied to gold. From thelate 1960s onwards this mechanism came undergreat strain, partly because of the American tradedeficit brought on by the Vietnam war and partlybecause of the rapid growth in international flowsof private capital. On 14 August 1971, fearful ofhaving to honour requests to convert a large pro-portion of the dollars in circulation into gold andthus seeing the United States' gold reservesdepleted, the American president Richard Nixonunilaterally took the dollar off the gold standard.The exchange rate system that had been so care-fully maintained by the IMF was instantly shat-tered, and the world has been searching for a newequilibrium in foreign exchange ever since. Thedebate on tomorrow's "international monetaryand financial architecture" has been going on forthirty years now, and there is still no sign of anysolution.

2.5 The International Monetary Fund:Reserves and Interventions

61

© Observatoire de la Finance, 2002; [www.obsfin.ch] Primary data: IMF, Annual Report; Thomson Financial, Datastream Advance

0.70

0.90

1.10

1.30

1.50

1.70

1956 1959 1962 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001

SDRs exchange rate in USD

0

10

20

30

40

50

60

70

1948 1952 1956 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000

Total amounts committedduring the year

Outstanding IMF loans

Billionsof SDRs

2.5.B. IMF’s outstanding loans and commitments, in billions of SDRs, 1948-2000

2.5.A. Exchange rate of Special Drawing Rights in USD, 1956-2001

Th

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un

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Under the IMF's initial statutes, countries wishingto join the Fund were required to make a contri-bution to IMF resources (known as a quota). Partof this was to be paid in gold or foreign currency(25%) and the rest in national currency (75%). In1944, quotas totalled USD 7.5 billion. Today, fol-lowing an increase in quotas in 1999, the IMF'sresources are 28 times greater: 212 billion specialdrawing rights (SDRs), equivalent to about USD

264 billion. Furthermore, in 1962, the IMFreached a series of agreements with the ten richestcountries (the General Arrangements to Borrowand the New Arrangements to Borrow) whereby itcan easily obtain additional sums when needed,particularly when the international financial andmonetary system is threatened.

RECENT TRENDS

1. The SDR: a unit of account and a liquidity instru-ment (Fig. A)

Ever since the SDR was created in 1970, the IMFhas used it as a unit of account. The SDR is anartificial currency which was first defined as0.888671 grams of gold (or 1 US dollar), and lateras a basket of the main currencies, whose weight-ing is periodically renegotiated. The compositionof the basket is currently as follows: 45% US dol-lars, 29% euros, 15% yens and 11% pounds ster-ling. The SDR was created to act as an additionalreserve instrument at international level, and theIMF regulates the volume of SDRs by periodicallyallocating them. These decisions are very infre-quent and have major political implications.

2. Increase in outstanding loans (Fig. B and C)

Apart from cooperation, the IMF was set up tomake funds available to countries in need, so thatthey could deal with balance-of-payments prob-lems in an orderly manner and draw up policies torestore equilibrium. The IMF fulfils its task ofsupervising exchange rate stability by protectingthe weakest links in the chain. Whenever there isan international crisis, member countries' out-standing debts increase. The debt crisis in theearly 1980s, the collapse of the Soviet bloc, thesecond Mexican crisis and the Asian and Russiancrises have caused outstanding debts to the IMFto double since 1983. However, current annual

commitments do not exceed 0.5% of non-OECDcountries’ GDP, and the relative weight of thestock of outstanding debt is still less than 1%.

3. Means of access to IMF funding (Fig. D)

A key aspect of the operation of the IMF has beenthe establishment by the member countries ofprocedures for access to the Fund's resources. Theprinciple adopted at the outset was that eachcountry has more or less automatic access to thesums it has paid in gold or foreign currency, butcan only obtain additional funding on certain con-ditions. In 1968 the "conditionality" principle wasintroduced for IMF loans. Whenever a countryapplies for IMF funding, the Fund and the coun-try jointly agree on how it will be used, i.e. theexpected macroeconomic performance and theeconomic policy measures that the country's gov-ernment will take to achieve the intended results.Stand-by arrangements (SBAs) are still the mostimportant instrument for the use of IMFresources.

True to its original goals, the IMF has respondedto the financial crises that have shaken the inter-national monetary system at regular intervals.Besides its ordinary lending activities, the Fundhas set up funding arrangements to deal with spe-cific situations such as explosive increases in theprice of oil, natural disasters, sudden changes inprices of raw materials, the collapse of the Soviet

63

© Observatoire de la Finance, 2002; [www.obsfin.ch] Primary data: IMF, Annual Report; Thomson Financial, Datastream Advance

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

1948 1952 1956 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996

Outstanding amounts as % of GDP of non-OECD countries

Amounts committed as % of GDP of non-OECD countries

2000

0

5

10

15

20

25

30

35

1948 1952 1956 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000

Stand-by arrangements

Extended arrangements

PRGFs

SAFs

Billionsof SDRs

2.5.D. Distribution of IMF commitments by type of arrangement, in billions of SDRs, 1948-2000

2.5.C. IMF’s outstanding loans and commitments, as a percentage of the GDP of non-OECD countries, 1948-2000

Th

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bloc or poverty reduction programmes. In IMFjargon these arrangements are known as "facili-ties", the most common of which are currently theStructural Adjustment Facility (SAF) and thePoverty Reduction and Growth Facility (PRGF).

4. Challenges to conditionality

Lending agreements, referred to in IMF jargon as"stand-by arrangements", contain specific clausesconcerning the measures that the country hasagreed to take. The "macroeconomic stabilizationprogrammes" that the IMF encourages applicantcountries to adopt are based on a view of theeconomy which is increasingly questioned evenby economists. According to the model used bythe IMF for many years, balance-of-paymentsequilibrium depends in the short term on bal-anced public finances and the level of inflationand in the medium term on structural policies topromote the development of local businesses.Accordingly, IMF stand-by arrangements alwaysrequire borrowing countries to reduce publicspending and liberalize their domestic economies.In recent months this standard model has begunto be challenged not only by civil society, but evenby the IMF and some of its member countries.


65III. The economy and tradeIII. The economy and trade

3.1 National product and value added

3.2 Inflation




66



The related concepts "national income" and"national product" refer to the productive activi-ties that take place within a country over a givenperiod of time. They include flows of value added,consumption or expenditure. Yet neither conceptgrasps the full extent of a country's wealth in thesense of the stock of resources - gold, raw materi-als, productive capital - that may be located there.

"National product" is not an intuitive concept. Itis part of a model-based view of how countries'economies work, better known as the "circularflow of income". This sees a country's economy asa circular flow of transactions between the variouscategories of economic agents, chief among whichare households, businesses, government and therest of the world. The circular flow approachclaims to identify all the transactions that takeplace within an economy over a given period oftime and to record them simultaneously as oneagent's incomings and another's outgoings. It alsoassumes that all agents spend all the availableresources on consumption, investment or exportsand that all the income thus generated is used forthe purchase of goods and services, for transfersor for savings. This means that the circular flow isalways closed and in overall equilibrium. It servesas a reference model for the system of nationalaccounts which is to macroeconomics what dou-ble-entry bookkeeping is to businesses, namely anessential tool for grasping reality.

This view of the economy became firmly estab-lished in the period between the two world wars.The concept of "national product", in the con-temporary meaning of the term, is therefore arecent one. Its emergence and its quantificationmark the birth of present-day macroeconomicsand the development of economic policy as a setof intervention tools for managing the growth anddistribution of national product.

National accounts tell us how a country's nation-al product is distributed within the economy. Thevery substance of national product is captured bythe notion of value added, which identifies all theefforts made by the country's factors of produc-tion (land, capital and labour) to enhance andincrease the value of what is used in the process ofproducing goods and services for end users. Thusvalue added does not arise at the point of produc-tion, but at the point where a user purchases thegood or service offered for sale. Thus defined,value added should not be confused withturnover, which may include value that was addedat earlier stages of production. When measuringvalue added, the technical challenge is to avoidduplication and to identify only the portion ofvalue that is actually added at the stage of pro-duction under consideration.

If the economy is seen as a circular flow, nationalproduct can be approached from three differentpoints of view. Theoretically, disregarding prob-lems of measurement, the same aggregate shouldresult in each case:

• The production approach measures the value ofgoods and services at the point where they leave theproduction sector (businesses) to satisfy the enddemand of households, government or foreign buy-ers. By focusing on the point of exit from the pro-duction sector, this approach avoids double countingof intermediate goods and services, i.e. ones that areinvolved in the production of other goods and ser-vices.

• The expenditure approach adds up the value ofgoods and services as represented by the finaldemand of economic agents. This includes not onlyprivate and public consumption and private andpublic investment, but also exported goods and ser-vices, minus the imported goods and services whichappear in all the components of expenditure, like con-sumer goods imported for the benefit of households.

3.1 National product and value added

67

© Observatoire de la Finance, 2002; [www.obsfin.ch] Primary data: World Bank, “World Development Indicators”; United Nations, “System of National Accounts”

3.1.A. Growth rates in regions of the world based on per capita GDP, 1980

Nati

onal

pro

duct

and v

alu

e a

dded

Luxembourg

Switzerland

Roumania

Estonia

Russian Federation

Botswana

Congo

Singapore

China

Japan

United Arab Emirates

Brunei Darussalam

Oman

100

1 000

10 000

100 000

-2% 0% 2% 4% 6% 8% 10%

EU

Other Europe Africa

Asia and Oceania Latin America

Uruguay

Per capita GDP, 1980(Constant USD, 1995)

North America

Average annual GDP growth between 1980 and 2000

68


• The income approach focuses on remuneration offactors of production. At the same time as they cre-ate value added, producers reward the agents whohave made factors of production available to them.Total income includes all the remuneration of labour(wages, salaries, social security contributions) andcapital (dividends, interest, rent, etc.).

Among the most common terms used in relationto "national product" are gross national product(GNP) and gross domestic product (GDP). GNPconcerns productive efforts (at home and abroad)by agents resident in the country. GDP, on theother hand, only records production within thecountry, but includes non-resident as well as resi-dent agents. The difference - which is consider-able in certain countries with very open markets -is the balance of remittances and current transferseffected between the country and the rest of theworld. For example, GNP includes remunerationof labour and capital (wages, repatriated profits,dividends and interest) in return for the supply offactors of production to other countries by resi-dent agents (residents working abroad for shortperiods, foreign investment, etc.), but does notinclude similar remittances which residents pay tothe rest of the world.

Despite its undeniable advantages and its abilityto grasp the market value of most goods and ser-vices, national product is not a measure of wel-fare. At best, it measures users' assessment of theproducts that supposedly contribute to their wel-fare. National product takes no account of exter-nal effects, it fails to assess the costs of publicactivities properly, and it overlooks certain non-commercial economic activities. Ironically, itincludes expenditure incurred in order to repairdamage - for example, the costs generated by aroad accident - even though the accident effec-tively reduces the victim's welfare. Capital losses(the car, the victim's health, etc.) are not deduct-ed from the costs of repair or recovery. The samecan be said of costs incurred in order to combatpollution, in other words to repair the damagesustained by nature. Attempts to correct GDP sothat it measures people's welfare more effectivelyhave failed for lack of a consensus as to whatexactly increases or reduces it. However, the mainuse of GDP is a different one: in combination withnational income, it is the most widely used sum-mary account of the state and overall develop-ment of a country's economy.


The first version of the System of NationalAccounts, a methodological and conceptual guidefor national statistical authorities, was drawn upby the United Nations in 1952. The latest versionof this reference book, the result of joint efforts bythe United Nations, the European Commission, the OECD, the IMF and the World Bank, was pub-lished in 1993. Specific implementation of thesystem is left up to individual countries. As aresult, its quality varies considerably from countryto country, depending on the available resources,the volume and quality of the basic statistics and the efficiency of the institutions involved.

Accordingly, a certain proportion of economicactivity, namely the informal economy, is notdirectly quantified, especially in developing coun-tries, owing to institutional failings and localhabits of payment. In theory, published GDP fig-ures include estimates of informal economicactivity, but in practice such estimates are haz-ardous.

GDP has numerous limitations and has beengreatly criticized for conceptual inadequacy, arbi-trary processing of statistics and classification ofactivities, and statistical difficulties which

69


3.1.B. Growth paths in groups of countries based on per capita GDP levels at PPP

0

6 500

13 000

19 500

26 000

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000

Per capita GDP at PPP

United States - Belgium Switzerland - KuwaitNorway - France ...

Argentina - GreeceItaly - AustraliaSouth Africa - Japan ...

Portugal - IrelandRomania - UruguayMexico - Brazil ...

Iran - BulgariaChile - TurkeyPeru - Colombia ...

Tunisia - MalaysiaGuatemala - Surinam ...

Bolivia - Egypt - Morocco ...

India - Kenya - Mali - China ...

Gambia - Indonesia - Madagascar ...

Countries grouped in sets of fifteen (from the richest to the poorest), in 1980

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inevitably mean that estimates include margins oferror. Two of these problems merit closer exami-nation:

• The notion of national product is based on a com-mercial valuation of goods and services. Inclusion ofthe public sector is therefore a problem, since in theabsence of reference markets government activitiesare assessed in terms of production costs rather thanvalue added. Furthermore, government activities aretreated by definition as final consumption, whereasat least part of them also benefit businesses. Forinstance, government spending on infrastructure isviewed as depreciable investment, and this directlyaffects the level of national product.

• Similarly, GDP/GNP includes depreciation of thecapital stock used by businesses (which is reallyintermediate consumption). Although this "con-sumption of fixed capital" is the estimated cost ofwear and tear and technological obsolescence duringthe working life of equipment and infrastructure, itin fact serves to finance substitution investmentwhich keeps the capital stock constant. Theseresources, which are counted as income, are includ-ed in gross value added (GDP), but do not actuallycontribute to the growth of agents' freely disposableincome. A more accurate estimate of income fromproduction should therefore exclude depreciation(net product); this, however, is seldom feasible, sincethe margin of error in calculating depreciation is verylarge.

Certain forms of production and consumption areexcluded from national product by definition,regardless of the difficulty of assessing their value.

Examples include housework and illegal activi-ties. This is because national accounts focus onlegal, official forms of production whose factorsreceive a monetary reward. The inevitable result isa difference in treatment between two forms ofconsumption, for example housework done athome (excluded from GDP/GNP) and the samework done by a paid employee (included inGDP/GNP).

In practice, measurement of national productdepends on (a) the availability, quality and accu-racy of the basic statistics and (b) their exhaus-tiveness, and hence the estimates andassumptions (of varying reliability) that statisticalauthorities are forced to make in order to make upfor the inadequacies. Statistical research is limitednot only by the amount of resources invested, butalso by such factors as the classification systemsused, data protection, the degree to which eco-nomic agents are prepared to be surveyed, andalso the difficulty of accurately defining and mea-suring services (which are less uniform and stan-dardized than goods). For all these reasons,figures on the level of and growth in nationalproduct are often subject to extensive revision.Since it takes between 18 and 24 months to cal-culate national product exactly, in the shorterterm it is based on quarterly estimates such asproduction indicators (industry, total wages,employment, etc.) or even on forecasts derivedfrom economic models of varying sophistication.

RECENT TRENDS

1. Diverging growth paths (Fig. A and B)

Statistical authorities estimate national product interms of nominal value, i.e. at actual prices. Assoon as the time dimension is introduced, thingsget complicated. An increase in national productcan mean one of two things: an increase in theprices of goods and services, or an increase in thequantities of goods and services produced (or in

their quality). The former situation is called infla-tion and the latter economic growth. To neutralizethe impact of price changes on national product,each of its components must be deflated with thehelp of appropriate price indexes. National prod-uct expressed in terms of "real value" is thus thesum total of aggregates expressed in terms of theprices that prevailed in the chosen base year (e.g.

71


3.1.C. Comparison of per capita GDP using three calculation methods, 1980 and 2000

38%

32%

17%

13%

38% 35%

7%

2%

19%

31% 30%

21%19%

29%

34%

6%

2%

29%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

NAFTA EU Rest of OECD

Non-OECD

NorthAmerica

Europe SouthAmerica

Africa Asia andPacific

1960 1980 2000

2000 (1980)

Current USD Constant USD, 1995 PPPLuxembourg 1 42 550 (10) 1 56 162 (6) 1 47 114Japan 2 36 894 (23) 3 43 054 (4) 11 26 172United States 3 35 102 (15) 8 32 053 (14) 2 34 260Switzerland 4 33 471 (5) 2 46 465 (1) 6 28 671Norway 5 33 248 (8) 5 38 021 (7) 3 30 072Iceland 6 31 435 (9) 10 31 407 (9) 4 29 423Denmark 7 30 109 (11) 4 38 252 (5) 8 27 404Sweden 8 25 636 (7) 12 31 020 (8) 18 24 291Ireland 9 24 878 (31) 16 27 616 (30) 5 29 394Hong Kong, China 10 24 016 (35) 18 24 227 (27) 15 25 248United Kingdom 11 23 660 (21) 20 21 614 (20) 21 23 417Austria 12 23 581 (20) 6 32 661 (10) 10 26 835Finland 13 23 132 (18) 9 31 999 (15) 16 25 154Singapore 14 22 960 (39) 15 28 230 (28) 22 23 416Netherlands 15 22 925 (12) 11 31 266 (12) 13 25 957Germany 16 22 765 - 7 32 653 - 14 25 250Belgium 17 22 534 (14) 13 30 737 (13) 9 27 237Canada 18 22 435 (19) 19 22 617 (16) 7 28 198France 19 21 856 (13) 14 29 798 (11) 17 24 342Australia 20 20 528 (17) 17 24 245 (18) 12 26 130Italy 21 18 525 (26) 21 20 748 (19) 19 23 559

3.1.D. Comparison of distribution of global product, in constant 1995 USD

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1990). Consequently, the rate of growth of aneconomy is measured by the percentage change inreal national product from one period to the next.

Leaving aside this cyclical analysis based on short-term fluctuations in GDP, the real GDP data(based on the exchange rate of the US dollar in1995) supplied by the World Bank show that therich countries and the countries of Africa andLatin America had annual rates of growth averag-ing between 2% and 4% in the 1980s, whereas alarge number of Asian countries had considerablyhigher rates of growth. In the light of this, theanalysis can be sharpened by taking account ofpopulation (per capita GDP) and differences inpurchasing power (GDP expressed in terms ofpurchasing power parity, or PPP). When per capi-ta GDP is expressed in terms of PPP, it revealsmajor divergences in growth paths between devel-oped and developing countries. In terms of percapita GDP, which takes account of populationgrowth, divergences in rates of economic growthare emerging. This shows that there are limits tothe convergence of income between developedand developing countries, when differing pricelevels are taken into account.

2. International comparison (Fig. C)

International comparison of per capita nationalproduct is hampered by two factors: exchangerates of national currencies and differences in pur-chasing power. The World Bank uses the exchangerate in a given reference year to calculate thenational products of the various countries in termsof constant US dollars. As for purchasing power, itdepends on average income levels and overallprice levels. International comparison of price lev-els involves comparing what must be spent inorder to purchase the same basket of goods andservices in the various countries. The ratiobetween the amounts spent in two different coun-tries indicates the exchange rate at purchasingpower parity. Thus, depending on which system ofmeasurement is adopted, the classification ofcountries as rich or poor may change significantly.

3. Many are poor and few are rich (Fig. D and E)

A country's national product tells us nothingabout how income is distributed among its peo-ple. Similarly, global product at purchasing powerparity reveals nothing about how it is distributedamong the various countries. The OECD coun-tries account for more than 80% of global produc-tion (72% in 1960) but contain only 18% of theworld population. Asian and Pacific countries'share of global production (Japan included) hasincreased from 19% to 29% in thirty years. Thehighly unequal distribution of global product (percapita PPP) is reflected in widening gaps betweencountries: in twenty years the differential betweenSierra Leone and Luxembourg has increased from17 to almost 100.

73


3.1.E. Distribution of global product at PPP over the world population, based on country of residence, Lorenz curve, 2000

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Cumulative share of world population in %

United States

Brazil

Japan

India

China

Germany

Russian Federation

+ 22% of the population

+12%of GDP

Cumulative share of GDP in %

Italy

France

100% = 43 493 billions of USD at PPP

100% = 5,7 billioninhabitants

Countries classified by per capita GDP

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3.2 Inflation


Overall changes in price levels are measured usinga complex data gathering methodology and meth-ods of calculation which not all experts agree on.

The first stage involves determining which view-point to measure inflation from. The usual answeris to focus on consumer prices, but there are otheroptions: wholesale prices, import or export prices,prices derived from GDP, etc. Movements in over-all price levels cannot be quantified withoutchoosing a point of reference to observe themfrom. This may be linked to a given category ofplayers, or to a particular geographical area; forexample, there are certain cities or regions that draw up their own price indexes. Drawing up aconsumer price index involves determining

weighting coefficients which will be used toaggregate individual observations. The choice ofcoefficients has strategic implications for the rele-vance of the results. It is therefore not surprisingto find that some countries have several consumerprice indexes, which may even compete with oneanother.

As for the actual calculation, there are two schoolsof thought regarding the structure of the index. Inthe Laspeyres method, which is the one mostcommonly used, the physical make-up of the typ-ical basket is assumed to be stable in the mediumterm. From one revision to the next, it indicateshow recorded prices should be weighted duringthe period concerned. The Paasche method takes


The notion of inflation is a key economic concept,since it captures the dynamic relationshipbetween money and goods and services intendedfor sale. From the point of view of money, infla-tion may be seen as a measure of its purchasingpower, whereas from the point of view of goodsand services it reflects overall changes in prices.When prices remain stable, so does the value ofmoney, but when prices shoot up, the value ofmoney shrinks. The notion of inflation thusrequires one to differentiate between a relativechange in price (e.g. an increase in the price of oilcompared with all other goods), which is not trueinflation, and a overall change in price (anincrease in all prices to the same degree), which isinflation.

Aside from definitions - and problems of mea-surement - inflation is a central concept in contemporary economic thinking. The main pointof disagreement between monetarists and

Keynesians concerns the position and role ofinflation. As monetarists see it, inflation under-mines confidence in money, encourages postpone-ment of productive investment and hence leads tounemployment and recession. They believe thatthe only way to combat inflation is to maintainequilibrium in public finances and to keep a tightrein on monetary policy. They also argue that,once inflation has taken hold in an economy, ittends to persist because people start to behave onthe assumption that it will. The Keynesian posi-tion is more qualified. Keynesians believe thatmoderate inflation is not a disaster and that it mayeven encourage growth. Whereas monetarists seeinflation as an absolute evil, Keynesians are moreinclined to analyse the costs and benefits of eachparticular case before pronouncing judgement.Despite these differences, it is accepted that infla-tion has an income distribution effect which isgenerally detrimental to income from capital.

75

© Observatoire de la Finance, 2002; [www.obsfin.ch] Primary data: Thomson Financial, Datastream Advance; IMF, International Financial Statistics; World Bank, World Development IndicatorsGrouping of countries: Fig. A cf IMF

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

1957

1959

1961

1963

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

Developing countries

Developed countries

World

Annual change in consumer prices in %

39 34 2742 36

201 1 3 2 2 11

24 3021 17

36 2944

68

21 27 4034 44

5830

1724 30

1643

4240 51

4540

3855

49

6 46

109 15

5863

62 5770

4032

32 3139

31 4939

18

1 55

4 34 13 2419 19

30 2424

26 30 4046

4321

17

58%

49%

35%

47%

39%

21%

9%20

% 23%

16%

12% 24

%18

% 28%

45%

31%

39%

51% 38

%48

%60

%29

%16

% 22% 28%

14%

36%

34% 31

%38

%32

%26

%24

%35

%32

%

9%6% 8% 11

% 10%

15%

57%

60%

57% 53

%59

%34

% 26%

25%

23%

28% 20

%31

%25

%12

%

7% 6% 4% 3% 4%13

%23

% 18%

18%

25% 20

%20

%20

%23

%28

%30

%27

%13

%11

%

0

20

40

60

80

100

120

140

160

180

1961

1963

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

1961

1963

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

Very high inflation

High (<20%)

Moderate (< 8%)

Low (< 2.5%)

Number of countries

3.2.B. Distribution of countries by level of inflation, 1961-1999

3.2.A. Annual changes in consumer prices, 1957-2001

Infl

ati

on

76


account of changes in consumption and assessesthe current make-up of the basket at historicalearlier prices. In other words, this method com-pares differently made-up baskets. The differencebetween the two methods thus lies in the waythey take changes in consumer behaviour intoaccount.

Monitoring overall price levels is a delicate exer-cise which presupposes political and economicstability and requires the authorities to musterconsiderable resources. Over the last quarter of acentury many countries have experienced majorpolitical and economic upheavals, border

changes, crises, wars and civil wars. Under suchcircumstances it is clear that changes in overallprice levels can only be measured approximately.

Each country is free to choose its own method ofmonitoring changes in price level. The results areusually forwarded to the IMF and the WorldBank. The IMF uses these primary data to calcu-lated the global rate of inflation and the corre-sponding rates for developed (OECD) anddeveloping countries. This aggregation is basedon weighting coefficients derived from each coun-try's share of global product.

RECENT TRENDS

1. Inflation: the gap between North and South (Fig. A)

Long-term trends in global inflation point to twodistinct phases. During the first, which ended inthe early 1970s, global inflation remained withinthe 3% to 6% range. This was due to extremelylow inflation in the developed countries and infla-tion which, although high, was usually within the8% to 20% range in the developing ones, whoseeconomic influence was in any case minimal. Thesecond phase began when the US dollar was takenoff the gold standard and the oil crisis broke out,and appeared to be ending at the close of thetwentieth century. This phase was marked by avery considerable increase in global inflation,which was henceforth in the 10% to 20% range.Behind this global trend lay contrasting develop-ments. The developed countries stabilized infla-tion at around 5% from the early 1980s onwards,but in developing countries the aggregated rate ofinflation rose to levels of 30% or 40%, and washighly volatile. After a period of considerabledivergence, inflation rates in the two groups ofcountries appear to have been converging sincethe second half of the 1990s.

2. External and internal shocks: disrupted economies(Fig. C)

If high inflation can be seen as a symptom of aseriously disrupted economy, the number of "dys-functional" countries does not appear to havedecreased significantly in the last 25 years. Majorbursts of inflation have coincided with a widevariety of domestic situations: financial crises (ofwhich Latin America has had repeated experi-ence), political upheavals (as in the former Sovietbloc) and war (as in certain African countries).The significance of inflation thus extends wellbeyond the purely cyclical dimension.

3. Variable degrees of inflation (Fig. B)

The global rate of inflation is determined byaggregating weighted national rates. Comparisonsover time are limited by the availability of data.Between 1980 and 2000 the number of countriescovered by IMF statistics rose from 110 to over150. A breakdown of countries by inflation brack-et highlights the change of phase that occurred inthe early 1970s. Since 1975 the number of coun-tries with high rates of inflation has never fallenbelow 19 (except in 1999), and countries withmoderate inflation have followed the same trend.

77

© Observatoire de la Finance, 2002; [www.obsfin.ch] Primary data: Thomson Financial, “Datastream Advance”; IMF, “International Financial Statistics”; World Bank, “World Development Indicators”

1 %

10 %

100 %

1000 %

1960 1965 1970 1975 1980 1985 1990 1995 20001 %

10 %

100 %

1000 %

NAFTA

EU

Central and South America

Africa

Asia and Pacific

Rest of Europe

Indonesia

Chile Argentina

Nicaragua

Peru

ArgentinaBrazil

Congo

Angola

ArmeniaKazakhstan

UkraineBelarus

Annual rate of inflation, in %

3.2.C. Annual changes in consumer prices, logarithmic scale, 1960-2000

Infl

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78


TERMS AND DEFINITIONS

For many years contemporary economists auto-matically spoke of development in terms ofgrowth, claiming that the economic dimension ofdevelopment was the only one not to involvevalue judgements. This approach reduces devel-opment to the production and consumption ofcommercial values and takes per capita income asthe only scale of measurement. Yet development isnot merely economic or social, but is primarily aphilosophical and cultural notion which ultimate-ly refers to values. There is now a global consen-sus on a concept of human development basednot only on the notion of welfare, but above all onthat of human (civil, economic, social, politicaland cultural) rights.

Expressing this current consensus, the UnitedNational Development Programme (UNDP) hasdefined human development as a process that fos-ters the creation of an environment in which peo-ple can develop their full potential and leadproductive, creative lives in accord with theirneeds and interests. Such a definition implies along list of rights and conditions that are consid-ered essential to human development. The mostimportant of these are access to education andculture, a decent standard of living, safety, free-dom and social justice. In modern societies thevarious facets of development are interdependentand, it is increasingly clear, inseparable. Politicaland social rights thus appear to be essential toeconomic development, which can only takeplace if players have access to decent pay, educa-tion and health services.

The need to reconsider the notion of developmentand ensure that it is no longer measured in pure-ly economic terms - particularly at the instigationof the United Nations, which launched a newworld development decade in 1988 - has also beenencouraged by the expansion in international

statistical data. It was above all in the 1990s thatthe first composite development indicatorsappeared, attempting (with varying success) tocombine the economic, social and cultural dimen-sions of development such as per capita income,life expectancy, infant mortality, education and soon. The Human Development Index (HDI) intro-duced by UNDP in 1990 is the best known andmost useful of these attempts, and has beenextended at least twice:

• In 1991-92, UNDP attempted to incorporate civiland political rights into its index. However, the ideawas abandoned because this extension was not basedon quantitative data, but solely on assessments by anindependent committee which gave each country ascore from 1 to 10 for the five basic freedoms – amethod which led to endless wrangling.

• In 1995 UNDP introduced a "gender-specific" devel-opment index (GDI), which has proved more accept-able. This index identifies differences between menand women in a country's HDI.

As these indicators have been refined, anotherconcept has been emerging - that of sustainabledevelopment, first mentioned in 1987 in theBrundtland report to the United Nations Confer-ence on Environment and Development (entitled"Our Common Future"). Although this concept isstill rather vague, it emphasizes the component ofdevelopment which "meets the needs of the pre-sent without compromising the ability of futuregenerations to meet their own needs". In particu-lar, intergenerational solidarity presupposes theprotection of environmental resources. The IMFand the OECD have since introduced the notionof sustainable economic development, whileWorld Bank reports refer to sustainable, equitabledevelopment.

Currently, research by universities and interna-tional agencies is progressing in two directions:


79

© Observatoire de la Finance, 2002; [www.obsfin.ch] Primary data: World Bank, UNDP, Human Development Report; World Bank, World Development Indicators

0%

20%

40%

60%

80%

100%

120%

140%

0.0 0.2 0.4 0.6 0.8 1.0

1999 HDI

Exports of goods and services (as % of GDP), 1999

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0.0 0.2 0.4 0.6 0.8 1.0

1999 HDI

Use of traditional fuels, as % of

of total energy

consumed, 1997

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0.0 0.2 0.4 0.6 0.8 1.0

1999 HDI

Population using adequate sanitation facilities (%), 1999

3.3.C. Limits to the relevance of HDIs:correlation with use of sanitation

3.3.A. Limits to the relevance of HDIs:correlation with exports

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0.0 0.2 0.4 0.6 0.8 1.0

1999 HDI

Mobile phone subscribers

(as % of population), 1999

3.3.D. Limits to the relevance of HDIs:correlation with density of mobilephones

3.3.B. Limits to the relevance of HDIs:correlation with use of fossil fuels

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(a) seeking ways of incorporating sustainabilityinto development indicators and (b) attempting toincorporate empirical data on fundamental rights

into them. All this is taking place amid a debateon how globalization affects development andvice versa.


1. The structure of the HDI

First published by UNDP in 1990, the HumanDevelopment Report introduced the HDI, whichcurrently strikes the most successful balancebetween the number of factors included and thecomplexity of the method of calculation. The HDIcombines life expectancy, standard of living andstandard of education. Each country is given ascore from 0 to 1 for each of these factors. A coun-try's HDI is the average of the three scores.

• For life expectancy, the minimum is set at 25 yearsand the maximum at 85 years. A country where lifeexpectancy is 55 years will score 0.5.

• In the absence of satisfactory statistics on the averagestandard of living, the HDI uses per capita GDP. Thefew income data that currently exist come from pollsor surveys which are unreliable and difficult to com-pare. Per capita GDP is calculated by the purchasingpower parity (PPP) method, which takes account ofdifferences in price levels between countries, for thesame kinds of goods and services. PPP is calculatedby comparing the prices of similar articles in differ-ent countries. This method has been criticizedbecause the articles available in the various countriesat various periods are not strictly identical. Never-theless, real per capita GDP at PPP remains the bestcurrently available indicator of a country's standardof living. The scale ranges from USD 100 to USD40’000 per capita per annum.

• For standard of education, UNDP aggregates weight-ed data on rates of primary and secondary school attendance (weighted at 0.33) and rates of adult lit-eracy (weighted at 0.66). The scale adopted for thisfactor ranges from a minimum of 0% to a maximumof 100%.

By combining these essential dimensions, the HDI also takes account of health infrastructure, safety

and cultural standards, but disregards civil andpolitical rights. Research is currently taking placeinto ways of incorporating these two dimensionsinto development indicators in the future.

2. Measuring development - a constant challenge

Although the HDI has undeniably made it easierto quantify human development without measur-ing it in purely economic terms, there are still alarge number of problems:

• In publishing the HDI, UNDP reveals the progress ofdevelopment at global level, but at the same time itexposes the spread of poverty, inequality and socialexclusion (which the HDI does not measure).Extreme poverty is the most serious limitation todevelopment indicators, since the poorest are notusually included in statistics. The same is even trueof such specialized indicators as the UNDP's HumanPoverty Index (HPI) or the Physical Quality of LifeIndex (PQLI) which the World Bank uses to draw upits list of Least Advanced Countries (LACs). Thisraises the key issue of what can currently be mea-sured and what cannot. This is an important ques-tion, and it should not be obscured by squabblesover methods of calculation. Statistics can also helpto exclude people.

• Another major problem is the arithmetical structureof the indexes, since ultimately the units of mea-surement used for the various factors are not compa-rable. The difficulty lies in correctly assessing theimportance of each parameter and weighting itaccordingly.

• The larger the number of parameters included in anindex, the more delicate the issue of weightingbecomes. There are those who boast of creatingindexes with 50 or more parameters, but they dodgethe problem by simply using identical weightingcoefficients. Such approaches may create more

81


0%18%

43%53%

77% 82%

100%

1% 9%22%

32%40%

70%

87%100%

4%

818

1 991

2 443

3 5443 770

4 598

16215

HDI < 0.1 HDI < 0.2 HDI < 0.3 HDI < 0.4 HDI < 0.5 HDI < 0.6 HDI < 0.7 HDI < 0.8 HDI < 0.9 HDI < 1.0

Share of population (%)

Share of countries (%)

Population in millions

0

0.2

0.4

0.6

0.8

1

0 0.2 0.4 0.6 0.8 1

Life expectancy

Education

GDP

HDI index

Parameter index

3.3.F. Country-by-country analysis of each component’s contribution to the 1999 HDI

3.3.E. Distribution of countries and population according to their 1999 HDI level

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confusion than they are worth, for they take noaccount of the importance of the various parametersor the correlations between them. Given the abun-dance of data, it makes more sense, for example, tolist each parameter separately, as the World Bankdoes in its annual publication World DevelopmentIndicators.

• Another serious problem is how to take account ofinequality. Most of the parameters used are averages

and hence take no account of distribution (for exam-ple, distribution of income, which is often veryunequal). However, the fact that Gini, Theil orAtkinson indexes cannot be calculated on the basisof reliable data does not mean that we should aban-don them altogether. The GDI is a first step in theright direction, since it takes account of the differ-ences between men and women.

RECENT TRENDS

1. The HDI - a useful indicator (Fig. A, B, C and D)

The relevance of the methodological choices onwhich the HDI is based is partly enhanced by itsability to grasp a broader reality than that coveredby its components. Thanks to a judicious choiceof factors, the HDI correlates well with other vari-ables measured elsewhere, such as consumptionof traditional fuels or the number of doctors per100,000 inhabitants. However, the limitations ofthe HDI become apparent when it is set againstother factors such as exports of goods and servicesas a percentage of GDP, etc.

2. Africa - a ravaged continent (Fig. E and G)

Although in most countries the HDI is increasingyear by year, in many of them the absolute level ofthe index remains low. Only 48 countries - 30% ofthose analysed - have an HDI greater than 0.8. Ofthe world population covered by the study, 77%live in countries with an HDI below 0.8, and thenumber of people living below the 0.5 mark

exceeds the population of the United States andthe European Union put together. Geographically,most of the people excluded from developmentlive in Africa. Hostage by turns to its wealth ofraw materials, Aids and warfare, Africa is findingit very difficult to catch the development train.

3. Education is causing the HDI to rise (Fig. F)

A breakdown of the 1999 HDI into education, lifeexpectancy and per capita income indexes shows

that overall standards of education are causing theHDI to rise: 75% of countries have an educationindicator greater than 0.62. The same is not trueof life expectancy and real per capita income, forwhich only 25% of countries have indexes greaterthan 0.49.

83


0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

1999

1990

1980

HDI

NAFTAand EU

Rest ofEurope

Latin America Asia and PacificAfrica

3.3.G. Dispersion of national HDIs in the five regions and changes in this between 1980 and 1999

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Exports and imports, known jointly as "interna-tional trade", are at the heart of international eco-nomic relations. According to thelong-established pure theory of internationaltrade, trade brings about gains in efficiency,increases wealth and encourages growth.

There are three reasons why cross-border transac-tions occur. A country imports goods and serviceseither because it is unable to produce them local-ly (e.g. certain raw materials), or because localproducts are more expensive or of poorer qualitythan foreign ones. The third reason why a countrybecomes involved in international trade is thatcertain production units within its borders havebuilt up special business relationships with for-eign partners. The first two reasons were identi-fied long ago and have been known since the daysof Adam Smith and David Ricardo as the theoriesof absolute and comparative advantage. Accord-ing to the latter theory, a country specializes ingoods and services which it can produce at lower

prices than other countries. However, the theoryof comparative advantage does not provide a sim-ple explanation for trade resulting from specialrelationships between businesses (e.g. comple-mentary technology, other synergies or joint own-ership).

Accounts record trade flows in the balance oftrade which is a component of the currentaccount, itself part of the balance of payments. Asits name suggests, the balance of paymentsrecords all the payments between a country andthe rest of the world; imports appear as outflowsor expenditure and exports as inflows or earnings.If there is a surplus or a deficit on the balance oftrade, the other components of the balance of pay-ments must – in accounting terms – correct thedisequilibrium by creating flows of opposite signin the opposition direction, such as foreign directinvestment in the country, increased foreign debtor repatriation of profits made by foreign branch-es of the country's businesses.



In theory, trade flows are divided into threegroups according to their content: commodities(agricultural products and mining products),manufactures, and services. Together, commodi-ties and manufactures make up the category com-monly known as “merchandise”. In practice, theway in which the flows of each of these compo-nents are quantified will depend on the particularcountry's institutional and legislative arrange-ments.

In most countries, primary data on exports andimports of goods and services are provided by the customs authorities. However, since nomen-

clature and methods differ from country to coun-try, data have to be harmonized at internationallevel. The differences may concern the types oftransactions covered (for example, is mail trafficincluded or not?), the point at which the transac-tion is recorded (the IMF uses the point at whichownership changes, whereas certain countries usethe point at which the article crosses the border),the method of assessment (CIF or FOB) or thetype of classification used.

Other differences in national practice concern thedegree of detail in the information provided andthe time taken to publish data. Since most

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0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998

Switzerland

United Kingdom

World

United States


Japan

442

11662

631

120 144

574

449

571

940

1055

157199

541465

640

6% 2% 2% 8% 6% 8% 13% 14% 2% 3% 7% 4% 6% 9%

330

1% 8% 2%0

400

800

1 200

Food

Raw

mat

eria

ls

Ore

s an

d ot

her

min

eral

s

Fuel

s

N

on-fe

rrou

sm

etal

s

Iro

n an

d st

eel

Che

mic

als

Oth

er s

emi-

man

ufac

ture

s

a

utom

otiv

e pr

oduc

ts

Offi

ce a

ndte

leco

m e

quip

men

t

Oth

er m

achi

nery

&

trans

port

equi

pmen

t

T

extil

es

C

loth

ing

Oth

er c

onsu

mer

g

oods

Tr

ansp

orta

tion

Tra

vel

Oth

er c

omm

erci

al s

ervi

ces

Agriculturalproducts

(8%)Mining products

(11%) Manufactures (62%) Commercial

services (19%)

Billions of USD

Total = 14 872 billion

3.4.B. Components of global trade, as a percentage and in terms of value, 2000

3.4.A. Exports of goods and services as a percentage of GDP, at current prices, 1965-1998

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countries do not publish information on trade inweapons or gold, trade flows are always underes-timated. Another area in which they are seriouslyunderestimated is trade in services, which usuallydoes not involve the customs. In countries wherethis is possible, central bank statistics on interna-tional payments and transactions are used toobtain a more reliable picture of trade in services.

Since methods of gathering data on trade are con-stantly changing, it is becoming increasingly diffi-cult to compare statistical series over time. Thisparticularly applies to changes in political or com-mercial borders; examples in recent years includethe break-up of the Soviet Union into a large num-ber of successor states, and the emergence of theEuropean Union as a single trading entity. Tradebetween EU Member States accounted for 25% ofworld trade in 1999; however, once such flows aretreated as domestic, international trade willdiminish by a quarter - purely in statistical terms.

The IMF adjusts national data on trade to produceharmonized statistics which can be comparedinternationally. In addition to the IMF, other inter-national organizations make efforts to producecoherent international statistics; examples are the

OECD (which publishes Special Trade Statistics),the United Nations (which has the fullest andmost detailed database on trade) and the WTO(which produces regional aggregates and seasonaladjustments).

Commercial transactions are initially recorded innominal terms, i.e. in terms of value. However,economists often use sophisticated methods toobtain data based on volume. The purpose of thisis to eliminate the background noise supposedlycaused by price changes and so obtain a moreaccurate picture of reality. Yet, despite their name,"volume-based" data are not provided in physicalunits, but simply in constant prices from a givenreference year. The relevance of the results willtherefore very much depend on which base year ischosen and how carefully the data are processed.In any case, there are many who would challengethe view that price changes are mere backgroundnoise, since they may in fact reflect changes inquality or in patterns of consumption or produc-tion. In this publication we prefer to provide pri-mary data rather than the results of complextechnical processing. Most of the data on trade aretherefore presented here in nominal terms.

RECENT TRENDS

1. Openness to trade (Fig. A and C)

Despite the decreasing share of in product, thevalue of trade in merchandise (exports orimports) expressed in terms of global product hasbeen increasing over time. This ratio - known as"openness to trade" - can be calculated for coun-tries, regions or the whole world. The openness to

trade of the global economy rose from 12.6% in1960 to 22.7% in 1998 and 26.8% in 1999. Thesame trend can be seen in most countries,although at very different levels and rates. Forexample, openness to trade has remained relative-ly low (around 10%) in Japan and the United

States, whereas in most European countries it hasrisen by 10 to 20 percentage points. In certainhigh-income non-OECD countries such as Tai-wan, Hongkong and Singapore, openness to tradehas skyrocketed and has now reached 60% to 80%of GDP; at the other end of the spectrum, wellbelow the global average, is Latin America, main-ly because Argentina and Brazil are so relativelyclosed to trade.

The fact that in the long term trade in merchan-dise has increased more rapidly than its produc-tion suggests that there is a close relationshipbetween international trade and growth. Standardeconomic theory sees this as a causal relationship,

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0

50

100

150

200

250

300

350

1980 1985 1990 1995 2000

GDP (current USD)

World merchandise and commercial services exports (current USD)

1980 = 100

0

200

400

600

800

1 000

1 200

1 400

1950 1960 1970 1980 1990 2000

Mining products

Manufactures

Agricultural products

1950 = 100

3.4.D. Unit value of merchandise exported, as an index, 1950-2000

1997 2000

free access 47% 57%

moderate 30% 29%

high 23% 14%

free access 43% 57%

moderate 33% 27%

high 23% 17%

free access 79% 91%

moderate 15% 9%

high 6% 0%

free access 30% 43%

moderate 32% 43%

high 39% 14%

free access 44% 50%

moderate 50% 47%

high 6% 3%

Western hemisphere

World

Asia

Europe

Sub-Saharan Africa

3.4.E. Summary indicator of traderestrivtiveness, 1997 and 2000

3.4.C. Global product and exports of goods and services, at current prices, as an index, 1980-2000

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yet this is only a likelihood, not a certainty.According to this view, trade, by bringing gains,increases efficiency and boosts growth. However,even if trade leads to considerable gains in effi-ciency at global level, the question remains howthese gains are distributed among the variousplayers.

There has been much greater long-term growth intrade in merchandise than in the production ofthe goods concerned. According to the WTO,between 1948 and 2000 (at constant prices) glob-al trade in merchandise increased by an average of6.1% a year, whereas industrial production ofgoods increased by only 3.9% a year. However,these figures take no account of the share of ser-vices in either trade or production. Once servicesare included, growth in international trade is thesame as growth in national product.

2. Geographical distribution of trade (Fig. F)

The matrix of global trade flows has changed sig-nificantly over the last twenty years.

• The European Union is the world's leading tradingpower, accounting for 53.5% of global trade in mer-chandise. Of EU trade, 48% takes place betweenMember States, 17% with the other two members ofthe Triad (13% with NAFTA and 4% with Japan) and35% with the rest of the world.

• In twenty years, from 1979 to 1999, the concentra-tion of trade in merchandise within the Triad (theEU, NAFTA and Japan) increased from 35% to 45%.Over the same period, the share of trade between theTriad and the rest of the world fell from 56% to 41%,while trade between non-Triad countries rose from9% of 14% of global trade.

• In 1999, 42% of global trade took place within themajor regional blocs; the rest was interregional. Along-term trend appears to be emerging here, withthe share of transcontinental trade diminishing infavour of intraregional trade. This trend is beingboosted by an explosive growth in the number ofregional trade agreements, of which the WTO hadidentified 220 in 2001.

3. The composition of trade (Fig. B, D and G)

The composition of global flows of trade in mer-chandise in terms of volume (at constant 1950prices) has changed considerably over the lastforty years, particularly as rates of growth in thevarious product groups have been very different.For example, trade in manufactures has multi-plied by 20, whereas trade in agricultural andmining products has risen by a factor of 3.5 to 4.

• The share of manufactures skyrocketed, from 41% ofthe total in 1960 to 73% in 2000.

• The share of agricultural products collapsed, from35% of the total in 1960 to 12% in 2000.

• The share of mining products fell significantly, from15% to 5% of the total over the same period.

Services, which did not appear as a separate cate-gory in international trade statistics until 1983,now account for 19% of the total. Trade in ser-vices is not growing as quickly as trade in gener-al, despite the rapid growth in their share ofoverall economic activity. This suggests an incon-sistency between the share of services in the GNPof OECD countries (between 55% and 65%) andtheir share of trade (19%). The answer may wellbe that trade in services has been underestimated,owing to the difficulty of recording actualexchanges of services, which by definition areintangible. However, this is merely a hypothesis.

Unit value is the ratio between the value and vol-ume of trade flows. The unit value of the variousgroups of merchandise has behaved differently inthe long term. While the unit value of manufac-tures and agricultural products has more or lessfollowed the rate of inflation, the unit value ofmining products - particularly oil - has been guid-ed, ever since the 1973-74 crisis, by political con-siderations as much as it has by supply anddemand.

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3.7%

3.0%

European Union

7.0% 20.4% 2.1%

5.7% 1.3%

NAFTA18.8%

6.8%4.6% 24.5%

15.1% 6.8%

23.7% 7.6%

0.9% 6.6%1.1% 0.3%

InterregionalRest of Europe Middle East4.4%1.6%5.8%

0.3%

1.3% 0.4%

Africa

0.2%

0.2%

Overall: 13.9%9.2%

1979

Latin America

1999

Japan

Rest of Asia

25.6%

(100%)

(100%)

3.4.F. Trade in goods within and between the main regions, 1979 and 1999

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4. Internationalized production

The explosive growth in trade in manufacturesmay reflect changes in the way transnational cor-porations operate. The term "internationalizedproduction" refers to the increasing tendency oftransnational companies to make their varioussites specialize in the production or assembly ofspecific components. Once manufactured, thecomponents are transported to another site to beassembled, and the finished products are then dis-tributed to the various markets. Although theproducts never leave the company at any stage ofthis process, they do cross political borders. Thistrend towards internationalized production mayexplain the exponential growth in the share ofsemi-manufactures in international trade, calledalso intra-industry trade.

5. The role of the WTO: liberalization of trade (Fig. E)

Growth in trade, which has been apparent sincethe end of the Second World War, has been facili-tated by constant efforts to liberalize trade. On atheoretical level, the principle of free trade anddistrust of protectionism were expressed as longago as the 1944 Bretton Woods conference. In1948 an ad hoc negotiation platform (GATT) wasset up in Geneva, and by 2002 four full rounds ofnegotiations had been completed: the DillonRound in 1947, the Kennedy Round in 1968, theTokyo Round in 1979 and the Uruguay Round in1994. This latter round saw the birth of an inter-national organization in the full sense of the term:the World Trade Organization, whose sole pur-pose is to liberalize trade. In late 2001 the DohaRound was launched under the auspices of theWTO.

The contents of these successive rounds of tradenegotiations reflect the changes that have takenplace in the global economy. Until 1970 the mainissue was customs tariffs and quotas. In the 1980s,the agenda was extended to include non-tariff bar-riers and services. In the 1990s the focus was onaccess to markets and non-discriminatory treat-

ment of foreign and domestic players. Finally, theDoha Round is mainly concerned with protec-tionism in the agricultural and textile sectors, aswell as issues relating to the environment, thesocial clause and competition policy.

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0

500

1 000

1 500

2 000

2 500

3 000

3 500

4 000

4 500

5 000

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000

Total merchandise

Agricultural products

Mining products

Manufactures

32%

7%

17%

5%

51%

87%

1950 2000

1950 = 100

Volume, constant USD 1950

3.4.G. Global trends in trade, at constant prices, for the main categories of goods, as an index, 1950-1999

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As used in the narrow sense in the internationaleconomy, the term “foreign direct investment”(FDI) means resources which are transferred fromone country to another and which, in the hostcountry, directly contribute to gross capital forma-tion and hence to growth in productive capacity.However, in everyday usage (particularly that ofthe IMF and the OECD), the notion of FDI isbroader than it is in theory, referring instead to alltransactions whereby a foreign player takes lastingcontrol of national assets. According to this defi-nition, there are, operationally speaking, three keyelements in any FDI transaction:

• inflow of foreign capital;

• long-term commitment to the host country by theowner of the capital, which distinguishes FDI fromthe purely financial – and usually short-term -investment known as "portfolio investment";

• foreign control of national assets. This highlights thebasic difference between the broader and narrowermeanings of FDI as illustrated by the example ofcross-border mergers and acquisitions. In such trans-actions, control of the host country's companiespasses into foreign hands (in accordance with thebroader definition of FDI), but the sums involved donot automatically contribute to gross capital forma-tion in the country (as the narrower definitionwould require).

The broader definition also raises the difficulty ofidentifying the point at which control changeshands. In FDI theory, a business is under foreigncontrol if 10% of its share capital is held by a for-eign player. In practice, however, the make-up of shareholdings does not necessarily determinewho is in charge of the business. Managementcontracts, franchises and licensing or royaltyagreements can result in foreign control of a

business just as effectively as a 10% shareholdingcould ever do. Such transactions involving a for-eign partner are, in terms of foreign control, simi-lar to a classic FDI transaction, even if they do notand should not appear in balance-of-paymentsstatistics.

Conceptually, FDI is not restricted to the initialtransaction whereby a foreign parent companyacquires or establishes a local subsidiary, but alsoincludes all subsequent payments between thetwo parties. Thus, for FDI purposes, inflows intothe host country cover the initial transactionwhereby control changes hands, whereas subse-quent outflows include the local subsidiary'sundistributed profits. Loans and credits between aparent company and its subsidiary are also FDItransactions.

Most FDI transactions are triggered off by a com-bination of two sets of factors: (a) the strategies ofprivate companies (especially transnational cor-porations) which use FDI to expand their globalnetworks, and (b) macroeconomic variables suchas exchange rates, growth potential, market sizeand, more generally, the competitiveness of thehost country (although this is difficult to deter-mine). FDI thus lends itself to both microeco-nomic and macroeconomic analysis. In theglobalization debate, FDI is used as an indicatorof the extent to which a country is integrated intothe global production network shaped by transna-tional corporations’ internationalization policies.In the context of classic international economics,inflows of FDI are part of the capital accountwhich - in some countries - may play an impor-tant part in balancing the overall balance of pay-ments.


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69%

77%

81%

90%

40%

50%

60%

70%

80%

90%

100%

1970 1975 1980 1985 1990 1995 2000

OECD figures UNCTAD figures

Global FDI outflows = 100%

FDI inflows, in billions of USD World = 100% FDI outflows , in billions of USD World = 100%Rank in 2000 all 5 Rank in 2000 Cumul all 5

1 United States 281 22% 22% 1 United Kingdom 249 22% 22%2 Germany 176 14% 36% 2 France 172 15% 37%3 United Kingdom 130 10% 46% 58% 3 United States 139 12% 49% 62%4 Belgium and Luxembourg 87 7% 53% 4 Belgium and Luxembourg 82 7% 56%5 Hong Kong, China 64 5% 58% 5 Netherlands 73 6% 62%

6 Canada 63 5% 63% 6 Hong Kong, China 63 5% 68%7 Netherlands 55 4% 67% 7 Spain 53 5% 73%8 France 44 3% 71% 19% 8 Germany 48 4% 77% 22%9 China 40 3% 74% 9 Canada 44 4% 81%10 Spain 36 3% 77% 10 Switzerland 39 3% 84%

11 Brazil 33 3% 80% 11 Sweden 39 3% 87%12 Sweden 21 2% 81% 12 Japan 32 3% 90%13 Ireland 16 1% 83% 8% 13 Finland 23 2% 92% 10%14 Denmark 15 1% 84% 14 Italy 12 1% 93%15 Mexico 13 1% 85% 15 Denmark 8 1% 94%

16 Australia 11 1% 86% 16 Norway 7 1% 95%17 Italy 11 1% 87% 17 Taiwan 6 1% 95%18 Argentina 11 1% 88% 4% 18 Portugal 5 1% 96% 3%19 South Korea 10 1% 88% 19 Australia 5 .5% 96%20 Poland 10 1% 89% 20 Chile 4 .4% 97%

Cumul

3.5.B. Top 20 countries receiving FDI flows, 2000

3.5.A. Deviations in assessment of FDI outflows from OECD countries, in per cent, 1970-2000

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RECENT TRENDS

1. FDI: an OECD activity (Fig. A, B and D)

In 1998, according to UNCTAD figures, therewere some 53,000 parent companies running449,000 foreign subsidiaries around the world.The estimated contribution by foreign sub-

sidiaries to gross global product doubled between1982 and 1999, from about 5% to almost 10%.That would mean that assets under foreign con-trol currently generate about one tenth of globalproduct.


The complexity of FDI in actual practice makes itextremely difficult to measure statistically or evento estimate. The most serious attempts to measureFDI focus on flows, whereas stocks of assetsunder foreign control are merely estimated. Apartfrom subsidiaries' undistributed profits andtakeovers that do not involve shareholdings, allother FDI transactions involve international pay-ments. Theoretically, therefore, they should beidentifiable from the balance of payments, but inpractice things are a good deal more complicated.

The main publication on FDI is UNCTAD’s annu-al World Investment Report. This focuses oninformation on FDI flows provided directly bynational authorities. In the event of gaps or grossinconsistencies, the data are matched up andadjusted with the help of information from otherorganizations such as the IMF or the OECD. Whatmakes this task particularly difficult is that theoperational definitions used by the various orga-nizations do not altogether coincide. This partic-ularly applies to FDI transactions relating tomergers and acquisitions. These are estimated byUNCTAD on the basis of information from theWorldscope data bank set up by the ThomsonFinancial company.

The seriousness of the statistical problems associ-ated with FDI data is illustrated by the major dis-crepancy between the sum totals (calculated atglobal level) of FDI inflows and outflows, a dis-crepancy known as the "global FDI deficit". Thissituation is due to the lack of symmetry between

statistical records in countries of origin and countries of destination. Consequently there isstill no clear picture of FDI inflows and outflows.This lack of precision indicates just how profoundthe statistical problems are, and forces the bodiesthat produce FDI data (the IMF, the OECD andUNCTAD) to update them retrospectively at fre-quent intervals.

Data on FDI stocks are even more uncertain thandata on flows. They are obtained from twosources: (a) the sum total of historical flows or (b)information on foreign assets in annual reports bytransnational corporations. In the latter case, for-eign assets appearing on the consolidated balancesheet are often considered an indirect assessmentof the value of FDI stocks. Since methods of con-solidation and assessment vary from company tocompany, it seems unlikely that the aggregatedfigure can be anything more than an approximateorder of magnitude. Moreover, the fact that sub-stantial discrepancies emerge whenever two dif-ferent methods are used to estimate FDI stocksconfirms the need for caution.

Consequently, FDI statistics must be used withgreat care, since on the one hand data on flows aremuch more reliable than stocks estimates andgrowth rates and, on the other, percentages aremore significant than absolute values. Despitethese drawbacks, FDI statistics are of crucialimportance in understanding one of the essentialaspects of globalization, namely the expansion ofproduction by transnational corporations.

95

53%

70%72%

74%

52%

47%

37%

50%

56%59%

64%

77%

71%

90%

0

100

200

300

400

500

600

700

800

1987 1989 1991 1993 1995 1997 1999

Relative importance of cross-border mergers and acquisitions

Western Europe

North America

Africa


Asia et Pacific

Central and Eastern Europe and European economies in transition

FDI inflows,in billions of current USD

3.5.C. FDI flows by region, in billions of USD, and relative share of mergers and acquisitions in per cent, 1987-2000

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By the end of the twentieth century, about 80% oftotal FDI flows were between OECD countries.This percentage has greatly increased over the lastfifteen years. According to the OECD, 69% ofglobal FDI originated in its member countries in1985, but by 1999 this figure had risen to over90%. The same countries absorbed 77% of worldFDI flows in 1999, compared with 67% in 1993.In other words, in 1999 fewer than 10% of FDIflows originated in non-OECD countries andabout 23% had such countries as their destina-tion. However, there is a considerable discrepancybetween OECD and UNCTAD figures on the sub-ject.

Analysis of FDI stocks by area of origin indicatesthree things:

• since the early 1990s, western Europe has remainedthe largest net foreign investor

• the position of North America appears balanced(although the American authorities state that theUSA's net investment position at the end of 2000 wasnegative, totalling some USD 750,000 billion).

• the Asia-Pacific zone is above all a net absorber ofFDI.

2. The select club of recipient countries (Fig. B)

FDI flows from OECD to non-OECD countriesare increasingly concentrated on a small group ofcountries in Asia (Singapore, Hongkong, Thai-land, Malaysia, China and Taiwan) and LatinAmerica (Brazil, Argentina, Chile, Colombia andVenezuela). In Africa, only Egypt and South

Africa are on this select list. In 1985 some 20% ofthis investment went to the ten main recipients;by 1999 this figure had risen to 45%.

3. The ambiguous role of mergers and acquisitions(Fig. C)

Cross-border mergers and acquisitions have tradi-tionally been a highly volatile, yet important,component of FDI. By 2000 their share had shotup to 90% of global FDI (compared with about37% in 1993). The volume of cross-border

mergers and acquisitions suggests that localiza-tion of assets is gradually making way for indus-trial consolidation at global level, with the majortransnational corporations leading the way. Nev-ertheless, the true importance of mergers andacquisitions is hard to assess, since the amountsinvolved have been blown up by the financialeuphoria which drove share prices to such dizzy-ing heights in the second half of the 1990s.

© Observatoire de la Finance, 2002; [www.obsfin.ch] Primary data: UNCTAD, World Investment Report; OECD, Financial Market Trends Grouping of countries: Fig. D cf UNCTAD

0

500

1 000

1 500

2 000

2 500

3 000

3 500

1980 1985 1990 1995 2000

Western Europe: inward FDI stocks

Western Europe: outward FDI stocks

North America: inward FDI stocks

North America: outwartd FDI stocks

Asia and Pacific: inward FDI stocks

Asia and Pacific: outward FDI stocks

Billions ofUSD

3.5.D. Inward and outward FDI stocks in the three main economic regions, in billions of USD, 1980-2000

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98



99IVIV. Money and finance. Money and finance

4.1 International debt

4.2 Foreign exchange regimes and exchage rates

4.3 Interest rates



100



The notion of international debt involves twoconcepts (debt, and the international nature ofdebt) and two disciplinary approaches (legal, andfinancial or economic).

Seen in legal terms, debt is an obligation on thepart of an individual or a legal entity to pay backmoney. However, a country is not a legal entityand therefore cannot be under an obligation topay anything back. From a strictly legal point ofview, the notion of debt can thus only apply to acountry by analogy. However, the same is not trueof the economic players (public or private) wholive there.

The statistical aggregate known as "internationaldebt" is heterogeneous, for it comprises four dif-ferent kinds of cross-border debt contracts,depending on whether the national debtor and theforeign creditor fall under public or private law:(a) both parties to the contract are private; (b) thecreditor is private and the debtor is public; (c) thecreditor is public and the debtor is private; and(d) both parties are public. In practice, two otherconsiderations must also be taken into account:(a) some private debts are guaranteed by the state;and (b) public creditors include internationalorganizations.

Seen in macroeconomic terms, the notion of inter-national debt does not refer to individual con-tracts, but to the burden imposed on the nationaleconomy by all the financial obligations incurredby players resident in the country towards the restof the world. The economic approach thus focus-es on the indirect mechanisms whereby interna-tional financial obligations may affect all or someof the players in a country. These mechanismsinclude changes in interest rates, in exchangerates or in inflation.

Economists are less interested in the total value ofcommitments (gross debt) than in net debt, i.e.what is left after commitments by the rest of theworld towards players resident in the country aresubtracted. In theory, this net debt is the cumula-tive total of balances, before "compensatory"transactions to finance the country’s balance ofpayments. In practice, however, the level of netdebt is determined by matching up informationobtained from debtors and creditors. For this rea-son, quantification of foreign debt (also known asinternational debt) depends on legal and account-ing definitions, careful recording of positions andcomplex statistical calculations.

Although the notion of international debt is theo-retically applicable to all countries, it is mainlyused in relation to developing or transitionalcountries. The reasons for this are both practicaland political. When markets operate well and allthe available information is continually used tohelp determine exchange rates and interest rates,individual players (both debtors and creditors)manage their international exposure in real time.This being the case, as far as any given player(whether a government, a bank or a business) isconcerned, the only difference between interna-tional debt and domestic debt lies in the technicalinstruments used to manage commitments andrisks. From the point of view of economic policy,the way to control a country's international debtin such circumstances is to monitor its publicdebt and supervise its financial players' interna-tional exposure (i.e. their exposure to foreignplayers and exposure in foreign currencies). Incountries with highly developed, intricate finan-cial systems, monitoring the components of acountry's debt is more important than measuringits level of international debt as such.

4.1 International debt

101

Total short- and long-term debt

0

500

1 000

1 500

2 000

2 500

3 000

1982 1984 1986 1988 1990 1992 1994 1996 1998 2000

Long-term debt (public creditors)

Long-term debt (private creditors with public guarantees)

Long-term debt (private creditors without public guarantees)

Short-term debt

Use of IMF credit

Billionsof USD

Total long-term debt

0

200

400

600

800

1 000

1987 1989 1991 1993 1995 1997 1999


East Asia and Pacific

Europe and Central Asia

Sub-Saharan Africa

Middle East and North Africa

South Asia

Billionsof USD

4.1.B. Levels of international debt by region, in billions of USD, 1987-2000

4.1.A. Total external debt of developing and transitional countries, by type of creditor and maturity, in billions of USD, 1982-2000

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A country's international debt is a diffuse phe-nomenon whose quantification requires consider-able technical skill. The range of possible sourcesand methods is extremely wide, especially sincedebtors and creditors may have divergent inter-ests. Mexico's default (in summer 1982) showedhow ill-prepared the world was to foresee andcope with such a crisis, mainly for lack of appro-priate statistical data. Since 1984 the main inter-national organizations have been trying to comeup with a single, coherent statistical frameworkthat will capture all the dimensions of developingcountries' foreign debt, so that future crises can beprevented more effectively.

In 1992 an Inter-Agency Task Force on FinanceStatistics was set up under the chairmanship ofthe IMF, with the World Bank, the Bank for Inter-national Settlements (BIS) and the OECD as itsleading members. Its task was to draw up a coher-ent set of statistics on developing and transitionalcountries' foreign debt. Each member of the taskforce contributes to its work in areas in which ithas specific skills: the BIS supplies data providedby markets and financial institutions in developedcountries, the World Bank supplies data providedby debtors through its Debtor Reporting System,and the OECD supplies data on bilateral loans aspart of public development aid.

The quantification of a country's foreign debt hastwo main aspects: the debt "stock", i.e. the totalamount owed, and the debt "flow", i.e. changes inthe stock over a given period of time. Both theflow and the stock can be recorded in terms of netor gross value, the former being much harder todetermine than the latter. This is because a coun-try's debt is the aggregate of a multitude of sepa-rate commitments, each with its own financialinstruments and its own repayment schedule.Under such circumstances it is extremely difficultto monitor the payments made and the changesthey cause in terms of commitments simultane-

ously, which is why the data are so frequently(and often incompletely) revised.

In the available statistical framework there are twopossible ways of breaking down net debt in thecountries examined: (a) by type of instrument;and (b) by type of creditor.

Breakdown by type of instrument subdivides totaldebt into:

• loans from banks established in the 28 BIS reportingcountries;

• international money and bond market instrumentsissued by the country's public and private debtors;

• Brady bonds resulting from the restructuring ofdeveloping countries’ debts after the crises of the1980s;

• commercial loans by non-banking institutions;

• debts to multilateral agencies;

• bilateral public loans by OECD member countries.

Breakdown by type of creditor - notably in theWorld Bank publication Global DevelopmentFinance (formerly World Debt Tables) - applies tolong-term debt, which is subdivided (dependingon the creditor or guarantor) into:

• government and multilateral agencies;

• the private sector;

• use of IMF credit lines;

• short-term debt, which for reasons of feasibility isnot systematically broken down by type of creditor.

Each of these approaches applies to both debtstocks and debt flows, with a distinction betweenthe long and the short term (the latter includingany possible arrears). As regards sources, break-down by type of instrument is based on data gath-ered from creditors, whereas breakdown by typeof creditor is based on data provided by debtors.Although both approaches seek to define the samereality, the totals they yield are very different. In2002, for example, the Inter-Agency Task Force

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-100

0

100

1987 1989 1991 1993 1995 1997 1999

East Asia and Pacific

Europe and Central Asia


Billionsof USD

35.6%

10.2%

21.0%

4.2%

18.9%

10.0%

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%

Bank loans

Non-bank trade credits

Debt securities issued abroad

Brady bonds

Multilateral claims (including IMF)

Official bilateral loans

4.1.D. Composition of international debt by type of instrument, 2000

4.1.C. Annual changes in debt levels for the three most indebted regions, in billions of USD, 1987-2000

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on Finance Statistics estimated the total debts ofdeveloping and transitional countries at USD1,986 billion, whereas Global DevelopmentFinance (which breaks down data by type of cred-itor) came to a total of USD 2,528 billion - a dif-ference of 21.5%.

Another difficulty in monitoring statistics overtime concerns changes in the number of countries

covered by the various data-gathering instru-ments. A further complication is that countriesare frequently reclassified under different groupsby the World Bank but that the series are not allrecalculated retrospectively. Historical series (par-ticularly before 1987) should therefore be treatedwith caution in the absence of appropriate verifi-cation.

RECENT TRENDS

1. Changes in debt patterns (Fig. A, B and C)

Between 1980 and 2000, according to World Bankfigures, developing and transitional countries'total debt multiplied by a factor of 4.3 in nominalterms. A similar trend was found in most cate-gories of debt classified by type of creditor, espe-cially in the case of multilateral creditors andprivate creditors not guaranteed by the state,whose shares of the total are tending to increase.At the same time, the share of short-term debt fell,from 24% to 16% of the total.

In dynamic terms, regions such as Africa, the Mid-dle East, South Asia and Latin America saw theirshare of total debt decreased markedly; LatinAmerica alone accounted for 44% of the total in1980, but this figure had fallen to 32% by 2000.On the other hand, regions such as Central andSouth-East Asia and Eastern Europe saw theirshare rise sharply, from 25% to 45% of the total.These are therefore the regions that have con-tributed most to the growth in overall interna-tional debt.

There have been major changes in the overall pat-tern of international debt, with periods of eupho-ria succeeded by periods of great restraint (as inthe years following the Asian and Russian crises of1997-98).

2. Concentration and crisis (Fig. D and E)

Bank loans and international bond markets are still the most commonly used financial instru-

ments, accounting for 57% of total debt. In allprobability these instruments are favoured by pri-vate creditors.

The ten main debtor countries account for 57% oftotal debt in developing and transitional coun-tries. Of these ten countries, eight have sufferedserious financial crises in recent years, althoughstrictly speaking no causal relationship can beidentified. International debt has been a constantcause for concern over the past twenty years. Onat least five occasions the international financialsystem has been shaken to its foundations by debtcrises: Mexico in 1982 and 1995, South-East Asiain 1997, Russia in 1998 and Argentina in 2001-02.This means that, above a certain level, debt is athreat not only to the country directly affected,but also to its creditors. Thus, in order to avoidacute crises and irreversible situations, the partiesusually find negotiated solutions in the form ofmoratoriums, rescheduling, restructuring or quitesimply reduction of debt.

3. Towards a bearable level of debt (Fig. F, G and H)

Since 1996 creditor countries have become con-cerned about the poorest countries’ burden ofdebt. On the initiative of the IMF and the WorldBank, a scheme has been launched to alleviate thedebts of highly indebted poor countries (HIPC),put them in a better position to fight poverty andencourage their development. Following an inter-national campaign by civil society entitled Jubilee

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Total foreign debt Interest/ExportsBillions of USD

1998 1993 1998 1993Cumul. Cumul.

1 Brazil 232 9% 9% 143 8% 8% 74.1% 24.4%

2 Russia 183 7% 16% 111 6% 14% 12.1% 3.3%

3 Mexico 159 6% 23% 131 7% 22% 20.8% 35.8%

4 China 154 6% 29% 85 5% 27% 8.6% 11.1%

5 Indonesia 150 6% 35% 89 5% 32% 33.0% 33.6%

6 Argentina 144 6% 40% 65 4% 35% 58.2% 30.9%

7 South Korea 139 5% 46% 47 3% 38% 12.9% 9.3%

8 Turkey 102 4% 50% 68 4% 42% 21.2% 28.6%

9 India 98 4% 54% 94 5% 47% 20.6% 25.5%

10 Thailand 86 3% 57% 52 3% 50% 19.2% 13.0%

Total 2536 100% 100% 1777 100% 100% 18.4% 16.2%

10%

24%

7%

17%

2%

4%

0%

5%

10%

15%

20%

25%

1998 1999 2000 2001 2002 2003 2004 2005

Debt service/Government revenues

Debt service/Exports

Debt service/GDP

4.1.F. Predicted effects of reductions in debt for the 24 HIPC countries, 1998-2005

4.1.E. Levels and concentrations of debt in the ten most indebted countries, 1998

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2000, the conditions for access to this schemewere relaxed in 1999. Countries that meet theconditions are entitled to a considerable reductionin debt servicing and cancellation of approximate-ly 30% of the updated value of their debts. As ofearly 2002, 42 of the poorest countries were eligi-ble for the HIPC scheme and 24 had alreadysigned the relevant agreement. However, the totaldebts of these 42 countries represent no morethan 10% of overall international debt.

The burden of international debt on a country'seconomy is usually measured with the help ofthree indicators:

• the ratio between the country's total debt and itsGNP;

• the ratio between the country's total debt and itsexports;

• the ratio between the country's debt service and itsexports.

The creditor countries' debt alleviation schemehas temporarily postponed the debate (launchedby civil society) on how to determine a country's“bearable" level of debt. The major creditor coun-tries and international institutions are afraid that,once a “bearable level” of debt has been defined,civil society may start to insist that debtors canlegitimately repudiate “unbearable" levels of debt.

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0%

20%

40%

60%

80%

100%

120%

140%

160%19

87

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

All developing countries

SIC, Middle-income

SIC, Low-income

Total debt/GNP Debt service/ Exports

7.2%

12.0%

8.5%8.1%

4.0%

5.5%5.5%

3.6%

0.0%

2.5%

5.0%

7.5%

10.0%

12.5%

15.0%

17.5%

1970 1972 . . . 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998

5 years

10 years

15 years

20 years

25 years

30 years

35 years

Public creditors, maturity (in years) Private creditors, maturity (in years)

Private creditors, interest rate (in %) Public creditors, interest rate (in %)

4.1.H. Average terms of new commitments by type of creditor, 1970-1999

4.1.G. The burden of debt in 1987-1999, Severely Indebted Countries (SIC)

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The exchange rate is the price of a national cur-rency expressed in terms of a foreign currency.The notion of an exchange rate refers to thebroader notion of convertibility. A currency is saidto be convertible if it can be legally exchanged foranother currency. This means that there cannot bean exchange rate in the macroeconomic sense ofthe term unless the currency is convertible.

Since the 1944 Bretton Woods conference, theinternational monetary system has been built upon the basis of convertibility of member countries'currencies. However, the statutes of the IMF onlyrequire convertibility for current account transac-tions (commercial and similar transactions), andleave member countries free to apply exchangecontrols to movements of capital.

Which system of exchange rates a country choos-es - i.e. which institutional arrangements it adoptswith regard to exchange rates - is a key aspect ofinternational monetary history. In theory, thereare five regimes:

• non-convertibility, found in closed economies thattrade with the rest of the world on a clearing basis;

• exchange controls or multiple exchange rates, inwhich foreign exchange transactions are authorizedor prohibited depending on the rationale behind thetransaction, or are permitted at specific conversionrates;

• fixed exchange rates, in which the price of thenational currency in foreign currency (or in gold) isset by the central bank, which undertakes to applythis rate in its dealings with economic agents. Thissystem operated globally until 1971, and now sur-vives through currency boards that have been estab-lished unilaterally in some countries which peg theircurrency to another one;

• intermediate exchange rates regimes, in which thecentral bank undertakes to keep the exchange ratewithin a certain range;

• floating exchange rates, in which the monetaryauthorities deliberately allow the exchange rate to beset by the market.

The economic significance of exchange rates verymuch depends on which system of exchange ratesprevails nationally and internationally. Recentfinancial crises have shown that individual coun-tries - particularly the less important countries -do not have much room for manoeuvre when itcomes to choosing their exchange rate regime. Inevery regime except non-convertibility or a sys-tem of globally fixed exchange rates, the monetaryauthorities operate under the vigilant gaze of cap-ital markets, which can respond with devastatingforce to decisions they consider suspect.

In the 1970s, economic theory saw exchange ratelevels as the outcome of flows of imports andexports. This neat explanation assumed the exis-tence of an adjustment mechanism which kept acountry's balance of trade in equilibrium and bythe same token guided exchange rates towardswhat was known as equilibrium level. This viewof the international economy, which prevailedwhen the IMF was first set up, became much lessconvincing following the massive expansion ofcross-border flows of financial capital. Today it isby no means certain what factors determineexchange rates and what their relative influenceis. Nevertheless, it is clear that movements of cap-ital obey a very different logic from trade flows.They respond to a triad of factors (the rate ofinflation, the interest rate and the exchange rate),but there is no way of knowing exactly what influ-ences what, and to what extent.

4.2 Foreign exchange regimes and exchange rates

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40

60

80

100

120

140

160

180

200

220

240

260

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

United States Mexico

Japan South Korea

United Kingdom Switzerland

Germany France

Italy Turkey

1972 = 100

2002

4.2.A. Changes in the real effective exchange rates of the main currencies, as an index, 1972-2001

Fore

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regim

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xchange

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In a system of fixed exchange rates, the nominalrates are known and are published by the mone-tary authorities; they are then adopted by finan-cial intermediaries who, after incorporating theircommission, make their offers to buy or sell for-eign currency known to other economic agents.As a result, there may be minor differences inexchange rates between the various operators atretail level.

In a system of floating exchange rates, the nomi-nal rates vary constantly, and transactions do nottake place on an organized market. Rates arerecorded and then made known by suppliers offinancial information (Reuters and Bloomberg)whose technology also forms the backbone of thenetwork in which foreign exchange transactions

take place. In such interactions, the speed ofinformation is crucial and the fees charged bysuppliers depend on the delay. There may there-fore be minor differences between the levelsrecorded because of opportunities for arbitrage.

Apart from the nominal exchange rate,economists often make use of the “real exchangerate”, which takes account of differences in ratesof inflation between the two countries. To takeaccount of the composition of a country's tradeflows, use is often made of the real effectiveexchange rate, which incorporates not only thedifferences in rates of inflation between the coun-try and its trading partners, but also the composi-tion of the country's trade in terms of the variousforeign currencies.

RECENT TRENDS

1. Is a tripolar system emerging? (Fig. A)

Since 1999 the global foreign exchange systemhas been evolving towards an arrangement basedon three main groups. The three main currencies- the US dollar, the euro and the yen - form thebackbone of the system. Some currencies of inter-mediate importance - such as the Canadian dollar,the pound sterling and the Swiss franc – operateas free electrons within the system. All other cur-rencies gravitate around one of the three maincurrencies.

Before the euro made its entry into the financialworld in early 1999, the exchange rates of theeleven currencies which were initially part of itwere irrevocably fixed. They had already beenconverging for some years. However, it would beunwise to attribute this convergence entirely tomarket forces; it also reflects an economic andmonetary policy that was sufficiently rational andcoherent to convince the financial markets.

2. Financial crises and exchange rates (Fig. B)

In the 1990s a number of medium-sizedeconomies were hit by monetary crises. Thechanges in exchange rates indicate just how greatan adjustment these economies had to make inorder to get back onto the world economic stage.

3. "Pure" regimes are preferred (Fig. C)

The last two decades have been marked by con-siderable strain on foreign exchange markets,often at the expense of medium-sized economies.This has induced many countries to review theirexchange rate regimes. Thus, between 1991 and1999, the proportion of countries with regimesequivalent to hard peg or fixed exchange ratesrose from 16% to 24%. At the same time, the pro-portion of countries that allowed their currenciesto float also increased (from 23% to 42%), whilethe proportion of countries with intermediateregimes fell by almost half (from 62% to 34%).

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10

100

1 000

10 000

100 000

1 000 000

10 000 00019

86

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

India Indonesia ThailandMexico Turkey Argentina

1986 = 100

25

45

98

63

36

77

16% 24%62% 34%23% 42%0

20

40

60

80

100

120

140

160

1991 1999

Hard peg Intermediate Float

100% = 159 countries 100% = 185 countries

Number of countries

4.2.C. Distribution of countries by foreign exchange regime, 1991 and 1999

4.2.B. Examples of changes in nominal exchange rates in times of financial crisis, as an index, 1986-2001

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The interest rate is the price paid by a debtor overa period of time - usually a year - in order to maketemporary use of a sum of money. The price isexpressed as a percentage of the amount lent. In aworld without inflation, the interest rate reflectsthe parties' preference for the present: the lenderis willing to forgo immediate access to his assetsin return for a premium in the form of the inter-est paid, while the borrower is willing to pay thispremium in order to have immediate access to liq-uid assets.

A debt contract is different from a simple pur-chase or sale transaction, so determining theinterest rate is more complicated than setting aprice on a classic market for goods or services. Akey aspect of finance is the notion of risk, towhich the owner of funds is exposed if he allo-cates them to specific uses.

Risk has a number of dimensions, which concern(a) the type of debt instrument used, (b) the dura-tion of the commitment, (c) the currency used,and (d) who the debtor is and what the project is.It is therefore only natural that interest ratesshould vary from contract to contract, accordingto these various parameters.

For all these reasons, interest rates at macroeco-nomic level differ from those applied at microeco-nomic level, which bind the parties contractually.

At macroeconomic level the purest expression of the price of money is what is known as the "risk-free" rate. In most countries this is represented bythe yield on long-term government bonds. In ahypothetical world of efficient markets and per-fect competition, the only differences between thevarious interest rates and the risk-free rate arecaused by risk premiums.

While economic policymakers and economists areagreed that the interest rate is a key variable inmodern economies, opinions differ about itsmacroeconomic significance. This is because theinterest rate may reflect at least four factors: (a)the relationship between savings (supply offunds) and investment projects (demand forfunds); (b) liquidity preference, i.e. the tendencyof all the players on the market to prefer the mostliquid asset, namely cash; (c) the expected level ofinflation; and (d) the policy pursued by the cen-tral bank. The various schools of thought classifythese factors in different orders of importance.

The interest rate is a key factor in calculating theviability of investment projects, for it enables thepresent values of flows of expenditure and earn-ings that occur at different dates to be calculated.This allows the viability of alternative projects tobe accurately assessed.

4.3 Interest rates


Not only are interest rates economically impor-tant, but there is a huge variety of interest rates onthe various markets, which explains why there issuch a large number of statistical series. Some of these are compiled by market operators, others by

public bodies. Data may differ considerably fromone source to the next, especially when it comesto retail rates. In developed countries the centralbanks (such as the European Central Bank) publish the main rates and forward them to

113

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0%

4%

8%

12%

16%

20%

24%

1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000

United States GermanyJapan FranceSwitzerland ItalyThailand United KingdomSouth Africa

2002

0%

4%

8%

12%

16%

20%

24%

28%

1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002

United Kingdom United States

Germany Japan

France Switzerland

Netherlands

4.3.B. Changes in the LIBOR for various currencies, 1978-2002

4.3.A. Changes in the nominal “risk-free” interest rate, 1970-2002

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international organizations (the BIS, the IMF orthe OECD).

As a price, the interest rate is a variable which isextremely sensitive to changes of all kinds, partic-ularly ones affecting the overall price level. Theeconomic impact of a 10% interest rate will differaccording to whether prices are increasing by 5%or by 15% a year. Conversion from the nominalrate to the real rate (i.e. net of inflationary effects)thus raises serious problems of methodology.

Firstly, an interest rate that is negotiated today isnot based on the actual level of inflation, but onthe level of inflation that the players expect. Thereal rate of interest can only be calculated ex postand after some time has elapsed. Secondly, it is notclear that use of the consumer price index as adeflator is the best way to convert from the nom-inal interest rate to the real one (in economic lan-guage the word "real" always suggests "true").

RECENT TRENDS

1. Reference rates and interest rate structure (Fig. A and B)

Interest rates are a key economic phenomenonand, like the prices of financial assets in general,they are constantly changing. A distinction musttherefore be made between reference rates andother rates, which are in fact derived from the for-mer. In most present-day economies, the short-term (risk-free) reference rate is represented bythe terms on which the central bank refinancescommercial banks, whereas the long-term refer-ence rate is the effective yield of government bondissues.

International markets also have reference ratessuch as the London Interbank Offered Rate(LIBOR), represented by the terms on whichinternational banks in London are willing to lendeach other funds for a period of three months.The LIBOR, plus an ad hoc risk premium (the"spread"), is then used for contracts with lesscreditworthy debtors. In each country the refer-ence rates form the base of an entire pyramid ofinterest rates which are used according to theamount involved and the creditworthiness of theparties. The rate at which a local bank lends to amedium-sized business will thus be very differentfrom the rate at which an international bankmakes funds available to a reputable multination-al corporation. These differences will be due notonly to the specific risks of each transaction, but

also to the differing transaction costs and thebanks' commission policies.

2. Convergence of long-term rates (Fig. A)

In a fully globalized economy one can conceive ofa single reference rate which local rates will sim-ply adapt to local conditions (inflation levels,exchange rates and so on). This suggests thatinterest rates – at least real ones - will converge atglobal level. Medium-term trends in interest ratesin the OECD countries reveal increasingly similarfluctuations and smaller differences, particularlywithin the euro zone. Despite the run-up to theeuro, the convergence of interest rates in theOECD countries may be considered a sponta-neous phenomenon.

3. Interest rates and monetary policy (Fig. C and D)

In many respects the interest rate is the key vari-able in the economy, in that it brings together con-siderations of productive investment (long-termrates) - i.e. of the "real" economy - and ones offinance (short-term rates) and monetary policy. Itis therefore not surprising that the shortest-terminterest rates are a matter of serious concern tonational monetary authorities, which are not allpursuing the same goals.

1154.3.C. Changes in long-term interest rates,

1970-2000


-15%

-10%

-5%

0%

5%

10%

1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000

United States GermanyCanada FranceJapan ItalySwitzerland

-14.0%

-10.5%

-7.0%

-3.5%

0.0%

3.5%

7.0%

1965 1970 1975 1980 1985 1990 1995 2000

United States GermanyCanada FranceMexico ItalyJapan SwitzerlandSouth Korea

4.3.D. Changes in the differential between long-term and short-term rates, 1965-2002

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Money is at the heart of the contemporary econo-my, both as a monetary symbol and as a unit ofmeasurement. In the course of history money hastaken widely differing forms, from shells or salt toprecious metal coins, banknotes and, most recent-ly, intangible electronic transfers. Indeed, so var-ied have these forms been that there are some whowonder whether it is appropriate to refer to themall as "money". It would be pretentious to try anddefine money here, given that its mysteries havewithstood attempts by mankind's sharpest mindsto unravel them. Concerned not to get boggeddown in an overly philosophical and sociologicaldebate, economists have preferred to focus not onthe substance of money – much less on its essence- but on the functions it performs in the economyand in contemporary society. It is therefore tempt-ing to say that, from an economic point of view,anything which simultaneously performs thethree or four functions of money may be referredto as such. These functions are: unit of account,means of payment, standard of value, and pur-chasing power reserve.

The dematerialization of monetary symbols whichwe are currently witnessing is forcing us to reviewthe way in which we look at money. Monetaryfunctions are no longer performed by tangibleobjects, as in the days when paper money heldsway, but by institutional arrangements. It wouldtherefore be more appropriate to talk of a mone-tary settings rather than money. Any monetarysetting ultimately depends on an architecturewhich succeeds in gaining users' confidence. Todo so, monetary settings rest to a differentiatedextent on two pillars: the substance of the mone-tary vehicle, and the public institution that under-pins it. The greater the emphasis on substance (asin the case of gold coins), the less important theinstitutional dimension will be. Conversely, the

greater the emphasis on the institutional dimen-sion (as in the case of electronic transfers), theless important the substance of the monetarysymbol will be.

Any discussion of the monetary setting, and par-ticularly the question of how to protect moneyagainst loss of value, naturally leads to the issue ofhow money is created and the related issue of thequantity of money in circulation. In contemporarymonetary settings, the question of how money iscreated has two related but distinct aspects: theissuance of money in the form of banknotes andcoins (which remains the prerogative of the cen-tral bank) and the creation of money throughcredit (which is the responsibility of commercialbanks and other financial institutions). However,in all contemporary monetary settings, the centralbank is responsible for managing the quantity ofmoney in circulation, so as to ensure that the pur-chasing power of the currency is not eroded tooquickly.

Monetary policy is a favourite topic of discussionamong economists. Since the end of the eigh-teenth century there have basically been twoopposing schools of thought on the subject, undervarying names. There are those, nowadays knownas monetarists, who believe that the money sup-ply should be managed with the sole aim of keep-ing prices stable, and that the central bank shouldforce the economy to accept the resulting moneysupply as exogenous and leave economic agentsto cope with this as best they can. Others, knownas Keynesians, believe that the money supplyshould be adapted to the economy’s need forfunding, and particularly in order to stimulategrowth. Keynesians do not have a unanimousview about whether money should be created tofinance public deficits, or about how best to bal-ance growth requirements and the risk of inflation.


117

© Observatoire de la Finance, 2002; [www.obsfin.ch] Primary data: Thomson Financial, Datastream Advance; BIS, Statistics on payment systems in the Group of Ten countries - Figures for 1999, March 2001 Grouping of countries: Fig. A et B cf Thomson Financial

100

150

200

250

300

350

400

450

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

Germany

France

Italy

EU

1982 = 100

100

150

200

250

300

350

400

450

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

Germany

France

Italy

EU

1982 = 100

4.4.B. Growth in broad money in certain EU countries, as an index, 1982-2001

4.4.A. Growth in narrow money in certain EU countries, as an index, 1982-2001

Mo

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ag

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Given these great differences of opinion aboutmonetary policy, the goals pursued by centralbanks may vary considerably from time to timeand from place to place both in internal hierarchyand in coherence. A smoothly growing domesticmarket, a well-run payment system, stable prices,full employment and balanced foreign trade areamong the considerations involved in determin-ing monetary policy.

In the contemporary context, monetary policy -

i.e. management of the volume of money in circu-lation - is made more complicated by the largenumber of assets which may to a varying extentperform some of the functions of money, eventhough they are not money in the physical senseof the term. The need to regulate the money sup-ply naturally leads central banks to act indirectlyon the ways in which such assets are created anddestroyed, since their supply is beyond the centralbanks’ immediate control.


The various assets which perform the functions ofmoney are usually classified by degree of liquidi-ty, i.e. the difficulty (and cost) of converting theminto money immediately. Coins and banknotes inthe domestic currency are, of course, the most liq-uid assets, followed in turn by current accountdeposits with banks and non-banking financialinstitutions (the post office in some countries),readily accessible savings deposits, and finallyfixed-term deposits, other savings deposits,deposits in foreign currencies, government bondsand so on. As this list makes clear, financial inno-vation has created a continuum between money inthe primary sense - i.e. cash - and financial assets.This has had, and will continue to have, majorimplications for monetary policy.

If managing the money supply is the centralbank's main task, it is clearly of vital importanceto quantify it. Since financial innovation is con-stantly adding to the range of assets that performthe functions of money, any classification of assetsby the central bank in order to quantify and man-age the money supply rapidly becomes obsolete. To overcome this difficulty, central banks use sev-eral monetary aggregates at once when drawingup and implementing their policies.

Each country defines its own monetary aggregatesin accordance with its institutional framework.Many countries have a whole set of definitions ofthe money supply (M), while others have givenup trying to define things too precisely so thatthey do not have to redefine their aggregates, andhence their statistical series, too often. Neverthe-less, most countries use the following two types ofaggregate:

• "narrow money", which includes the most liquidassets, i.e. the ones that can instantly perform all thefunctions of money. In many countries this is knownas "money supply 1", or "M1" for short.

• "broad money", which includes all the assets thatcan perform the functions of money. This is thebroadest aggregate, known in some countries as M3or M4.

In some countries, or under certain regimes, data on monetary aggregates may be treated assensitive information, and the time lag and thedegree of detail with which they are publishedmay vary considerably from country to country.Many countries, particularly developed ones, haveopted for great transparency on the subject; othersare more discreet.

119

© Observatoire de la Finance, 2002; [www.obsfin.ch] Primary data: Thomson Financial, Datastream Advance; BIS, Statistics on payment systems in the Group of Ten countries - Figures for 1999, March 2001 Grouping of countries: Fig. D cf Thomson Financial

0

100

200

300

400

500

600

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

United States: Broad money United States: Narrow money

Japan: Broad moneyJapan: Narrow money

1982 = 100

0

100

200

300

400

500

600

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

Switzerland: Broad money

Switzerland: Narrow money

United Kingdom: Broad money

United Kingdom: Narrow money

1982 = 100

4.4.D. Growth in monetary aggregates in the United Kingdom and Switzerland, as an index, 1982-2001

4.4.C. Growth in monetary aggregates in the United States and Japan, as an index, 1982-2001

Mo

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RECENT TRENDS

1. "Broad money" in the Euro zone (Fig. A and B)

European monetary union has forced the memberstates to take a much closer look not only at theirdefinitions of monetary aggregates, but also at thelinks between the money supply and economicperformance, particularly in terms of growth andinflation. In 1999 the European Central Bankdecided to focus its policy on M3 growth. A retro-spective look at the behaviour of monetary aggre-gates in the Euro zone countries indicatesdivergence as compared with the whole of theEuropean Union in the case of narrow money, andconvergence in the case of broad money.

2. Greatly differing trends (Fig. C and D)

The great diversity of practice regarding monetaryaggregates also makes international comparisonvery difficult, particularly when it comes to inte-grating assets held by non-banking financial insti-tutions such as insurance companies, financecompanies and pension funds. For this reason,despite considerable efforts by the IMF and theOECD to standardize data, domestic aggregatesare still very hard to compare. These problems areusually avoided either by comparing countrieswith the help of indexes (with "broad money" onone side and "narrow money" on the other) or byexpressing the various aggregates as a percentageof GNP.

3. Towards a cashless society (Fig. E and F)

The speed of circulation of money varies fromcountry to country, which indicates both differ-ences in the exact definition of narrow money anddifferences in payment habits. The notion of"velocity of money" (technically defined as theratio between GNP and narrow money) is used todetermine the number of times a unit of currencyis involved in a transaction. Despite differing levels, the velocity of money is tending to falleverywhere except Italy and the United States.One explication for this is the spread of cashlessmethods of payment (especially electronicmoney) in everyday transactions.

4. “Dollarization” of the world economy

Large amounts of the world's leading currencies -particularly the US dollar and the euro (andbefore that the German mark) – are in circulationoutside their national borders. According to someestimates, up to one third of American banknotesmay be circulating outside the United States. Thistendency for internationally very liquid curren-cies to move around the world raises two majorproblems. Firstly, it makes it more difficult to pur-sue a monetary policy, and particularly to adaptthe money supply to changes in habits of pay-ment. Secondly, having large amounts of cash incirculation outside a country's borders conflictswith the political will, which has increased since11 September, to make all major monetary trans-actions traceable. The existence of such unmoni-tored cash makes it easier for criminals to bribeofficials and make other clandestine payments.

121

© Observatoire de la Finance, 2002; [www.obsfin.ch] Primary data: Thomson Financial, Datastream Advance; BIS, Statistics on payment systems in the Group of Ten countries - Figures for 1999, March 2001

0.5

1.0

1.5

2.0

2.5

3.0

3.5

1970 1975 1980 1985 1990 1995 2000

United States JapanCanada SwitzerlandUnited Kingdom GermanyFrance Italy

11 9 8 7 6

5245

3935 32

46 44 43 41

7 6 6 5 4

34 31 29 27 26

6 4 3 2 1 2 2 2 1 1 1

41 38 35 32 29

76 75 73 71 69

20 21 23 27 29

3339

4548 52

18 18 17 18

4 4 4 5 5

7 911 14 18

13 20 23 26 29

14 1519 23 24 18 21 23 23 27

24 27 30 32 35

20 21 23 25 27

60 60 58 54 52

8 9 9 10 9

16 16 16 16

49 49 48 51 51

45 42 41 39 37

5349 46 44 42

79 7972 69 68 76 74 72 72

18 18 18 18 18

2 3 3 3 3

10 10 10 9 9

6 7 7 7 8

11 12 13 13

41 40 42 40 40

57 9 9 10

28 28 28

6 7 7 8 8

3 3 4 4 4

16 17 18 19 19

68

2928

0%

20%

40%

60%

80%

100%

1995

1996

1997

1998

1999

1995

1996

1997

1998

1999

1995

1996

1997

1998

1999

1995

1996

1997

1998

1999

1995

1996

1997

1998

1999

1995

1996

1997

1998

1999

1995

1996

1997

1998

1999

1995

1996

1997

1998

1999

1995

1996

1997

1998

1999

1995

1996

1997

1998

1999

Belgium Canada France Germany Italy Netherlands Sweden Switzerland UnitedKingdom

United States

OtherDirect debitCredit transferCardCheque

4.4.F. Cashless payments, by instrument used, as a percentage of the number of non-cash transactions, 1995-1999

4.4.E. Velocity of money in certain developed countries, 1970-2001

Mo

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nd

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ag

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At the beginning of 2002, the Bank for Interna-tional Settlements (BIS) listed 125 central banksor monetary authorities - a considerably lower fig-ure than the 190 countries that are members ofthe United Nations. Each of these banks orauthorities has a separate history, is part of a dif-ferent institutional framework and has its ownparticular mandate. Just as each country is free tochoose its public institutions, it alone determineswhat form it will give its monetary authorities andwhat currency it will use.

The prerogatives of central banks vary from timeand time and from place to place, but most ofthem have the following main tasks. Firstly, theyare responsible for monetary policy, in otherwords for regulating the money supply in accor-dance with goals which are associated both withthe domestic economy and the external value ofthe country’s currency. Secondly, they are respon-sible for ensuring that the payment system oper-ates smoothly and for supervising the country'sfinancial and banking system. It is now generallyaccepted - although this may simply be a passingfashion - that in order to perform these tasks inthe best interests of the population, central banksshould enjoy a high degree of independence fromgovernments. This is in order to shield them frompressure of all kinds, including pressure from gov-ernments that seek to finance their deficits byprinting money, thereby boosting inflation.Although central banks are nowadays seen as theguardians of monetary stability, their indepen-dence from the political authorities is questionedwhenever a country suffers financial hardship orcrisis.

The world’s oldest bank, the Bank of Sweden, wasfounded in 1656, and the Bank of England some

forty years later, in 1694. It then took more than acentury for the Bank of France to be created (in1800), followed by the Swiss National Bank in1906 and the US Federal Reserve System in 1913.In 2002, four years after it was founded, the Euro-pean Central Bank introduced the euro, which hasset the seal on monetary union between twelvecountries of the European Union.

Although the circumstances in which these cen-tral banks came into being as institutions werevery different, their mandate (in the modern senseof the term) always includes two features. Thefirst is technical: the banknote, an inventionwhich sparked off the development of contempo-rary banks and financial institutions. The second,which is political, did not emerge until muchlater: the political will to establish a publicmonopoly on the issuance of money and to assignresponsibility for this to the central bank, whichthus becomes responsible for maintaining publicconfidence in the domestic currency.

As the issuing authority, the central bank recordsdomestic currency in circulation as a balance-sheet liability, and its reserves, which in account-ing terms are counterparts to its notes and coins,as assets. The types of assets that central bankscan hold are usually specified in national legisla-tion. They are divided into three categories:domestic securities, gold and foreign currency.The latter two categories are jointly known asinternational reserves.

In the days when currencies were tied to gold,central bank reserves were quite literally thecounterparts of the banknotes in circulation.However, any idea that the value of a currency wasbacked up by something outside the monetarysystem was finally swept away in 1971, when the


123

© Observatoire de la Finance, 2002; [www.obsfin.ch] Primary data: Thomson Financial, Datastream Advance; IMF, Annual Report; IMF, International Finance Statistics Grouping of countries: Fig. A cf Thomson Financial

0

100

200

300

400

500

600

700

800

900

1000

1970 1975 1980 1985 1990 1995 2000

Industrialized countries


Billionsof SDRs

0

10

20

30

40

50

1970 1975 1980 1985 1990 1995 2000

United States JapanCanada SwitzerlandUnited Kingdom GermanyFrance Italy

Billionsof USD

4.5.B. Gold stocks held by the central banks of certain developed countries at historical prices in billions of USD, 1970-2000

4.5.A. Foreign currency and gold reserves held by the central banks of developedand developing countries, in billions of SDRs (gold at current prices), 1970-2000

Cent

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and

the

ir in

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atio

nal r

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US government unilaterally declared that the dollar would no longer be convertible into gold.Despite this radical break with the past, centralbank reserves still play an important part in main-taining the credibility of a country’s monetary pol-icy on international markets.

From the point of view of the United States, whichissues the international reference and reserve cur-rency, the exchange rate of the dollar against othercurrencies has only a minimal impact on mone-

tary policy, and the same can be said (more orless) of the euro authorities. Other countries,however, must maintain sufficiently large interna-tional reserves to ensure that their central banks'exchange rate policies remain credible.

Thus the crisis surrounding the Thai baht - whichthen spread to the other "Asian tigers" - was trig-gered off in July 1997 by the markets' suspicionthat the Thai national bank’s figures on the level ofits international reserves were unreliable.


Gold and foreign currency are the two compo-nents of every central bank's internationalreserves. Each central bank has its own policyabout whether or not to publish data on the sub-ject. However, now that financial markets canmobilize speculative resources that far exceed thereserves of a medium-sized economy, regular pub-lication of figures on central banks' internationalreserves has become a crucial factor in maintain-ing international monetary stability. In 1999, inthe wake of the Asian crisis, the IMF tightened upits regulations on the publication of data concern-ing the state and composition of reserves. Accord-ing to the new Data Dissemination Standard, suchinformation must be published monthly and mustrelate to the situation in the month preceding thedate of publication. By the beginning of 2002, 45

countries (including the world's leadingeconomies) had adopted the standard.

The IMF traditionally receives figures on the levelof reserves from central banks. It standardizes andthen aggregates them, breaking them down intotwo components: gold and foreign currency.Unlike most central banks, which officially assess the value of their gold reserves at a historicalprice, the IMF publishes the value of gold stocksbased on the market price. The figures publishedby the IMF are in SDRs (Special Drawing Rights),a reserve currency administered by the IMF. Theinformation available on the subject can thus beconsidered reliable and do not raise any specificproblems of methodology other than the time laguntil publication, details of positions and the wayin which the value of the gold stock is assessed.

RECENT TRENDS

1. Southern countries' international reserves haveincreased sharply (Fig. A)

In thirty years (1970-2000) the world's interna-tional reserves (not including gold) increased sev-enteenfold from 100 to 1,700 billion SDRs(equivalent to less than 5% of global trade), whileglobal GDP was increasing by a factor of 10.7.

Over the same period, developed countries'reserves grew by a factor of 9, and those of devel-oping countries by a factor of 44. Until the late1980s, the annual rate of growth in developingcountries' reserves was considerably lower than indeveloped countries. At that point, however, thetrend was reversed, and in ten years (from 1990 to

125

© Observatoire de la Finance, 2002; [www.obsfin.ch] Primary data: Thomson Financial, Datastream Advance; IMF, Annual Report; IMF, International Finance Statistics

0

40

80

120

160

200

240

280

320

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

United States Germany

Canada France

Japan United Kingdom

Switzerland Italy

Billionsof SDRs

16% 19%15% 17%

21%

40%

58%

13% 8%10%

20%

19%

16%

9%

15%

7%

2%

2%

5%

3%

5%

36%

43%

30%

28%18%

18%

9%

5% 14%

17%

17%

10%

6%

6%

9%2%

14%

10%

17%

8%4%

6% 7%13%

8% 10% 9% 7%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1970 1975 1980 1985 1990 1995 2000

United Kingdom

Italy

France

Germany

Canada

United States

Japan

4.5.D. Distribution of the reserves held by the central banks of the G7 countries (gold at current prices), 1970-200

4.5.C. Changes in the reserves held by the central banks of certain developed countries, in billions of SDRs (gold at current prices), 1971-2000

Cent

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2000) developing countries' reserves grew five-fold, while those in developed countries onlyincreased by 75%. How can such a marked growthin developing countries' reserves be accountedfor? There are three possible explanations: (a)developing countries may have structural tradesurpluses with developed ones (however, this isclearly not the case, except for oil- exportingcountries); (b) the increase may reflect the influxof capital into developing countries throughdirect investment, debt or portfolio investment;(c) the “buffer” that the most exposed developingcountries have created in order to dissuade specu-lative attacks by the markets, which were respon-sible for (among other things) the Asian andRussian crises.

2. Gold is losing its monetary importance (Fig. A and B)

In 1971, when it was announced that the US dol-lar would no longer convertible into gold, the yel-low metal accounted for some 40% of globalreserves. By 2000 this figure had fallen to barely2%. This is the result of decisions, following thecollapse of the system of fixed exchange rates in1971, to demonetarize gold. These decisionsmeant that gold would no longer be used for pay-ments between central banks, and that the goldheld by central banks would be recorded at a historic price which would not be automaticallyadjusted to take account of fluctuations in its freemarket price. As a result of this differencebetween the historical price and the market price,the central banks built up considerable hiddenreserves. Today a growing number of centralbanks – as well as the IMF - are deciding toreassess their gold stocks and cash in some ofthese reserves.

3. The Bank of Japan is swimming in dollars (Fig. C and D)

Although in developed countries the monetaryreserves held by central banks have remained sta-ble, over the past fifteen years those in Japan haveskyrocketed - from 15% to 56% of the G8's total

foreign exchange reserves - despite the increasing-ly endemic weakness of the Japanese economy.This is due to the huge long-term trade surpluswhich Japan has built up with the rest of theworld, particularly the United States.


127VV. Capital markets. Capital markets

5.1 Stock market capitalization


5.3 Capital raised on stock markets

5.4 The bond and loan market

5.5 Derivatives


128



Just as certificates of ownership of commoditiesare negotiated on commodity or tradingexchanges, stocks are negotiated on stock mar-kets. Prices on such markets are determined bysupply and demand. The idea of bringing all themarket players together so that they can takeaccount of all the relevant information on theprices of commodities or stocks is not new. Thereare some who claim it existed as far back asancient Rome, but it first began to flourish inRenaissance Italy and has continued to developfrom the early sixteenth century right up to thepresent day. Today the term “stock market” meansan organized market for stocks (mainly shares,bonds and derivatives).

The rise of the stock market as we now know it isclosely linked to the spread of the joint-stockcompany as a form of business organization andfunding. Joint-stock companies raise capital byselling certificates (called shares) indicating thatthe bearer holds a share of the capital and is thusa co-owner of the business. Once issued, sharesare identical and freely transferable bearer certifi-cates, i.e. they can change hands without the busi-ness being directly involved. This means that thestock market no longer depends on how the busi-nesses concerned are operating, and as a resultshare prices become public information which isof interest to a wider circle of people than just theshareholders. As the volume of shares and trans-actions they handle increases, stock markets enterthe public sphere (even though legally speakingthey are still, in many countries, private compa-nies), for prices and transactions which directly orindirectly involve millions of people are undeni-ably matters of public interest.

The institutional consolidation of stock marketsin the various countries depends on how success-fully they are able to gain operators’ confidence.

This depends on two conditions: the technicalchoices they make must meet operators' require-ments, and there must be regulations and proce-dures in place to ensure that decisions aretransparent and impartial. In this connectionthere are four particularly sensitive areas:

• Conditions of admission to listing. Each stock mar-ket lays down conditions which businesses mustmeet in order for their shares to be quoted. At a min-imum these conditions concern the quality of thebusiness’s accounts, its operating results and thenumber of shares it intends to issue;

• Method of quotation. Share prices are the mostimportant "service" that a stock market provides. Itis vital that the quality of share prices be as high aspossible, i.e. that they be absolutely impartial and donot favour any of the parties to the transaction or anyother player. Today there are two ways of settingprices: (a) prices are set by the market authorities atfixed times on the basis of offers to buy or sell (thisarrangement is more suitable for smaller markets),and (b) continuous quotation, in which pricesrespond instantly to changes in buying or sellingconditions (this method presupposes a large volumeof transactions, and is mainly used by major worldstock markets).

• Membership. Historically, stock markets were pri-vate clubs in which certain securities were traded onan exclusive basis. In other words, any player seek-ing to buy or sell securities used one of the membersof the club as an intermediary and paid a commis-sion for the privilege. Previously organized as cooperatives, some stock markets are now turninginto joint-stock companies and can themselves bequoted.

• Public supervision. In almost every country, stockmarkets are subject to constant surveillance by apublic supervisory body with wide-ranging powers,whose task is to prevent any manipulation of mar-kets and prices (insider trading). This body helpsmaintain users’ confidence in the market.

5.1 Stock market capitalization

129

© Observatoire de la Finance, 2002; [www.obsfin.ch] Primary data: STANDARD & POORS, Emerging Stock Market Factbook; World Bank, World Development Indicators

52%

47%

7%

8%

17%

10%

16%

26%

9% 9%

0

5 000

10 000

15 000

20 000

25 000

30 000

35 000

40 00019

81

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

1981

2000

Total

Non-OECD

Rest of OECD

EU

United States

Non- OECD

Rest ofOECD

Japan

UnitedKingdom

United States

Billionsof USD

5.1.A. Global capitalization and the largest markets, in billions of USD, in per cent, 1981-2000

Sto

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It is a fairly simple matter to record the activitiesof a given stock market in statistics; all that is nec-essary is to record the transactions that take placethere. The quality of this primary informationthus depends on the technical capability of thestock market to record its own activities. Accord-ingly, the most direct statistical information abouta stock market is the total value of its transac-tions. However, when this figure is broken downinto two components - the volume of securitiestraded and the price level - difficulties arise owingto the variety of the securities quoted and fluctu-ations in prices.

Stock market capitalization is the commonest wayto determine the macroeconomic importance of astock market. It reflects the current value of allsecurities quoted at a given moment, i.e. the cur-rent value of all quoted businesses. It thus mea-sures one of the components of a country'swealth. Capitalization is calculated by multiplyingthe number of securities in circulation (ratherthan the number traded) by their prices.

Since they are in the public sphere, stock marketspublish basic data about themselves. The data can

be analysed in various ways:

• By identifying companies with head offices in thecountry concerned and thus assessing domesticcompanies’ market share. However, given the currenttrend towards international stock market mergers (aswitness the successful launch of Euronext in 2001),the link between stock markets and a particularcountry may in future be broken;

• By aggregating the data from several stock marketswithin a single country. This may lead to the compi-lation of figures on markets with very different sta-tuses and ways of operating, such as NASDAQ (asystem of over-the-counter trading in stocks of rela-tively small American companies) and the New YorkStock Exchange (which is reserved for major US andglobal corporations). During the 1990s, stock mar-kets specializing in medium-sized businesses werelaunched (under a variety of names) in a large num-ber of countries.

• By aggregating data at international level, as occursin the publications of the International Finance Cor-poration (IFC), a subsidiary of the World Bank. Theproblem here is which reference currency to adoptand which conversion rates to use.

RECENT TRENDS

1. Proliferation of stock markets

According to IFC figures published in 1981, therewere 47 countries with at least one stock market.Nineteen years later this figure had risen to 109.This increase reflects a fashionable trend whichhas swept through developing and transitionalcountries. From the 1980s until the crises of thelate 1990s, it was assumed (including by interna-tional financial agencies such as the World Bankand the IMF) that setting up a stock market wasbound to speed up development and facilitatetransition, since stock markets had a reputation

for attracting foreign portfolio investment andimposing standards of good governance on localquoted companies. All this was supposed to pre-pare the ground for an inflow of foreign directinvestment However, the crises of the late 1990sclearly revealed the limitations of such claims.

2. A more finance-oriented economy (Fig. A, B, C and D)

Stock markets have been at the heart of a pro-found change in the global economy, especially inthe OECD countries - namely, that it has become

131


0

500

1 000

1 500

2 000

2 500

3 000

3 500

4 000

4 500

5 000

1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Japan

United Kingdom

France

Germany

Spain

Billions of USD

5.1.B. Stock market capitalization in selected developed countries, in billions of USD, 1981-1999

0

50

100

150

200

250

300

350

1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Malaysia

Mexico

Thailand

Argentina

Russia

Billions of USD

5.1.C. Stock market capitalization in selected developing countries, in billions of USD, 1981-1999

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much more finance-oriented. Over the past twen-ty years, global stock market capitalization hasincreased five times faster than global product.This development has mainly taken place in theOECD countries, particularly the United States,where capitalization rose from 43% of GDP in1981 to 153% in 2000. In non-OECD countries,on the other hand, capitalization expressed as ashare of GDP remained hardly changed, increas-ing from 29% to 35% over the same period.

3. Higher turnover (Fig. E)

The above development has had a number ofeffects, including a significant increase in theturnover of quoted securities. This is the ratiobetween the total value of a stock market's trans-actions and its capitalization, and indicates whatproportion of securities has been traded each year.In 1981 the figure for the United States was 0.3,indicating that one third of securities changedhands that year, compared with barely one fifth onother markets. By 2000, the rate of turnover hadrisen sharply all over the world, particularly in theUnited States, where securities were traded twicea year on average. This reflects a significant reduc-tion in the average length of time that securitiesare held, which may be explained by increasedspeculation, encouraged by the reduction in com-missions on financial transactions.

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0

0.5

1.0

1.5

2.0

2.5

1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Total

Non-OECD

Rest of OECD

EU

United States

5.1.E. Number of transactions per year on an average share, 1981-2000

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

200%

1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

World

Non-OECD

Rest of OECD

EU

United States

5.1.D. Stock market capitalization as a percentage of GDP, 1981-2000

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The price of a share is the price at which it isnegotiated at a given moment in time. Numerousfactors contribute to the overall level of shareprices on a market, and to the level of individualprices. While some of these factors are peculiar tomarkets, others relate to certain types of sharesand still others to specific securities. As financegrows increasingly complex - both as a field ofknowledge and as a professional activity - the linkbetween a share price and the performance of theunderlying corporations (e.g. the value of itsassets or its profit expectations or forecasts)becomes increasingly tenuous. Since the mid-twentieth century, methods of valuing securitieshave become more and more elaborate, and nowtake explicit account of the risk and yield associ-ated with each one.

In today's world of globalized financial invest-ment, individual securities matter less than mar-kets seen in their entirety, particularly throughindexes. Stock market indexes are powerfulinstruments which can be used to synthesize vari-ations in the prices of a large number of securitieswhich are considered representative of an evenlarger group. The first stock market index wascreated by Mr Dow and Mr Jones in 1884, and hasbeen known since 1928 as the Dow Jones Indus-trial Average. At first it was simply an average ofthe stock prices of the eleven largest businesses onWall Street; in 1928 the number of businesses wasraised to 30, and has not changed since.

The structure of an index depends on two impor-tant choices. The first concerns the profile of theindex, i.e. the reality it seeks to apprehend. Thesecond concerns the method of calculation. Herethere are two conceivable methods: either theindex weights selected share prices in reference tosuch factors as capitalization, or else - like the cel-ebrated Dow Jones index – it gives each security

the same weight. If the coefficient method isadopted, the question remains how the coeffi-cients are to be calculated. In most modern index-es, stock coefficients are based on capitalization,as in the famous SP500 (Standard & Poor's 500Index) which covers some 75% of US stock mar-ket capitalization (Wall Street, NASDAQ, etc.). Ofthe weighted indexes, some (the Laspeyres type)set out from the initial situation, whereas others(the Paasche type) prefer continual updating.

Nowadays, most stock markets calculate indexesthat reflect the activity on their particular market.Apart from the "official" indexes run by the stockmarkets themselves, banks and other providers offinancial services offer investors an entire range oftransnational indexes, each with their own specif-ic geographical and/or sectorial features. Theglobal proliferation of stock market indexes overthe past twenty years is the result of (a) improvedcomputing capacity and (b) the increasing use ofstock market indexes in asset management strate-gies.

Stock market indexes have now become full-fledged management tools and play an increasing-ly important part in portfolio managementstrategies. The level of the index is a benchmarkperformance level which any manager who seeksan end-of-year bonus is expected to achieve anddoes his best to beat. Financial institutions havedevised computer techniques to help managersmake real-time adjustments to their portfolios inresponse to fluctuations in the index. Such pro-grammes adjust the make-up of portfolios on thebasis of price changes and the structural parame-ters of the index. At the same time, indexes havethemselves become the subject of speculation,and forward transactions on stock market indexeshave begun to emerge since the early 1980s.Unlike forward contracts or options whose


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0

500

1 000

1 500

2 000

2 500

3 000

3 50019

73

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

Italy France

United Kingdom Japan

Germany United States

Switzerland World

1973 = 100

5.2.A. Changes in stock market indexes on the main markets, as an index, 1973-2001

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underlying assets are individual securities, theseforward operations are based on a composite

underlying asset corresponding to the composi-tion of the index.


Given the importance of indexes in present-dayfinancial practice, the methods of calculation andthe rules governing their composition need to befully transparent and accessible to all market play-ers. Changes in the choice of securities or inweighting are based on preset rules, and areannounced and substantiated. Professionalism isessential in this area, not only because investorsuse the index for their own management purpos-es, but also because it is important to listed busi-nesses to have their shares included in an index.

The structure and composition of the index willlargely depend on its claim to be representative ofa larger whole, e.g. a market or a sector of theeconomy. Thus, in addition to classic (geographi-cal or industrial) indexes which claim to be high-ly representative, there has been a proliferation of

thematic indexes in recent years. These make noclaim to be representative, but list companies onthe basis of how they behave with regard to theenvironment, social welfare, ethics and so on.Their aim is always the same, namely to create abasket of securities that are distinct from those onthe market, by a judicious choice of characteris-tics. They thus seek to identify the main players ina given sector. In some cases they may even beexhaustive, i.e. include all the businesses withcertain features. Once compiled, the index ismaintained daily by its owners, who calculate andpublish it. They are constantly on the alert, forunforeseen events may force them to take certaincompanies off the list and replace them with oth-ers.

RECENT TRENDS

1. Stock market prices have shot up (Fig. A and B)

In the course of history, stock market indexeshave been marked by a succession of crises. How-ever, despite temporary reversals (as in October1987), the last twenty-five years of the twentiethcentury were particularly favourable to stock mar-kets, with index levels rising much faster thanGDP in the countries concerned. This long-termtrend, in which there have admittedly been one ortwo dips since the beginning of 2001, is due to acombination of at least two factors: (a) a verymarked increase in the availability of funds forstock market investment, owing to the growth of pension funds and the tendency of banks toreduce lending and deposit collection; and (b) changes in ways of assessing the value of stocks,

with appraisals of a business’s past performancemaking way for forecasts of its future perfor-mance. In other words, a fundamental change hastaken place on one hand in the way the value ofstocks is assessed by the market, and on the otherin the way companies present their accounts (cre-ative accounting in the 1980s) and inform themarket about their prospects.

2. Price/earnings ratio (Fig. C)

One of the classic ways to put share prices in per-spective is to express them in terms of the numberof years theoretically needed for the business'soperating profits divided by the number of sharesto equal the share price. This price/earnings ratiois thus influenced both by how well the company

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0

500

1 000

1 500

2 000

2 500

3 000

3 500

4 000

1973 1976 1979 1982 1985 1988 1991 1994 1997 2000

Nasdaq Composite Index

Datastream US market Index

S&P 500 Composite Index

Dow Jones Industrials Index

1973 = 100

5.2.B. Changes in various indexes on the US market, as an index, 1973-2001

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is performing and by the level of share prices.When the economy is in recession, price/earningsratios tend to rise sharply. Nevertheless, despitefluctuations, there has been a tendency for thenumber of years of profit needed in order to reachthe share price level to increase throughout thelast quarter of a century. This cannot be account-ed for in strictly economic terms; it is a passingfashion magnified by operators' herd instincts,rather than the result of the way in which modernbusinesses are run.

3. Irrational exuberance?

In December 1997, the chairman of the FederalReserve (the US central bank) referred to the“irrational exuberance” of the stock market. Thispassing comment in the middle of a speech sentthe markets into shock, for it indicated that themonetary authorities were concerned about stockmarket euphoria and might be about to take cor-rective action. These fears proved unfounded andprices began rising once again, but the questionremains. Stock market indexes can also be seen asindexes of inflation in the prices of financial assets(technically speaking, the two are similar), whichwould explain why the monetary authoritiesshould be concerned about a sharp increase instock market prices, just as they would be con-cerned about a sharp increase in consumer prices.

4. Increasingly correlated markets (Fig. A)

The key phrase in modern finance is diversifica-tion of risk. This means spreading assets in a port-folios not only on the basis of each security'srisk-to-yield ratio, but also so as to ensure that therisks to which the various securities are exposedare not correlated. When they are not correlated,the prices of the various stocks change indepen-dently of one another, and if one of them falls itwill only have a minor impact on the portfolio asa whole. If, on the other hand, the portfolio con-tains highly correlated securities, there is a con-siderable likelihood that all the stocks in theportfolio will move upwards or downwards atonce.

Seeking to diversify their investments, operatorsare on the lookout for assets which are not highlycorrelated. However, globalization of the economy- and especially of finance - has made stock mar-kets increasingly interdependent and has thusreduced opportunities for diversification. This iseven true of emerging markets which, except intimes of local crisis, are increasingly aligned withOECD markets.

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10

20

30

40

50

60

70

8019

73

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

World United States

Japan Germany

France United Kingdom

Switzerland

Share price as number of years of profits (P/E ratio)

5.2.C. Long-term changes in price/earnings ratio (ratio of share price to profits per share), 1973-2001

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5.3 Capital raised on the stock market


In order to understand the part the stock marketplays in the economy, one must look at it in thewider context of the financial system, of which itis a key component. According to one standarddefinition, the financial system (be it local orglobal) performs a number of essential functionsin a modern-day economy: (a) procuring paymentservices; (b) mobilizing savings; (c) allocatingfinancial resources; and (d) managing, pricing,structuring, grouping and negotiating risk. Look-ing back at the history of the OECD countries,one can identify two kinds of financial system:one in which the key role is played by banks, andone in which it is played by financial markets,particularly stock markets.

• When it is banks that bear primary responsibility forfinancing the economy, they collect households' sav-ings, grant loans to government and businesses,assess the risks involved in projects and take onthose risks in return for appropriate rates of interest.Such banks are referred to as "universal", in thesense of "multi-purpose". They provide all thefinancing services the players require, and remain inpermanent, long-term contact with the depositorsand the users of the funds. This type of system hastraditionally developed in mainland Europe andJapan.

• When it is financial markets that are responsible forconverting savings into investment and for manag-ing risks, transferable, negotiable stocks become thekey instrument in the financial system. In order to

obtain finance, business and government bodiesissue negotiable securities. Savers buy them, andhence have most of their assets in this form. Onceissued, the securities are constantly traded on orga-nized markets. Risk is thus managed in real time bycontinual reallocation in response to changes inprice. This type of system has traditionally devel-oped in the English-speaking countries, particularlythe United States and the United Kingdom.

Since the early 1980s, the rapid expansion of thefinancial sector has been accompanied at globallevel by a phenomenon known as "securitization",i.e. the replacement of non-negotiable debts andreceivables (typical of a bank-centred system) bynegotiable securities. Large-scale recourse to secu-ritization has enabled international banks toimprove their risk management strategies, but atthe same time it has increased the influence offinancial markets at global level. This trend hasled to the gradual emergence of a global financialsystem based on markets rather than bankinginstitutions. Banks are increasingly confiningthemselves to the role of intermediaries and ser-vice providers, and at the same time they are lessand less involved in collecting savings and aboveall in granting loans (and taking on the associatedrisk). Given the profound changes taking place infinancial systems, it must be wondered to whatextent stock markets are still an accessible sourceof funding for companies.


Not all stock markets publish data on the amountof capital raised by businesses. The informationgathered by the International Federation of StockExchanges (FIBV) is therefore very fragmentary,

and in any case does not go back beyond the early1990s.

Statistically, the amount of capital that businessesraise on a given stock market can be measured

141

15%

26%

13%

11%12%

4%

11% 14%

9% 6%

36%

18%

13%

4%9%

0

10 000

20 000

30 000

40 000

50 000

60 00019

81

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

1981

2000

World

Non-OECD

Rest of OECD

EU

United States

Non- OECD

Rest ofworld

Japan

UnitedKingdom

UnitedStates

India

Romania

CanadaNumber of listed companies

39%46%

51%

31%

44%51% 49%

38% 37% 40%

51%

23%

28%

45%28%

22%19%

34%31%

39%

2%

3% 4%2% 5%

2%2% 12%

2%

7%

15%

9% 11%

12% 8%

11%11%

10% 8%

3%

15%9% 9%

14% 14%19%

14%10% 11%

0

50

100

150

200

250

300

350

400

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

Non-OECD

Rest of OECD

Japan

EU

United States

Billions of USD

5.3.B. Capital raised on world stock markets, in billions of USD and by region in per cent, 1991-2000

5.3.A. Changes in the number of listed companies by major region, in units and in per cent, 1981-2000

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either in net or in gross terms. In net terms, anyshares bought back by businesses are deductedfrom the amount of capital raised, whereas ingross terms they are not. Capital is raised in two

different contexts: when a company is first quotedon the stock market, and when an already quotedcompany issues additional shares in order toincrease its own capital.

RECENT TRENDS

1. The number of quoted businesses is increasing(Fig. A)

The number of businesses quoted on stock mar-kets around the world has risen from 22,000 to50,000 in the space of nineteen years. In the Unit-ed States, on the other hand, the number hasremained more or less unchanged. Although someof the increase (9,000) has been in other OECDcountries, the bulk of it has come from non-OECD countries. This suggests that access bybusinesses to stock market finance has particular-ly improved in developing countries.

2. The influence of developed countries (Fig. B)

A regional breakdown of capital raised on stockmarkets clearly shows that developed countriesclaim the lion's share, accounting for 70% to 90%of the total volume in any given year. Even thoughthe percentage of new financing in their stockmarket turnover is tending to decline, their sheersize is such that the amounts they raise are stillconsiderable in comparison with the rest of theworld. Following a series of financial crises, thedevelopment of stock markets in certain emergingmarkets has ground to a halt.

3. The share of new financing is declining (Fig. C and D)

On OECD stock markets, new capital raised bybusinesses seldom accounts for more than 10% ofstock market transactions, and averages between3% and 5%. The peaks recorded by some marketsin developed countries in the 1990s were associ-ated with major privatization schemes, particular-ly in France and Italy. Despite temporaryenthusiasm for the "new economy", stock

markets are now generally reluctant to give busi-nesses additional capital and prefer to concentrateon risk management, performing endless changeson the makeup of individual portfolios.

4. New issues by existing businesses are preferred

Globally, over the past ten years, stock marketshave given more capital to existing businessesthan to newly created ones. This is particularlytrue of markets in developing countries. Those indeveloped countries, on the other hand, seemmore prepared to take risks: there the share ofnew issues by existing companies never exceeds70% of total financing.

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0%

5%

10%

15%

20%

25%

1992 1993 1994 1995 1996 1997 1998 1999 2000

United States Canada

Germany France

United Kingdom Italy

Two-year moving average

0%

10%

20%

30%

40%

50%

60%

1992 1993 1994 1995 1996 1997 1998 1999 2000

Malaysia Thailand

Indonesia Mexico

Philippines

Two-year moving average

5.3.D. Capital raised in some developing countries, as a percentage of stock market turnover, 1992-2000

5.3.C. Capital raised in OECD countries, as a percentage of stock market turnover, 1992-2000

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144



A bond is a certificate of indebtedness which rep-resents a fraction of a loan by a private or publicdebtor. Like a bank loan, a bond stipulates theamount of the debt, the date on which it will falldue, and the terms on which the creditor will berewarded. Unlike bank loans, bonds are bearercertificates, which means that they are negotiableand can be continuously quoted on marketsaccording to the debtor’s creditworthiness, thematurity of the bond and the terms of reward. Inmost countries, public bond issues (like shareissues) must be authorized by the supervisoryauthorities. Only highly reputed debtors - such asgovernment institutions - are allowed to makesuch use of the general public's savings.

The size of the bond market varies not only fromcountry to country, but also from period to peri-od. It depends on two features of the country'sfinancial system: the degree of securitization, andlocal habits when it comes to financing govern-ment deficits. The greater the degree of securitiza-tion, particularly with regard to governmentdeficits, the more likely it is that the bond marketwill have a major part to play.

Bond issues have traditionally been a favouriteway for governments to finance their budgets, butfor some time now they have also been used byprivate issuers such as banks and non-financialbusinesses. Until the end of the 1960s, interna-

tional bond issues - such as the famous "Russianloans" at the start of the twentieth century - weresingle events; there was still no such thing as aninternational bond market. International bondissues were mainly carried out by governments ofcountries whose financing needs exceeded theirdomestic funding capability. The loans were guar-anteed by specific earnings such as customs dutiesor postal revenue. Bonds for German reparationsafter the First World War are another well-knownpage in the history of international loans. In fact,the Bank for International Settlements (BIS) wasset up to guarantee loans issued after Germany'sreparation debts were restructured. From the late1960s onwards, with the emergence of the Euro-market and, in its wake, Eurobonds, internationalloans expanded and rapidly became common-place.

Today the international loan market includes alldebt instruments (bank loans and bonds) where-by residents of a country raise funds in foreigncurrency and foreign borrowers issue securities indomestic currency. Apart from bank loans, theinstruments used on this market are:

• money market instruments (12% of the total in2000) such as repo agreements, Euro-commercialpaper and other very short-term Euro-notes;

• classic bond instruments, such as the full range ofEurobonds or even Euro-convertibles.

5.4 The bond and credit market


Unlike with the stock market, it is difficult tospeak of capitalization of the international bondmarket, for two reasons: (a) the market is notorganized, so transactions take place over the counter; (b) issued bonds vary greatly as regards

currency, maturity and terms of repayment andremuneration, which makes continuous assess-ment of their overall value very difficult. Thus thefigures usually produced by national and interna-tional monetary and banking authorities measure

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5 000

10 000

15 000

20 000

25 000

30 000

1993 1994 1995 1996 1997 1998 1999 2000 1993 1994 1995 1996 1997 1998 1999 2000

Private sector

Public sector


Other developed countries

Europe

Japan

United States

Domestic markets International markets

Billionsof USD

82%

87%

86%

88%

88% 96

%

99%

95%

98%

102%

107%

106%

110%

111% 11

9%

121%

118%

121%

8% 12%

14%

16%

15%

19%

20%

20%

20%

8%

9% 9% 11%

12% 15

% 18%

20% 23

%

8%

9% 9% 10%

12% 14

% 17%

21% 26

%

7%6%6%6%4%3%3%2%

2%

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

1993

1994

1995

1996

1997

1998

1999

2000

2001

1993

1994

1995

1996

1997

1998

1999

2000

2001

1993

1994

1995

1996

1997

1998

1999

2000

2001

Outstanding domestic bonds Outstanding domestic bonds Outstanding domestic bondsOutstanding international bonds Outstanding internationals bonds Outstanding international bonds

% of GDP

World

Developed countries


5.4.B. Outstanding bonds expressed as a percentage of GDP, by region, 1993-2000

5.4.A. Outstanding bonds on national and international markets, by type of debtor, in billions of USD, 1993-2000

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the amounts outstanding rather than the totalmarket value of bonds in circulation. Conse-quently, these figures do not take account of priceeffects, which may lead to major discrepancies inrelation to market value, especially at times wheninterest rates or returns are highly volatile. Anoth-er way to analyse the bond market is to record theflow of new issues. Expressed in net terms - i.e.after subtracting repayments - issues over theperiod equal the change in total amounts out-standing over the same period.

The BIS produces quarterly statistics on interna-tional loan activities by aggregating the informa-tion provided by national authorities as well as by

private or semi-private bodies such as the Inter-national Securities Market Association. In aggre-gating these figures the BIS faces three majordifficulties: gaps and inconsistencies in nationalstatistics, shifts in exchange rates, and the processof financial innovation which means that any clas-sification must be constantly adapted. That iswhy, in 1999, the BIS ceased producing statisticson international banking commitments, and con-fined itself to figures on the international bondmarket. It is therefore not surprising to find thatevery institution which publishes figures of thiskind revises them retrospectively at frequentintervals.

RECENT TRENDS

1. Rapid growth in private international bonds (Fig. A, D and E)

The bond market is still mainly a domestic phe-nomenon, although the international market hasincreased from 10% of the total in 1993 to justover 20% in 2000. Between 1993 and 2000 theoutstanding amounts of domestic bonds rose byless than 50% (an average of about 6% a year),while those of international bonds increased by213% (18% a year). In terms of issues, this repre-sented an average growth rate of 36%. Almost twothirds of this growth (62%) is accounted for bybanks and financial institutions, which haveturned to the international bond market as theirusual sources of deposits have stagnated. Non-financial corporations have also resorted to theinternational bond market on a large scale, espe-cially since 1996, to finance what are in manycases mammoth projects, such as the purchase ofUMTS (Universal Mobile TelecommunicationsSystem) licences. Meanwhile, international publicissues have remained relatively stable.

2. Bonds: a source of funding confined to developedcountries (Fig. B, C and F)

Bonds are still the classic source of public sector

funding (over 60% of amounts outstanding),whereas the corresponding figure on the interna-tional market is only 25%. This difference is dueto the fact that, in countries where financial mar-kets are liquid, the government mainly turns tothe domestic market. This is not the case in othercountries, particularly developing ones, whichhave no option but to issue their bonds on theinternational market. Despite this, issues byemerging countries are still only a marginal fea-ture of international markets.

Expressed as a share of GDP, the total value of out-standing amounts of bonds increased consider-ably between 1993 and 2001, especially indeveloped countries where it rose from 110% to147% of GDP. In developing countries the rate ofgrowth was only half as great. This shows thatbonds are mainly a source of funding in countrieswhere financial markets are sufficiently welldeveloped for borrowers to approach them direct-ly, without going through banks. There has alsobeen some growth in issues by institutions whichare domiciled in off-shore centres but do not havetheir head offices there: 8% of amounts outstand-ing on the international market are accounted for

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27%

54%

64%

65%

63%

54%

70%

65%

60%

55%

69%

41%

28%

22%

16%

26%

18%

22%

25%

16%

3% 6% 8% 13%

22%

19%

12%

14%

15%

0

100

200

300

400

500

600

700

800

900

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Banks and financial institutions

Public sector and international institutions

Non-financial corporations

Billionsof USD

1 229

2 226

2 573

6 288

17%

31%

35%

87%

260

90

383

4877%

1%

4%

5%

0 1 000 3 000 5 000 7 000

Off-shorecentres

Other countries

International institutions

Other developed countries

Japan

United States

Europe

Developedcountries

Billionsof USD

2001

5.4.C. Outstanding international bonds,by issuer’s nationality, 2001

5.4.E. Net bond issues on the international market, by type of issuer, in billions of USD, 1992-2001

0

200

400

600

800

1 000

1 200

1 400

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

International bond issues

New bank loans (net)

Billionsof USD

non

disp

onib

le

non

disp

onib

le

5.4.D. New bank loans and internationalbond issues, 1985-2000

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by off-shore centres, but only 1.5% by institutionswith head offices there.

3. The euro is catching up with the dollar (Fig. G)

The US dollar is still the key currency, with 49%of amounts outstanding quoted in dollars in 2000- an increase of 23 percentage points since 1994.However, the euro has made great strides since1999, and by 2000 it was already the second mostimportant currency on these markets, well aheadof the yen and the pound sterling.

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-100

0

100

200

300

400

500

600

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Off-shore centres Emerging economiesInternational institutions

Developed countries Europe Japan United States

Billionsof USD

-100

0

100

200

300

400

500

600

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

USD

Euro area currencies

Yen

Other currencies

Billionsof USD

5.4.G. Net bond issues on the international market, by currency, in billions of USD, 1992-2001

5.4.F. Net bond issues on the international market, by region, in billions of USD, 1992-2001

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The broad definition of a derivative is a contractspecifying the parties' rights and obligations inrespect of an "underlying" asset (which is usuallyfinancial). The derivative is based on the differ-ence between the time when the contract isentered into and the time when the specific rightsand obligations take effect. Thus, in the interval,the derivative itself becomes a financial assetwhose value depends on the financial perfor-mance of the underlying asset, which may be ofvarious kinds: shares, raw materials, currencies,stock market indexes or interest rates.

Above all, derivatives are risk management instru-ments, for they enable operators to transfer cer-tain kinds of financial risk to other operators whoare better equipped to handle it. The most com-monly used derivatives concern risks, i.e. changesassociated with the underlying assets (rates ofinterest, exchange rates, prices of raw materials orshares). Derivatives can be classified in variousways, particularly by type of risk or category ofunderlying asset and by type of instrument. In thelatter case, the two main categories of derivativesare forward contracts and options:

• The parties to a forward contract agree to exchangea predetermined quantity of assets or goods on agiven date, at a predetermined price. The value ofsuch a derivative thus changes according to the dif-ference between the price of the underlying asset asspecified in the contract and its market price. A for-ward contract may involve a large number of under-lying assets such as currencies or interest rates.Standardized forward contracts traded on organizedmarkets are known as "futures". Another type of for-ward contract is the "swap". Here the parties agree toexchange, over a given period, flows of interest payments at predetermined rates, each calculated on a different basis (at the fixed or the variable rate,for instance) but in relation to the same "notional"sum, which is never exchanged. Here again, the

commercial value of the swap depends on the differ-ence between the interest rates specified in the con-tract and those prevailing on the market. At the endof a forward contract, each party - depending on howthe market has moved - may be both a winner and aloser, which gives the contract a certain symmetry.

• An option is a contract whereby, in return for a pre-mium, the buyer becomes entitled, but not obliged -this is the difference between an option and a for-ward contract - to buy (a "call" option) or sell (a"put" option) the underlying asset at a contractuallyspecified price, on or before a predetermined date.Here again, the value of the contract fluctuatesbetween the time it is entered into and the time itexpires, according to the difference between the mar-ket price of the asset and price specified in the con-tract. However, unlike forward contracts, options areasymmetrical, for the seller incurs an obligation,whereas the buyer only acquires an entitlementwhich he can exercise or not as he sees fit. This enti-tlement is thus an asset.

From the point of view of financial technique,derivatives expose the parties to the risk of gainsor losses several times greater than the value ofthe actual contract. The leverage associated withderivatives can only be mastered by highly skilledoperators - especially as it is quite normal onfinancial markets for intermediaries to deviseeven more complicated instruments on the optionand forward contract principle, sometimes com-bining a large number of underlying assets inorder to meet a client's need to cover or transferrisks. Standardized instruments which are tradedon organized markets and are thus continuouslyquoted are known in the profession as "plainvanilla" derivatives, unlike more sophisticatedinstruments which are traded over-the-counter(OTC).

The history of derivatives - particularly forwardcontracts - goes back many centuries. According

5.5 Derivatives

151

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Average total daily turnover notional value, in billions of USD

Number of countries covered by the BIS survey 21 26 26 48 48

April 89 April 92 April 95 April 98 April 01

Total turnover on OTC na na 880 1263 1387

Foreign exchange derivatives na na 689 959 853

Outright forwards and forex swaps na na 643 862 786Currency swaps na na 4 10 7Options na na 41 87 60Other na na 1 0 0

Interest rate derivatives na na 151 265 489

Forward Rate Agreements (FRA) na na 66 74 129Swaps na na 63 155 331Options na na 21 36 29Other na na 2 0 0

Estimated gaps in reporting na na 4 13 19

Total turnover on organized markets na na 1222 1373 2179

Currency contracts na na 17 12 10

Interest rate contracts na na 1205 1361 2169

For information,

Total turnover on traditional exchange rate instruments

590 820 1190 1490 1200

Spot transactions 317 394 494 568 387Foreign exchange swaps 190 324 546 734 656Outrignts forwards 27 58 97 128 131Estimated gaps in reporting 56 44 53 60 26

Data adjusted for local and cross-border double counting

5.5.A. Over-the-counter and organized market turnover in derivatives, 1989-2001

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to experts they were already used inMesopotamia, and then more widely during theMiddle Ages and the Renaissance. Until the1960s, derivatives were essentially limited to for-ward contracts on commodities, and were onlyused by those with expertise in the relevant mar-kets. However, in the 1970s, in response to theliberalization of exchange rates and financialinnovation, a wide variety of new instrumentscame into being and the volume of dealings in

derivatives grew explosively. Deregulation andinternationalization of the financial sector and thedevelopment of information technology fed awave of financial innovation which has persistedsince the 1970s. As a result, numerous derivativeshave been standardized for trading on organizedmarkets such as the Chicago Board of OptionsExchange (the first market on which options arecontinuously quoted), which was opened in 1973.


It was only in the mid-1980s that monetary andfinancial supervisory authorities turned theirattention to derivatives. In a report published in1986, the Bank for International Settlements (BIS)expressed concern about the structural changesoccurring in global finance. The report stressedthat "disintermediation", coupled with financialinnovation (particularly with regard to deriva-tives), had transferred a considerable amount offinancial activity off banks' balance sheets, there-by extending the notion of risk beyond operators'balance-sheet commitments. It was at this pointthat banking supervisory authorities began to takea closer look at derivatives at international leveland to measure them as exhaustively and coher-ently as possible.

Since 1986 the BIS and the IMF have drawn upstatistical series which allow the impact of deriva-tives to be monitored. However, three major diffi-culties remain:

• How to draw up an accurate classification of deriva-tives, given their great variety. Only a small propor-tion of derivatives are standardized ("plain vanilla");

most transactions involve extremely sophisticatedproducts. In order to be properly analysed, thesederivatives must therefore be broken down into theirprimary components – a complex process.

• The prevalence of OTC transactions (ones that donot take place on organized markets). This meansthat the supervisory authorities must now lookbeyond at the institutions (banks and markets) thatthey are traditionally required to monitor. To copewith this problem, the BIS has held three-yearly sur-veys among all operators since 1986, most recentlyin 2001.

• How to assess the importance of a given derivative.There are two alternative methods, although asthings stand it is not possible to gauge the coherenceof the resulting information. The BIS publishes dataon the turnover realized on derivatives in a singleday (in terms of the notional value of the underlyingassets, the prices of contracts and the number of con-tracts), whereas the IMF focuses on the number ofoutstanding commitments (in terms of notionalvalue) on a given date. Each of these methods isbased on a different approach, and may result in dif-ferent assessments.

RECENT TRENDS

As we have seen, systematic use of derivatives is arecent phenomenon. The available statisticalseries are therefore short, and the trends theyreveal can be no more than medium-term.

1. OTC transactions are taking over (Fig. A and E)

In terms of the total value of notional commit-ments, OTC derivatives have taken over fromones traded on organized markets. Between 1987

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84%

79%

73%

65%

55% 61

%

58%

56%

54%

52%

48%

51%

53%

51% 58

%

2%

2% 14%

14%

20%

20%

24%

23%

21%

24%

28% 29

% 32%

29%

29%

14%

19% 13

%

20%

24% 19

%

18%

21%

24%

21%

22% 18

% 13%

18% 11

%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%19

86

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

0

2 000

4 000

6 000

8 000

10 000

12 000

14 000

16 000

18 000

Other

Asia and Pacific

Europe

North America

Billionsof USD

56.0

22.3

13.8

32.8

18.1

73.8

53.2

79.7

45.8

34.4

42.1

11.3

170.8

90.9

162.0

67.0

97.0

275.0

135.0

6.0

22.0

21%

8%

5%

12%

7%

27%

20%

17%

10%

7%

9%

2%

36%

19%

21%

9%

13%

3%

1%

36%

18%

0 100 200 300

Other

France

Germany

Japan

Singapore

United Kingdom

United States

April 2001

April 1998

April 1995

Billionsof USD

5.5.C. Total daily value of over-the-counter transactions, by operator’s location, in billions of USD, 1995-2001

5.5.B. Organized markets, notional value of commitments, by operator’s location, in billions of USD, 1986-2000

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and 2001 the share of derivatives traded on orga-nized markets fell from 45% to 13% of the total.This has caused serious problems for regulators;whereas risk exposure on organized markets isreduced by insistence on guarantees (margincalls), this is less common in the case of OTCtransactions. However, when the daily turnoveron OTC derivatives and those traded on organizedmarkets are compared, the figures are reversed(only 39% for the former and 61% for the latter).This is because the two types of transaction do notinvolve the same instruments.

2. Dealings involving interest rates on organizedmarkets (Fig. D)

Again in terms of notional exposure, the share ofderivatives relating to interest rates increasedslightly over the period, from 83% to 96% of thetotal amounts exposed to risk through derivatives.This trend reveals the increasing complexity ofglobal finance, particularly through the interna-tionalization of private financial institutionswhich manage their overall exposure in relationto a considerable number of interest rates. How-ever, comparison of the volume of commitmentsand daily turnover on derivatives relating to inter-est rates and foreign exchange transactions sug-gest that dealings involving foreign exchangetransactions are almost 18 times more volatilethan ones involving interest rates.

3. Competition between financial centres (Fig. B and C)

Because they are so numerous and so short-lived,derivatives are major sources of income for theintermediaries who earn commissions on them, and such dealings are therefore the subject offierce competition between financial centres.Since the mid-1980s, European centres – withLondon leading the way - have greatly increasedtheir share of both OTC and organized trading, atthe expense of the United States and Asia. Itshould also be noted that other financial centres -particularly off-shore ones - have increased theirshare of OTC dealings.

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0

10 000

20 000

30 000

40 000

50 000

60 000

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

OTC traded instruments

Interest rate swaps and options

Foreign currency swaps

Exchange-traded instruments

Interest rate futures and options

Foreign currency futures and options

Stock market index futures and options

Billionsof USD

12%12 626

1% 1 493

0.1%96

59%64 668

14%15 666

11% 12 313

2%1 891

1% 662

0 10 000 20 000 30 000 40 000 50 000 60 000 70 000

Interest rate

Stock market index

Currency

Interest rate

Foreign currency

Other

Shares

Commodity

Org

aniz

ed

mar

kets

(13

%)

OT

C (

87%

)

Billions of USD

5.5.E. Notional value of commitments, by type of derivative instrument, in billions of USD, 2000

5.5.D. Selected derivatives, notional value of commitments, in billions of USD, 1987-2000

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A foreign exchange transaction can be defined asthe sale of one currency in return for the purchaseof another. Traditionally, when foreign currencyhad to be obtained in order to purchase imports,or when export earnings had to be converted intodomestic currency, cross-border movements ofcapital and foreign trade were accompanied byforeign exchange transactions. During the 1960sthe international monetary order set up as a sys-tem of fixed exchange rates at the end of the Sec-ond World War became noticeably less rigid aspurely financial international transactions, epito-mized by the emergence of the eurodollar, multi-plied. In the early 1960s banks outside the UnitedStates began to accumulate large deposits of USdollars, and started to use them for loans - in dol-lars or other currencies - to non-banking clientsoutside the USA. The Euro-market was born.

By making it possible to lend and borrow foreigncurrency, the Euro-market opened up the door toa wide range of arbitrage transactions betweencountries and currencies. These new opportuni-ties increased the international mobility of finan-cial capital, particularly as the Euro-marketoperated in a legal vacuum. At the time no nation-al legislation was able to control national banks'transactions in foreign currency or non-resident

banks' transactions in domestic currency. TheEuro-market based its foreign exchange transac-tions on a purely financial rationality which hadno connection with trading and foreign directinvestment needs. Meanwhile, the expansion ofinternational finance and the foreign exchangetransactions that this involved helped to bringabout the collapse of the Bretton Woods system insummer 1971. Currencies were henceforth fully-fledged financial assets and became part of inter-national asset management strategies. Thefundamental question of how foreign exchangetransactions have contributed to exchange ratestability (or instability) remains unanswered.

Technically speaking, foreign exchange transac-tions take a number of forms, which differ accord-ing to how the risk is distributed between theparties:

• cash transactions (the most common);

• forward transactions (in which the terms of thetransaction are set in advance, even though the actu-al exchange will only take place at a later date);

• swaps (in which the parties exchange two cash sumsin different currencies and agree to make the reversetransaction at a later date).



Strictly speaking there is no such thing as a for-eign exchange market. Instead, there are operators- banks, transnational corporations and financialintermediaries - linked by an efficient, thoughcostly, information network which permanentlyindicates the exchange rates at which currenciesare offered or demanded. The volume of foreign

exchange transactions within the network is noteasy to quantify, owing to its huge size and theover-the-counter nature of its transactions, whichalso give it considerable flexibility. Thus, withinhours of the 11 September tragedy, almost all for-eign exchange transactions quit the United Statesand moved across the Atlantic.

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© Observatoire de la Finance, 2002; [www.obsfin.ch] Primary data: BIS, Triennial central bank survey of foreign exchange and derivatives market activity in 2001; BIS, Annual Report

Average daily turnover (April) in billions of USD

Total reported gross turnover 907 100% 1 293 100% 1 864 100% 2 37 100% 1 863 100%

Adjustment for local double counting -189 -21% -217 -17% -292 -16% -368 -16% -245 -13%

"Gross-net" turnover, net of localdouble counting

718 79% 1 76 83% 1 572 84% 1 969 84% 1 618 87%

Adjustment for cross-borderdouble counting

-184 -20% -300 -23% -435 -23% -540 -23% -445 -24%

"Net-net" turnover 534 59% 776 60% 1 37 61% 1 429 61% 1 173 63%

of which: cross-border transactions … 392 30% 611 33% 772 33% 674 36%

Estimated gaps in reporting 56 +6% 44 +3% 53 +3% 60 +3% 26 +1%

Estimated total turnover 590 65% 820 63% 1 190 64% 1 490 64% 1 200 64%

The data include spot transactions, outright forwards and foreign exchange swaps

April 1989 April 1992 April 1995 April 1998 April 200126 43 48Number of countries covered

by the BIS survey:21 26

21 26 26 45 48April 1989 April 1992 April 1995 April 1998 April 2001

USD 90% 82% 83% 87% 90%

Euro - - - - 38%

ECU and other EMS currencies 4% 12% 16% 17% -

German mark 27% 40% 36% 30% -

French franc 2% 4% 8% 5% -

Pound sterling 15% 14% 9% 11% 13%

Yen 27% 23% 24% 20% 23%

Swiss franc 10% 8% 7% 7% 6%

Other currencies 25% 17% 16% 22% 30%

All currencies 200% 200% 200% 200% 200%

Number of countries coveredby the BIS survey:

Total = 200 %

5.6.B. Distribution of average daily foreign exchange turnover by currency, in per cent, 1989-2001

5.6.A. Elimination of double counting in assessing foreign exchange markets’ dailyturnover, in billions of USD, 1989-2001

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The first international attempt to measure the vol-umes of currency exchanged was in April 1986, inthe form of a survey of daily market turnover car-ried out simultaneously by several central banksunder the auspices of the Bank for InternationalSettlements (BIS). The survey has since beenrepeated every three years, most recently in April2001. From just four countries in 1986 (the Unit-ed States, the United Kingdom, Japan and Cana-da), the geographical spread of the surveyexpanded to 48 countries by 2001. Even thoughleading financial centres were included in theseseries from the outset, comparisons over timerequire caution, for the BIS only began to makeadditional estimates from 1989 onwards.

The major technical difficulty with the survey is

how to eliminate double counting. This is done intwo stages:

• at national level, transactions in which both partiesare included in the survey are identified. In BIS ter-minology, this yields what are known as "gross-net"values. The difference between "gross-gross" and"gross-net" amounts gives a picture of foreignexchange activities within the country.

• at international level, contracts between parties cov-ered by the survey and residing in countries that arealso covered by the survey are identified, yieldingwhat are known as "net-net" figures. The differencebetween these figures and "gross-net" figures indi-cates the order of magnitude of each country's cross-border foreign exchange transactions.

RECENT TRENDS

1. Increasingly financial logic (Fig. A, B and C)

According to one American estimate, foreignexchange transactions in the United Statestotalled USD 18 billion in 1980 and, according tothe BIS, had risen to USD 254 billion by 2001 - afourteenfold increase in the space of twenty years.This gives an idea of the speed of development offoreign exchange markets, which in 2001accounted for a "net-net" volume of USD 1,200billion a day, equivalent to 3.8% of global GDP.Even if commissions are calculated in fractions ofa per cent, this activity "adds" almost USD 350billion a year to global GDP (more or less 1%).

Foreign exchange transactions are essentially afinancial management instrument, as witness thefact that since the early 1990s more than 80% ofthem have taken place between financial opera-tors. They go hand in hand with the globalizationof finance and are an integral part of every opera-tor's hedging strategies. The increasingly financiallogic behind foreign exchange transactions isunderscored by the fact that the percentage of

cash transactions is declining, while the percent-age of derivatives (options and swaps) is increas-ing.

2. No foreign exchange without London and the dol-lar (Fig. B and C)

The foreign exchange market is dominated by theUS dollar, which is involved in 90% of all transac-tions. This reveals two essential facts: the impor-tance of the US currency in the global economyand global finance, and the fact that the foreignexchange market between certain minor curren-cies is very illiquid. To overcome this difficulty,operators often resort to the US dollar, whichmeans that there are two transactions instead ofone. While the dollar is the key currency, Londonis the key financial centre: almost one third of allforeign exchange transactions take place in thecity on the Thames.

3. The Tobin tax

Since the mid-1980s, when the vast scale of thetransactions taking place on foreign exchange

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287

58

76

90

161

105

87

464

244

368

72

94

79

136

139

82

637

351

338

48

88

147

101

71

504

254

67

18.3%

3.7%

4.8%

5.7%

10.2%

6.7%

5.5%

29.5%

15.5%

18.8%

3.7%

4.8%

4.0%

6.9%

7.1%

4.2%

32.5%

17.9%

20.9%

3.0%

5.4%

4.1%

9.1%

6.2%

4.4%

31.1%

15.7%

0 100 200 300 400 500 600 700

Other

France

Germany

Hongkong

Japan

Singapore

Switzerland

United Kingdom

United States

April 2001

April 1998

April 1995

Billions of USD

13%20% 20%

28%

18%

16% 17%

13%

70%64% 64%

59%

0

200

400

600

800

1000

April 1992 April 1995 April 1998 April 2001 April 1992 April 1995 April 1998 April 2001

0%

20%

40%

60%

80%

100%

Reporting dealers

Other financial institutions

Non-financial clients

Billionsof USD

5.6.D. Daily turnover by type of counterpart, in billions of USD and in per cent,1992-2001

5.6.C. Changes in average volumes of transactions by financial centre, in billions of USD and in per cent, 1995-2001

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markets began to be noticed, the idea of taxingthem has been voiced repeatedly. The tax (namedafter late James Tobin, who won the Nobel prizefor economics in 1981 and died in March 2002)would be levied at the rate of 0.1% of the value ofeach transaction. This would reduce the volumeof foreign exchange transactions (and, somebelieve, stabilize exchange rates) and would makeconsiderable sums available to international orga-nizations working in the field of development.Despite strong opposition, civil society has by nomeans abandoned the idea of the Tobin tax.

161

USER’S GUIDE


162


163


The following is a list of the abbreviations used,with the English version first and the French ver-sion (where it exists) in brackets, followed by thefull name in English. In one or two cases theFrench abbreviation is also used in English, orvice versa.

Abbreviations of organizations

BIS (BRI): Bank for International Settlements

EMS (SME): European Monetary System

EU (UE): European Union

FIBV (FIBV): International Federation of StockExchanges

GATT (GATT): General Agreement on Tariffs andTrade

ICAO: International Civil Aviation Organization

IFC (SFI): International Finance Corporation

ILO (OIT): International Labour Organization

IMF (FMI): International Monetary Fund

IRU (IRU): International Road Transport Union

ITU (UIT): International TelecommunicationUnion

NAFTA (ALENA): North American Free TradeAgreement

OECD (OCDE): Organization for EconomicCooperation and Development

UIC (UIC): International Railway Union

UNCTAD (CNUCED): United Nations Confer-ence on Trade and Development

UNDP (PNUD): United Nations DevelopmentProgramme

UNO (ONU): United Nations Organization

UNPD (UNPD): United Nations Population Division

UPU (UPU): Universal Postal Union

WB (BM): World Bank

WTO (OMC): World Trade Organization

Other abbreviations

CIF (Caf): Cost, insurance, freight

FDI (IDE): Foreign direct investment

FOB (Fab): Free on board

GDI (ISDH): Gender-specific development index

GDP (PIB): Gross domestic product

GNP (PNB): Gross national product

HDI (IDH): Human development index

HIPC (PPTE): Highly indebted poor countries

HPI (IPH): Human poverty index

ISIC: International Standard Industrial Classifica-tion

LACs (PMA): Least Advanced Countries

LIBOR: London Interbank Offered Rate

OTC: Over-the-counter

PC: Personal computer

PPP (PPA): Purchasing power parity

PQLI (IPQV): Physical quality of life index

PRGF (FRPC): Poverty Reduction and GrowthFacility

SAF (FAS): Structural Adjustment Facility

SDR (DTS): Special drawing right

SME (PME): Small or medium-sized enterprise

UMTS: Universal Mobile TelecommunicationsSystem

USD: US dollar

Abbreviations

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165


Most of the statistical data presented in this pub-lication are aggregates of primary data initiallyproduced by national authorities. Two kinds ofgrouping have been used: (a) groupings made bythe Observatoire de la Finance itself, and (b)groupings borrowed from suppliers of data. Whengroupings have been used in charts, the source ismentioned at the bottom of the page. If no sourceis mentioned, this automatically means that thegrouping was made by the Observatoire de laFinance.

1. Groupings made by the Observatoire de laFinance:

For reasons of coherence and comparability,groupings made by the Observatoire de la Financeare based on the current composition of the vari-ous organizations or zones. This even applies tosituations that predate the emergence of the orga-nization or zone in question. For example, the“NAFTA” grouping is also used for series datingfrom before 1992, when the group first came intobeing.

Grouping by level of development:

• “OECD”: the member countries – 30 at the beginningof 2002 – of the Organization for Economic Coopera-tion and Development, which are divided into threesubgroups:

• “NAFTA” : the three parties to the North American Free

Trade Agreement as of 2002: Canada, Mexico, United

States;

• “EU”: the 15 member states of the European Union as of

2002: Austria, Belgium, Denmark, Finland, France, Ger-

many, Greece, Ireland, Italy, Luxembourg, Netherlands,

Portugal, Spain, Sweden, United Kingdom;

• “Rest of OECD”: the other 12 member countries of the

OECD as of 2002: Australia, Czech Republic, Hungary,

Iceland, Japan, New Zealand, Norway, Poland, South

Korea, Slovakia, Switzerland, Turkey.

• “Non-OECD”: countries that are not members of theOECD, i.e. the rest of the world.

Grouping by geographical position:

• The Americas are divided into “North America”(Canada, United States) and “Latin America”.In some cases the “North America” grouping isreplaced by “NAFTA”, the effect of which is totransfer Mexico - a member of NAFTA - fromone group to another;

• “Europe” is sometimes divided into two sub-groups: “European Union” and “rest of Europe”(which includes Russia);

• “Africa”;

• “Asia”, including the Middle East.

2. Groupings made by other organizations:

Most suppliers of statistical data group countriesin accordance with their own particular criteriaand aims, which are set out in the relevant pub-lications. These groupings vary over time andare updated very regularly. The bases for thegroupings used are indicated in the followingpublications, which interested readers are here-by referred to :

• World Bank, Development Finance 2001; WorldDevelopment Indicators 2001;

• International Labour Organization, Key Indicators ofthe Labour Market, 1999;

• International Monetary Fund, International Finan-cial Statistics 2000;

• United Nations Conference on Trade And Develop-ment, World Investment Report, 2001;

• World Trade Organization, Annual Report, 2001;International Trade Statistics, 1998;

• Bank for International Settlements, QuarterlyReview: International Banking and Financial MarketDevelopments, November 2000; Guide to Interna-tional Banking Statistics, July 2000;

• Universal Postal Union, Post 2005 – Core BusinessScenarios; Postal Statistics, 1996.

Grouping of countries

166


3. Missing data and the “World” group

The era of statistics is only just beginning and,despite continuing improvements in coverage, thefigures are still far from complete, especially inrelation to earlier periods and depending on thenature of the data or the countries concerned.This is particularly true of Asian, African andLatin American countries and micro-states in gen-eral.

Owing to these gaps, the statistics presented heremay not always entirely match the theoreticalcomposition of the groups they refer to. Even ifthe number of countries not covered is sometimesquite large, they are mostly micro-states whoabsence has very little impact on orders of magni-tude or long-term trends. Major discrepancies arediscussed in the sections of the text dealing with“Methods and problems of measurement”.

Gaps in statistical coverage of countries are aproblem in the “World” group. This grouping wasobtained simply by taking all the available datainto account, with minor interpolations to coverindividual gaps.

In some cases, world population and global prod-uct were used to compare other variables or putthem in perspective. In that case use was made ofdata supplied by the World Bank.

167


1.1 POPULATION

1.1.A. World population by continent, in millions, in per cent and as an index: 1950-2010

1.1.B. Population of most populous countries, inmillions and as an index: 1950-2010

1.1.C. Population by level of development, inmillions, by age group and as an index:1950-2000

1.1.D. Population by age group and by level ofdevelopment, in per cent, 1950-2000

1.1.E. Urban population, in per cent of total pop-ulation, 1960-2000

1.1.F. Urban population growth, by continentand by country, in per cent, 1965 and 2000

1.2 TELECOMMUNICATIONS

1.2.A. Band width of international Internet circuits in megabytes per second, in 1999and 2001

1.2.B. Access to telecommunication networks, inmillions of units and in per cent, 1965-1999

1.2.C. Access to telecommunications by region(all types of system), in millions of unitsand in per cent, 1965-1999

1.2.D. Density of telecommunication systems byregion, in units per 100 inhabitants, 1965-1999

1.2.E. Distribution of telephone traffic by switch-ing area, in per cent

1.2.F. Changes in the price of a three-minutetransatlantic call, in constant USD, 1940-2000

1.2.G. Investment in telecommunication infras-tructure, in USD per capita, 1975-1999

1.2.H. Turnover of telecommunication operators

by region, in millions of USD and in percent, 1975-1999

1.3 TRANSPORT FLOWS

1.3.A. Comparative trends in air and maritimetransport, as an index, 1970-2000

1.3.B. Distribution of passengers transported, bytype of carrier, in billions of passenger-kilometres, 1999

1.3.C. Distribution of flows of passengers andgoods within the EU, by type of carrier,1970-1999

1.3.D. Distribution of goods transported, by typeof carrier, in billions of tonne-kilometres,1999

1.3.E. Distribution of goods transported, by typeof carrier, in tonne-kilometres per capita,1999

1.4 MAIL TRAFFIC

1.4.A. Number of mail consignments in the worldand in industrialized countries, 1978-2000

1.4.B. Distribution of consignments by type ofcontents in 1995 and forecasts for 2005

1.4.C. Population having mail delivered at home,in per cent, in 1993, 1996 and 2000

2.1 ECONOMICALLY ACTIVE POPULATION2.1.A. Population and economically active popu-

lation by level of development, in millionsand in per cent 1950-2010

2.1.B. Economic activity rate by age group and bylevel of development, in per cent, 1950-2010

2.1.C. Unemployment rates in industrializedcountries, in per cent, 1965-2000

2.1.D. Economically active population by eco-nomic sector and by level of development,in per cent, 1950-1990

List of Figures

168


2.1.E. Economically active population in each eco-nomic sector, in millions, distributed bylevel of development in per cent, 1950-1990

2.1.F. Male-female distribution in the economi-cally active population and by economicsector, by level of development and in percent, 1950-1990

2.1.G. Female economic activity rates, by agegroup, 1950-2010

2.1.H. Number of economically active men pereconomically active woman, by age groupand by level of development, 1950-2000

2.2 MAJOR CORPORATIONS

2.2.A. Major corporations and the poorest coun-tries: a comparison, 2000

2.2.B. Concentration of the 800 largest corpora-tions, 2000

2.2.C. The 100 largest industrial and financialcorporations : comparison of concentra-tion, 2000

2.2.D. Relationship between turnover and capital-ization for the 800 largest industrial corpo-rations, 2000

2.2.E. Relationship between jobs and balance-sheet totals for the 800 largest industrialcorporations, 2000

2.3 SMALL AND MEDIUM-SIZED ENTERPRISES

2.3.A. Distribution of total jobs by size of busi-ness, 1996

2.3.B. Share of micro-businesses in total jobs andin business population, selected countries ,in 1996

2.4 PUBLIC BUDGETS AND DEFICITS

2.4.A. Public revenue as a percentage of GDP inrelation to per capita income, 1998

2.4.B. Public revenue as a percentage of GDP inrelation to per capita income, 1998

2.4.C. Public spending on health and educationas a percentage of GDP, 1998

2.4.D. Public spending on health and educationas a percentage of GDP, 1998

2.4.E. Level of public debt as a percentage ofGDP, by group of countries, 1972-1999

2.4.F. National indicators of debt viability, aver-age values, 1995-1999

2.5 THE INTERNATIONAL MONETARY FUND: RESERVES AND INTERVENTIONS

2.5.A. Exchange rate of Special Drawing Rights inUSD, 1956-2001

2.5.B. IMF’s outstanding loans and commit-ments, in billions of SDRs, 1948-2000

2.5.C. IMF’s outstanding loans and commitments,as a percentage of the GDP of non-OECDcountries, 1948-2000

2.5.D. Distribution of IMF commitments by typeof arrangement, in billions of SDRs, 1948-2000

3.1 NATIONAL PRODUCT AND VALUE ADDED

3.1.A. Growth rates in regions of the world basedon per capita GDP, 1980

3.1.B. Growth paths in groups of countries basedon per capita GDP levels at PPP

3.1.C. Comparison of per capita GDP using threecalculation methods, 1980 and 2000

3.1.D. Comparison of distribution of global prod-uct, in constant 1995 USD

3.1.E. Distribution of global product at PPP overthe world population, based on country ofresidence, Lorenz curve, 2000

3.2 INFLATION

3.2.A. Annual changes in consumer prices, 1957-2001

3.2.B. Distribution of countries by level of infla-tion, 1961-1999

3.2.C. Annual changes in consumer prices, loga-rithmic scale, 1960-2000

169


3.3 DEVELOPMENT INDICATORS

3.3.A. Limits to the relevance of HDIs: correlationwith exports

3.3.B. Limits to the relevance of HDIs: correlationwith use of fossil fuels

3.3.C. Limits to the relevance of HDIs: correlationwith use of sanitation

3.3.D. Limits to the relevance of HDIs: correlationwith density of mobile phones

3.3.E. Distribution of countries and populationaccording to their 1999 HDI level

3.3.F. Country-by-country analysis of each com-ponent’s contribution to the 1999 HDI

3.3.G. Dispersion of national HDIs in the fiveregions and changes in this between 1980and 1999

3.4 INTERNATIONAL TRADE

3.4.A. Exports of goods and services as a percent-age of GDP, at current prices, 1965-1998

3.4.B. Components of global trade, as a percent-age and in terms of value, 2000

3.4.C. Global product and exports of goods andservices, at current prices, as an index,1980-2000

3.4.D. Unit value of merchandise exported, as anindex, 1950-2000

3.4.E. Summary indicator of trade restrictiveness,1997 and 2000

3.4.F. Trade in goods within and between themain regions, 1979 and 1999

3.4.G. Global trends in trade, at constant prices,for the main categories of goods, as anindex, 1950-1999

3.5 FOREIGN DIRECT INVESTMENT

3.5.A. Deviations in assessment of FDI outflowsfrom OECD countries, in per cent, 1970-2000

3.5.B. Top 20 countries receiving FDI flows, 2000

3.5.C. FDI flows by region, in billions of USD,and relative share of mergers and acquisi-tions in per cent, 1987-2000

3.5.D. Inward and outward FDI stocks in thethree main economic regions, in billions ofUSD, 1980-2000

4.1 INTERNATIONAL DEBT

4.1.A. Total external debt of developing and tran-sitional countries, by type of creditor andmaturity, in billions of USD, 1982-2000

4.1.B. Levels of international debt by region, inbillions of USD, 1987-2000

4.1.C. Annual changes in debt levels for the threemost indebted regions, in billions of USD,1987-2000

4.1.D. Composition of international debt by typeof instrument, 2000

4.1.E. Levels and concentrations of debt in theten most indebted countries, 1998

4.1.F. Predicted effects of reductions in debt forthe 24 HIPC countries, 1998-2005

4.1.G. The burden of debt in Severely IndebtedCountries (SIC), 1987-1999

4.1.H. Average terms of new commitments bytype of creditor, 1970-1999

4.2 FOREIGN EXCHANGE REGIMES ANDEXCHANGE RATES

4.2.A. Changes in the real effective exchangerates of the main currencies, as an index,1972-2001

4.2.B. Examples of changes in nominal exchangerates in times of financial crisis, as anindex, 1986-2001

4.2.C Distribution of countries by foreignexchange regime, 1991 and 1999

4.3 INTEREST RATES

4.3.A. Changes in the nominal “risk-free” interestrate, 1970-2002

170


4.3.B. Changes in the LIBOR for various curren-cies, 1978-2002

4.3.C. Changes in long-term interest rates, 1970-2000

4.3.D. Changes in the differential between long-term and short-term rates, 1965-2002

4.4 MONEY AND MONETARY AGGREGATES

4.4.A. Growth in narrow money in certain EUcountries, as an index, 1982-2001

4.4.B. Growth in broad money in certain EUcountries, as an index, 1982-2001

4.4.C. Growth in monetary aggregates in theUnited States and Japan, as an index, 1982-2001

4.4.D. Growth in monetary aggregates in theUnited Kingdom and Switzerland, as anindex, 1982-2001

4.4.E. Velocity of money in certain developedcountries, 1970-2001

4.4.F. Cashless payments, by instrument used, asa percentage of the number of non-cashtransactions, 1995-1999

4.5 CENTRAL BANKS AND THEIR INTERNATIONAL RESERVES

4.5.A. Foreign currency and gold reserves held bythe central banks of developed and devel-oping countries, in billions of SDRs (goldat current prices), 1970-2000

4.5.B. Gold stocks held by the central banks ofcertain developed countries at historicalprices in billions of USD, 1970-2000

4.5.C. Changes in the reserves held by the centralbanks of certain developed countries, inbillions of SDRs (gold at current prices),1971-2000

4.5.D. Distribution of the reserves held by thecentral banks of the G7 countries (gold atcurrent prices), 1970-2000

5.1 STOCK MARKET CAPITALIZATION

5.1.A. Global capitalization and the largest mar-kets, in billions of USD, in per cent, 1981-2000

5.1.B. Stock market capitalization in selecteddeveloped countries, in billions of USD,1981-1999

5.1.C. Stock market capitalization in selecteddeveloping countries, in billions of USD,1981-1999

5.1.D. Stock market capitalization as a percentageof GDP, 1981-2000

5.1.E. Number of transactions per year on anaverage share, 1981-2000

5.2 STOCK MARKET PRICES AND INDEXES

5.2.A. Changes in stock market indexes on themain markets, as an index, 1973-2001

5.2.B. Changes in various indexes on the USmarket, as an index, 1973-2001

5.2.C. Long-term changes in price/earnings ratio(ratio of share price to profits per share),1973-2001

5.3 CAPITAL RAISED ON STOCK MARKETS

5.3.A. Changes in the number of listed companiesby major region, in units and in per cent,1981-2000

5.3.B. Capital raised on world stock markets, inbillions of USD and by region in per cent,1991-2000

5.3.C. Capital raised in OECD countries, as a per-centage of stock market turnover, 1992-2000

5.3.D. Capital raised in some developing coun-tries, as a percentage of stock marketturnover, 1992-2000

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5.4 THE BOND AND CREDIT MARKET

5.4.A. Outstanding bonds on national and inter-national markets, by type of debtor, in bil-lions of USD, 1993-2000

5.4.B. Outstanding bonds expressed as a percent-age of GDP, by region, 1993-2000

5.4.C. Outstanding international bonds, byissuer’s nationality, 2001

5.4.D. New bank loans and international bondissues, 1985-2000

5.4.E. Net bond issues on the international mar-ket, by type of issuer, in billions of USD,1992-2001

5.4.F. Net bond issues on the international mar-ket, by region, in billions of USD, 1992-2001

5.4.G. Net bond issues on the international mar-ket, by currency, in billions of USD, 1992-2001

5.5 DERIVATIVES

5.5.A. Over-the-counter and organized marketturnover in derivatives, 1989-2001

5.5.B. Organized markets, notional value of com-mitments, by operator’s location, in bil-lions of USD, 1986-2000

5.5.C. Total daily value of over-the-counter trans-actions, by operator’s location, in billionsof USD, 1995-2001

5.5.D. Selected derivatives, notional value ofcommitments, in billions of USD, 1987-2000

5.5.E. Notional value of commitments, by type ofderivative instrument, in billions of USD,2000

5.6 FOREIGN EXCHANGE TRANSACTIONS

5.6.A. Elimination of double counting in assess-ing foreign exchange markets’ dailyturnover, in billions of USD, 1989-2001

5.6.B. Distribution of average daily foreignexchange turnover by currency, in percent, 1989-2001

5.6.C. Changes in average volumes of transac-tions by financial centre, in billions of USDand in per cent, 1995-2001

5.6.D. Daily turnover by type of counterpart, inbillions of USD and in per cent, 1992-2001

172


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