The Financial Capabilities of Emerging Powers and Why They Matter

The Financial Capabilities of Emerging Powers—And Why They Matter

Leslie Elliott Armijo

Portland State University

March 2010

The financial crisis of 2007-9 revealed and possibly accelerated three pre-existing trends: a shift toward eventual global political multipolarity, similar movement in the direction of international financial multipolarity, and the breakdown of the ideological consensus on market self-discipline as the dominant financial regulatory norm. The BRIC countries

(China, India, Brazil, and Russia), along with other large emerging powers in the Group of Twenty (G20), are becoming more consequential in international political and monetary relations. The paper assesses the domestic and international financial capabilities and goals of the top rank of emerging states. We conclude that the dissimilarities in patterns of national financial institutions, assets, and global links (and thus dissimilarities in substantive preferences for global regulatory reform) within the sets of major advanced industrial democracies and top emerging powers are often as profound as the differences between the two groups. Nonetheless, the senior emerging powers are coalescing around two preferences. First, they desire greater and better-institutionalized inclusion in international financial governance. Second, their governments are likely to perceive virtues as well as costs from state participation in financial markets. The Financial Capabilities of Emerging Powers—and Why They Matter

The financial crisis that began in the sub-prime mortgage markets of the United

States was principally responsible for a global growth rate of 3.8 percent in 2007 becoming a 2.9 percent contraction by 2009 (World Bank 2009). The crisis has highlighted and perhaps accelerated three pre-existing global trends. The first is an ongoing transition from unipolarity to eventual multipolarity in the international political system. A second trend is a similar shift toward increasing international financial multipolarity. A third change is a net global pendulum shift away from an uncritical embrace of market deregulation, and back toward an explicit recognition of a positive role for the state in overcoming market failure. All three shifts bring with them risks to system stability and performance, along with potential benefits. The capabilities and policy preferences of the larger emerging powers--particularly the BRICs group of Brazil,

Russia, India, and China (O’Neill 2001)—play a role in each of these transitions.

The paper begins with the international political system, arguing that its distribution of capabilities among the constituent states is trending toward eventual multipolarity. Section two compares financial capabilities across two groups of countries: the nine major advanced industrial democracies and the nine emerging powers with the greatest financial capabilities, and proposes that the distribution of the national financial capabilities of nation-states is also becoming multipolar. The third section further compares national financial characteristics within and between the same two groups of countries. Section four examines the financial preferences of the most globally- consequential emerging powers: the BRIC countries. Our conclusions envision an incrementally increasing role for the top emerging powers in global monetary governance.

The global political future is multipolar

Today’s world may be unipolar, as recently has been argued by Ikenberry,

Mastanduno, and Wolhforth (2009). There currently is only one superpower, arguably still able to confront a hypothetical military coalition of all of the other major powers.

The United States also retains overwhelming “soft power,” enabling its officials to influence outcomes in international governmental organizations (IGOs), even without a clear preponderance of formal authority (Nye 2004). In concert with its partners in the

North Atlantic Treaty Organization (NATO) and the Group of Seven (G7), the US would prefer to ensure the stable management of the status quo via soft power, without overtly pushing to get its way. Yet soft power and influence over global outcomes very often flow from, though may lag, the underlying distribution of objectively measurable capabilities. If the objective capabilities of others are increasing at a faster rate than those of the dominant state, then it is reasonable to anticipate turbulence and possibly a nontrivial shift in the interstate system are the distribution of capabilities is rebalanced

(cf. Zakaria 2008; Tammen et al. 2000).

Rather than assuming a continuation of unipolarity for the foreseeable future, we instead ask: Which states matter in the international system? The slippery but essential concept of the relative “power” of states may be assessed either in terms of a) latent capabilities, with which their owners subsequently may (or may not) be able to coerce or persuade other states to alter their behavior, or b) realized influence, which requires an after-the-fact analysis showing that state A was able to get state B to alter its behavior (cf. Waltz 1979; Sullivan 1990; Dahl 1986; Baldwin 1989). There are numerous reasons to be skeptical of assessing “power” based on relative capabilities. Realized influence does not always correlate with objective capabilities, as small, apparently weak states may sometimes seem to dictate to large, ostensibly capable ones. Another problem for the capabilities approach is that resources may be multidimensional and useful in a variety of issue-arenas, or instead fragmented and highly issue-specific--and the capabilities approach has a hard time digesting this ambiguity. For example, national military prowess may (but may not) be relevant to leadership in trade negotiations; on the other hand, a large and attractive home market almost certainly cannot assist a country in becoming a major international player unless the global environment is sufficiently peaceful for foreign trade and investment opportunities to matter for diplomatic calculations. Finally, the capabilities approach to assessing power falters when confronted with assessing the theoretical “weight” of non-material or non-traditional assets, although we know that ideas and culture are in some respects “powerful” (Adler

1985; Dunoff and Trachtman, eds. 2009).

While acknowledging these profound theoretical concerns, an argument about likely future shifts in the relative global influence of sovereign states may lack options other than to count guns, butter, and similar more or less objective capabilities—which this paper therefore does. We also engage, with eyes open, in a seat-of-the-pants comparative assessment of the quintessential manifestation of soft power: current regional and global “leadership.” Table 1 presents a rough relative “power” or capabilities index. It is not the only possible index, but we suggest it replicates reasonably well the judgments foreign policymakers are obliged to make on a daily basis and, very approximately, the relative positions of major states.

Any relative capabilities index faces two challenges: which countries to include and what qualities to measure. Surprisingly, even very recent efforts by international relations scholars to compare the relative capabilities of systemically-important countries, such as that by Ikenberry et al. (2009), routinely fail to include such senior middle powers as India and Brazil in their assessments. But we wish to identify which are the rising or emerging powers. We therefore begin with an expansive group of countries, including all of the Group of Twenty (G20, once known as the “financial G20” to distinguish it from the “trade G20” of developing countries, but more recently termed the

“large economies group”). To the G7 set of major industrial democracies we add

Australia and Spain, the next two largest economies among the wealthy democracies. To the emerging powers in the G20 we add Iran and Venezuela, both states whose leaders have made concerted efforts to be recognized as a world power.

Any capabilities index also aggregates dissimilar components, with weights and choices of what to include subject to the biases of the researcher. For example, scholars such as Mearsheimer (2001) give enormous weight to military power, while we side with those who consider economic size (and growth rates and fiscal viability) ultimately the most important components of state capability (cf. Organski and Kugler 1981; Drezner

2008; Strange 1994; Ferguson 2002). Our choices are as follows. The index, which is illustrative only, allocates a maximum of 20 total points in seven categories to each country. Countries receive 0-4 points for economic size. Four additional categories

(population, military, technology, and recognition by other governments as a leading international power, as measured by participation in consequential IGOs) receive 0-3 points each. Finally, energy independence and recognition by other governments as a regional leader receive 0-2 points each. Column 7 gives relative scores for “hard” or objectively measurable capabilities, and column 10 for combined “hard” and “soft” capabilities. Coding rules are in the notes to the table.

< Table 1 about here. >

We conclude that the interstate system is on its way to becoming multipolar. As expected, the US remains primus inter pares, followed at some distance by China.

Notably, the remaining G7 states are interspersed with the remaining BRIC countries:

Russia, Brazil, and India. The BRICs are the only developing or transitional countries in the top ten states worldwide in terms of both population and economic size, as measured by gross domestic product (GDP) calculated at purchasing power parity (PPP). If GDP is

th calculated at market rates, India ranks 12 . Of course, if Western Europe is considered as an emerging single political entity, as scholars including Drezer (2008) and Khanna

(2009) would have us do, then the future looks tripolar. This paper does not futher consider this provocative possibility.

We also see a closing of the capabilities gap between, on the one hand, the status quo powers—all advanced industrial democracies—and a disparate group of emerging states. Although we have not included data on change with respect to earlier years, all but one of the set of developing and transitional countries in Table 1 have improved their relative positions since 1950 (or since almost any year between 1950 and 2000) vis-à-vis the set of advanced industrial countries. The exception is Russia, formerly the Soviet

Union. The country with the greatest relative rise is of course China. Among the advanced industrial democracies, countries such as Germany and Japan also have narrowed the capabilities gap with the U.S. since 1950.

Another way to consider the problem is to focus on rates of change. Table 2 contrasts economic growth in two sets of countries: the nine wealthy industrial democracies from Table 1, and the nine emerging powers most likely to possess financial influence, the dimension of interest in this paper’s next section. We first include the four

BRICs. Mexico and Indonesia are the next logical candidates, appearing just after the

BRICs on Table 1’s ranking. South Africa, Turkey, and South Korea make the list due to their consistently high global financial “weight” vis-à-vis the remaining countries from

Table 1, such as Iran and Argentina, that now drop out of the analysis. We explicitly exclude financially weighty city-states like Singapore because their overall international political capabilities are limited. In the descriptive statistics that follow, we note that each set functions as the entire population of interest, not as a sample: we are not inferring the characteristics of all emerging economies from our set, but only describing qualities of these nine countries.

< Table 2 about here.>

To gauge the implications of the recent financial crisis, Table 2 reports annual economic growth rates during the crisis years of 2007-9, and projected rates for two subsequent years. It shows the following. First, during the crisis growth rates in the major emerging financial powers were substantially higher, albeit considerably more variable, than was the case among the major industrial democracies. There is little overlap between the two groups. The same is true of the initial projected recovery: growth rates among the emerging financial powers were higher but more variable than growth rates among the major advanced industrial democracies. Not shown is the fact that these emerging powers

(although not the set of all developing and transitional countries!) also were growing faster than these major industrial democracies in the decade prior to the crisis. Second, the mean difference between the recovery and crisis growth rates is slightly greater for the advanced economies than for the emerging powers (2.69 and 2.11 percent, respectively).

We may conclude that it is incorrect to suggest, as some breathless news reports have done, that the emerging powers are recovering better from the crisis than are the major industrial democracies. Instead these nine emerging financial powers have recovered about as well (relative to their pre-crisis trajectory) as the advanced industrial economies. However, the top emerging financial powers will continue to expand faster than the major industrial democracies, continuing their previous trend. What the crisis has done is to make the relative growth rates more noticable. Had we instead used the longer term and more speculative projections of the Goldman Sachs research team that invented the term “BRICs,” the future growth gap in favor of emerging powers would appear much larger (Kamakawa, Ahmed, and Kelston 2009). Tables 1 and 2 together suggest that the political future for interstate relations probably is moving in the direction of eventual multipolarity. Although one cannot assume that this trend will continue unchanged, it provides an important background condition for the evaluation of the financial capabilities of states.

The international financial future also is multipolar

A related power transition, although one even less far along, is underway in global finance. Just as there is no consensus over precisely how one ought to quantify our commonsense notion of interstate political “power,” the concept of total national financial capabilities is similarly undefined. Ideological priors, or mental models, will shape how we implicitly sum national financial power (Roy, Denzau, and Willett 2007).

Moreover for most economists and those working in the financial sector it is firms and markets, not nation-states, that are the objects of study. These finance specialists often have understood states as relatively unimportant to the study of banks or capital markets and institutions, except insofar as governments interfere with demand-and-supply-driven processes of market growth and evolution. Our analysis, in contrast, assumes that the preferences of sovereign governments have been very significant in shaping global finance, that not all state intervention or regulation of finance is harmful, and that national financial capabilities in turn can serve states’ political goals (cf. Kirshner 1979).

Table 3 reports on several financial dimensions likely to be relevant to any assessment of relative monetary weight or size, although we do not attempt to sum these dimensions. The overall economic weight (combined market rate GDP) of the nine major emerging market countries in 2008 was about $19 trillion, and that of the nine advanced economies about $35 trillion, for a developing to developed (“emerging/rich”) ratio of about 54 percent. We take this as one comparative baseline, understanding ratios less

(more) than this as implying comparatively lower (higher) than commensurate financial capabilities in the nine emerging as compared to the status quo powers.

Table 3’s initial columns present alternative estimates of the total size (“weight”) of a country’s home financial sector. The World Economic Forum (WEF) figure in column 1 combines government and corporate debt, bank deposits, and equity market capitalization, while the Economist Intelligence Unit (EIU) estimate in column 2 also includes other country-specific financial assets such as insurance premiums and leasing assets. Column 3 reports mutual fund assets, the best internationally comparative measure of national participation in decentralized capital markets. Column 4’s weight in global investments is the sum of the absolute value of a country’s international investment assets and the absolute value of its international investment liabilities, thus providing a measure of its overall importance to global financial markets. All four measures suggest that the

US continues to dominate global finance, perhaps as much as it dominates global military capabilities. After the US, Japan has the largest domestic financial markets, and the UK bulks largest in global financial transactions. We also see that China ranks third in core financial assets, and seems to belong with the advanced industrial country group, while the other emerging powers do not. Finally, the combined current financial weight of these nine emerging powers falls below their economic weight, although their combined weight of 10 to 20 percent that of nine major financial powers is nontrivial. We note that the indicators in the table are all measures of stocks, representing the cumulative inheritance of past financial flows.

Another way to think about relative financial size is to focus not on the economy as a whole but instead on specific firms. The heft of a country’s flagship banks resonates in the world business press, even though national regulators may experience large banks with high stock valuations as a profoundly mixed blessing. Among the emerging financial powers, only China, Brazil, Russia, and India field banks that rank among the world’s largest. In the 2009 edition of The Banker’s “Top 1000 World Banks,” China had from three to five banks in the “Top 25” by Tier 1 capital, market capitalization, and pre- tax profits (Lambe 2009). Brazil had two banks among the “Top 25” in market capitalization and profits. Russia had one bank in the high profits category—but also another (Gazprombank, the Russian bank owned by the state energy conglomerate) which captured the 21st slot in the list of banks with the highest annual losses. Similarly, the

2009 edition of Fortune’s “Global 500” top firms by total revenues included 62 banks, ten from emerging economies: five Chinese, three Brazilian, one Russian, and one Indian

(Fortune 4 March 2009). The financial turmoil since 2007 has left both Chinese and

Brazilian banks in a relatively better competitive position than before the crisis (FT 10

January 2010).

< Table 4 about here >

Table 4 examines attractiveness to foreign investors and global balances. The nine developing countries’ stock of outstanding global corporate bonds is about a third that of firms based in our rich country group. International merger and acquisitions (M&A) activity, representing current flows, is similarly dominated by the wealthy democracies.

Moreover, the total volume of equity trading in 2009, not shown in the table, would result in an emerging to wealthy countries ratio of only about 28 percent (Financial Times, 3

February 2010). However, the sum of recent initial public offerings (IPOs) of new corporate equity, arguably the most forward-looking indicator of capital markets activity among those examined, was approximately equal between the groups. In terms of column

4’s global foreign exchange reserves, the most liquid form of international investment asset, the emerging financial powers punch well above their weight, holding about four times what would be expected relative to the size of their economies. The table’s final column, net foreign assets, reflects “global imbalances,” a dimension which, unlike many of the other indicators, does not break down along the lines of advanced versus developing economies. Of the eighteen countries, only four have a significant financial assets surplus with the world: Japan, Germany, China, and Russia. Citizens of these countries own far more portfolio equity, foreign direct investment, and other assets abroad than foreigners do in their countries. The UK, Canada, South Africa, and India have relatively balanced global investment positions, while all others in our table show international investment deficits. There is no significant difference between the net foreign assets position of the nine major and the nine emerging powers.

Another dimension of international attractiveness, and thus of monetary capability, is international use of a country’s currency. On this measure there is no comparison among the established and emerging financial powers: the US dollar remains the overwhelmingly dominant global reserve currency. As of 2009 Q2 approximately 63 percent of allocated global reserves were in dollars or dollar-denominated securities, a percentage that has remained remarkably stable since at least the early 1970s, although the share of allocated reserves in total reserves has fallen.1 Most international trade uses the dollar as an invoicing or vehicle currency, due to a combination of the weight of the

US as a trading nation and the US’ prominence in specialized financial markets where the spot and forward prices of commodities and other goods are set (Goldberg and Tille

2005).

Our final dimension of financial capability (“power”) is participation in global economic and financial governance. Here the US and the other members of the G7 still dominate, although less so than previously. The 1980s and 1990s saw a series of financial

1 Governments announce the allocation among currencies for about 63 percent [sic] of all official reserves, and the IMF compiles these figures. See http://www.imf.org/external/np/sta/cofer/eng/cofer.pdf, consulted November 11, 2009. crises involving sovereign borrowing by developing countries from private banks in wealthy countries: the Latin American debt crisis of the early 1980s, the peso/tequila crises of the mid 1990s, and the East Asian, Russian, Brazilian, and Argentine crises of the late 1990s and early twenty-first century. In each case, developed country governments and international financial institutions dominated by them arranged the details of the world economy’s exit from the crisis. Throughout the 1980s, for example, members of the Paris Club, uniting private creditors of developing countries in default on sovereign loans, and the London Club, bringing together official creditors in advanced industrial countries, negotiated jointly with representatives of each individual borrowing nation. The few attempts of debtor countries to bargain collectively, such as the

Cartegena initiative briefly organized in South America in 1985, met outrage and stonewalling from creditor country governments and institutions, and soon faltered. In the

East Asian crisis of 1997-8 the U.S. government even bristled when fellow G7 country

Japan attempted independent participation through creation of an Asian Monetary Fund

(Laurence 2002; Volz and Fujimura 2008).

The first signs of a shift in the global distribution of “soft” financial capabilities occurred at the turn of the new century. During the East Asian financial crisis, the G7 countries created the Financial Stability Forum (FSF), meeting at the Bank for

International Settlements (BIS) in Basel. The FSF convened financial policymakers from the G7 countries, Australia, Switzerland, Hong Kong, and Singapore to discuss reform of the global financial architecture. There was a brief but loud outcry in elite media, policy, and diplomatic circles over the political unrepresentativeness of the FSF. Consequently, the following year the G7 inaugurated the G20 (initially the G22, then briefly the G33). The financial G20 (hereafter simply the G20) settled on a membership including the G7,

Australia, G8 member Russia, and ten additional large or regionally-prominent emerging powers: Argentina, Brazil, China, India, Indonesia, Mexico, Saudi Arabia, South Africa,

South Korea, and Turkey. The European Union is the 20th member, and the IMF and

World Bank participate on an ex-officio basis. Until the recent financial crisis, however, the G20 was marginal to substantive discussions over global economic governance, which were conducted through the BIS or the FSF. But in the third quarter of 2008, the

U.S. financial crisis worsened and spread to much of the world, including to other advanced industrial countries. The leaders of the G7 belatedly recognized their need for cooperation from countries with significant global monetary capabilities that were members of neither the G7 nor the FSF. The first G20 heads of state summit occurred in

Washington, D.C. in November 2008 to discuss macroeconomic and regulatory policy coordination. Following the April 2009 London meeting the developing country members of the G20 were inducted into the FSF, then renamed the Financial Stability Board.

Subsequently country quotas at the International Monetary Fund (IMF) were incrementally adjusted in favor of large developing countries, and the US and G7 have promised that the selection process for IMF and World Bank heads will become merit- based and transparent. At the joint IMF/World Bank meetings in October 2009, IMF managing director Dominque Strauss-Kahn jokingly referred to the “old G7, I was about to say the late G7” and its effective replacement in global economic crisis management by the G20 (Sydney Morning Herald 4 October 2009; FT 3 October 2009). Their new prominence in the G20 has helped large emerging powers achieve a higher profile in other global fora, such as the December 2009 meeting on climate change in Copenhagen. In sum, this section suggests that the global distribution of financial capabilities remains dominated by the US and the other advanced industrial democracies. However, the direction of change is that of a slow shift in the direction of the major emerging powers. In terms of overall global financial weight and influence, China clearly is first among the emerging powers, and already among the top financial powers globally on several dimensions. Brazil, not yet a top global financial power, is a distant second among the set of emerging financial players.

The emerging financial powers: Not market fundamentalists, but reasonably stable

The top emerging powers rather suddenly find themselves in a position to participate in global financial governance. The situation is analogous to the stylized story told of the initial inclusion of the great merchants in the English parliament in the nineteenth century: both the monarch and the landed aristocracy were financially stretched; in order to encourage the haute bourgeoisie to contribute tax revenues and purchase government debt, they were offered seats in the House of Commons (Moore

1966; Ferguson 2002). Later the urban middle class and eventually the working class were enfranchised. As occurred with the historical reactions to expansion of political voice to new social groups, there are those in the currently dominant countries who question the wisdom of including the representatives of inexperienced, culturally different, and sometimes non-democratic regimes in consequential global economic fora.

More generally, observers wonder about their likely influence on the status quo. In the

2005 phrase of then US Assistant Secretary of State Robert Zoellick, will the new powers be “responsible stakeholders”? 2

2 The phrase is from a 2005 speech about US-China relations by then US Assistant Secretary of State Robert Zoellick. See “China’s Obsession with the Zoellick Speech,” Stratfor Global Intelligence, November 9, 2005, at: http://www.stratfor.com/chinas_obsession_zoellick_speech < Table 5 about here >

A reasonable hypothesis would be that the policy preferences of emerging powers should be at least partly a function of their pre-existing financial market structures, regulatory frameworks, and, more generally, their perceived financial comparative advantages. We employ the same group of eighteen financially consequential states to investigate. Table 5 compares the regulatory and macroeconomic policy frameworks in the same two sets of countries profiled above. The data are from an extensive database that rates 55 “major financial centers,” including 21 “advanced economies,” on 119 separate measures (WEF 2009). “Financial development,” in column 1 is their broadest composite, constructed to reward strong property rights for business and market-based, non-discretionary allocation of finance, even on some dimensions where the efficiency benefits of deregulation may be legitimately contested. For example, a country receives positive points for a high score on capital account liberalization and negative points for significant government ownership of banks. The wealthy democracies rank clearly above the emerging powers; their means are very widely separated (by over two standard deviations), and there is no overlap between the two groups. Among the advanced industrial countries the more lightly-regulated countries Anglophone countries receive the highest rating, although in 2008 the financial crisis caused the US, UK, and Canada to fall back slightly from their even more impressive scores in the previous year’s report.3

The difference between the traditional and emerging powers in column 2’s “financial liberalization” also is very clear. Again, there is no overlap, and a very large gap exists between the two groups’ means. Examining the index’s components, one sees that the

3 The top ten countries in the 2009 financial development index, in order, are: UK, Australia, US, Singapore, Hong Kong, Canada, Switzerland, Netherlands, Japan, and Denmark. large emerging powers have less open capital accounts, are less likely to have accepted the World Trade Organization’s provisions on trade in financial services, and are more likely to offer subsidized credit to domestic borrowers.

The differences between the advanced industrial and emerging economies groups are much less stark in Table 5’s remaining columns. Column 3 reports on “financial stability,” a composite of 15 measures of vulnerability to sudden shifts in global financial markets, including levels of dollarization, public debt, external borrowing, and participation in exotic financial markets such as that for credit default swaps. There is considerable overlap between the advanced industrial and emerging market groups, and their means lie less than one standard deviation apart. Despite their comparative lack of financial development and liberalization, in other words, the financial markets of the top emerging powers are judged relatively safe. Column 4 has the WEF’s financial access measure, a composite of 11 indicators of the availability of financial services to businesses and individuals. Many of the components reflect income per capita, including the density of ATMs per capita, the “sophistication” of financial markets, the availability of venture capital, and the ratio of foreign direct investment to GDP, leading the advanced economies to score higher as a group. Still, there is considerable overlap between the non-Anglophone wealthy economies and the emerging market countries profiled. Moreover, the gap between the means of the two groups is only about 2/3 the size of that in the overall financial development index—smaller than one might expect.

Column 5, credit to the private sector as a share of GDP, is an alternate measure of financial access. This suggests that, excepting South Africa and South Korea, notably less credit is available to private borrowers in our emerging powers set than in the advanced industrial democracies. As a whole, Table 5 suggests that the emerging powers have more regulated, less economically liberal, patterns of national financial regulation than the mature industrial powers. Their comparative regulatory illiberality notwithstanding, these emerging powers performed relatively well on one dimension of great interest to their societies: financial stability. As to financial access, the picture is mixed, and perhaps accounted for by the lesser relative weight of their financial sectors in the overall economies of the top emerging powers as compared to the major industrial democracies.

Next we look at the structure of financial assets across these countries. Through the early 1990s, scholars distinguished between “state” and “market” dominated financial systems, with the former tending toward a larger role for bank credit and the latter possessing vibrant capital markets trading corporate equity and debt securities. Central banks beholden to political executives reigned over bank-dominated systems, while independent central banks allowed decentralized capital markets to flourish. Permutations among these structural financial characteristics resulted in useful hypotheses about the macroeconomic and foreign exchange management preferences of key states (Zysman

1984; Henning 1994). More recent efforts at categorizing national financial systems have focused on their legal and regulatory systems rather than the relative size of similarly- named institutions, providing an updated framework for keeping Anglophone or common-law systems together in one category as contrasted to continental Europe’s civil law traditions (La Porta, Lopez-de-Silanes, Shleifer, and Vishny 1999). Stunningly, these well-established analytical categories do not reflect observable differences between our advanced industrial and emerging powers groups. Moreover, among the major democracies, only the US and Japan seemed to have retained the core characteristics of their traditional financial structures.

Table 6 compares patterns of national financial assets and institutions. Columns 1 through 3 examine sources of business finance. The countries with a larger role for decentralized capital markets financing than for bank credit (shown in column 1) are a surprising set, including three expected Anglophone industrial powers (the U.S.,

Australia, and Canada), France, once the most state and bank-dominated among the major industrial economies, and a difficult to interpret subgroup of emerging powers:

Mexico, Turkey, Brazil, India, and South Africa. The UK, also very unexpectedly, shows up as the most bank-dominated corporate finance system, followed by Germany, both of which reveal a larger proportionate role for bank financing than any emerging power except China. The mean reliance on capital markets is higher among the emerging powers, but both groups of countries show great variation around their central tendencies.

We conclude that there is no important difference between our two sets of countries on this dimension. Column 2 suggests that mean securitization/GDP is higher in the major wealthy democracies, but only because it is high to very high in the Anglophone countries, except Canada, and in Spain. The remaining industrial countries and all of the emerging economies show similar moderate levels. However, there is a meaningful difference between the large stocks of global corporate bonds outstanding (column 3) in the major industrial democracies (Japan excepted) and the much smaller accumulated corporate borrowings of firms in these major developing countries. Overall, we don’t see clear differences between our rich and emerging country groups in terms of their reliance on banks or capital markets, except that firms in the wealthy democracies have had their securities marketed globally for longer, and are thus more likely to have foreign shareholders and creditors.

Table 6’s next three columns look at bank ownership. We find that the national private share in total bank assets is the majority in all of the major industrial economies except the UK, where the assets of foreign banks are greatest. Figures are unavailable for

Japan, where large state banks once dominated, but are now being slowly privatized. The only major wealthy democracy with large state banks remaining is Germany, and their share of assets is still less than that of private national banks. In contrast, among the emerging powers, only in South Africa and Russia are national private banks the largest in terms of their assets. State banks dominate in Brazil, China, and India, while foreign banks rule in Mexico and South Korea. On the dimension of bank ownership the differences between our two study groups thus are clear, even stark. The table’s final category—the scope of government borrowing—again shows limited differences between the two groups. The wealthy countries borrow more, with a difference of about a standard deviation. However, there is overlap between the groups.

< Table 7 about here >

We close this section with an examination of bank soundness and efficiency, shown in Table 7. It appears that the emerging financial powers hold more high-grade capital against their loan assets than the wealthy democracies; their means lie at least a standard deviation apart. Non-performing loans are slightly higher on average in the emerging powers, but the groups’ means fall less than a standard deviation apart, and there is considerable overlap between the two groups. On the ratio of liquid assets/short- term liabilities, where a higher ratio generally implies more conservative, “safe” banking practices, there is no meaningful difference between the two groups. Turning to the measures of bank efficiency in columns 4 and 5, the table reveals that the emerging powers group has higher return on assets (the means are separated by more than a standard deviation), while there is no meaningful difference (the means fall less than a standard deviation apart) in terms of banks’ administrative costs. In sum, on Table 7’s measures the banking systems in these emerging financial powers appear about as stable and efficient as those in the major industrial democracies. We note that unfortunately

Table 7 does not include data for the U.S., Japan, and China, arguably the world’s three most important financial powers.

This section began with the premise that the global financial governance preferences of large emerging market countries—that is, emerging powers in the international political economy—might be expected to derive at least partially from their preexisting national regulatory frameworks. We found that structural financial differences between the major industrial economies and the top emerging financial powers are not large. Both groups are recovering about equally well from the 2007-09 financial crisis and returning to their long-term growth trajectories, although these emerging powers will continue to grow more rapidly than the major industrial countries. These nine emerging powers have as yet shallower financial markets than the nine advanced democracies, and thus less credit available for the private sector. The emerging powers also have a modestly greater role for the state, on average, in both bank ownership and in regulatory oversight than is the case in the major industrial democracies. Finally, the emerging powers have on average a greater role for foreign banks within their economies, while both firms and governments in the industrial economies have borrowed more abroad.

However, the wealthy and emerging powers are surprisingly similar in terms of multiple indicators of financial stability and bank soundness. On most of the other financial structure dimensions surveyed there is greater diversity within each of the two groups than between them. We conclude that the likely financial preferences of the top emerging financial powers are not radically different from those of the major industrial powers.

The financial goals of the BRICs

The previous section employed aggregate data to discover differences in the financial structures and preferences of top emerging powers as compared to the status quo industrial democracies. Here we look more closely at the four emerging financial powers that are politically most important today: the BRICs.

Among the Chinese government’s highest political priorities in recent years has been ensuring continued high growth for the sake of easing potentially explosive tensions among its disadvantaged rural citizens and ethnic minorities. Finding secure access to petroleum and other scarce natural resources needed for its expanding industrial economy has been a key foreign economic aim. Expanding exports have helped the leadership respond to both goals. To ensure jobs and pay for large resource imports a surplus elsewhere in the external accounts is needed: consequently, China maintains a

“competitive” exchange rate policy, that is, one designed to ensure strong sales of its manufactures in global markets (Goldstein and Lardy, eds. 2008). The Chinese leadership has been annoyed by lectures from prominent American opinion-leaders suggesting that the yuan-dollar exchange rate has been intentionally undervalued, thus generating China’s large trade surplus with the U.S., and some in Washington, D.C. would like to formally label China a “currency manipulator,” thus opening the way for U.S. sanctions, likely including an import surcharge of 27.5 percent and measures to force a 40 percent yuan revaluation. The Chinese have reciprocal complaints. In July 2009 ministerial-level

US-Chinese contacts, once anticipated to feature American officials gently chiding China for economic nationalism, instead saw the Chinese lecturing the Americans for their government budget deficit and low savings rates (WSJ 29 July 2009).

Some aspects of the 2007-09 global downturn have been a blessing in disguise for

China, whose leadership has been wanting to reorient gradually toward demand based on the domestic market, without wishing to incur the domestic political costs of reversing strategy. The abrupt disappearance of export opportunities in the US and throughout the industrialized economies has obliged Chinese policymakers to unite around a strategy of domestic expansion based on investment spending, mostly on transportation and related infrastructure, and on encouraging consumer spending within China by expanding consumer credit (Chen 2008). Yet despite bullish predictions for Chinese growth in 2010 and beyond, some analysts have begun to worry that Chinese banks, which required large government capital infusions and thorough restructuring in the initial few years of this century, are again overextending themselves. Their accounts are non-transparent, and their part in the economic stimulus may once again contribute to a large problem with non-performing loans in the future. Wing Thye Woo (2009) observed that, “The state- owned banks (SOBs) will be happy to obey the command to increase lending because they cannot now be held responsible for future nonperforming loans. The local governments and the state-owned enterprises (SOEs) can now satisfy more of their voracious hunger for investment motivated by the soft-budget constraint situation where the profits would be privatized and the losses socialized.” In January 2010 the central bank began to tighten monetary policy by raising bank reserve ratios, amid worry that the expanding Shanghai stock market also could be contributing to a new property bubble.

We suggest that China’s influence in world monetary governance cannot but increase, although others such as Helleiner and Chin (2009) doubt that China’s new financial capabilities yield any consequential constraint on Western policymakers. One medium-term Chinese goal is greater use of the yuan as a global transactions currency, particularly through invoicing South-South bilateral trade in China’s home currency— thus reducing China’s exchange rate risk. China will continue to participate in various regional and South-South fora--from the ASEAN + 3 process, to the Chiang Mai

Initiative Multilateral for regional currency cooperation, to the BRICs summit process— in order to explore ways to discover and promote international financial goals shared with other emerging powers, the most important of which is greater participation in the process of global economic governance. At the level of substantive preferences, China supports a reorientation of the multilateral financial institutions away from their pronounced neoliberalism in recent years and toward a greater legitimation for developmentalist perspectives. China also is seeking an orderly path to diversify away from its current international investment strategy based on holding low-yielding U.S.

Treasury securities, including by using sovereign wealth funds to purchase productive assets in the advanced industrial countries, a move that will continue to be politically- contentious in its relations with the G7 (cf. Truman 2008).

Brazil Brazilian policymakers support their country’s private banks and other financial institutions, including their expansion abroad, but also believe that public sector banks play an essential role in national strategic planning. And the international financial outcome that Brazilian leaders want most is not resolution of a particular dispute in their favor (as with Chinese exchange rate conflicts with the U.S.), but rather an assured, permanent place at the top global negotiating and crisis management table.

Brazil is currently the most financially-sophisticated of the BRICs; among our list of emerging financial powers, the breadth and depth of Brazil’s markets make them most comparable to those of South Korea and South Africa, both of which are much smaller economies. Brazil endured several years of painful bank restructuring and recapitalization following the end of decades of high to very high inflation in the mid 1990s (Stallings with Studart 2006:222-60). Today its banks, which were very little exposed to any of the questionable securities such as mortgage-backed assets and credit-default swaps, are generally reckoned to have emerged healthy from the 2008-2009 crisis (Viewswire 5

November 2005). Brazilian banking is dominated by four large institutions, of which one, the Bank of Brazil, is majority federal government-owned, two are owned by private national capital, and the fourth is majority Spanish-owned, having recently absorbed several mid-sized Brazilian banks. Brazil’s big three nationally-owned banks envision themselves in a contest with Spanish banks to expand throughout Latin America.

Meanwhile, Bovespa, the São Paulo stock exchange, trades full range of financial products: equities, commodities, debt, and a variety of derivatives. Bovespa went public in 2007, and by early 2009 was fourth in market-capitalization among all exchanges worldwide. As Table 6 revealed, Brazilian corporations receive substantially more funding from the capital markets (including by floating debt securities) than from bank lending. The Bovespa index crashed in 2009:Q1 as foreign institutional investors pulled their funds in order to cover losses elsewhere, but by October 2009 it had recovered, and at the end of that month the Central Bank (BCB) had to impose temporary capital controls on short-term inflows. Interestingly, this reversal in market sentiment occurred even as the BCB lowered domestic interest rates as part of its stimulus package, reflecting a policy freedom unimaginable even a decade ago.

Meanwhile, the overwhelming majority of long-term industrial credit originates with the national development bank, the BNDES, which also has extensive on-lending programs with commercial banks around the country. The BNDES’ president has proudly noted that although development banks in both China and South Korea are bigger in terms of their annual lending, they are “monoline” banks, engaged only in direct lending to large firms, while the BNDES has a range of services (FT 4 November 2009). In addition to direct lending to big businesses, the BNDES buys equity in new firms along the lines of a venture capital business, on-lends to private banks, runs small business support units, and is the country’s principal provider of export finance. What he did not say, as it would have been impolitic, was that the sum of BNDES loans in 2008 was greater than that of the World Bank, not only in Latin America but worldwide. BNDES lending also exceeded the sum of all multilateral development bank lending in Latin

America and the Caribbean, whether from the World Bank, Inter-American Development

Bank, or one of several smaller regional institutions. The BNDES does not show up in international tables of banks, because it does not accept deposits nor does its equity trade. Brazilian policymakers are eager and willing to participate in the minutiae of global financial governance. In fact, the foreign ministry for some years has had a policy of seeking out positions coming open in various multilateral (government to government), transnational (civil society to civil society), and mixed (both public and private) financial governance fora, trade associations, and non-governmental organizations. Brazilians are now active in internal governance within, for example, the

Institute for International Finance (IIF), Global Corporate Governance Forum (GCGF),

International Accounting Standards Board (IASB), World Federation of Exchanges

(WFE), and IOSCO (International Organization of Securities Commissions).

Brazilian leaders, whose country’s structural trade surplus and accumulation of foreign exchange reserves both are smaller than those of China (which recently has replaced the US as its single major trading partner), are not eager to exchange dollar dominance for that of the euro or renmimbi. At the same time, Brazilian politicians have been quite willing to give rhetorical support the idea of a plurality of reserve currencies or their replacement by a non-national currency based on Special Drawing Rights (SDRs) of the International Monetary Fund. They are also anxious to promote their regional financial leadership in South America through technical assistance to their neighbors.

Russia

For all the posturing and even vitriol of public debate in Russia, the possibility of domestic political unrest may frighten Russian leaders less than its counterpart worries

Chinese politicians. Russia has endured both deep economic hardship and much political dissent and uncertainty in the two decades since the end of Communist rule there.

Periodic and somewhat competitive elections notwithstanding, the state is frequently authoritarian and capricious. At the same time, information, people, and money flow freely within the country and across its borders. One might characterize the Russian leadership’s attitude toward financial markets as an extension of the general political milieu: financial experimentation has been free-wheeling, non-transparent, and often very profitable (Berglof, Kounov, Schvets, and Yudaeva 2003). For the most part regulatory oversight is light—until suddenly it is not, and draconian penalties befall those who have strayed too far. Gazprombank, one of the country’s three largest banks, made enormous losses in 2008. Connected to the profitable and shadowy natural resource sector, it had operated largely free of regulatory scrutiny. Although commodity price volatility probably made some losses inevitable, their scale brought President Medvedev to announce plans to fully or partially privatize state-owned enterprises through the stock exchange (FT 12 November 2009).

National finances in Russia in 2008 were much healthier than in 1998, when financial contagion from the East Asian crisis hit, and the country defaulted on its sovereign debt. However, in the first decade of this century Russian banks and firms borrowed heavily abroad on the strength of the country’s natural-resources-led expansion; they thus were strongly impacted by the 2008-9 financial crisis and credit crunch that hit the major advanced industrial country markets. In this case, a useful image might be to counterpoise Russia to India, perhaps the two BRICs whose financial management style is most dissimilar, despite the large role of state banks in each. While

Indian financial management has been extremely cautious, Russian banks have been encouraged to take risks, both in terms of expanding abroad and by experimenting with exotic financial instruments. In the few years prior to 2008 Russia’s financial sector asset growth was “close to 50 percent a year” (Banker 6 October 2008). As of late 2009,

Russia was the only one of the four BRICs whose government, like those in the US, UK, and other major advanced industrial economies, had had to come up with funds to recapitalize shaky banks. Like China, but unlike either Brazil or India, banks remain the dominant source of corporate finance in Russia. Yet even so, government control of banks is sometimes tenuous. For example, much of the stimulus money transferred from the public budget to banks in late 2008 and early 2009 apparently was used by banks to speculate in foreign exchange as the ruble fell (EIU-Russia June 2009:7).

The stock market, though substantial in terms of market capitalization, also retains strong elements of cowboy capitalism, although the participation of foreign investors remains strong. In mid 2009 the EIU wrote, “As the state began to play a larger role as a source of funds for business in 2008, corporate governance in Russia began to decay, and it will probably decay further in 2009. The negative financial results of 2008 put the governance mechanisms of many companies to the test … Many firms have been turning to related-party lending to support affiliated entities in distress, potentially against the interests of external investors” (EIU-Russia June 2009:60). The Russian state may foster crony capitalism.

By the criteria of the Western industrial democracies, Russia probably lacks both the financial strength and credibility sufficient enable its representatives to contribute usefully to technical discussions of reforms of the global financial architecture such as those being carried out at the Financial Stability Board (formerly the FSF) or the Basle II committees, all of which meet at the Basle headquarters of the international organization for central banks, the BIS. However, Russian leaders do not share these views, and clearly aspire to international political, and thus also financial and monetary, leadership.

It is they who initiated ministerial meetings and since April 2008 leaders’ summits among the BRICs countries. At the World Economic Forum’s annual meeting in Davos in January 2009 Prime Minister Vladimir Putin damned US financial management— while claiming to be doing no such thing—and offered his country as the champion of

Europe, left to the side by “one regional centre [that] prints money without respite and consumes material wealth, while another regional centre manufactures inexpensive goods and saves money printed by other governments.” He continued, “Excessive dependence on a single reserve currency is dangerous for the global economy. Consequently, it would be sensible to encourage the objective process of creating several strong reserve currencies in the future.” Putin further reasoned that reserve currency issuing nations were happy to have others hold their currencies and therefore had reciprocal responsibilities. “Consequently, it is important that reserve currency issuers must implement more open monetary policies. Moreover, these nations must pledge to abide by internationally recognised rules of macroeconomic and financial discipline. In our opinion, this demand is not excessive” (WSJ 28 January 2009).

India’s Gandhian and Nehruvian ethic of morally-infused gradualism and abstemiousness in government still extends to its national style of financial regulation.

India’s large British-owned banks were taken over by the new government shortly after independence in 1947, while Indira Gandhi’s administration nationalized all of the large

Indian-owned banks in 1969. For decades “capitalism” and “profits” were words with negative connotations in political speeches, views shared by much of the intelligentsia. Even state banks were forbidden by law to grow too large, on the understanding that they would tend to become monopolies and engage in anti-consumer practices. India, in common with the other three BRICs, has liberalized its economy quite dramatically since the mid 1980s, but has done so very gradually and with much discussion and consensus- building for each incremental change. Private banks were allowed to be formed to compete with public sector banks in the early 1990s, and from the late 1990s the state banks have been encouraged to constitute themselves as joint-stock companies and sell minority shares to the public—although the government must retain at least 50 percent of voting shares. New foreign banks also have been allowed, but they operate under many restrictions to their growth, including prohibitions from taking over existing Indian banks. Until very recently, even the majority state-owned banks were prohibited from mergers and acquisitions. Meanwhile, the central bank, the Reserve Bank of India (RBI), has acted as a guardian, not only against inflation as is usual for central banks, but also against what it has viewed as precipitous modernization and financial deregulation, even when promoted by the finance ministry (cf. Ghosh 2009). As is also the case with its

BRICs counterparts, the RBI does not enjoy formal independence. Nonetheless, contemporary governments recognize that any overt attempts to muzzle much less replace a sitting RBI governor before his or her term is up would immediately translate into very negative financial market sentiments, so de facto independence is quite high.

Although its stock exchanges have been given new freedoms in leaps and bounds since the early 1990s, and currently supply almost three-fifths of corporate financing,

India’s public sector banks remain the core of its financial system. They are smaller and less globally active than those of the other BRICs, precisely because domestic regulation has prevented expansion—thus far, although the new head of India’s largest bank, the public sector State Bank of India, emphasizes its future acquisition plans (Banker 1

December 2008). Due to their intentionally conservative management, they have come through the current crisis very well, with little exposure to bad assets. In September 2008 the country’s largest and most ambitious private bank, ICICI, experienced a classic bank run as depositors digested the news of the failure of Lehman Brothers, a quantity of whose securities ICICI held. The RBI stepped in rapidly, and the run was stopped before

ICICI suffered great damage. Academic economists generally agree with senior finance ministry officials, and with private bankers and investors, that banking efficiency has improved notably as a result of even the limited financial liberalization put in place thus far, which has put felicitous competitive pressure on public sector banks (GOI-PC 2008;

Thomas 2006).

In common with leaders in the other BRIC countries, Indian policymakers believe their country’s size and accomplishments merit greater recognition on the world stage.

They are envious of China’s growth rates, and increasingly economically linked to

China via trade, but are also mistrustful of Chinese intentions on a number of security- related issues, recently with respect to the Indian state of Arunachal Pradesh, which in

2009 official Chinese commentators, after a hiatus of many years, again referred to as

“Southern Tibet.” It has been easier for India to cooperate with Brazil, as it has done via the IBSA (India-Brazil-South Africa) group began in 2003 to lobby jointly in the World

Trade Organization. In April 2009 a joint IBSA--BRICs group meeting is scheduled in

Brazil. With respect to issues of greater participation in global governance, India’s interests are aligned with those of the remaining BRICs. On substantive issues related to global financial regulation, it shares with them, and perhaps particularly with China, a clear reluctance to push capital account liberalization or opening to foreign investment in financial services at all rapidly. Indian policymakers will provide rhetorical support to statements preferring to reduce the dominance of the US dollar—at least so long as they seem unlikely to have concrete results in the short-term.

Conclusions

This paper began with the claim that the current financial crisis had accelerated— or at least helped to uncover--three trends that already were underway. The first was that of a gradual political power shift toward new players, manifested in the shift of global economic governance from the G7 to the G20. The most prominent emerging power is of course China, but the remaining BRICs plausibly may lay claim to being the next in line.

Beginning with ministerial level meetings in 2006, and leaders’ summits from April

2008, the Russian government has taken the lead in organizing the BRIC countries--a disparate set of countries initially conceived of in 2001 as a marketing tool to attract private investors--as a formal IGO (Roberts 2010). The BRICs have wildly diverse economic structures, trading profiles, and domestic political systems, but nonetheless now issue joint communiqués and share several preferences. Most importantly, each perceives itself to be unduly excluded from global governance. In 2005 Brazil and India made a joint bid, with Germany and Japan, for permanent membership in the United

Nations Security Council. At the time neither China nor Russia supported their bid;

Russia has since changed its mind. A second global trend is toward specifically financial multipolarity. The BRICs’ group has collectively demanded a greater say for developing economies in governance of the IMF and World Bank. In the case of the IMF, Russia concurred with a demand that developing and transitional country representation be increased by an additional 10 percent--even though Russia is not one of the countries that will benefit, as Russia’s votes in the Fund currently exceed its global economic weight. The four also have jointly defended, in principle, a move toward lesser use of the US dollar as a trading and reserve currency, and all except India have taken concrete steps to begin to invoice their own trade in their home currencies. Officials in each of the four have spoken in favor of collaborative global financial reform through the G20, perhaps even the United Nations.

A third tendency is a shift in the dominant global economic ideology away from the romance with ever less regulated and constrained market exuberance, particularly in exotic financial markets, and back toward a consensus on a greater role for government to ensure that banks and exchanges operate to support societal goals as well as those of their corporate executives. All four BRICs retain financially-activist states. Their national governments own big banks, and unabashedly employ credit subsidies as a tool of state developmental policy. As Brazil’s finance minister Guido Mantega (2009) explained, possession of large state banks enabled all four BRICs to respond both rapidly and effectively to the financial crisis: when the economy began to slow, he and his colleagues could order the public sector banks to step up lending, and in some cases to lower their rates. Yes, he noted, these banks needed to be both efficient and profitable—but they also had a social function that was an explicit part of their mission. Similarly, in June 2008

Y.V. Reddy, then Governor of India’s central bank, used a speech at the Bank for International Settlements (BIS) to observe that central banks ought to be accountable to the government, the real sector, and the public at large—not simply to the financial markets (Ghosh 2009).

The BRICs countries, individually and collectively, have been somewhat skeptical of free market financial capitalism of the Anglo-American mode. In their minds the recent crisis in major industrial country markets has vindicated many of their choices.

It is Russia, with the deepest and most laissez faire ties to global markets, that has been slammed hardest of the four by the financial crisis. Of course perceptions are not static, and the view from at or near the top of any hierarchy looks different from that seen by challengers and aspirants. For example after having been accused, with at least some justification, of holding the Doha Round of trade liberalization talks hostage to their particular concerns, both Brazil and India, as well as China, now have realized the critical importance to their economies of global free trade in goods, and are pushing hard for a resumption of negotiations. The financial preferences of the BRICs are also evolving.

Nonetheless, in the recent words of Martin Wolf, chief economics commentator for

London’s Financial Times,

[T]he supremacy of western – and particularly US – models of finance is no

longer evident. … [T]he pendulum is swinging towards regulation. … Beyond

these changes, all more or less directly the consequence of the crisis, is the shift

in the locus of world economic activity and savings. … As China’s economy

continues to grow and, in all probability, its exchange rate continues to

appreciate, China’s absolute savings will become by far the biggest in the world.

.. This will change … the philosophy of finance: for most emerging and developing countries, the financial industry exists to push the economy along a

development path broadly determined by the state. It will not be allowed to

determine the allocation of resources across the economy. Such a role for

finance has never been accepted in France, Germany or Japan. It will not be

accepted in China either (FT 6 November 2009).

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Economy Popu- Military Technology Energy Total Global Region Total 2008 lation, 2008 per capita indep. “hard” leader- leader- “hard” & 2008 2006 2004 (max=15 ship? ship? “soft” (0-4) (0-3) (0-3) (0-3) (0-2) ) (0-3) (0-2) (max=20) US 4 2.5 3 2.5 0.5 12.5 3 2 17.5 China 3 3 1 1 0.5 8.5 2 2 12.5 UK 2 1 1 3 1 8 2 1 11 Russia 1 2 1 1.5 2 7.5 1 2 10.5 Japan 3 2 0 1 0 7.5 2 1 10.5 France 2 1 1 1 0 6.5 2 1 9.5 Germany 2 1 0 3 0 6 2 1 9 Brazil 1 2 0 1 1* 6 1 1 7* Canada 1 0.5 0 2.5 2 6 1 0 7 India 1 3 0.5 0 0.5 5 1 1 7 Italy 1 1 0 3 0 5 1 1 7 Spain 1 0.5 0 3 0 4.5 1 0.5 6 Mexico 1 2 0 1 2 5 0 0 5 Australia 0.5 0 0 2.5 2 5 0 0 5 Indonesia 0.5 2 0 0 2 4.5 0 0 4.5 Iran 0 1 0 0.5 2 3.5 0 1 4.5 So. Africa 0 0.5 0 1 2 3.5 0 1 4.5 Argentina 0 0.5 0 1.5 2 4.0 0 0 4.0 Saudi A. 0 0 0 0.5 2 2.5 0 1 3.5 Venezuel 0 0.5 0 1 2 2.5 0 1 3.5 a Turkey 0.5 1 0 1.5 0 3 0 0 3 So. Korea 0.5 0.5 0 1.5 0 2.5 0 0 2.5 Thailand 0 1 0 0.5 0.5 2.0 0 0 2.0

* Brazil discovered very substantial new petroleum reserves in 2007-2009, and is likely to become a net exporter in the near future, which would raise its “energy independence” score to 2 and its total score to 8.

Notes: 1) Raw scores and further details available from author. 2) Cutoff levels chosen to discriminate among the country cases, as our interest is in (perceived) relative capability. Coding rules are as follows. Economy: 0.5 if 2008 market rate gross domestic product (GDP) is $500 to <$1000 B; 1 if $1,000 to <$2,500 B; 2 if $2,500 to <$4,000 B; 3 if $4,000 to < $10,000 B; and 4 if $10,000 or greater. Population: 0.5 for 25 to <50 million residents in 2008, 1 for 50 to <100 million people; 2 for 100 to <200 million; 2.5 for 200 million to <1 billion; and 3 for >= 1 billion. Military: 0.5 for each of top five military spenders in 2008; 0.5 for each declared nuclear weapons state ; US, the sole military superpower, alone accounting for over 40% of world military spending, receives an additional 2 points.Technology uses two indicators: fixed and mobile phone lines per hundred people and broadband subscribers per hundred citizens. 0.5 if phones/100 >= 50; 1 if >= 100; and 1.5 if >= 150. Another 0.5 if broadband/100 >= 1.5; 1 if >= 10; and 1.5 if >= 15. Energy independence: 0 if net energy imports >= 50% of consumption; 0.5 if net energy imports >= 20% of consumption; 1 if net energy imports are < 20% of consumption; and 2 for being a net energy exporter. Regional leadership means a country’s willingness and ability to exercise independent leadership vis-à-vis its geographic neighbors. Author judgments. Global leadership measures participation and leadership in existing intergovernmental organizations and institutions. Author judgments. Sources: Cols. 1-2 from www.economist.com, consulted August 2009. Cols. 3-4 from World Bank, World Development Indicators, consulted online August 2008. Col.5 from International Energy Administration, Energy Yearbook 2006, pp. 48-57. Col. 6 from Stockholm International Peace Research Institute (SIPRI). The 15 major spender countries in 2008. Accessed online in August 2009. Table 2. Crisis and recovery, major developed democracies and emerging powers (average annual GDP growth, constant $ dollars, %)

Developed Crisis Recovery Emerging Crisis Recovery democracies 2007-09 2010-11 powers 2007-09 2010-11 Australia 1.52 2.88 Brazil 3.10 3.61 Canada 0.19 3.61 China 9.49 10.50 France -0.07 2.09 India 7.02 7.77 Germany -0.67 1.90 Indonesia 4.93 5.25 Italy -1.34 1.47 South Korea 1.03 4.90 Japan -1.55 2.99 Mexico 0.29 5.41 Spain 0.55 1.47 Russia 2.39 4.64 UK -0.16 2.87 South Africa 2.59 4.41 US 0.11 3.46 Turkey 0.13 3.50 Mean:* -0.16 2.53 Mean:* 3.44 5.55 S.D.: 0.89 0.77 S.D.: 2.99 2.11

* Unweighted mea Source: International Monetary Fund, World Economic Outlook, April 2009; Consulted January 28, 2010 at www.imf.org. Figures after 2008 are estimates. Table 3. Weight in global financial markets, major developed democracies and emerging powers

Core All financial Mutual fund |interntl fin assets| Rank order (of 18 financial assets (EIU) assets, $bn, + |interntl fin in table) by core assets (WEF) $bn, 2008 2009 Q3 liabilities| $bn, financial assets, $bn, 2008 2008 2008 US 58,119 125,400 10,832 43,246 1 Japan 22,458 63,504 662 8,957 2 UK 12,205 35,812 703 28,401 4 Germany 11,912 26,372 313 12,855 5 France 9,293 18,761 1,851 12,600 6 Italy 6,951 11,550 284 5,627 7 Spain 6,935 7,850 276 5,023 8 Canada 5,655 10,642 545 2,422 9 Australia 3,526 5,295 1,151 1,905 10 Subtotal: 137,054 305,186 16,617 121,036 --

China 12,564 21,744 307 4,322 3 India 3,357 .. 118 760 11 Brazil 3,281 4,370 742 1,104 12 S. Korea 2,754 6,648 269 1,104 13 Russia 2,102 3,338 3 1,766 14 S. Africa 1,189 2,215 99 373 15 Mexico 1,049 2,011 68 837 16 Turkey 846 924 20 551 17 Indonesia 537 503 .. 319 18 Subtotal: 27,679 41,753 1,626 11,136 -- 9 Emerg/ 0.202 0.137 0.098 0.092 9 Rich

Sources: For core financial assets (column 1) see World Economic Forum (WEF), The Financial Development Index 2009 (Geneva: WEF, 2009), “Country profiles,” 52-272. For column 2’s alternative estimate of total assets see Economist Intelligence Unit, Country Finance, various countries, for 2008 and 2009. Latest available as of October 1, 2009 (in a few cases figures refer to 2007, not 2008). The EIU figure for India is almost certainly incorrect, and has been omitted. Investment Company Institute (ICI), Washington, DC. Latest statistics on “Worldwide Mutual Funds, Net Assets” accessed February 19, 2010 at www.ici.org. Absolute value of international investment assets plus absolute value of international investment liabilities (column 4) from International Monetary Fund (IMF), International Financial Statistics (IFS), February 2010, consulted online Feb 6, 2010. Table 4. International finance, major developed democracies and top emerging powers

Attractiveness to global investors Global payments position Home firms’ Recent global Recent global World FX Net foreign global bonds M&A’s, IPOs, reserves, assets/ outstanding, % share % share % share GDP $bn 2006-08 2006-08 Q3 2009 2008 2007 or 2008 US 5,523 41.7 16.9 1 -24% Japan 147 3.2 4.0 12 +51% UK 1,353 10.0 5.7 1 -3% Germany 2,804 3.5 3.2 2 +25% France 1,604 4.3 1.9 1 -18% Italy 971 3.0 2.0 1 -20% Spain 1,500 2.7 3.1 1 -75% Canada 1,592 4.9 1.3 1 +0% Australia 576 3.2 2.1 <1 -49% Subtotal: 16,070 76.5 40.2 20 -- Mean*: ------12% S.D.: 35

China 44 1.2 19.3 26 +35% India 37 0.9 2.7 3 -6% Brazil 63 1.2 6.6 3 -17% S. Korea 112 1.2 1.4 3 -12% Russia 117 2.1 8.9 5 +16% S. Africa 28 0.5 0.2 <1 -4% Mexico 52 0.9 0.9 1 -34% Turkey 15 0.6 0.9 1 -25% Indonesia 15 0.2 0.7 1 -31% Subtotal: 483 8.8 41.6 43 -- 9 Emerg/ 0.030 0.115 1.031 2.128 -- 9 Rich Mean*: ------9% S.D.: 21

*Unweighted mean. Notes: These other emerging markets (although not necessarily “emerging powers” by this paper’s definition) also hold large FX reserves, but are not listed in the table: Saudi Arabia (5%), Taiwan (4%), Hong Kong (3%), Singapore (2%), Algeria (2%), and Thailand (2%). The 27 Eurozone countries together hold 6% of global FX reserves. Sources: For home firms’ global bonds outstanding (column 1), see Economist Intelligence Unit, Country Finance, various countries, for 2008 and 2009. Latest available as of October 1, 2009. For mergers and acquisitions (M&As) and initial public offerings (IPOs) in columns 2 and 3 see World Economic Forum (WEF), The Financial Development Index 2009 (Geneva: WEF, 2009), pp. 310, 326-327. Net foreign assets is net figure for international investment from International Monetary Fund, International Financial Statistics, divided by current $ GDP from World Bank, World Development Indicators, both consulted online Feb 6, 2010. Foreign exchange reserves are as of Q2 or Q3 2009, from International Monetary Fund, accessed at: . Table 5. Financial regulatory and policy framework, major developed democracies and emerging powers

Scale of 1 (worst) -7 (best), for columns 1-4

Overall Financial Financial Financial Memo: financial liberalization stability access Loans to development (CAL, GATS, (risk of currency, (for firms, private index domestic banking, & including sector/ interest rates) sovereign debt SMEs, and GDP crises) citizens) (%) 2007 UK 5.25 7.00 4.57 4.02 176 Australia 5.13 5.40 5.48 5.19 114 US 5.12 6.85 4.56 4.19 202 Canada 4.96 6.95 5.57 4.75 157 Japan 4.64 6.76 4.57 3.03 97 France 4.57 6.85 5.27 3.86 101 Germany 4.54 6.84 5.34 2.96 105 Spain 4.40 7.00 4.66 3.95 169 Italy 3.98 7.00 4.44 3.72 96 Mean: 4.73 6.74 4.94 3.96 135 S.D.: 0.39 0.48 0.44 0.68 38

So. Korea 3.91 3.65 4.73 2.50 101 China 3.87 2.82 4.83 3.31 .. So. Africa 3.48 3.3 4.67 2.89 155 Brazil 3.46 3.21 5.13 3.31 38 India 3.3 1.73 4.23 2.76 43 Russia 3.16 1.82 4.5 2.73 32 Mexico 3.06 3.18 5.13 2.95 20 Turkey 3.03 2.88 3.79 3.01 26 Indonesia 2.9 2.75 4.44 3.11 23 Mean: 3.35 2.82 4.61 2.95 55 S.D.: 0.34 0.61 0.40 0.25 45

Notes: 1) The overall Financial Development Index is composed of seven “pillars,” each a composite of multiple indicators. Two pillars are “Financial Stability” and “Financial Access.” The set of “major financial markets” included in the study is comprised of 20 advanced economies and 35 developing or transitional economies. Small tax haven countries were excluded. 2) Our “Financial Liberalization” score combines 3 of the individual indicators in the WEF’s “Institutional Environment” pillar. CAL = capital account liberalization; GATS = General Agreement on Trade in Services, representing WTO commitments to liberalize access to foreign direct investment in financial services; SME = small and medium-sized enterprises. 3) SME = small and medium-sized enterprises. Sources: Cols. 1-4: World Economic Forum (WEF). The Financial Development Report 2009. Geneva: World Economic Forum, pp. 12-13, 280-281. Col. 5: “Private credit by deposit money banks and other financial institutions” from Thorsten Beck and Ed Al-Husseiny, “Financial Structure Dataset,” Washington, D.C.: The World Bank, DECRG-FI, revision of November 1, 2008. Table 6. Structure of financial institutions and asset classes, major developed democracies and emerging powers, %

Sources of business finance Bank ownership Crowding out Capital Securiti- Global National Govt Foreign Public debt/ mkts/ zation/ corporate private share in share in GDP Bank loans GDP bonds share in bank bank 2007 2007/8 2008 outstand./ bank assets assets GDP assets 2005 2005 2007/8 2005* Australia 124 5.06 53.59 85.0 0 15.0 16 Canada 108 3.32 26.12 92.8 0 7.2 64 France 118 2.80 55.84 84.2 0.3 15.5 64 Germany 52 2.67 77.80 53.5 40.0 6.5 65 Italy 83 1.98 42.45 79.6 9.3 11.1 104 Japan 61 0.97 7.69 .. .. 6.1 170 Spain 65 5.50 93.19 89.8 0 10.2 36 UK 41 10.11 100.47 .. .. 54.2 44 US 191 16.30 40.28 91.5 0 8.5 61 Mean*: 94 5.41 55.27 82.3 7.1 14.9 69 S.D. 44 4.61 28.86 12.5 13.8 14.3 42

Brazil 170 1.31 4.37 34.9 45.2 19.9 45 China 56 0.17 0.89 29.3 68.8 1.9 18 India 144 1.23 3.95 19.2 74.0 6.8 58 Indonesia 73 1.53 2.57 21.8 38.5 39.7 34 Mexico 262 1.03 5.15 .. .. 80.0 23 Russia 96 3.69 7.02 53.2 38.5 8.3 6 S. Africa 128 2.23 9.86 70.5 0 29.5 31 S. Korea 92 .. 13.38 25.6 18.8 55.6 28 Turkey 203 2.33 1.58 ...... 39 Mean*: 136 1.69 5.42 36.4 40.5 30.2 31 S.D. 63 0.99 3.83 17.4 24.1 25.4 14

* Unweighted mean. ** Computed as residual from government and foreign shares. Sources: Col. 1: WEF 2009. Includes bank deposits, equity market capitalization, private bonds outstanding, and public bonds outstanding. Cols. 2 ,4, & 7: EIU Country Reports, 2008 or 2009 (most recent available as of October 2009). Col. 2 includes all of the above plus additional specialized assets, varying by country. However, the figure for India appears incorrect, and is omitted. Col. 3, “public debt” is from Central Intelligence Agency (CIA), World Factbook, consulted online at February 2010. Col. 4 is (“equity market capitalization” + “domestic financial sector & corporate debt issues outstanding”)/ “total loans to the corporate & household sectors.” Col. 5: WEF 2009. Col. ? & ?; J. Barth, G. Caprio, and R. Levine, “Bank Supervision and Regulation Dataset,” hosted at www.worldbank.org, 2008 revision, Questions #3.8.1 and 3.8.2. NOTE: I think above sources note is wrong. Correct is this: “Sources of business finance” are computed from EIU Country Reports 2008 & 2009, while “Bank ownership” is from Barth, Caprio, and Levine, and public debt from CIA factbook. Table 7. Bank soundness and efficiency, major developed democracies and emerging powers (%, as of end 2008)

Bank soundness Bank efficiency Tier 1 capital/ Non-perform Liquid assets/ Return on Administrative Risky Assets loans/ Short-term assets costs/ Total loans liabilities Bank income Australia 8.2 1.4 34.6 0.9 47.4 Canada 9.8 0.8 37.2 0.5 77.7 France 8.3 3.3 150.5 0.1 56.1 Germany 9.6 2.8 120.4 -0.1 73.4 Italy ...... Japan ...... Spain 8.5 2.8 .. 0.8 44.4 UK 9.6 1.6 42.3 -0.5 84.3 US ...... Mean*: 9.0 2.1 77.0 0.3 63.9 SD: 0.7 0.9 48.8 0.5 15.3

Brazil 14.3 3.1 117.1 1.3 70.6 China ...... India 9.1 2.4 29.5 0.9 50.7 Indonesia 15.4 3.2 30.8 2.4 48.7 Mexico 15.5 2.5 94.9 0.6 50.5 Russia 11.6 3.8 92.1 2.1 66.8 So. Africa 10.2 3.9 9.8 1.2 49.2 So. Korea 8.8 0.6 101.4 0.7 60.2 Turkey 17.2 3.4 74.2 1.5 52.5 Mean*: 12.8 2.9 68.7 1.3 56.2 SD: 3.0 1.1 37.3 0.6 8.0

* Unweighted mean. Source: International Monetary Fund, “Financial Soundness Indicators,” accessed February 2010, at: www.imf.org.