326 CHAPTER NiNE ■ InternatIonal Po lItI cal economy
multilateral institutions (the World Bank institutions, regional development banks)
and official bilateral donors (the United States, Germany, Japan) have declined as a
percentage of total capital flows; at the same time, private capital flows from MNCs
and other private sources have expanded. During the international financial crisis that
began in 2008, however, the direction was reversed temporarily.
Beginning in the 1980s, international financial flows accelerated through several
other mechanisms. Exchange rates were no longer fixed, so traders in currency exchange
markets and in MNCs could capitalize on buying and selling currencies, often in very
short periods, facilitated by increasing technological sophistication of communica-
tions. By the beginning of the new millennium, such currency transactions averaged
more than $3 trillion a day. Markets developed new financial instruments, such as
derivatives (options against the future in a variety of asset classes, including loans and
mortgages). These instruments were packaged and sold around the world, spreading
risk and accelerating the flow of capital. New economic actors, sovereign wealth
funds— state- owned investment funds composed of financial assets, including stocks,
bonds, precious metal, property, or other financial instruments— formed in capital-
surplus countries such as China and in the major petroleum exporters such as Kuwait,
the United Arab Emirates, Norway, Rus sia, and Canada. Those wealth funds have
been able to move capital quickly across national bound aries, taking advantage of cur-
rency differentials and buying and selling new financial instruments to maximize
long- term economic return for what many recognize may be a declining resource.
Fi nally, economic liberalization has led to the emergence of offshore financial centers,
such as the Cayman Islands, Bermuda, and the British Virgin Islands. These jurisdictions
have low taxation and little or no regulation. Individuals, companies, and states can
move capital in and out rapidly via electronic transfers, making millions of trans-
fers daily.
The Asian financial crisis of the 1990s illustrates the pos si ble outcomes of the glo-
balization of finance. Beginning in Thailand in 1997, in a relatively short period,
2 percent of gross domestic product fled that country. Within weeks, the crisis spread
to Indonesia, Malaysia, the Philippines, and beyond. Many countries were unable to
adjust to the rapid withdrawal of capital. Exchange rates plummeted to 50 percent of
precrisis values, stock markets fell 80 percent, and real GDP dropped 4 to 8 percent.
Individuals lost their jobs as companies went bankrupt or were forced to restructure.
Millions of people were forced into poverty. In Thailand, then spreading to South Korea
and Taiwan, and eventually, to Brazil and Rus sia, economies that had previously
depended on external trade experienced an unparalleled sense of economic vulnerabil-
ity. Fueled by instantaneous communication, the capacity to move trillions of dollars
daily, and the power of MNCs, traders, and financial entrepreneurs, economic global-
ization quickly displayed its pitfalls. The largely un regu la ted market had melted down,
and states and individuals appeared helpless.