CIAO DATE: 11/2008
October 2001
Institute on Globalization and the Human Condition, McMaster University
Global finance is simultaneously one of the most globalized and one of the most esoteric sectors in the world economy. Within global finance, perhaps no activity is more esoteric and more difficult to understand than the buying and selling of derivatives. Their names are familiar perhaps - futures, options, forwards, swaps - but their nature is obscure. Simply put, derivatives are financial instruments that are used to hedge risk. If a Canadian corporation knows that it will want to buy 50 million US dollars on foreign exchange markets in three months time, it can arrange a fixed price for that purchase using a financial contract called a derivative. In doing so, it lowers the risk of the price of the currency changing drastically before it purchases the amounts it needs.
Derivatives are important because they have become very big business in global finance. In a way, they epitomize globalization in that they permit individuals and firms to control price irrespective of time and place, and all for a known fixed cost. They have also become objects of speculation, leading to trillions of dollars sloshing around the globe on a weekly basis. The sheer sizes of the amounts involved and the difficulties in regulating the markets and the firms active in those markets have left the world financial system vulnerable to financial crises several times over the past decade.
This working paper explores the relationships between derivatives markets and the capacity of nation-states to govern. It focuses on a particular concept, ‘transformative capacity’ and asks whether nation-states can use such capacity to maintain some control over the effects of global markets like those for derivatives. The concept speaks to how well states can marshal resources within government and from civil society actors in defining a strategy for how to take advantage of opportunities in the global economy and how to cushion shocks derived from this economy. The paper argues that global governance arrangements have supplanted to some extent the efforts undertaken by nation-states.
Resource link: Governing Global Finance: Financial derivatives, liberal states and transformative capacity [PDF] - 104K