Financial Security Is at the Heart of National Economic Security

From: English Edition of Qiushi Journal Updated: 2011-09-19 20:08
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    Finance is the nucleus of a modern economy, and financial competition is the focus of international economic competition today. This places financial security at the heart of national economic security. The recurrent financial crises that have occurred in the world since the 1980s show several things. One, a country that is not fully aware of the importance of taking precautions against financial risks or takes inappropriate actions to guard against risks can experience a financial crisis. Two, a financial crisis triggered by numerous problems and issues accumulated in the process of social transition and opening up in a developing country, more often than not, turns into an economic crisis, a social crisis or even a political crisis in that country. Three, although it is difficult for a country to be established and grow strong through financial means, poor financial management can debilitate a country or even bring about its total collapse. Hence we need to pay close attention to financial security from both a technological and strategic perspective. 

  The Core Position and Role of Finance

    The end of the cold war and the advance of economic globalization have made the importance of non-traditional security, especially economic security, increasingly more obvious. Financial security refers to the capability of a country to deal with various types of risks coming from inside and outside the country in the process of financial development to ensure that its financial sovereignty is not endangered, that its financial system is not disrupted, that large amounts of financial wealth are not lost, and that its financial system functions normally. Financial security, as a product of a given historical stage, is closely related to economic globalization, and is being seen by more and more countries as an important component of their national security strategy.

    As a matter of fact, the sustained growth of the post-war global economy is closely linked to the rapid development of the financial system, which has become a means for allocating resources, a tool for serving the real economy and a driving force for economic growth. But the turmoil plaguing the world’s financial markets over the last 30 years is posing a grave threat to the steady growth of the world economy and the economic security of sovereign countries. There are several reasons for this. First of all, finance provides a means of wealth distribution. The virtualization of the economy has made it possible for institutions, groups and individuals that have financial resources and dominate financial markets to siphon off wealth of other individuals, society and the state to fill their own pockets by manipulating the prices of financial assets. Secondly, finance is a tool employed by economic powers. In a modern market economy, the power to influence the international order and the right to have a say in international markets means the power to determine prices and the distribution of interests. Therefore, all types of economic entities have now made it their objective to gain the power to determine prices for all kinds of assets, including exchange rates, interest rates, stock prices and prices of bulk commodities. Economic powers (giant multinationals, international financial oligarchs and countries that engage in economic hegemony) have always taken advantage of their monopolistic position in the financial markets to make small and weak economic entities (small and medium-sized enterprises, small and medium-scale capital, and small and weak countries) dependent on them. Third, finance may become a force for mass destruction. Innovations in finance provide an important driving force for financial development as well as an important source of financial risks. As finance plays more and more important role in economies, credits and debts arising from commercial transactions have increasingly become a breeding ground for financial derivative products, resulting in rapid expansion of the scale of international financial derivative products, the total value of which far exceeds the world’s total GDP. Economic globalization has led to the penetration of financial derivative products into every part of the world. The emergence of a problem in the ground for these products or any link in the chain of the derivation process will spark a chain reaction and the rapid release of a force of mass destruction that can devastate financial systems and the economies alike.

    Hence, finance is a double-edged sword, serving to optimize the allocation of resources and stimulating economic growth, as well as representing the threat of increasing economic risks and intensifying social contradictions. In addition to paying close attention to financial development and stability, the necessity of guarding against financial risks and crises cannot be ignored. Now that economies are becoming more and more dependent on finance, the emergence of a financial crisis is not only disruptive for the virtual economy but the real economy as well, and will usually deteriorate into an economic and social crisis. Due to the consequences of economic globalization, international financial turbulence has become a normal state. As a result, developing countries that are opening to the outside world, especially those with emerging markets, are faced with an ever-growing threat. The Asian financial crisis has made it clear to Asian countries that were survivors of this disaster that finance is a powerful force, and that they can not always defend their own countries and peoples by merely relying on missiles and a strong army. Financial security has become an important component of national security strategy.

  Safeguarding Financial Security from a Technological Perspective

    Financial security, in a narrow sense, means security of money and capital financing. All economic activities directly related to monetary circulation and credit and all variables affecting the normal functioning of the financial system can be regarded as falling within the scope of financial security. Financial security derives from maintaining the proper balance between financial efficiency and financial stability, and between innovations in the financial industry and regulation of the financial industry. Because of economic globalization, the financial sector of a modern market economy is the sector with the fiercest competition and the highest magnitude of risk. Financial activities always involve risk. Therefore, it is not possible to entirely eliminate financial risk or achieve absolute financial security. 

    The recent series of financial crises, in particular the worst financial crisis in a century in the US, clearly indicates that serious problems have cropped up in theoretical innovations and policy execution in international finance. The theory of economic liberalism and policies of financial liberalization, in particular, have proved to be a failure overall despite the positive role played in improving the financial market system and improving the financial operating mechanism.

    According to the theory of economic liberalism, financial liberalization stimulates financial deepening, which, in turn stimulates economic growth that benefits the people of the country. The idea that liberalization promotes economic growth has long been widely accepted as “truth” by developing countries, especially by countries with emerging markets. The annual Index of Economic Freedom for all countries (regions) of the world was first compiled in the 1990s by the U.S. Heritage Foundation, using economic freedom as an important indicator of a country or region’s prosperity. However, World Bank statistics show that in the 25 years from 1980 to 2005 when financial liberalization was most in vogue, the average economic growth rate for 105 developing countries was only 0.8%, far below that for the period of social reform that followed World War II.

    Contrary to the argument that economic liberalization promotes economic growth, financial liberalization easily leads to financial crises. Liberalization sends an excessively optimistic signal, resulting in excessive lending and investment, a lower national savings rate and a rapidly rising current accounts deficit, thus eroding the foundation for economic stability and making it possible for over invested enterprises caught in a debt trap to touch off a bank crisis. Financial liberalization has increased the threat of financial instability and is a crucial factor leading to financial turmoil in which short-term fluctuations in stock prices become noticeably bigger, especially in developing countries. International monopoly capital reigns supreme in the international competition. Financial liberalization in those countries has created extremely favorable conditions for the free entry and exit of international monopoly capital and good profits from arbitrage trading.

    According to World Bank statistics, a total of 108 financial crises of varying severity were recorded in the world from the 1980s to the late 1990s. More than 63 of those crises occurred in the 1990s when financial liberalization was at its high tide, an obvious increase over the level of the 1980s. Latin America has become a region prone to financial crises since countries in the region began carrying out financial liberalization in the early 1990s. A financial crisis in a developing country often triggers an economic and social crisis and, in some cases, even leads to a political crisis. Hence, developing countries must be highly vigilant in this regard.  

  Safeguarding Financial Security from a Strategic Perspective

    Independent economic and financial sovereignty is the element most crucial to financial security. A country cannot ensure stable development of the financial sector or any significant financial security, if its economic development is subject to the control of other countries and if it is not in a position to determine its own monetary and financial policies. Supporters of economic liberalism have tried hard to dodge the question of economic and financial sovereignty, arguing that the resulting financial issues are technical issues, a question of market risks or a question of financial regulation in an attempt to substitute financial security with financial stability, and some even deny or make light of the importance of financial security. Developed countries, led by the United States, however, constantly work to strengthen and improve their strategies for economic and financial security. As early as 1999, the US included safety of the banking and financial industry among the “vital interests” to the United States in the report, A National Security Strategy for a New Century. Hence, the question of safeguarding financial security must not be viewed only from a technological perspective but from a careful strategic perspective as well.

    In a modern market economy, financial resources are considered separately from natural resources as a special kind of social resource, and are considered separately from strategic natural resources, such as oil and natural gas, as a strategic social resource. These not only affect the financial stability, economic growth and social development of a country but also affect its national security. 

    Under the US financial strategy, a policy of financial liberalism is the core element of the effort to promote neoliberalism. While preaching financial liberalism with high-sounding words and working hard to convince the rest of the world of its merits over the past century, the United States has adopted more than 1,000 measures to restrict and regulate foreign capital. Moreover, these measures are more rigorous and stringent than those adopted by numerous developing countries. Between 1917 when the Trading with the Enemy Act was enacted to 2007 when the Foreign Investment and National Security Act was passed, the US passed more than ten laws and executive decrees to tighten regulations and restrictions on foreign capital. The Committee on Foreign Investment in the United States was established in 1975 specifically to subject foreign capital investments to national security examination, and its power has been growing ever since then. The National Strategy for the Physical Protection of Critical Infrastructure and Key Assets, introduced in 2003, lists agriculture and food, water, public health, emergency services, the defense industrial base, telecommunications, energy, transportation, banking and finance, the chemical industry and hazardous materials, and postal and shipping as 11 key sectors requiring special protection, which covers almost the entire US economy. As the financial crisis has worsened, the United States has resolutely stopped calling for economic liberalism that it had been so enthusiastically supporting, embraced Keynesianism again and even went as far as nationalizing its financial institutions. This clearly shows that the United States does not uphold the values of liberalism under all circumstances. 

    The lesson and reminder provided by the international financial crisis is that the irrational international economic order of today’s world and the prevailing unstable world economic situation makes the financial security situation of developing countries, especially those with emerging markets, even worse. Therefore, developing countries should work hard to reduce financial crisis, safeguard financial stability and ensure financial security while deepening financial reform, improving financial efficiency and promoting innovation in the financial sector to “guard against hegemony, strengthen protection of their rights and interests and ensure security.” They must work to bring about a new international economic order that is fair, equitable, sound and stable while focusing on “working for peace, pursuing development and promoting cooperation”.

Note: Jiang Yong is the Director of the Center for Economic Security Studies, China Institute of Contemporary International Relations

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