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Challenging the Sovereign

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Permanent Link: http://ufdc.ufl.edu/UFE0021053/00001

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Title: Challenging the Sovereign Investigating Financial Globalization's Challenges to the State
Physical Description: 1 online resource (64 p.)
Language: english
Creator: Scalera, Jamie E
Publisher: University of Florida
Place of Publication: Gainesville, Fla.
Publication Date: 2007

Subjects

Subjects / Keywords: globalization, sovereignty, uk
Political Science -- Dissertations, Academic -- UF
Genre: Political Science - International Relations thesis, M.A.
bibliography   ( marcgt )
theses   ( marcgt )
government publication (state, provincial, terriorial, dependent)   ( marcgt )
born-digital   ( sobekcm )
Electronic Thesis or Dissertation

Notes

Abstract: If there ever was a word to describe the 1990s, it would be globalization. This phenomenon has been the subject of political and academic debates and inquiry, but few definitive conclusions about globalization have been reached. Among the many debates surrounding globalization is the debate over the extent to which globalization represents a threat to state sovereignty. The aim of this project has been to investigate this relationship with a particular focus on financial globalization as a challenge to state sovereignty. Even though it was the initial goal of the researcher to join the chorus proclaiming the end of the sovereign state, the findings presented in this study cannot support that initial perspective. Consequently, I argued that financial globalization has significantly change the pre-1990 conceptualization and practice of state sovereignty but has yet to present a challenge significant enough to completely undermine state sovereignty. The challenges presented by financial globalization emphasized herein include information technology and the internet, non-state actors, speculation, crisis and contagion, and external pressures on domestic decision-making. Each of these challenges are presented highlighting their impact on the domestic and international markets of the United Kingdom. Then, state responses to these challenges both domestic and global are investigated paying particular attention to the response of the United Kingdom. Britain's domestic responses focus primarily on the restructuring of the Treasury, the Bank of England, and the Financial Services Authority as a means to control technology, non-state actors, and speculation. At the global level, the United Kingdom's participation in the Organization for Economic Cooperation and Development and the European Union are investigated as a means of controlling for contagion and external pressures. In the end, the empirical evidence of the successful implementation and continuation of these responses to financial globalization suggest that states are able to maintain their sovereignty even in the face of serious challenges presented by financial globalization. While the expression of state sovereignty in these examples was clearly different from previous years, this change in sovereignty does not signal an end or undermining of sovereignty; although, some scholars might see them as the same. Instead, the changes in sovereignty are undertaken as a prerogative of the state?an expression in itself of the state's sovereignty?and do not signal an end to sovereignty. Thus, at this point in time, financial globalization does not represent a fatal threat to state sovereignty.
General Note: In the series University of Florida Digital Collections.
General Note: Includes vita.
Bibliography: Includes bibliographical references.
Source of Description: Description based on online resource; title from PDF title page.
Source of Description: This bibliographic record is available under the Creative Commons CC0 public domain dedication. The University of Florida Libraries, as creator of this bibliographic record, has waived all rights to it worldwide under copyright law, including all related and neighboring rights, to the extent allowed by law.
Statement of Responsibility: by Jamie E Scalera.
Thesis: Thesis (M.A.)--University of Florida, 2007.
Local: Adviser: Brown, M. Leann.
Electronic Access: RESTRICTED TO UF STUDENTS, STAFF, FACULTY, AND ON-CAMPUS USE UNTIL 2008-05-31

Record Information

Source Institution: UFRGP
Rights Management: Applicable rights reserved.
Classification: lcc - LD1780 2007
System ID: UFE0021053:00001

Permanent Link: http://ufdc.ufl.edu/UFE0021053/00001

Material Information

Title: Challenging the Sovereign Investigating Financial Globalization's Challenges to the State
Physical Description: 1 online resource (64 p.)
Language: english
Creator: Scalera, Jamie E
Publisher: University of Florida
Place of Publication: Gainesville, Fla.
Publication Date: 2007

Subjects

Subjects / Keywords: globalization, sovereignty, uk
Political Science -- Dissertations, Academic -- UF
Genre: Political Science - International Relations thesis, M.A.
bibliography   ( marcgt )
theses   ( marcgt )
government publication (state, provincial, terriorial, dependent)   ( marcgt )
born-digital   ( sobekcm )
Electronic Thesis or Dissertation

Notes

Abstract: If there ever was a word to describe the 1990s, it would be globalization. This phenomenon has been the subject of political and academic debates and inquiry, but few definitive conclusions about globalization have been reached. Among the many debates surrounding globalization is the debate over the extent to which globalization represents a threat to state sovereignty. The aim of this project has been to investigate this relationship with a particular focus on financial globalization as a challenge to state sovereignty. Even though it was the initial goal of the researcher to join the chorus proclaiming the end of the sovereign state, the findings presented in this study cannot support that initial perspective. Consequently, I argued that financial globalization has significantly change the pre-1990 conceptualization and practice of state sovereignty but has yet to present a challenge significant enough to completely undermine state sovereignty. The challenges presented by financial globalization emphasized herein include information technology and the internet, non-state actors, speculation, crisis and contagion, and external pressures on domestic decision-making. Each of these challenges are presented highlighting their impact on the domestic and international markets of the United Kingdom. Then, state responses to these challenges both domestic and global are investigated paying particular attention to the response of the United Kingdom. Britain's domestic responses focus primarily on the restructuring of the Treasury, the Bank of England, and the Financial Services Authority as a means to control technology, non-state actors, and speculation. At the global level, the United Kingdom's participation in the Organization for Economic Cooperation and Development and the European Union are investigated as a means of controlling for contagion and external pressures. In the end, the empirical evidence of the successful implementation and continuation of these responses to financial globalization suggest that states are able to maintain their sovereignty even in the face of serious challenges presented by financial globalization. While the expression of state sovereignty in these examples was clearly different from previous years, this change in sovereignty does not signal an end or undermining of sovereignty; although, some scholars might see them as the same. Instead, the changes in sovereignty are undertaken as a prerogative of the state?an expression in itself of the state's sovereignty?and do not signal an end to sovereignty. Thus, at this point in time, financial globalization does not represent a fatal threat to state sovereignty.
General Note: In the series University of Florida Digital Collections.
General Note: Includes vita.
Bibliography: Includes bibliographical references.
Source of Description: Description based on online resource; title from PDF title page.
Source of Description: This bibliographic record is available under the Creative Commons CC0 public domain dedication. The University of Florida Libraries, as creator of this bibliographic record, has waived all rights to it worldwide under copyright law, including all related and neighboring rights, to the extent allowed by law.
Statement of Responsibility: by Jamie E Scalera.
Thesis: Thesis (M.A.)--University of Florida, 2007.
Local: Adviser: Brown, M. Leann.
Electronic Access: RESTRICTED TO UF STUDENTS, STAFF, FACULTY, AND ON-CAMPUS USE UNTIL 2008-05-31

Record Information

Source Institution: UFRGP
Rights Management: Applicable rights reserved.
Classification: lcc - LD1780 2007
System ID: UFE0021053:00001


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1 CHALLENGING THE SOVEREIGN: INVESTIGATING FINANCIAL GLOBALIZ ATIONS CHALLENGE S TO THE STATE By JAMIE ELIZABETH SCALERA A THESIS PRESENTED TO THE GRADUATE SCHOOL OF THE UNIVERSITY OF FLOR IDA IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF ARTS UNIVERSITY OF FLORIDA 2007

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2 2007 Jamie Elizabeth Scalera

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3 For Dad, Mom, Cameron and Emilyfor your unconditional love and support

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4 ACKNOWLEDGMENTS I would like to thank the faculty and staff in th e Department of Political Science, especially my chair and supervisory committee, for their insights and direction on this project and many others over the last two years. I would also like to thank my friends and fam ily who have encouraged me to always do my best. More importantly, I owe you the greatest de bt of gratitude for helping me to remember what is truly important in this life. I hope this makes you proud.

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5 TABLE OF CONTENTS page ACKNOWLEDGMENTS...............................................................................................................4 ABSTRACT....................................................................................................................... ..............6 CHAPTER 1 INTRODUCTION................................................................................................................... .8 The Research Question.......................................................................................................... ...9 Literature Review.............................................................................................................. .....11 Financial Globalization...................................................................................................12 State Sovereignty.............................................................................................................16 Conceptualizations............................................................................................................. .....18 Conclusion..................................................................................................................... .........19 2 GLOBALIZATIONS C HALLENGES TO STATE SOVEREIGNTY................................21 Information Technology and the Internet...............................................................................22 Non-state Fina ncial Firms...................................................................................................... .26 Speculation.................................................................................................................... .........28 Crisis and Contagion........................................................................................................... ....31 External Pressures............................................................................................................. ......34 Conclusion..................................................................................................................... .........36 3 THE STATE RESPONSE TO FI NANCIAL GLOBALIZATION........................................37 Domestic Response.............................................................................................................. ...40 Her Majestys Treasury...................................................................................................41 Bank of England..............................................................................................................43 Financial Services Authority...........................................................................................44 Global Response................................................................................................................ .....46 Organization for Economic Cooperation and Development...........................................47 The European Union........................................................................................................49 Conclusion..................................................................................................................... .........52 4 CONCLUSION..................................................................................................................... ..54 LIST OF REFERENCES............................................................................................................. ..59 BIOGRAPHICAL SKETCH.........................................................................................................64

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6 Abstract of Thesis Presen ted to the Graduate School of the University of Florida in Partial Fulfillment of the Requirements for the Degree of Master of Arts CHALLENGING THE SOVEREIGN: INVESTIGATING FINANCIAL GLOBALIZAT IONS CHALLENGES TO THE STATE By Jamie Elizabeth Scalera May 2007 Chair: M. Leann Brown Major: Political ScienceInternational Relations If there ever was a word to describe the 1990s, it would be globalization. This phenomenon has been the subject of political and academic debates and inquiry, but few definitive conclusions about globalization have been reached. Among the many debates surrounding globalization is the deba te over the extent to which gl obalization represents a threat to state sovereignty. The aim of this project ha s been to investigate this relationship with a particular focus on financial globalizati on as a challenge to state sovereignty. Even though it was the initial goal of the researcher to join the chorus proclaiming the end of the sovereign state, the findings presented in this study cannot support that initial perspective. Consequently, I argued that fi nancial globalization has signi ficantly change the pre-1990 conceptualization and practice of state sovereignty but has yet to present a challenge significant enough to completely undermine state sovereig nty. The challenges presented by financial globalization emphasized herein include inform ation technology and the internet, non-state actors, speculation, crisis and contagion, and ex ternal pressures on domestic decision-making. Each of these challenges are presented high lighting their impact on the domestic and international markets of the United Kingdom. Th en, state responses to these challenges both

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7 domestic and global are investig ated paying particular attention to the response of the United Kingdom. Britains domestic responses focus pr imarily on the restructuring of the Treasury, the Bank of England, and the Financial Services Au thority as a means to control technology, nonstate actors, and speculation. At the global level, the United Kingdoms participation in the Organization for Economic Cooperation and De velopment and the European Union are investigated as a means of controlling for contagion and ex ternal pressures. In the end, the empirical evidence of the su ccessful implementati on and continuation of these responses to financial globalization suggest that states are able to maintain their sovereignty even in the face of serious challe nges presented by financial globalization. While the expression of state sovereignt y in these examples was clearly different from previous years, this change in sovereignty does not signal an e nd or undermining of sovereignty; although, some scholars might see them as the same. Instead, the changes in sovereignty are undertaken as a prerogative of the statean expr ession in itself of the state s sovereigntyand do not signal an end to sovereignty. Thus, at this point in time, financial globalization do es not represent a fatal threat to state sovereignty.

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8 CHAPTER 1 INTRODUCTION Globalization was the buzzword of the 1990s and remains today as the hot topic in International Relations (IR) and Internationa l Political Economy (IPE). For over a decade, scholars have been exploring the phenomenon of globalization and debating their findings. Globalization literature has focused on a number of different issue areas, including social, political, cultural, and economic globalization. Th e range of research areas is truly endless under the umbrella of globalization, but for the purposes of this study, our focus will rest solely on financial globalization. While a seemingly narrow topic, financial globalization is signifi cant to the broader research area of globalization. Within this issue area are a number of elements that are central to the process of globalization as a whole, incl uding technology and non-stat e actors. Thus, the topic of financial globalization in a sense serves as a micro-leve l investigation into the broaderpicture of globalization. In part icular, financial globalization repr esents an important area of study, because it represents one of the primary issue areas where the debate surrounding globalizations impact state s overeignty has materialized. Through an effort to understand what globalization is and how it came about, scholars within IR and IPE more specifica lly have noted that many of the indicators of globalization have presented a challenge to state sovereignty. In particular, the efforts to define financial globalization theoretically and empi rically have coincided with a debate over the exact nature of the relationship between financial globalization and state sovereignt y. The literature on financial globalization represents the dive rsity of opinion on this subjec t ranging from arguments that financial globalization has completely underm ined state sovereignty to arguments that globalization has never challenged sovereignt y (Strange 1986; Thomson 1995; Barrow 2005).

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9 This project seeks to contribute to this debate by examining further the relationship between the challenges presented by financial gl obalization and the response offe red by states in an effort to retain their sovereignty. The Research Question The question of the extent to which financial globalization presents a challenge to state sovereignty serves as the focus of this project. Essentially, this project examines the theoretical literature on financial globaliza tion in order to understand th e challenges that the various indicators of financial globalization present to state sovereignty. This project will draw on the body of globalization literature in the subfield of IPE to i nvestigate this relationship. Globalization literature addre sses both the theoretical and empirical aspects of the contemporary world from a number of different a pproaches. Generally, globa lization is seen as an intensification in scope a nd depth of linkages and interc onnectedness between peoples and states that has occurred since the 1960s. Just as the concept of globalization encompasses a number of distinct globalizations, there are a number of different theoretical approaches to globalization. In the context of this research project, I will draw primarily on the body of globalization literature that is reflective of mainstream IPE. As such, this investigation assumes the existence of an a priori reality that can be observed with some degree of objectivity. In that observation, states are assumed to be the central actors within the global financial system, even though the presence of non-state ac tors is recognized and given a great deal of importance. Additionally, the goal of this pr oject is not seeking emancipa tion from the current global financial system but rather to better understa nd that system. It is important to address this issue from a theo retical level for two reas ons. First, both the concept of financial globalizati on and state sovereignty are well -used within the discipline but remain poorly defined. There are a number definitions of both financial globalization and state

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10 sovereignty, which often leads to a disconnect in the academic dialogue. Thus, this project will seek to distill conceptualizat ions of both the concept of financial globalization and state sovereignty. Secondly, by addressing this debate from the theoretica l level, it is the aim of this study to lay a foundation for future empirical inve stigation. While the ultimate focus of this investigation is not meant to be empirical, some empirical examples will be taken from the United Kingdom during the 1990s. Drawing examples from the British case is partic ularly relevant to th is study because of the centrality of the United Kingdom in the historic al and contemporary international financial market. Prior to 1914, Britain enjoyed pre-emin ence over the internatio nal economic system. This time period, referred to now as Pax Britannica was characterized by British dominance in foreign trade as well as finance with the sterling serving as the primary in ternational medium of exchange (Cassis, 2005: 6). Historically, theref ore, London rested comfortably in its position as the worlds foremost financial center until this pos ition was interrupted due to the financial strain on the British economy caused by World Wars I and II. Still, in the contemporary context, the United Kingdom had become one of the most gl obalized economies in th e world. In terms of number of foreign banks, foreign exchange trading volume, and num ber of international companies with a presence in London, the United Kingdom ranks as one of the most global and interconnected financial markets in the world. According to Cassis ( 2005: 291) London had 481 foreign banks in residence in 2000 compared to only 287 in New York. In 1998, the foreign exchange trading volume in London comprised 32% of the global total whereas the volume in New York rested at 18%. Finally, the London Stock Exchange (LSE) had 499 international companies listed on its exchange in 1999 versus 429 companies on the NASDAQ and 406 on the New York Stock Exchange (NYSE). Moreover, London is unique from other major financial

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11 centers in the world, because it specializes in se rvicing internationally oriented capital flows as opposed to only servicing regiona l markets (Watson, 2002: 197). Fi nally, the British example is important, because the United Kingdom continues to lead the way toward further financial liberalization throughout Europe and in the rest of the worl d through participation in the Organization for Economic Cooperation and Deve lopment (OECD) and the European Union (EU) (Abdelal, 2006: 6). Given this level of significance to th e historical and contemporary international financial market, the United Kingdom represents a state open to the challenges presented by financial globalization. For this reason, the empirical exam ples provided by this case will prove useful in estab lishing a theoretical foundation for fu ture empirical investigations into the extent to which financial globa lization challenges st ate sovereignty. The relationship between financial globalizat ion and state sovereignty has enjoyed a prominent place within the academic and political debates regarding globalization. As a means of contributing to these debates, this project will bring greater clarification to the meanings of financial globalization and state so vereignty as theoretical concepts with added reference to their empirical significance. This clarification is n ecessary to move forward in both research and policy on the issue of gl obalization and the ways in which states respond to the various challenges it presents. Literature Review Before moving ahead with the research question be fore us, it is important to first define the two central elements to of study. There is certainly no consensus on the definitions of financial globalization or state sovereignty, but many schol ars have weighed in on the debate surrounding the meanings of these two terms. Here, the litera ture on these concepts will be examined for the purposes of distilling a workable definition of both financial gl obalization and state sovereignty.

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12 Financial Globalization Scholars contributing to the literature on financial globaliz ation have defined this concept in a number of ways. With each variation on th e definition of financial globalization, scholars propose different ways of looki ng at state sovereignty. Jame s Tobin (1998: 161) defines financial globalization as the market of assets and debts securities, bank loans and deposits, titles to land, and physical cap ital. This market, according to Tobin, was the easiest to globalize, because the communicatio n revolution made the transfer of funds faster and cheaper. Moreover, Tobin (1998: 161) writes that the only barriers to financial tr ansactions are national regulations, and as these have b een liberalized in country after country, international financial flows have flooded into national securities mark ets and banking systems all over the world. However, scholars often propose that finance was much more completely internationalized in the nineteenth century as a way of showing that financial globa lization is really nothing new (Tobin, 1998: 162). Then, this historical comparis on is often taken to weaken the argument that financial globalization presents any real threat to state sovereignty. Nevertheless, while Tobin refers to the classic argument th at financial globalization is itself not entirely new, he recognizes that the speed of these high-volum e transactions has led many obser vers to fear that financial globalization has gone too far too fast. Consequently, in order to regain or retain control over the financial market, governments need to come up with solutions to slow financial transactions as well as to regulate the influx of capital into their states. Tobins solution is a small tax on foreign transactions, now known as the Tobin Tax, which w ould prevent rapid transfers of hot money (Tobin, 1998: 167). While states and internationa l organizations have yet to implement such a tax, it is important to note that Tobin believes the speed of financial globalization presents a potentially serious threat to the state.

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13 Dombrowski (1998) offers an important cont ribution to the debate surrounding financial globalization and state sovereignt y. For the purposes of his inve stigation, the definition of financial globalization is narrowe d to the system under which cr edit is created, allocated, and put to use (Dombrowski, 1998: 2). He then di vides the research on fina ncial globalization into three broad categories: global fi nancial structures, regional arra ngements, and national financial systems. In each of these areas, Dombrowski sees important implications for the basic theoretical concepts within International Relations especially the sovereign state. Based on his survey of the literature, Dombro wski concludes that the majority of scholars agree with that markets exist under the authority and by permissi on of the state, and are conducted on whatever terms the state may choose to dictate, or allo w (Strange, 1986: 29 as cited in Dombrowski, 1998: 11). A number of st udies have confirmed that states have been critical to the construction and evolution of global finance, but Dombrowski also recognizes that many scholars believe this creation has moved beyond the control of the states. The question of regulation is at the heart of this debate, which has led many sc holars to point out the trend towa rd cooperation between states as well as states and private ac tors to guarantee levels of re gulation. For Dombrowski, this signals not a retreat of the state but a redefinition of the role of the state within the international financial structure (Dombrowski, 1998: 14). He does not believ e that collaborative efforts at regulation are a sign of the retrea t of the state or a surrendering of sovereignty, but Dombrowski admits that these assertions remain to be tested empirically (Dombrowski, 1998: 21-22). For Cohen (2001) the central issue of state s overeignty brought into question by financial globalization is not regulation but rather borde r control. Cohen (2001: 76) writes that the significance of globalization is that it is working to diseng age the boundaries of the states authority from its territorial borders, and/or changing the wa ys in which these boundaries are

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14 governed. For Cohen, state sovereignty is ti ed to geographic space, which he sees as problematic under the system of globalization. Th is observation is important to the definition of financial globalization, because it emphasizes the m obility and fluidity inherent in the process. Financial globalization is unique fr om other periods of financial integration largely because of the breakdown of territoria lity. In this way, Cohens perspective is useful in the debate regarding the integrity of state sovereignty in the face of financial globalization. Sinclair (2001) and King and Sinclair (2003) present studies of fina ncial globalization that deal primarily with the influence of non-state acto rs on state sovereignty. Initially, these private actors, banks and ratings agencies in particul ar, were called on as experts when the global financial structure was being put into place; many st ate governments handed over the process of financial liberalization and globali zation to these private actors. Consequently, these actors have become embedded in the basic architecture of th e global financial order (Sinclair, 2001: 441). Presently, this has resulted in private actors settin g international rules, institutional operations, as well as systems of self-regulation (King and Sincla ir, 2003: 349). What th is means for the state is that these private actors have not only establ ished the global financial system but have done so in a way that ensures their unregulated influence. In other words, policy can be made by private institutions or networks when the outputs of thes e private institutions shape the basic norms that produce action in governments and business organi zations (King and Sinclair, 2003: 358). In the current globalized system, this influence has become especially relevant as other non-state actors including pension funds, tr ansnational corporations and pr ivate citizens have entered the system. Consequently, this situat ion presents a real challenge to sovereignty as it deals with the ability of states to establish and enforce rules without external influenc es. These scholars do not seem totally convinced that stat es will be able to undo the influe nce private actors have in the

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15 global financial system, but they do believe it wi ll be an important ques tion to address for the future of state influence in the global financial system. Finally, Hveem (2000) understands the debate between globalization a nd state sovereignty through the context of re gionalization. Regionalization refers to the process that actually builds concrete patterns of transaction within an identified regional space (Hveem, 2000: 72). Essentially, this is the process where states enter into formal or informal relationships with other states, usually for economic benefit. The foremost example of regionalization in the contemporary era has been the European Union (EU), but other examples include the North American Free Trade Agreement (NAFTA) and th e Association of Southeast Asian Nations (ASEAN). Clearly, some of these regional organizations are more d eeply integrated than others, but they all represent the moveme nt by states toward deeper inter-state economic and political relationships with other states in close geogr aphic proximity. Hveem writes that among scholars of globalization, the process of region alization is seen as part of the effort of states to cope with a pervasive globalization, and they see the region as a staging post for corporate actors on their way to becoming global participants (Hveem, 2000: 70). This has been part icularly relevant for financial globalization as regional agreements have often helped to contribute to state and private firm competitiveness as well as their protection ag ainst the volatility of the financial system (Hveem, 2000: 78). In this case, Hveem argues that the region has become important to the process of globalization, because re gionalization represents an effort by states to seek authority and global governance that is l acking in the curren t global system (Hveem, 2000: 77). Here, Hveem brings the process of re gionalization into the conceptua lization of globalization as a central component of this process.

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16 Clearly, the concept of financ ial globalization has taken on a number of definitions throughout the academic literature. For the majority of the scholars review ed here, the definition of financial globalization is qui te narrow usually only emphasizing one or two indicators. The goal in this project, however, is to integrate th ese specific indicators into a broader and workable conceptualization of financial globali zation, which will be presented below. State Sovereignty Also important to this debate are the scholar s whose primary focus is state sovereignty. Krasner (2001a and 2001b) is an example of one sc holar who contributes to this debate from the sovereignty-focused approach. He argues that s overeign states are the building blocks, the basic actors, for the modern state system (Krasner, 2001b: 230). Consequentl y, sovereignty has been defined in a number of ways, and Krasner cites fo ur primary dimensions of sovereignty. First, sovereignty can be understood as th e ability of the state to contro l movement across its borders. This aspect of sovereignty is commonly expr essed through controls on trade and immigration. Secondly, sovereignty can be defined by the authority structures within stat es and the ability of these structures to effectively regulate domestic behavior. Here, sovereignty rests with the institutions and domestic structur es of government. As such, do mestic sovereignty encompasses both the acceptance of these authority structures and the degree of control that the state can actually exercise on its c itizens through these struct ures. Krasner defines the third component of sovereignty as Westphalian or Vatt elian sovereignty which speaks to the ability of the state to exclude external sources of author ity in the decision-making process. Essentially, this aspect of sovereignty focuses on the ability of the state to devise foreign polic y free of external pressures. Finally, international legal sovere ignty comprises the mutual recognition of states. This facet of sovereignty rests on the state bei ng an independent territorial enti ty that is capable of entering into voluntary contractual ag reements with other states (Krasner, 2001b: 230-233). Based upon

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17 his definitions of sovereignty, Krasner argues that globalization does not represent a significant threat to state sovereignty. With respect to financial globalization, Kras ner writes that high capital flows and the rules of sovereignty have coexisted for at least two centuries even though this environment can be problematic for domestic sovereignty as well as sovereign control over cross-border movements (Krasner, 2001b: 235). Kr asner is ultimately unwilling to part with his four-part conceptualizat ion of sovereignty, but he does conc ede that globaliz ation, especially monetary and financial globalization, is changing the scope of state c ontrol. This is particularly evident in the willingness of stat es to walk away from issues they cant resolve, which ultimately causes states to turn over c ontrol in these issue-areas to other actors (Krasner, 2001a: 24). Ultimately, Krasner never fully expands these thought s in part because of his fundamental belief in the staying power of state sovereignty. Wang (2004) is not entirely c onvinced that the concept of state sovereignty is without contestation. He defines sovere ignty as absolute supremacy ove r internal affairs within its territory, absolute rights to govern its people, and freedom from any external interference in the above matters (Wang, 2004: 473). With regard to globalization, Wang believes that sovereign states are substantially restra ined even though it might have been of their own doing (Wang, 2004: 483). States may still be free to choose th eir own internal policies, but Wang is doubtful that states are still free from external interferen ces. Ultimately, Wang doesnt believe that states have a choice in their internal affairs, because they must live with the constraints put in place by the forces of globalization (Wang, 2004: 481). Consequently, based on Wangs definition of state sovereignty, it is easy to see the importa nce of examining the external pressures brought upon the state because of globalization. Nevert heless, Wangs conclusion draws primarily on a

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18 study of the World Trade Organiza tion (WTO) and thus remains to be applied to the area of financial globalization. Just as is the case with th e definition of financial globa lization, the concept of state sovereignty has taken on a number of meanings thr oughout the literature. In this case, it is also important to narrow and refine th e concept of state s overeignty, which will be undertaken in the following section. Conceptualizations Defining financial globalization is not an eas y task as the literature on globalization represents a range of perspectiv es on the topic. In an effort to present a comprehensive definition of financial globaliza tion, the literature has suggested the following elements as necessary components of the definition markets of currencies, assets, loans, derivatives, and credit; proliferation of communication technology, especially the inte rnet, as the forum for this market; inclusion of non-state ac tors in the market; financial liberalization and de regulation, particularly with regard to border control; regional integration. Thus, for the purposes of this project, I define financial globalization as: the increasingly digital market where currencies, assets, loans, derivativ es, and credit are traded by state and non-state firms across deregulated borders. As a secondary component to this definition, the spread of financial globalization has coincided with increased levels of regional integra tion that primarily serve as a way for states to control for the potential adverse affects of globalization. Thus, the process of financial globalization is not simply about bringing the dome stic financial markets into one international

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19 market, but it is also about creating new regional markets that are subsumed under the international market. Here, regi onal integration must be viewed an answer to the question what is financial globalization as opposed to an answer to the question what i ndicators of financial globalization challenge state sovere ignty. This brings to light an important nuance in this discussionthe definition of fina ncial globalization includes both it s challenges to the state as well as states response to these challenges. Just as is the case for the definition of fi nancial globalization, th e definition of state sovereignty must be consolidated for the purposes of this research project. Here, the concept of state sovereignty will be based on Krasners f our components of sovereignty, which include the ability to control movement of financ ial goods and services across state borders; the ability to regulate domestic financial activity through legislation and institutions; the ability to exclude external pressures fr om the domestic decision-making process on financial regulation and enfor cement of that regulation; the ability to enter voluntarily into binding agreements between other nation-states and non-state financial firms, which includes the ability to join regi onal or international organizations and willingly submit to their governance measures. This is by no means an exhaustive list of the co mponents that can go into a definition of state sovereignty, but it will hopefully provide a leve l of clarity and parsim ony in the process of empirical investigation. Conclusion As previously stated, the purpose of this st udy is to examine theoretically the ways in which financial globalization repres ents a challenge to state sove reignty. In so doing, this research will draw on the globali zation literature as well as empiri cal examples from the British experience with financial globaliz ation from the 1990s to the pr esent day. The globalization literature suggests that the indica tors of financial globalization represent formidable challenges

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20 to state sovereignty. It is clear from both an examination of the literature and the empirical example of the United Kingdom that financial globa lization is a reality and one that states must engage. Still, while financial globalization has changed the inte rnational context within which states exist, this project cannot not argue that the challenges of financial globalization have completely undermined state sovereignty. Even though it was the initial goa l of the researcher to join the chorus proclaiming the end of the sovereign state, the findi ngs presented here cannot suppor t that initial perspective. Consequently, I argue that fi nancial globalization has signi ficantly changed the pre-1990 conceptualization and practice of state sovereignty but has yet to present a challenge significant enough to completely undermine state sovereignty. Here, change is not seen as signaling an end or undermining of sovereignty, although some schol ars might see them as the same. Instead, the change of sovereignty is seen as a prerogative of the statean e xpression in itself of the states sovereigntyrather than an end to sovereignt y. Thus, at this point in time, financial globalization does not represent a fa tal threat to state sovereignty.

PAGE 21

21 CHAPTER 2 GLOBALIZATIONS CHALLENGES TO STATE SOVEREIGNTY It has been argued by a number of scholars that the current inte rnational system under globalization undermines state sove reignty. In general terms, th e factors responsible for the evolution of globalization are se en as simultaneously presenting a number of challenges to the states retention of its domestic and internati onal sovereignty. Among th e most influential of these scholars is Susan Strange, and her work on the challenges of globali zation for the sovereign state has served as the foundation for the rest of this literature within the field of IPE. In Casino Capitalism Strange makes a statement that has come to shape the subsequent literature on this issue: Political leaders, and their opponent s, like to pretend that they are still in c ontrol of their national economies, that their policies have the power to relieve unemployment, revive economic growth, restore prosperity and encour age investment in the future. But recent years have shown again and again how the pol iticians plans have been upset by changes that they could not have foreseen in the world outside the state. (Strange, 1986: 3) What Strange could not have known in 1986 was th at the world outside the state that was beginning to emerge during the 1980s came to fru ition in the 1990s under what is now termed globalization. Her observations were simply th e beginning of the lively dialogue concerning the challenges of financial globaliz ation to state sovereignty. Here, the claim that financial globalization challenges state sovereignty will be further explored and analyzed in light of the theoretical discourse as well as the empirical example provided by the United Kingdom duri ng the 1990s. Through this anal ysis, it will be argued that while financial globalization does ch allenge the retention of state s overeignty in some respects it also opens new avenues for the maintenance of state sovereignty. Esse ntially, the relationship between financial globalization a nd state sovereignty is not as deterministic as the literature suggestsmeaning financial globalization does not n ecessarily lead to the loss of sovereignty.

PAGE 22

22 Instead, financial globalization has caused the in ternational context to change thereby forcing states to express sovereignty in different ways. Many of the indicators of financial globaliz ation also represent the most formidable challenges that financial globalization presents to state sovereignty. This analysis focuses on five indicators of financial gl obalization that are commonly cited as the most difficult challenges for states to overcome in their efforts to maintain their sovereign status. These challenges are (1) technology and the internet, (2) non-state actors, (3) speculation, (4) crisis and contagion, and (5) external pressures. Information Technology and the Internet Studies of information technology and the internet have certainl y taken center stage in the globalization literature. The dig ital revolution in the early 1980s caused a sensation in the international markets as well as in academic lite rature. States and markets all over the world embraced technology as an integral component of political, social, and economic life. Moreover, technology has spread rapidly throughout the worl d with global estimates of internet users jumping from 16 million in 1995 to ove r 580 million in 2002 (Khiabany, 2003: 143). For many scholars, the proliferation of info rmation technology exemplifies the beginning of the process of globalization (McMahon, 2004). The internet and corresponding technologies have proven central to the evolut ion of globalization throughout th e last ten years. In fact, scholars argue that many of the changes that have been observed in the operations of global financial markets have been ascribed to the wo rlds rapidly evolving t echnological capabilities (Dombrowski, 1998: 3). While creating numerous changes in the global financial market, increases in information technology and the internet have also challenged the sovereignty of the state. As a component of financial globaliza tion, information technology has challenged state

PAGE 23

23 sovereignty through the increased speed and volum e of financial transac tions, feasibility of establishing offshore trading locations, and the creation of e-currency as a vehicle currency. This technology, and especially the internet, has in effect cr eated a new marketplace for the global financial market. Prior to the 1980s, financial transactions often required paper documentation that had to be reviewed by various divisions in corpora tions or the government and approved prior to the comple tion of the transaction (Cohan, 2006). This process was slow and very complicated, but the in troduction of information technol ogy changed all of this. The emergence of computer technology, especially pe rsonal computers (PCs), allowed for improved data processing, information sharing, and mark et mobility. In addition, the new computer technology came with software that also improved th e efficiency of business, such as Microsoft Excels spreadsheets and other business intellig ence (BI) programs. These BI programs enable analysts to pinpoint business opportunities by anal yzing huge volumes of transactional data; the volume of this data can range depending on the sp ecific program, but in ge neral it can process in the 10s of millions of transactions (Cohan, 2006: 21). Consequently, for firms in the financial market, this has opened up the opportunity to conduct business in a number of different commodities and in a number of different dom estic markets since their technology has the capability of processing these large volumes of data. Finally, technological advances in buying and selling have made the market instantaneous (Kat ada, 1997: 78). This is especially due to the creation of electronic funds transf er (EFT) technology that allowe d transactions to be process and paid for instantaneously ove r the internet (McMahon, 2004: 74). Almost instantly, financial markets all over the world became available 24hours a day thereby increasing the speed and efficiency of the market. Moreover, the prolifer ation of the internet as a way to link these 24hour markets transformed the market itself.

PAGE 24

24 Online transactions opened wide the barrier s previously imposed by geography. Before the proliferation of on line technology, the proc ess of conducting a financial transaction took place in a room, in a building, in a city, in a state bound by the rules and regulations of a government. Now, while the major financial cen ters of the world, including London, continue to be major financial centers, cyberspace has completely redefined the geography of the international financial markets. Firms can now conduct business essentially anywhere that they can connect to a form of elec tronic communication, whether it be phone, fax, or the internet; and because of satellite technology, this means firms can set up business virtually anywhere in the world (Yeung, 1998: 294). In the case of some UK banks, Davies (1997: 219) writes that the management of their global foreign exch ange book will be in London during London office hours, then it will switch to the US operation after the United States close it will move again, to the Far East. Thus, the financial market ha s become mobile in a way that was previously never seen. As a further example of the result of the advances in information technology, financial transactions are increasingly taking place in what is commonly known as offshore locations (Leblang, 1997: 436). Offshore fina ncial centers (OFCs) are small islands located all over the world that house financial firms who participate in international financial markets by way of the internet technology (Cobb, 2001: 161). Among the most important of these OFCs is the Isle of Man, located in the Irish sea, which serves as a tax haven for European, and especially British, financial firms. The Isle of Man has an estimated population of only 75,000 but a GDP of million and an offshore banking deposit base of almost billion thereby making it an important location for financial tr ansactions (Cobb, 2001: 166). It is estimated that as much as

PAGE 25

25 half of the worlds currency e ither resides in or passes throug h these OFCs, and as such, these locations have become a cornerstone of the global financial market (Cobb, 2001: 163). These locations have re-defined the physical geography of the financial market as well as its regulation. The ability to avoid the historical geo-physical constraints of the market, especially in using the internet as a trading foru m, has challenged the stability of domestic border controls and market regulations. The internet has allowed firms to participate in domestic markets without having to physically cross the bord er of a state thereby avoiding the traditional understanding of border control. Therefore, previous measures of control such as customs or requiring registration with the lo cal government are no longer appl icable in a highly mobile market (Cobb, 2001). Thus, in order for the state to continue to have control over its domestic financial market, it must establish new ways of re gulating transactions that occur via the internet and thus reach into offshore locations. Finally, information technologies have paved th e way for the use of electronic money in a number of economic sectors but es pecially within the financial market. In the international arena, the use of electronic money makes curren cy conversion virtually unnecessary and capital mobility increasingly seamless (Helleiner, 1998: 388) According to Helleiner (1998), nearly all of the international financial transactions are conducted using electroni c money as opposed to paper or currency. The primary challenge electronic money presents to state sovereignty is its use in making monetary and financial crime easier. Internationa l money laundering through financial transactions, fraud, and drugs/arms trafficking have a ll become concerns for states (Helleiner, 1998 and Dombrowski, 1998). Spalek ( 2001: 75) writes that financial crime in Great Britain has become a common part of the financia l system. Electronic money is a challenge to state sovereignty, because it lacks the potential for regulation that paper money has; it is more

PAGE 26

26 difficult to tell if electronic mone y is counterfeit or to track its movement across physical space. Here again, the technological dime nsion of financial globalization presents challenges to states control over financial markets a nd thus to their sovereignty. In summary, information technology as an inte gral component of fi nancial globalization presents a challenge to the states ability to re gulate domestic financial activity. Due to the use of the internet, buyers and sellers are no longer obligated to pass through physical state borders to reach the location of financia l trading, nor are they required to remain in one physical location under the rules of that particular state (Helle iner, 1998: 389). In the example of the United Kingdom, technology has enabled offshore firms to participate in the domestic financial market without actually residing in London; consequently, regulating the domestic market requires additional measures beyond federal legislation si nce a firm may establish its physical location outside the jurisdiction of that le gislation. Moreover, the speed of transaction has required that states invest additional time a nd money into technological advan ces and training of personnel to continually monitor the markets, which proves to be quite costly (Bank of England, 1997: 109110). Finally, electronic money presents a comp letely new challenge for state regulation over monetary and financial crime as these activit ies have been made easier by advances in technology. Here, sovereignty unders tood as the ability to regulate domestic markets is clearly challenged by the information technology presen t in the phenomenon of financial globalization. Non-state Financial Firms The challenges presented to state sovereignt y through information technology are also tied to the challenges presented by nonstate financial firms. As a nother component of financial globalization, the evidence of non-st ate firms in the global market is directly connected to the increased proliferation of information technology.

PAGE 27

27 Prior to the advent of the internet, buying and selling on the financial markets were primarily restricted to state governments and a few financial firms in the major metropolitan centers (Cassis, 2005). Now, the availability of cyberspace and the boo m of personal computers have opened the market to private firms or indi viduals who may have been prevented access to the market prior to the 1990s (Yaziji, 2004; Si nclair, 2001). These new non-state actors have included pension funds, insurance fi rms, private citizens and transna tional corporations. In fact, many of the non-state actors now participating in the financial market do not conduct their primary business within the financial sector; the instance of firms crossing over from other sectors into the financial market has risen at an exponential rate in the last decade. De Goede (2004: 198) writes that the involveme nt of such corporations as En ron and General Motors in the international financial market makes it difficult for states to regulate financial trade since the majority of their corporate activity is regulated in other sectors. The quantity and type of nonstate actors involved in the financ ial system is astounding and a just discussion of this issue is beyond the scope of this project. Still, these nonstate actors are critical to the discussion of financial globalizations chal lenge to state sovereignty. The states ability to regulate domestic financial activity through legislation and institutions is an important component of the de finition of state sovereig nty, which the presence of non-state actors complicates. In order to regulate financial activity, a state must have the ability to oversee the pa rticipants in the financial market th rough a relationship of legislation and enforcement. Previously, these relationships were fairly straightforward as they involved a small number of large banks and other states, but toda y the relationship of re gulation and enforcement has been expanded to encompass states, private co rporations, banks, and i ndividual citizens. As such, the principles of inter-state diplomacy do not apply to non-state ac tors, and consequently,

PAGE 28

28 states must become more inventive to stay abreas t of the financial activitie s of these consumers. In addition, the issue of regulating financial transactions is fu rther complicated; it is much easier to track the activity of a slow-moving government bureaucracy or national bank but much more difficult to keep track of multiple participants especially private c itizens (Watson, 2002: 205). Finally, the relative wealth of ma ny of these non-state actors has gi ven them an amount of power over the workings of the financial markets, what Cohen (1998: 133) describes as a de facto veto power, elusive but effective, over state behavior in the area of financial regulation. In these ways, the involvement of non-state actors in th e financial markets represents an important challenge to state sovereignty. In addition, the presence of nonstate actors within the financia l market has contributed to the creation of a casino of sorts (Strange, 1986). Many of these non-state actors are heavily involved in complex derivatives tr ading that involves high levels of risk, since they have other sectors from which to make a profit. For exampl e, trading in weather de rivatives has become a very popular market; since there are a numbe r of businesses whose profits depend on the weather, there is a lot of m oney to be gained through betti ng on these businesses (De Goede, 2004). However, these markets tend to be very complex and dynamic making it costly in terms of technology and personnel for states to constant ly regulate this type of activity (Li and Smith, 2002: 776). Clearly, the participa tion of non-state actors in the fi nancial market is a serious challenge to state control over the volatility of the market, and in this way, financial globalization presents anothe r real and potential challe nge to state sovereignty. Speculation This speed of business has also opened the door for another critical ch allenge presented to the state from the global financial market, which is speculation. Speculation is nothing new to financial markets, but the speculation that exists in the global financial market is on a much

PAGE 29

29 larger scale and happens at a much faster pace th an in periods prior due largely to advances in technology. Speculation refers to the pract ice of buying and selling in e xpectation of a gain from fluctuations in the market. As such, speculati on usually involves taking so me amount of risk to seek profit. This process has been equated with gambling in a casino where sheer luck begins to take over and to determine more and more of what happens to people (Strange, 1986: 2). Presently, short-term financial transactions are the primary ve hicle by which firms speculate on fluctuations in currency, interest rates, and even such things as weather forecasts or public opinion polls (De Goede, 2004: 198). The dangers of speculation are commonly unders tood to represent a formidable challenge to the state. Speculation depends on market volat ility, which is something states work hard to avoid (Kirshner, 1995: 29). For speculators, howev er, high levels of volatili ty signal high levels of potential profit. For a state, however, this quest for profit of ten involves high levels of risk which can further complicate their efforts to contro l volatility and stabilize the market (Kirshner, 1995: 12). The experience of the United Kingdom during 1992 serves as a poignant example of the challenge speculation bri ngs to state sovereignty. The effects of speculation came full force to the British financial market on Wednesday, 16 September 1992. This date, known as Black Wednes day, marked the forced exit of the British pound from the European Monetary Systems exch ange rate mechanism (ERM). The ERM was a tool used to encourage currencies throughout Eu rope to come as close as possible to the exchange rate of the German Deutschemark (DM) in preparation for further economic integration (Cobham, 1997b: 1128). The United Kingdom, in seeki ng a solution to controlling inflation, joined the ERM in October 1990 (Cobham, 1997b: 1129).

PAGE 30

30 Soderlind (2000: 8) writes that the possibilitie s for a Black Wednesday crisis were not far removed during 1992 because the tight German m onetary policy after the reunification resulted in high interest rates and appreciation of the ERM currencies against the US dollar. In the United Kingdom, the high interest rates proved particularly problem atic to justify given the slow growth and low inflation, which would normally demand low interest rates (Soderlind, 2000: 8). While the possibility for a crisis in the ERM ha d been evident since earlier in the summer of 1992, it is suggested that specula tion over the devaluation of the pound forced the cost of defending the price of the pound to become too high for the British government (Masson, 1995: 580). The pound was in fact suspended from the ERM on Black Wednesday and depreciated the following day by more than 5% against the DM (S oderlind, 2000: 10-11). Speculators, such as the famed George Soros, anticipated the devalu ation of the British pound and capitalized on the opportunity. Pounds were borrowed and sold for DM at the exchange rate prescribed by the ERM; thus, when the pound was finally devalued, the loans could be paid back using this devalued currency and speculators would pocket the difference. In the end, only estimates regarding the total amount lost by the UK government have been reported, but those estimates total around US$4.91billion (Masson, 1995). According to the British Treasury, while sp eculative forces were not the fundamental cause of withdrawing from the ERM, they were important in setting off the trigger for the collapse (Treasury, 1992: 2). Thus, the challenge of speculati on must be understood not as a danger in and of itself but rather as an element that can exacerbate already volatile market conditions. In the case of Black Wednesday, the withdrawal from the ERM seemed to be looming for months, but the speculative attacks ma de loss of revenue and credibility higher and more significant over the long-term (Masson, 1995: 571). In fact, this loss of credibility after the

PAGE 31

31 speculative attacks may have contributed to the overall dissatisfaction with the Conservative government under Prime Minister (PM) John Majo r and to the election of New Labour under PM Tony Blair in 1997 (Cobham, 1997b). Here, it is cl ear that the adverse effects of financial speculation left their impression on the UK. Given this example, it is clear that speculation has come to represent a serious challenge to state sovereignty under the system of financial gl obalization. As such, states must develop new measures for controlling market volatility and short-term transact ions that provide the fertile context for speculation. Thus, th e states ability to regulate do mestic financial and currency markets as a component of its broader soverei gn status is called into question by speculation. Crisis and Contagion In addition to creating an environment hospita ble toward non-state actors and speculation, the spread of information technology as a compone nt of the globalized financial system has been responsible for the further integr ation of domestic fina ncial markets. Even prior to the 1980s, it was recognized that the domestic financial mark ets were connected in a phenomenon that was then referred to as interdependence (Keohane and Nye, 2000). Interdependence refers to situations characterized by r eciprocal effects among countries or among actors in different countries (Keohane and Nye, 2000: 105). Toda y, however, the process of globalization has taken this interdepende nce to the next level. Essentia lly, technology has worked to further shrink the distance between domestic fina ncial markets thereby deepening the already established patterns of inte rconnectedness (Mattli, 1999: 77 and De La Dehesa, 2006: 5). According to Keohane and Nye (2000: 105), the old system of interdependence is different from the contemporary context of globalization, because of the multiple linkages that exist between countries (as opposed to single linkages) and because these networks span multicontinental

PAGE 32

32 distances. While advocates of globalization see many positive results of this progression, there has been a serious negative consequence, wh ich is the likelihood for crises and contagion. According to scholars, rapid changes occurrin g in the international financial system have resulted in new sources of, a nd transmission mechanisms for, systemic shocks (Heimann and Lord Alexander, 1997: 82). Systemic shocks, wh ich prior to financial globalization could have been contained within domestic or regional mark ets, are much more difficult to contain when a multitude of the domestic financial markets ar ound the world are connected through technology. This has created a system beset with systemic ri sk, which is the risk that something which goes wrong in one firm or market will, because of linkages which now exist between firms and markets, spill over to affect other firms and ma rkets (Bank of England, 1998: 4). This spill over is also known as contagion and refers to th e transmission of volatility, crisis, or shocks from one market to another. In the 1990s, the danger of contagion became a reality in the East Asian Crisis. In 1997, the newly-industrializing countries in Asia experien ced a devastating financial crisis of the currency and stoc k markets that resonated throu ghout the world. The crisis was largely the result of the quick exit of capital inflows and currency speculation, which had been characteristic of the majority of the economies in Southeast Asia, especially Thailand and Korea (Lukauskas and Minushkin, 2000: 701). Essen tially, the East Asian Crisis had three components: (1) a currency crisis a rapid outflow of financial capit al in anticipati on of a possible currency depreciation, inducing depletion of re serves, and forcing a radical change of policy in this case abandonment of fixed exch ange rates in favour of floating rates during a period of loss of confidence; (2) a financial crisis a collapse of domestic financial institutions induced by the currency depreciati ons and high domestic interest rates, which resulted from the currency floats; and (3) an economic crisis a contraction of output causing a loss of government revenue, loss of employment and consequent loss of

PAGE 33

33 household incomes, producing serious hardship for large numbers of people. (Warr, 2003: 381-382) The effects of the economic dist urbances in these countries we re felt throughout the world and were evident in bank failures, corporate bankrup tcies, stock market tu rbulence, depletion of foreign exchange reserves, currenc y depreciation and increased fi scal burden (Das, 2003: 19). The effects of the East Asian crisis signaled the reality of contagi on for the global system; contagion refers to the spread of shocks or othe r economic disturbances from one state or market to another (Das, 2003). Here, the crisis felt in Southeast Asia quickly became a problem for the entire world, largely as a result of the interdependence and integr ation of domestic markets into a global system of markets. The implications of the 1997 cr isis are critical to the study of globalization in the years after. The contagion of the cr isis throughout Asia and the rest of the world suggests that the interconnectedness so often associated with globaliz ation is a reality and one that spreads across both geography and relative wealth of an economy. Moreover, the ev ents of 1997 reveal that the contemporary system of globalization has made the reality of crises and contagion even more severe than in years past, largely because of th e deep level of interdep endence. For example, Keohane and Nye (2000:112) write that whereas th e debt crisis of the 1980s was a slow-motion train wreck that took place over a period of year s, the Asian meltdown struck immediately and spread over a period of months. As such, the potential for widespread financial crises is a serious challenge facing the globa l financial market, especially those states that are deeply embedded in the system such as the United Kingdom. The realities of financial crises and global contagion represent a new challenge to the traditional perspectives of state sovereignty. In the case of the East Asian Crisis, intervention in the domestic financial markets in Thailand and othe r states would have been a violation of their

PAGE 34

34 sovereignty. However, the failure to intervene resulted in a loss of othe r states abilities to control their own domestic markets. Thus, unde r the system of financ ial globalization, states must redefine sovereignty and its expression relative to other states so as to include measures to regulate both domestic financial activity and inte rnational financial activity. In this way, the experience of crises and contagion as an elem ent of financial globalization challenges state sovereignty. External Pressures State control is also limited by the external pressure to liberalize from other states and inter-governmental organizations in the international system. This pressure has been existent since the early days of financ ial liberalization. Fo llowing the tragedy of World War II, which many believed was caused by financial crises, the vict orious states set out to create an economic system that would link domestic economies and prevent future economic instability (McMahon, 2004: 74). The primary route for accomplishing this goal was to lib eralize the financial markets of domestic economies. At its core, financial liberalization refers to the removal of capital controls on the inward and outward flow of financial a ssets. In other words, libera lization is the process of deregulating the financial system (Svensson et al., 2006:47). During the Bretton Woods era, it was argued that financial liberalization was an optim al method for ensuring th e interconnectedness of the international economic community to encourag e people, assets, goods, and services to flow more freely from one state to another (Yeung, 1999: 291). Consequently, fi nancial liberalization came to serve as a prerequisite for entering into this agreement as well as the international market at large; states experienced pressure to liberalize as a sign of modernity and development by the United States and other in ternational organizations such as the World Bank (WB) and the International Monetary Fund (IMF). However, the consequences of financ ial liberalization were

PAGE 35

35 not always positive for domestic markets or th e retention of state autonomy over decisions relating to these mark ets (Mosley, 2000: 738). Today, this early process of financial liberalizat ion is typically understood to be the building blocks of financial gl obalization (Stulz, 2005: 1595). Ho wever, scholars suggest that these external pressure s have dramatically increased si nce the early 1990s. According to Lukauskas and Minushkin (2000: 697), the Un ited States and several international organizations, notably, the International Mone tary Fund (IMF), stepped up their demands on countries to liberalize their financ ial systems. In many ways, this pressure is the direct result of US interests and has been successful because of the hegemonic position of the United States in the world economy (Gilpin, 2000; Helleiner 199 4). Even in the cas e of international organizations, many scholars and opponents of globalization see th e policies of these organizations as serving the interests of the Unite d States rather than the global financial system at large. These charges are quite serious, because if true, they imply that as states agree to the policies enacted by these organi zations they are simultaneously handing over their ability to make decisions on their domestic markets without external pressures. For those states refusing to succumb to these external pressures, the costs of this defiance are becoming increasingly difficult to bear (Li and Smith, 2002: 776). These co sts have included the in ability to receive aid from such organizations as the IMF and the Worl d Bank, the inability to trade with other states, and the inability to have a voice in international organizations who dictate policy for the majority of the states in the world. Consequently, many states are currently engaged in the struggle to maintain their independence in decision-making wh ile simultaneously receiving the benefits of agreeing to financial liberalization pressures. Th us, the external pressure s to liberalize represent an important challenge to state sovereignty.

PAGE 36

36 Conclusion A myriad of the challenges presented by fina ncial globalization to the state have been discussed here. Technology, non-state firms, sp eculation, crisis and contagion, and external pressures are all evident in the expansion of financial globalization and all represent unique challenges to the state. In the next chapter, we will examine the ways in which the state has or has not responded to these challe nges in order to determine th e extent to which financial globalization is a threat to state sovereignty.

PAGE 37

37 CHAPTER 3 THE STATE RESPONSE TO FINANCIAL GLOBALIZATION In the face of the challenges presented by financial globalization, we now turn to the question of how the state responds to financial globalization in an effo rt to retain its sovereignty. As the starting point for this discussion, we turn firs t to an examination of th e role of the state in the early years of financial globa lization. Understanding the initial role of the state in this phenomenon is critical to understanding where the state currently stands in relation to globalization today. It is a widely held assumption in the globali zation literature that th e state is the primary author of the globalized financial system (Str ange, 1986; Helleiner, 1994; Leblang, 1997; Stulz, 2006). From its earliest beginnings as financia l liberalization expresse d primarily through the Bretton Woods agreement, states were respon sible for establishing the building blocks of financial globalization (Yeung, 1998: 296). The Allied states led by the United States were responsible for re-constructing th e international financial system and did so in a way that facilitated the growth of financ ial globalization. Due to the in itial control states had over the beginnings of financial globalizat ion, some scholars argue that we must not exaggerate the extent of financial globalization (Leblang, 1997: 451). Here the assumpti on reads that initial control determines perpetual co ntrol, even though the internat ional context in the 1990s had changed dramatically since the 1950s. Thus, this conventional assumpti on is rejected in this proj ect. It has already been established that the challenges presented by fi nancial globalization have undergone a significant change largely due to the technolog ical revolution in the 1980s. Consequently, this project aims to examine anew the relationship between th e state and the global financial system. Nevertheless, the historical role of the state remains important as it sets the context for the

PAGE 38

38 contemporary state response; states today react to the challenges of fina ncial globalization based upon the history of this relationshi p. In addition, the contemporary response to globalization as an issue of sovereignty must be judged in contra st to earlier expressions of sovereignty; in order to know what has been lost or retained, we must assume that sovereignty was existent in the first place. Thus, for the purposes of this project, we adhere to the assumption that states were responsible for creating the intern ational context of financial gl obalization while retaining each of the four elements of sovereignty as expressed in the initial conceptualization of the term. It is important to clarify here that th e states we speak of in the context of financial globalization are very large states: the great and near-great powers as opposed to all of the states in the world, many of whom continually struggl e with sovereignty (Kirshner, 1995: 23). Thus, in moving beyond the historical context of state sovereignty, we turn to the primary subject of this discussion which is how states respond to th e challenges of financial globalization. State response to financial gl obalization generally falls under one of two approaches: either breadth or depth. When a state chooses to res pond to financial globalization from the breadth approach, it chooses a comprehensiv e or big-picture strategy. This usually entails regulating the market and participating firms at large, as opposed to on a specialized level (Lukauskas and Minushkin, 2000: 698). Typically, institutions or br oad-based legislation serve as the source of control in this approach. On the other hand, in approaching th e response from a depth approach, the state will enact market regulations that apply more specifically to individual firms or commodities. This might mean that restrictions are placed on stocks or bonds but not on loans or pension funds; in a similar way, states might chos e to monitor the market activity of banks but not the activity of private citizen s (Lukauskas and Minushkin, 2000: 699) It is important to note

PAGE 39

39 that neither of these approaches are exclusive as a state may chose broader controls over-all while specifically targeting one type of firm or commodity that is particularly troublesome. In using the example of the United Kingdom, this investigation will examine the state response to financial globalizati on from an approach that emphasizes breadth. As is the case with many of the wealthiest countries in the wo rld, the United Kingdom ha s chosen to respond to financial globalization as a wi der phenomenon instead of focusing on the individual challenges. While some scholars would seek to deny fi nancial globalization as a comprehensive phenomenon, the governments of these states have embraced this conceptualization of financial globalization and have responded to it as such. Dearlove (2000: 114) reminds us th at ideas continue to matter in politics. As such, we can observe that whether accurate or otherwise it is the ideas political subjects hold about the context in which they find themselves rather than the mate rial reality of the cont ext itself that informs their conduct. Consequently, whether the gl obalization thesis is true or not may matter far less than whether it is deemed to be true (or, quite possibl y, just useful) by those employing it. (Hay, 2001: 234) What this quote from Hay suggest s is that the discourse about wh ether or not globalization is a true phenomenon means very little if politicia ns claim the concept as true through their discourse. In the case of Great Brit ain, this is particularly important. We can decipher from the economic policie s enacted by the British government that globalization has been considered more significant than just a rh etorical concept for the states facing the challenges of financial globalization. Indeed, the British gove rnment has taken these issues seriously and has responded in a manner that aims to retain state sovereignty over the domestic and global financial market. In ex amining the breadth of this response, our investigation will look first at th e domestic-level response and then at the global-level response. At the domestic level, reforms have been made to the Treasury, the Bank of England (BoE) and

PAGE 40

40 the Financial Services Authority (FSA) in an effort to retain sovereignty, especially in light of the challenges presented by technology, non-stat e actors, and speculation. Here, the two elements of sovereignty that are specifically addr essed are (1) the ability to control movement of financial goods and services acro ss state borders and (2) the ability to regulate domestic financial activity through legislation and in stitutions. At the global leve l, the British government sought out international cooperation with the Organi zation for Economic Cooperation and Development (OECD) and the European Union (EU) as a way to respond particularly to the challenges of contagion and crises as well as external pressure s on the decision-making process. At this level, the response to financial globali zation addresses the final two com ponents of sovereignty: (1) the ability to exclude external pressures from the domestic decision-making process on financial regulation and enforcement of that regulation and (2) the ability to enter voluntarily into binding agreements between other nation-states and non-stat e financial firms, which includes the ability to join regional or internati onal organizations and willingly subm it to their governance measures. Thus, the success of these responses by the Un ited Kingdom to financial globalization will be evaluated as an illustration of the extent to wh ich state sovereignty can withstand the challenges of financial globalization. Domestic Response The British government made responding to the domestic effects of financial globalization a priority after the Black Wednesday Crisis in 1992. After this event, the government under John Major experienced a tremendous loss of credibility, as well as did the institutions responsible for regulating the financia l and monetary markets (Cobham, 199 7: 1131). To some degree, the Black Wednesday crisis was seen as a failure of the Conservative govern ment, and the British voting public responded by electing new l eadership from the New Labour Party.

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41 The New Labour party has taken financial globa lization very seriously since its election into government in 1997. In 2000, this administ ration made its opinions about the need to control the domestic financial market especi ally clear through the Fi nancial Services and Markets Act 2000 (FSMA 2000) (Lutz, 2004: 181). Th is act provided for a revision of previous legislation enacted during the 1980s whose goal at the time was to oversee financial regulation. However, it had become painfully clear to th e British government during the 1990s that the financial markets had changed and that their form er system of regulation had become outdated (Spalek, 2001: 76). The new version of the bill solidified the move within the government to shift the primary responsibility for regulation from an emphasis on self-regulation to inst itutionalized regulation, which suggests a desire of the gove rnment to play a more direct role in matters relating to the financial markets (MacNeil, 1999: 725). Thus, th e responsibilities for fi nancial regulation were divided between Her Majestys Treasury (Tr easury), the Bank of England (BoE), and the Financial Services Authority (FSA) as explici tly laid out in the Me morandum of Understanding 2006; each of these parties is responsible for specific regulatory tasks but all serve under the direction of government policy. In this way, the New Labour administration has hoped to make regulation of the global financial mark et more efficient and more secure. Her Majestys Treasury The Treasury is the United Kingdoms economic s and finance ministry. Its primary responsibility is to formulate and implement the British governments financial and economic policy, and it reports directly to the Parliame nt. As such, the Treas ury is the official government arm of the three-dimensional approach to financial regulation as set out by the FSMA 2000. Essentially, the Treasury is respon sible for overseeing the Bank of England and

PAGE 42

42 the Financial Services Authority and for media ting between these two agencies and the British Parliament. More specificall y, its responsibilities include overseeing the overall institutional structure of financial regulation and legislation; informing Parliament of problem s within the financial system and the measures taken to resolve those problems; accounting for financial sector resilience to operational di sruption within government (Financial Services Authority, 2006). Clearly, the Treasurys responsibil ities under the FSMA are reflectiv e of the breath-approach to regulation as they are more general in scope. However, what is curious about these responsibilities is that even t hough this department has the closest affiliation with the government, the Treasury has no operational responsibilities for financial management. Moreover, the BoE and the FSA reserve the power to inform the Treasury on a need-to-know basis following th eir own discretion rather than government mandate (Financial Services Authority, 2006). To be sure, the British government has made a strong statement here regarding their desire for i nvolvement in the financial markets. Yet, from the perspective of state sovereignty, this hands-o ff approach to regulation does not necessarily signal a loss of sovereignty. Instead, the FSMA 2000 and consequent division of responsibilities was enacted under the sole discretion of the Br itish government; these policies were chosen by the government not for the government. In additi on, it is important to note that while the BoE and the FSA have been given the primary res ponsibilities in regulat ion, the Treasury still oversees their operation and creates the legisl ation upon which these agencies base their operations. Thus, the division of authority over the financial market has changed since the days prior to financial globalization, but the final authority still rests firm ly in the hands of the state by way of the Treasury.

PAGE 43

43 Bank of England The efforts at restructuring the banking system in England were a high priority of the New Labour government (Lutz, 2004:181). Consequentl y, the reforms made to the Bank of England are an important part of the FSMA 2000. The pr imary responsibilities of the BoE according to the reforms include ensure the stability of the monetary system; oversee UK payments systems domes tically and internationally; maintain a broad overview of the system as a whole; intervene in other financial operations to prevent widespread problems throughout the system (Financial Services Authority, 2006). These policy objectives were desi gned primarily to regulate th e monetary system, which is inexorably tied to the financial markets. Accord ing to Kirshner (1995: 29 ), monetary power is a remarkably efficient component of state power and currency manipulation is a central component of this monetary power. For th e United Kingdom, the chosen avenue for the retention of its monetary power ha s been to firmly solidify it in the responsibilities of the Bank. In addition, implicit in the re sponsibilities given to the Bank of England are the British efforts to respond to the challenges of financial globalization. In particul ar, the Bank of England has been given responsibilities de signed to respond to the adva nces in information technology that have led to the increase in currency sp eculation and use of electronic currency. It has already been argued that financia l globalization presents a challe nge to state sovereignty through the proliferation of information technology and its role in facilitating the use of e-currency and speculation. However, the advances in informa tion technology have also enabled the BoE to turn the information technology to their advantage, using it to track the li nkages in the financial system and make those linkages safer (Bank of England, 1998: 4). Consequently, the Bank of

PAGE 44

44 England has begun embracing the advances in in formation technology as new avenues by which to control for its challenges. For example, the Bank of England has employed real-time gross settlement (RTGS) technology that enables funds to transfer in real-time as opposed to waiting until the end of the day. This technology allows the Bank to monitor transactions as they occur and to immediately decipher problems that may aris e due to the speed of these transactions or any illegal activity (Bank of England, 1996). By embracing technology, the Bank can more closely and more quickly monitor market activity for the purposes of preventing speculation or monetary/financial crime from becoming unmanag eable. Thus, the restructuring of the BoE is evidence of a desire to retain control over specula tion and electronic curren cies that have become so prolific due to advances in communication technologies. Financial Services Authority The Financial Services Author ity (FSA) was updated in 2000 to specifically address the challenges presented by a technologically-driven, global financial market. Although the FSA is an independent non-governmental body, it remains accountable to Parliament through the Treasury. Under the Financial Services and Ma rkets Act 2000, the four statutory objectives given for the FSA include market confidence: maintaining confidence in the financial system; public awareness: promoting public unde rstanding of the financial system; consumer protection: securing the appropria te degree of protection for consumers; reduction of financial crime: reduc ing the extent to which it is possible for a business to be used for a purposed connected with financial crime (Financial Services Authority, 2006) The creation of the FSA in the United Kingdom was part of an internationa l trend to divert the increasingly complicated regulati on of financial markets to an independent agency whose sole focus would be these markets (Lutz, 2004: 192). Governments quickly discovered in the late-

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45 1990s that the internet made it possible for high vol umes of financial transactions to occur at a rapid pace by a number of consumers. Consequen tly, the plan was devised to create a unitary regulator whose sole responsibility would be to m onitor the financial market. This was largely a response to the trend that as fi nancial groups have become more complex incorporating a range of different financial businesses and have be gun to operate on a global basis, the number of regulators had grown to over 150 agencies in the United Kingdo m (Bank of England, 1997: 110). Consequently, the establishment of the FSA allo wed the government to co nsolidate its regulatory efforts to make them more efficient and effective. Financial firms are supervised by the FSA acco rding to the potential risk they pose for increasing the volatility in the la rger financial market. Risk is determined by a scale measuring both potential impact and probabilit y of financial failure and is a ssessed on a regular basis. Once risk is determined, firms are classified as either medium to high-impact firms or as low-impact firms; the difference between these two classifica tions refers primarily to the level of damage their private failures could cause for the larger market as well as the consequent amount of detailed attention paid to the specific firm. High-impact firms are mon itored very closely and even have their own relationshi p manager who carries out regular risk assessments, establishes a risk mitigation program, and checks for compli ance with these programs. For the low-impact firms, regulation is done on an aggregate scale, drawing from the belief that small firms are only a threat to the larger system as a collective (Financial Serv ices Authority, 2006). Consequently, the small firms are placed in contact with the Firm Contact Centre who performs the same functions as a relationship manager but on a less-individualized scale. In addition to supervision, the FSA is also enga ged in the business of enforcement. In fact, the agency is fully-funded by the firms it serves; their fines for misconduct help to fund future

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46 regulation. Additionally, due to the supervision of the Treasury, the FSA is able to present repeat-offenders or other high-ri sk firms directly to Parliame nt for further regulation and penalties (Financial Services Authority, 2006). This allows the government to still retain control over the market and its major players without getting bogged down in the daily regulatory functions. Thus, the FSA has proven to be a useful tool for the maintenance of state control over the globalized financial market. Global Response Along with these domestic-level responses, the United Kingdom, like many other states, has chosen to respond to the challenges of fi nancial globalization at the global level. The tendency to respond to financial gl obalization at both the domestic and global level is due in part to the very nature of globaliz ation where there is a unique conn ection between the domestic and the global/international. In ot her words, just as globalization presents both domestic and global challenges to the state, it also serves as the context through which a state responds to its challenges domestically and in ternationally (Yeung, 1998: 293). The United Kingdom has responded to the ch allenges of financial globalization by participating in a number of international organi zations, such as the United Nations (UN), the World Trade Organization (WTO), the Bank fo r International Settlements (BIS) and the International Monetary Fund (IMF). Here, however, the focus of this investigation will rest on the two most important examples of the Unite d Kingdoms international response to financial globalization, which are partic ipation in the Organization for Economic Cooperation and Development (OECD) and the European Union (EU) Participation in these two organizations has served as the British governments primary way to respond to the challenges of financial globalization that cross domestic borders, particularly the challe nges of contagion and external pressures. Consequently, the response to financia l globalization at this level is meant to address

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47 the final two components of sovereignty, which are (1) the ability to exclude external pressures from the domestic decision-making process on fi nancial regulation and enforcement of that regulation and (2) the ability to enter voluntarily into binding agreements between other nationstates and non-state financial firm s, which includes the ability to join regional or international organizations and willingly submit to their gove rnance measures. Thus, the success of the international responses of the United Kingdom to financial globalization will be evaluated as a second illustration of the extent to which fina ncial globalization challe nges state sovereignty. Organization for Economic Cooperation and Development On 14 December 1960, 20 states came together to form the Organization for Economic Cooperation and Development (OECD). The OE CD had its roots in the Organization for European Economic Cooperation (OEEC), whic h was created after World War II for the purposes of promoting democratic values and fr ee market economies. In 1960, membership in the organization was extended to states outside of Europe, and so the name was changed (OECD, 2007). Even from the beginnings of the organizati on, the OECD recognized the change taking place in the international market s. In the preamble of their founding agreement, called the Convention, the members agreed that after recognizing the incr eased interdependence of their economies cooperation would be necessary among th eir governments in order to ensure stability and peace (OECD, 1960). Thus, even though the OECD was founded before the era of globalization, the system of interdependence that proceeded and le d to globalization was recognized by these states as a phenomenon worthy of their attention. Even more specifically, financial stability was recognized in the Convent ion as an increasingly important issue to be addressed within the OECD as the system of in terdependence intensified (OECD, 1960). Today, the OECD remains committed to the principles of cooperation as globalization continues to

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48 advance. It has become commonplace for th e members of the OECD to recognize that improved internal policy coordi nation mechanisms are essential for meeting the challenges of globalization and for playing an e ffective international role (OECD, 1995: 3). This is certainly the case for the United Kingdom; membership in the OECD represents a way to respond to the challenges of financial globalization th at traverse international borders. Among the most important of these challenges are the possibility of cont agion of crisis and external pressures on domestic decision-making. Since both of these challenges involve more than one domestic economy, it is imperative to tu rn to international cooperation as a means of responding to these issues. For example, in th e case of contagion, in ternational cooperation through the OECD provides a forum for open co mmunication between states, which is an important element in preparing the international and domestic markets fo r volatility and crises (OECD, 1995: 2). Greater transparency between states has long been recognized as an effective means to control for international crises as it w ould enable states to foresee instability and thus prepare for it (Watson, 2002: 1999). The OECD se rves as an avenue for encouraging greater transparency, because there is an emphasi s placed on information sharing, communication between states, and policy coordi nation all of which can lead to greater transparency (OECD, 2007). Here, the context of an international orga nization is key, since it is more appropriate for the British government to expect transparency fro m other states when thos e are also in a position of expecting that from the British. The principle of reciprocity also applies in the context of responding to external pressures on domestic decision-making. As a founding member of the OECD, the United Kingdom has a particularly powerful voice in negot iations and policy formulation. In fact, it has been suggested that the British government ha s been the most consistent, voc iferous and unyielding advocate of

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49 a global regime of free trade and free capital mobility (H ay and Smith, 2005: 133). This suggests that the OECD has allowed the British g overnment to respond to the external pressures of the United States and other international organizations by becoming a vocal and powerful member of this organization. Within the c ontext of the OECD, the British government can respond to the challenges set forth by the United St ates as well as develo p international policies that suit the domestic aims of the United Kingdom. Nevertheless, it is important to recognize that even in the context of the OECD, the British government still faces tremendous external pressure s on their domestic decision-making process. This is evident even in the requirements for memb ership in the organization, such as the sharing of information and deregulating border controls. Thus, this suggests a serious challenge to state sovereignty in this area. However, it is important to note that the ability to enter voluntarily into agreements where sovereignty may willingly be su rrendered is also considered a component of the definition of state sovereignty as outlined in this study. Still, many scholars would say that membership in the OECD and other internationa l organizations has ceased being voluntary and has since become compulsory for any state wishing to participate in the international market (Li and Smith, 2002). A thorough investigation into this complex argument certainly warrants the attention that cannot be afforded to it here. However, it is signif icant to note that regardless of whether or not membership in the OECD was vo luntary, the British have used this membership as a platform from which to advocate their own in terests and to challenge the interests of other states. In this way, membership in the OECD represents a powerful response to the challenges of financial globalization th at suggests the staying power of state sovereignty. The European Union In addition to seeking membership in the OE CD, the British government has responded to the challenges of financial gl obalization by seeking c ooperation with the European Union (EU).

PAGE 50

50 Similarly to the OECD, the European Union wa s established after World War II as a way to promote peace and prosperity through the principles of democracy and free market economies (European Communities, 2006). In keeping with these principles, th e EU has sought after political and economic stability within the member countries as well as in the neighboring states of the Union. The efforts at stability have not always been successful as evidenced by the ERM crisis in 1992, for example, but the European Un ion provides another forum to improve interstate cooperation in an effort to respond to the ch allenges presented by financial globalization. Among its many efforts to respond to the challe nges of financial globalization, the EU has worked to increase transparency in policy design and implementa tion, improve the flow of interstate communication, and strength en domestic financial systems all with the goal of preventing domestic and international cris es (European Union, 2002: 9). These efforts are accomplished through the institutions of the European Union that provide forums for communication, monitor domestic and regional markets, and collect and distribute funds to s ubsidize poorer domestic markets. The significance of these efforts by the EU is the same as the OECD, namely that the EU provides governance at a level beyond natio nal borders (European Union, 2002: 23). As was seen in the discussion of the OECD, this supra-national level of governance has become critical in an era of financial globalization where challenges to st ate sovereignty are at times the result of global or supra-national events rather than anything that can be controlled at the domestic level. Still, in the case of the Unite d Kingdom, the European Union is not an entirely obvious response to financial globalization given th e fact that the UK is not a member of the Economic and Monetary Union (EMU). Cons equently, the United Kingdom does not benefit from the monetary and financial policies associat ed with the EMU, but it does benefit indirectly from the stability these policies create within Europe.

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51 The importance of regional stability was seen in the East Asian Crisis. There, contagion occurred at such a dramatic level because the markets in state neighbor ing Thailand were also unstable (Das, 2003). Thus, for the United Kingd om, encouraging the EMU by participating in the European Union is a way to control for the potential for regional cris es and contagion. The logic follows that if the economies of the EMU ar e stable, it will only improve the stability of the British domestic economy. Moreover, even though the United Kingdom is not a member of the EMU, it still has an indirect voice in the policies enacted through the EMU due to its position within the European Union. Thus, the United Ki ngdom still plays an important role in the EU and the EMU, which has the benefit of encouragi ng regional policy that se rves the interests of the British. Even though the United Kingdom is not a memb er of the EMU, its membership in the European Union is still seen by the British as a response to financial globa lization. Furthermore, the possibility of joining the EMU sometime in the future is very real for the British: Blairs comments are again indicative: in a world that is moving closer together and being transformed by globalization, it would be a cruel denial of our own proper selfinterest to cut ourselves adrift from the ma jor strategic, economic and political alliance right on our doorstep. (H ay and Smith, 2005: 144) Clearly, the British have and continue to take the European Union and the EMU seriously as a response to the challenges presente d by financial globalization. More over, their ability to decide for themselves when the appropriate time is to make this transition shows that the British sovereignty in this area is still very much in tact. Thus, in the broa der picture of financial globalization, the states who have chosen to respond to the challeng es of financial globalization by turning to regional organizations are still acting within the real m of their sovereign powers. In these cases, these states have chosen to surren der elements of their sovereignty in favor of a system of pooled sovereignty, where power is shared collectively over certain issues. The

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52 important part of this process for this investigation is that states chose this process, and because of the ability to make this choice, regiona l integration and other expressions of pooled sovereignty are not considered to be indicators of a loss of domes tic sovereignty. Consequently, participation in the European Union and remaining open to membership in the EMU represent an important response of the United Kingdom to th e challenges of financial globalization that testifies to the stability of state sovereignty. Conclusion Given our discussion of the challenges of financ ial globalization, it is hard to believe that any state could deny the realities of financia l globalization. For the United Kingdom, the challenges of financial globalization are taken very seriously. As such, the British government has responded to these challenges in a way that aims to retain sovereignty over the domestic and global financial market. In examining this res ponse, the breadth-approach presented here led to an investigation of both the domestic-level resp onse and the global-level response. At the domestic level, reforms have been made to the Treasury, the Bank of England (BoE) and the Financial Services Authority (FSA) in an effort to retain sovereignty, espe cially in light of the challenges presented by technology, nonstate actors and speculation. Here, the two elements of sovereignty that were specifically addressed are (1) the ability to control movement of financial goods and services across state borders and (2) the ability to regulate domestic financial activity through legislation and institutions. At the globa l level, the government of the United Kingdom sought out international coope ration with the Organization for Economic Cooperation and Development (OECD) and the European Union (E U) as a way to respond particularly to the challenges of contagion and crises as well as external pressures. At this level, the response to financial globalization addresses the final two components of sovereignty, which are (1) the ability to exclude external pressures from the domestic decision-making process on financial

PAGE 53

53 regulation and enforcement of that regulation and (2) the ability to enter voluntarily into binding agreements between other nation-states and non-stat e financial firms, which includes the ability to join regional or internati onal organizations and willingly subm it to their governance measures. The success of these responses at the domestic and international levels show that states have been able to maintain their sovereignty even in the face of the se rious challenges presented by financial globalization. The expr ession of state sovereignty is cl early different in the context of financial globalization, as evid enced by the presence of indepe ndent regulators at the domestic level and by the pooling of sovere ignty at the international level. Yet, it is important to remember that states have chosen to respond to financial globalization in these ways and that, since the late-1990s, these responses have successfully prevented financial market failures in the United Kingdom and in many other parts of the world.

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54 CHAPTER 4 CONCLUSION If there ever was a word to describe the 1990s, it would be globalization. This phenomenon has been the subject of political and academic debates and inquiry, but few definitive conclusions about globalization have been reached. Among the many debates surrounding globalization is the deba te over the extent to which gl obalization represents a threat to state sovereignty. The aim of this project ha s been to investigate this relationship with a particular focus on financial globalizati on as a challenge to state sovereignty. As the starting point for this investigation, fi nancial globalization has been defined as the increasingly digital market where currencies, asse ts, loans, derivatives, and credit are traded by state and non-state firms across deregulated border s. As a secondary element to this definition, the spread of financial globaliza tion has coincided with increased levels of regional integration that serve as a way for states to control for th e adverse effects of globa lization. In conjunction with this definition, state sovereig nty has been defined as (1) the ability to control movement of financial goods and services across state borders, (2) the ability to regulate domestic financial activity through legislation and inst itutions, (3) the ability to excl ude external pressures from the domestic decision-making process on financial regulation and enforcement of that regulation, and (4) the ability to enter volunt arily into binding agreements between other nation-states and non-state financial firms. While neither of these definitions are meant to be the final word on the process of conceptualizing these terms, the definitions presente d here do serve as a foundation for the basic argument of the paper. Even though it was the initial goa l of the researcher to join the chorus proclaiming the end of the sovereign state, the findings presented in this study cannot s upport that initial perspective. Consequently, I have argued that financial globalization has significan tly change the pre-1990

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55 conceptualization and practice of state sovereignty but has yet to present a challenge significant enough to completely undermine state sovereig nty. The challenges presented by financial globalization that were emphasized here include d: information technology and the internet, nonstate actors, speculation, crisis and contagion, and external pressures on domestic decisionmaking. Each of these challenges were presente d highlighting their impact on the domestic and international markets of the United Kingdom. The n, the state response to these challenges was investigated paying particular at tention to the response of the United Kingdom, which featured both domestic and global responses. From a pers pective that emphasized breadth, the domestic responses investigated focused primarily on th e restructuring of the Treasury, the Bank of England, and the Financial Services Authority as a means to control for technology, non-state actors, and speculation. At th e global level, the emphasis wa s placed on the United Kingdoms participation in the OECD and the EU as a m eans of controlling for contagion and external pressures. In the end, the successful implementation and co ntinuation of these responses to financial globalization were determined to have shown that states have been able to maintain their sovereignty even in the face of serious challe nges presented by financial globalization. While the expression of state sovereignt y in these examples was clearly different from previous years, this change in sovereignty has not been seen as signaling an end or unde rmining of sovereignty, although some scholars might see them as the same Instead, the change in the expression of sovereignty was seen as a prerogative of the statean expression in itself of the states sovereigntyand is not equated with an end to sove reignty. Thus, at this point in time, financial globalization does not represent a fa tal threat to state sovereignty.

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56 As with any project that takes on a complex topi c, there is an important limitations of this study that needs to be addressed. For any study that seeks simplicity, there is a trade-off in complexity and richness; the many concepts addressed in this study (such as financial globalization, state sovereignty, non -state actors, contagion, and pooled sovereignty to name a few) are incredibly complex and heavy with theore tical and empirical implic ations. In this study, however, it was necessary to give these concepts a simpler treatment for two reasons. First, one of the goals of this project was in fact to simplif y these concepts in order to more clearly define and apply them. Part of the challenge to the greater literat ure on globalization has been the complexity of these terms, but here the goal was to remove some of the complexities in order to address the debate from a new a ngle. Secondly, given the limita tions imposed by the nature of this study, it would simply be impo ssible to give adequate treatmen t to each of these concepts. Thus, the simplification was also a matter of conve nience to enable the pr oject to move forward. While this study has traded complexity for simp licity, it was done so purposefully so as to provide a micro-level study that could speak back to the macro-level debate. The literature on globalization has reached a junctu re where it is becoming increasingly important to accept the risks of simplification for the pur poses of moving forward in this research area. If scholars and politicians continue to speak and think only in co mplexities, it is unlikely that globalization as a broader concept will ever be de fined or fully investigated empirically. While some might see this as a strength in itself, it is also working to keep the field trapped in the same debates it has been facing for over two decades. Thus, this project has willingly accepted the limitations imposed by simplicity for the aim of ultimately applying this study back to the broader field. While this project has focused exclusively on financial globalization, the ultimate aim of this project is to bring greater understanding to the phenomenon of globalization as a whole. As

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57 was stated previously, the lack of progress in re search on globalization ha s often been attributed to the inability to solidly define the key elements of globalization and othe r related concepts such as state sovereignty. Thus, one of the strongest points of this investig ation is the attempt to solidify the definitions of financial globalization and state sovereignty for the purposes of applying those definitions to both theory and empirics. Throughout this study, the conceptualizations of these two terms have proven workable in their application to the empirical example of the United Kingdom in the 1990s. Here, these concepts are proven to be more than just conjecture or academic speculation as they are in fact reflective of actual phenomenon. As such, these definitions possess the potential for furt her applications in other states and in other time periods, because they have been proven applicable in this context. A second strength of this projec t is its ability to tie togeth er the broader literature on financial globalization with the empirical ex amples provided by the United Kingdom during the 1990s. Even though this project is not design ed to be a case study, drawing on empirical evidence has grounded the investigation in a way that gives it more credibili ty and applicability. This project has attempted to go beyond the confines of the literature of fi nancial globalization to actually investigate how financial globalization plays out in the real world and how well the theoretical arguments about financial globalization a pply in these contexts. As such, this project brings back to the debates concrete concepts and examples from which scholars can more forward, either further proving or refuting. For too long, the deba te on the impact of financial globalization on state sovereignty has remained abstract and conj ectural, but this study enables this debate to move forward both theoretically and empirical ly in a very concrete way. Consequently, a third strength of this proj ect is the foundation it provides for future research. As was stated prev iously, this project encounters a serious limitation in depth.

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58 However, this limitation should also be recogn ized as a strength, because it provides a foundation for a number of avenues for future resear ch. Any one of the challenges of financial globalization or the responses of st ate sovereignty could be investig ated as distinct subject areas for the purposes of further enhancing the overall picture of financial gl obalization. Moreover, the application of this study to the United Kingdom could be further investigated in an in-depth case study or translated to other specific states or to trends across time or space. This project is therefore successful in its aim to provide a foundation for fu ture avenues of research, all of which will continue to benefit the growing research area of globalization. In the end, the true merit of this work will re st on the successes of th e research that comes after it. This investigation into the theoreti cal and empirical relati onship between financial globalization and state sovereignty in the Unite d Kingdom shows that the conclusion of this debate is not out of reach but that there is also still much work to be done to reach this end. What this project can promise, however, is that the future of globalization research is full of endless possibilities and ex citing discoveries yet to be made. Th is is truly an exciting time to be part of the globalization dialogue.

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59 LIST OF REFERENCES Abdelal, R. (2006) Writing the Rules of Gl obal Finance: France, Europe, and Capital Liberalization, Review of International Political Economy 13(1): 1-27. Andrews, D. et al. (2002) Governing the Worlds Money, Ithaca: Cornell University Press. Arestis, P. et al. (2005) Financial Globalizatio n: The Need for a Single Currency and a Global Central Bank, Journal of Post Keynesian Economics, 27(3): 507-531. Bank of England. (1996a) Financial Sector Issues, Financial Stability Review 1: 3-6. Bank of England. (1996b) Regulatory Developments, Financial Stability Review 1: 82-86. Bank of England. (1997a) Regulatory Developments, Financial Stability Review 2: 74-83. Bank of England. (1997b) Financial Re gulation: Why, How and By Whom?, Bank of England Quarterly Bulletin 37(1): 107-112. Bank of England. (1998) Financial Sector Issues, Financial Stability Review 4: 2-7. Barrow, C. (2005) The Return of the Stat e: Globalization, State Theory, and the New Imperialism, New Political Science, 27(2): 123-145. Bordo, M. and Murshid, A. (2006) Globalizatio n and Changing Patterns in the International Transmission of Shocks in Financial Markets, Journal of International Money and Finance, 25: 655-674. Cassis, Y. (2005) London and Paris as International Financia l Centres in the Twentieth Century Oxford: Oxford University Press. Cobb, S.C. (2001) Globalization in a Sma ll Island Context: Crea ting and Marketing Competitive Advantage for Offshore Financial Services, Geografiska Annaler 83(4): 161174. Cobham, D. (1997a) The Post-ERM Framewor k for Monetary Policy in the United Kingdom: Bounded Credibility, The Economic Journal 107: 1128-1141. Cobham, D. (1997b) Inevitable Disappointme nt? The ERM as the Framework for UK Monetary Policy 1990-92, International Review of Applied Economics 11(2): 213-228. Cohan, P. (2006) Finance & IT: The Transforming Power of Technology, Financial Executive 2006: 18-23. Cohen, B. (1998) The Geography of Money Ithaca: Cornell University Press. Cohen, E. (2001) Globalization and the Boundaries of the Stat e: A Framework for Analyzing the Changing Practice of Sovereignty, Governance: An Internati onal Journal of Policy and Administration 14(1): 75-97.

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60 Conley, T. (2002) The State of Globalis ation and the Globalisa tion of the State, Australian Journal of International Affairs, 56(3): 447-471. Dahbour, O. (2006) Advocating Sovereig nty in an Age of Globalization, Journal of Social Philosophy, 37(1): 108-124. Das, D. (2003) Globalization in the Wo rld of Finance, in Das, D. (ed) An International Finance Reader New York: Routledge, pp. 3-11. Davies, H. (1997) International Regula tory Structure: A UK Perspective, Bank of England Quarterly Bulletin 37(2): 214-221. De Goede, M. (2004) Repoliticizing Financial Risk, Economy and Society, 33(2):197-217. De La Dehesa, G. (2006) Winners and Losers in Globalization Malden, MA: Blackwell Publishing. Dearlove, J. (2000) Globalization and the Study of British Politics, Politics 20(2): 111-118. Dombrowski, P. (1998) Haute Finance and High Theory: Recent Scholarship on Global Financial Relations, Mershon International Studies Review, 42(1): 1-28. European Communities (2006) Enlargement : http://ec.europa.eu/enlargement/index_en.htm European Union (2002) Responses to the Challenges of Globalisation: A Study on the International Monetary and Financial Sy stem and on Financing For Development Brussels. Financial Services Authority (2006) Memorandum of Understanding London. Fulcher, J. (1995) British Capitalism in the 1980s: Old Times or New Times?, The British Journal of Sociology, 46(2): 325-338. Gilpin, R. (2000) The Challenge of Global Capitalism: The World Economy in the 21st Century, Princeton: Princeton University Press. Hay, C. (2001) The Invocation of External Ec onomic Constraint: A Ge nealogy of the Concept of Globalization in the Political Econom y of the British Labour Party, 1973-2000, The European Legacy 6(2): 233-249. Hay, C. and Smith, N. (2005) Horses for Courses? The Political Discourse of Globalisation and European Integration in the UK and Ireland, West European Politics 28(1): 124-158. Hays, J., Freeman, J. and Nesseth, H. (2003) Exc hange Rate Volatility and Democratization in Emerging Market Countries, International Studies Quarterly, 47: 203-228. Heimann, J. and Lord Alexander of Weedon. ( 1997) Global Institutions National Supervision and Systemic Risk, Financial Stability Review 3: 82-91.

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61 Helleiner, E. (1994) States and the Reemergence of Global Finance Ithaca: Cornell University Press. Helleiner, E. (1998) Electronic Money: A Challenge to the Sovereign State, Journal of International Affairs 51(2): 387-409. Helleiner, E. (2003) The Making of National Money: Terr itorial Currencies in Historical Perspective, Ithaca: Cornell University Press. Hirst, P. and Thompson, G. (2000) Globaliza tion in One Country? Th e Peculiarities of the British, Economy and Society 29(3): 335-356. Huhne, C. (1996) Rating Sovereign Risk, Financial Stability Report 1: 31-37. Hveem, H. (2000) Explaining the Regional Phenom enon in an Era of Globalization, in Stubbs, R. and Underhill, G. (eds) Political Economy and the Changing Global Order Ontario: Oxford University Press Canada, pp. 70-81. Jones, E. (2002) The Politics of Economic and Monetary Union: Integration and Idiosyncrasy, Oxford: Rowman & Littlefield Publishers. Katada, S. (1998) The Japanese Government in Two Mexican Financial Crises: An Emerging International Lender-of-Last-Resort?, Pacific Affairs, 71(1): 61-79. Keohane, R. and Nye, J. (2000) Globalization: Whats New? Whats Not? (And So What?), Foreign Policy 118: 104-119. Khiabany, G. (2003) Globalization and the Internet: Myth s and Realities, Trends in Communication 11(2): 137-153. King, M. and Sinclair, T. (2003) Private Acto rs and Public Policy: A Requiem for the New Basel Capital Accord, International Political Science Review, 24(3): 345-362. Kirshner, J. (1995) Currency and Coercion: The Political Economy of International Monetary Power, Princeton: Princeton University Press. Krasner, S. (2001a) Sovereignty, Foreign Policy, 122: 20-29. Krasner, S. (2001b) Abiding Sovereignty, International Politic al Science Review, 22(3):229251. Leblang, D. (1997) Domestic and Systemic Determ inants of Capital Controls in the Developed and Developing World, International Studies Quarterly, 41: 435-54. Li, Q. and Smith, D. (2002) The Dilemma of Financial Liberalization: State Autonomy and Societal Demands, The Journal of Politics, 64(3): 764-790. Lukauskas, A. and Minushkin, S. (2000) Explai ning Styles of Financial Market Opening in Chile, Mexico, South Korea, and Turkey, International Studies Quarterly, 44(4): 695-723.

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62 Lutz, S. (2004) Convergence Within National Di versity: The Regulatory State in Finance, Journal of Public Policy, 24(2): 169-197. MacNeil, I. (1999) The Future for Financial Regulation: The Financia l Services and Markets Bill, The Modern Law Review 62(5): 725-743. Masson, P. (1995) Gaining and Losing ERM Cred ibility: The Case of the United Kingdom, The Economic Journal 105: 571-582. Mattli, W. (1999) The Logic of Regional Integration: Europe and Beyond Cambridge: Cambridge University Press. McMahon, P. (2004) Money, Markets and Microelect ronics: Building the Infrastructure for the Global Finance Sector, Prometheus 22(1): 71-82. McNamara, K. (1998) The Currency of Ideas: Monetary Politics in the European Union, Ithaca: Cornell University Press. Mosley, L. (2000) Room to M ove: International Financial Markets and National Welfare States, International Organization, 54(4): 737-773. OECD (1960) Convention Paris, OECD. OECD (1995) The Impacts of Globalization on Policy Making Paris: OECD. OECD (2007) United Kingdom: About : http://www.oecd.org/uk Pacione, M. (1999) The Other Side of the Coin: Local Cu rrency as a Response to the Globalization of Capital, Regional Studies, 33(1): 63-72. Sinclair, T. (2001) The Infrastructure of Gl obal Governance: Quasi-Regulatory Mechanisms and the New Global Finance, Global Governance, 7: 441-451. Soderlind, P. (2000) Market Expectations in the UK Before and After the ERM Crisis, Economica 67: 1-18. Spalek, B. (2001) Policing the UK Financial System: the Creation of the New Financial Services Authority and its Approach to Regulation, International Journal of the Sociology of Law 29: 75-87. Strange, S. (1986) Casino Capitalism, Oxford: Blackwell. Stulz, R. (2006) The Limits of Financial Globalization, The Journal of Finance, 60(4): 15951634. Svensson, T., Mabuchi, M. and Kamikawa, R. ( 2006) Managing the Bank-System Crisis in Coordinated Market Economies: Institutions and Blame Avoidance Strategies in Sweden and Japan, Governance: An International Jour nal of Policy, Administration, and Institutions, 19(1): 43-74.

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63 Thomson, J. (1995) State Sovereignty in Inte rnational Relations: Bridging the Gap Between Theory and Empirical Research, International Studies Quarterly, 39: 213-233. Tobin, J. (1999) Financial Globalization, Proceedings of the Amer ican Philosophical Society, 143(2): 161-167. Treasury. (1992) Should Sterling Rejoin And If So When? London. Wang, G. (2004) The Impact of Gl obalization on State Sovereignty, Chinese Journal of International Law, 3(2):473-483. Warr, P. (2003) What Caused the As ian Crisis?, in Das, D. (ed) An International Finance Reader New York: Routledge, pp. 381-400. Watson, M. (2002) Sand in The Wheels, or Oiling The Wheels, of Interna tional Finance? New Labours Appeal to a New Bretton Woods, British Journal of Politics and International Relations 4(2): 193-221. Yaziji, M. (2004) Turning Gadflies into Allies, Harvard Business Review : 110-115. Yeung, H. (1998) Capital, State and Sp ace: Contesting the Borderless World, Transactions of the Institute of British Geographers, 23(3): 291-309.

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64 BIOGRAPHICAL SKETCH Jamie Elizabeth Scalera was born on August 29, 1983, in Atlanta, Georgia. Jamie grew up in Brevard County, Florida, and graduated from Cocoa Beach Junior/Senior High School in 2001 with an International Baccalaureate diploma. She attended Stetson University where she graduated summa cum laude with a Bachelor of Arts in international studies in May 2005. In August 2005, Jamie began her graduate work at the University of Florida where she will receive a Master of Arts in political scienceinternat ional relations. Upon gr aduation from UF, Jamie will pursue her PhD in political sciencein ternational relations with an emphasis on international political economy at the Un iversity of Illinois at UrbanaChampaign.