A Neo-Westphalian International Financial System?

TLDR: In the late 1990s, private markets were widely assumed to have triumphed over the state as mentioned in this paper, while the public votes only every few years, the markets vote every minute.

Abstract: In the late 1990s, private markets were widely assumed to have triumphed over the state. State firms were perceived to be a recipe for failure. Large financial flows overwhelmed and humbled small states. Countries that wanted to succeed had to embrace the policies favored by private capital. Daniel Yergin wrote in 1998, "While the public votes only every few years, the markets vote every minute.... National governments ... must increasingly heed the market's vote--as harsh as it sometimes can be." (1) The rating agencies that helped to determine a country's ability to access market financing were thought to be the superpowers of the post-Cold War era. (2) Michael Mandelbaum summarized the mood of the late 1990s well: Capitalism requires capital and the countries of the periphery looked to the core countries to supply it.... Attracting private capital required having the appropriate institutions and pursuing the appropriate policies. It required, that is, putting on the 'golden straightjacket' in order to appear a worthy recipient of resources for investment ... (3) Ten years after the financial crises in Asia, Russia and most of Latin America, talk of the triumph of private markets over the interventionist state seems far from the mark. Today's global economic system is marked both by increased trade--including greater trade in financial assets--and by a far larger state role in the financial markets. Martin Wolf, the Financial Times' influential columnist, recently wrote that "Globalization was supposed to mean the worldwide triumph of the market economy. Yet some of the most influential players are turning out to be states, not private actors." (4) The reassertion of the state in the marketplace has come not from an expansion of the state's regulatory role, but rather from the growing role governments--particularly governments in the emerging world--play in key global markets. Global financial order once again depends heavily on the financial decisions of large states, not just on swings in private market flows. Stephen Weber and his colleagues have argued that the world's emerging powers prefer a "neo-Westphalian" global order that places a far higher premium on state sovereignty than full integration into existing "liberal" international institutions. (5) This new and still emerging global financial system can be considered neo-Westphalian in two senses. First, large states are again key actors in financial markets. While the total stock of privately held financial assets in the United States, Europe and Japan remains large relative to the stock of financial assets in government hands, the foreign assets of key emerging market governments are growing far faster than those of private intermediaries. The foreign portfolios of large emerging market states now exceed the foreign assets of even the largest private financial institutions. Foreign exchange traders believe that, through its sale of dollars for euros, the government of China influences the dollar's value against the euro. U.S. Department of Treasury traders believe that the government of China exercises more influence over the treasury and agency market than any actor other than the U.S. Federal Reserve. This should not be a surprise. The government of China now holds more dollar assets than the Federal Reserve. Ousmene Mandeng of Ashmore, a large fund manager, argues, "No market, not even the treasury market, is now deep enough to accommodate the unprecedented growth of emerging market reserves." (6) Second, national governments have more financial firepower than do the multilateral institutions. The International Monetary Fund (IMF) now has roughly $250 billion available to lend, with few takers. At the end of June 2008, China held US$1800 billion at its central bank, with another US$500 billion or so in the hands of the state banks and in China's new sovereign wealth fund. Russia now has well over US$500 billion in its central bank. …