This article identifies a number of ongoing challenges. It focuses on the means of environmental regulation — the techniques regulators use to reduce pollution. It discusses traditional regulation (often called command-and-control regulation), the economic theory undergirding market-based environmental regulation, and increased use of market mechanisms. This treatment of market mechanisms considers them in an institutional context, showing how a multilevel governance system implements market mechanisms. Market-based instruments have become increasingly important as neoliberalism has advanced. While these instruments provide a cost effective way of realising environmental improvements, they depend on government design and enforcement for their efficacy. A concern that is shared across contributions is that such instruments are increasingly deployed in a complex context of multilevel governance and challenges multiply where market mechanisms traverse national boundaries.
D. Daniel Sokol
This chapter explores compliance in the antitrust context, reviewing both the antitrust and the non-antitrust literatures on compliance and corporate governance to provide a clearer picture of the extant literature and the theoretical and empirical gaps within the antitrust literature to better inform antitrust policy on detecting cartels. This chapter explores the scholarship both within and outside of antitrust to better understand internal detection of wrongdoing and improved compliance in the antitrust cartel context. It explores the organizational environment for antitrust compliance programs, firm and industry indicia that impact antitrust compliance, survey evidence and theoretical models on antitrust compliance, and the use of bounties to encourage compliance.
This chapter outlines the creation and development of the Australian Future Fund (FF), showing how and why policy makers adopted this option to manage the challenges presented by the “good economic fortune” that occurred in Australia from the mid-1990s to 2010. It discusses the politics behind the governing structure of the FF, which is copied from its neighbor, New Zealand. Despite its initial emphasis on independence, political influence was inevitable when selecting and appointing the chairman of the Board of Guardians. The chapter examines the two key issues of “ethical investment” and “ethical operation” and shows the difficult balance of demands between diverse constituents; it identifies the space created by the expectation that the FF will behave in a similar fashion of all profit-maximization investors.
Mark J. Roe
This chapter introduces a political-institutional perspective and argues that capital markets can function effectively if political institutions support capitalism, especially capitalism of financial markets. It looks at the shape, support, and extent of capital markets, which are usually questioned in the polity. It explains how these questions are settled, which consequentially affects the extent, form, and effectiveness of capital markets. The chapter also studies the main political economy forms shaping capital markets and the modification or replacement of old institutions.
This chapter provides a historical perspective on the relationship between capital markets and sovereign defaults. While the main body of the sovereign debt literature has rarely incorporated supply side factors, such as market distortions or conflicts of interest, we argue that the history of sovereign defaults cannot be understood without including the evolutionary structure of capital markets. The southern European debt crises and the recent controversy surrounding the role of holdouts demonstrate that certain proposals raised in previous default episodes deserve further discussion, in particular, those aiming to deal with problems of collective action, liquidity provision, and information flaws.
Central banks date from the late nineteenth century but the great majority from the twentieth century. They are institutions whose principal purpose is to provide stable monetary and financial conditions, though their functions have varied over time. Claims made for the banks’ powers have often been greater than was merited. This chapter sets out how central banks’ responsibilities arose and how they have been fulfilled. It gives particular attention to something that was almost lost sight of in recent years that of their traditional responsibility for financial stability. Other aspects of central banking are then discussed: the role they might have in supervision/regulation; central bank co-operation has played; and the meaning and desirability of central bank independence.
Christopher Balding and Kevin Chastagner
China’s sovereign wealth fund (SWF), the China Investment Corporation (CIC), was established in 2007 and has grown to become the fourth largest SWF in the world with assets and offices spanning the globe. This chapter looks at the range of unique factors that need to be understood in order to place the CIC in context. When China decided to form its own SWF, it decided to do so by borrowing from the central bank in a complicated swap transaction in order to highlight the CIC’s independence from existing entities like the People’s Bank of China and the State Administration of Foreign Exchange. While most SWFs grow from an excess of natural resource wealth, the Chinese SWF is unique in that it grew out of years of current account surpluses accumulated from ensuring a fixed exchange rate. The chapter discusses the macroeconomic interplay between China and the CIC.
Joseph A. McCahery and F. Alexander de Roode
Direct investments are the preferred vehicle for large institutional investors to have control over their portfolio investments. This chapter studies the deal structure of direct investments by sovereign wealth funds (SWFs) in private equity transactions. Its analyses of direct investments are based on data from Global Corporate Venturing. It finds that SWFs shift from investing in private equity funds to originating and co-investing together with private equity funds in deals. The choice for co-investment affects deal size, risk-bearing, fees and returns. Overall, results of research conducted for this chapter show the strong interest of SWFs in direct investments in developed markets.
This chapter provides an overview of the development of commercial banking—defined as taking deposits payable on demand and originating loans to private and corporate customers—from the mid-nineteenth century to the present. Two characteristics are underlined: state regulation, primarily dictated by concerns about banks’ position as deposit takers; and banks’ role in the financing of industry and more generally in economic growth including their assigned responsibility. The changing nature of these two features has shaped the development of commercial banks since the onset of industrialization. In all countries, with the exception of England, commercial banks developed into some kind of universal bank in the course of the nineteenth century. This converging movement ended in the interwar years, when in many countries commercial banks were separated from investment banks. Universal banking became dominant again in the late twentieth century, but in the form of banking conglomerates.
Economics has been at the heart of regulatory reform beginning with the wave of deregulation and privatisations of the 1980s. This article focuses on economic theories of regulation, and the way economics has been used to design and evaluate regulation. As the title of this article suggests, there are a number of economic approaches. However, these all share the conviction that relatively simple economic theory can assist in understanding regulation, and providing practical tools for regulators to make regulation more effective and efficient. The subject matter of the economics of regulation covers at least four broad areas — economic regulation, social regulation, competition law, and the legal system. Here a broader view is taken encompassing competition and merger laws, and the field known as law-and-economics or the economics of law is illustrated which looks at the legal system.
Paul A. David
This article shows, first, that the problem of congestion which was widely perceived to be a critical economic resource allocation challenge turned out to be largely chimerical; and, second, that economists were quite blasé in proposing solutions for that and other related problems by introducing pricing mechanisms whose implementation required radical engineering modifications to the Internet. The latter, however, would jeopardize, and possibly vitiate, the unique, socially valuable performance capabilities of the system. The third section takes note of the fact that the recommendations for usage-sensitive pricing that were advanced by economists on static and rather narrow ‘efficiency’ grounds probably posed less of an actual threat to the continuation of the end-to-end design principle than the pressures that presently emanate from the private sector. The fourth section addresses the questions of whether, and on what grounds, public policy might be mobilized to protect the architecture of the Internet. The final section concludes with some observations and suggestions regarding future policy-relevant directions for Internet economics.
Veljko Fotak, Xuechen Gao, and William L. Megginson
This chapter introduces the 35 funds that meet the authors’ definition of SWFs, discusses their evolution from stabilization funds to SWFs and illustrates the differences and similarities between the various types of funds. The authors discuss the documented importance of SWF funding sources and survey the normative literature describing how SWFs should allocate funds. They then summarize the empirical literature studying how SWFs actually do allocate funds across asset classes, geographically, and across industries. An assessment of empirical studies examines the impact of SWF stock investments on target firm financial and operating performance, and finds universal support for a positive announcement period stock price increase. Finally, the authors point out the unresolved issues and possible extensions in SWF research, and assess how the massive decline in oil export revenues by major SWF sponsor nations such as Abu Dhabi, Russia, Kuwait, and Norway is likely to impact SWF investment levels in coming years.
This article focuses on the particular challenges and risks raised by the regulation of financial services and markets. It reviews the traditional rationales for regulation and how regulation has experienced repeated reforms which are becoming increasingly transformative in their ambition. It suggests that what marks out this regulatory area is the significant level of risk involved in the regulatory project. It also considers how regulatory tools can be fine-tuned to mitigate the evolving risks of intervention. It considers the expanding domain of regulation as domestic markets have become closely inter-connected, the related risks, and the nature of the regulatory response. The traditional rationale for financial services and markets regulation is the correction of market failures related to asymmetric information and to externalities, notably systemic risks, in order to support market efficiency and efficient resource allocation.
From Financialization to Vulture Developmentalism: South-North Strategic Sovereign Wealth Fund Investment and the Politics of the “Quadruple Bottom Line”
This chapter dissects the potential and limitations of South-North strategic sovereign wealth fund (SWF) investment as a tool for catalyzing technological upgrading in the developing world. After an overview of the problems posed by financialized, neoliberal globalization for conventional development policy tools, and how states are seeking to overcome these limitations through the use of strategic SWFs, there follows a model of the political-economic factors conditioning the ability of developing countries to use South-North strategic SWF investment to promote technology transfer in the reverse direction. This model describes the politics of SWF-led development in terms of not only the “double bottom line” of SWF-owning state political and financial interests, but also a second double-bottom line encompassing the political and financial interests of multiple host economy actors. A case study of Abu Dhabi shows how this has simultaneously enabled and constrained state attempts to use South-North strategic SWF-investment to accelerate domestic economic development.
Youssef Cassis, Richard Grossman, and Catherine Schenk
This chapter provides a general introduction to the volume, whose objective is to present the state-of-the-art in banking and financial history. Financial history is of long standing, but it has gained even prominence since the mid-1970s—because of the huge development and transformation of the financial world, increasing financial instability, and more generally the growing role of financial services in ‘post-industrial’ societies. The volume concentrates on the economic and financial side of banking and financial activities, primarily though not solely in advanced economies (Western Europe, the United States, and Japan), in a long-term (from mid-nineteenth century to the present) comparative perspective. In addition to paying attention to general issues, not least those related to theoretical and methodological aspects of the discipline, the volume approaches the banking and financial world from four distinct but interrelated angles: financial institutions, financial markets, financial regulation, and financial crises.
Douglas Cumming, Igor Filatotchev, Juliane Reinecke, and Geoffrey Wood
Sovereign wealth funds (SWFs) represent not only an increasingly prominent player in the alternative investor ecosystem, but also a novel mechanism through which governments may project their power, and serve geopolitical and strategic interests abroad. There is a body of existing literature that suggests that the directly observable political effects of SWF activity are very limited. However, the ability of national governments to dispense, withdraw or withhold capital represents an important dimension of soft power abroad, and there is considerable evidence that the indirect effects of SWF investments may have considerable wider political, social, and economic effects, as outlined in the various chapters in this book. The growing body of evidence on the consequences of SWF activities highlight the need to develop and extend existing theories of institutions and the state, and the role of alternative investors as transnational actors.
This chapter briefly reviews the literature on sovereighn wealth funds (SWFs) with a focus on their investment characteristics and strategies. It describes the China Investment Corporation (CIC) with particular reference to its connections with the Chinese government. This is followed by analyses of hand-collected data based on 61 M&As, 8 JVs, and 28 fund investments made by the CIC 2007–15. The analyses focus on the formal control (equity stakes, voting rights, director nomination and board representation) of the CIC in its target firms, and on the indirect control benefits that the CIC can extract from them in their long-term post-investment relationships. The findings question the efficacy of proposals forcing SWFs to remain passive by suspending their voting rights, and suggest that SWF hosting countries should carefully consider the necessity and level of regulations directed at SWFs as a particular type of investors to guard against potential protectionism.
Chile has managed to avoid the St Augustine Syndrome of fiscal procrastination. This has required the prudent management of both fiscal flows and stocks. On the one hand, a fiscal policy rule has permitted Chile to save in sunny good times and to spend extraordinary resources on rainy days. The stabilizing fiscal policy rule has been key to smooth fiscal expenditure and avoiding the economic sins present in several countries: those of deficit bias and procyclicality. On the other hand, the management of fiscal stocks through its sovereign wealth funds (SWFs) has transformed Chile into an international example of transparency, good management, and responsibility. This sounds easy but it requires both political courage and economic responsibility. Several lessons could be learned from this which would be useful for other countries in any stage of development.
This chapter presents the evolution of Western monetary systems from the bimetallic standards of medieval Europe through the gold standard and Bretton Woods eras to today’s fiat money regimes. The chapter notes that issues of revenue creation enabled by the monopoly over money issue—through debasement and/or inflation—runs through this history, as does the significance of the credibility of the money issuer. An additional theme in the chapter is the role of changing technology of money issue, from the hammered coins of the medieval period, to the milled coins of the early modern period, through paper money issues to cryptocurrencies.
The notion that money markets were essential for smooth working of the economy but exposed to liquidity shocks was a key lesson banking theorists and central bankers learnt from panics of the nineteenth century. This chapter deals with the historical experience of money market stabilization in Britain and the USA. Since the 1860s, the London market, based on specialized intermediaries (discount houses) trading mainly in banker acceptances and with regular access to the Bank of England as a lender of last resort, achieved an admired record of financial stability. In contrast, the New York market, operating essentially as an inter-bank reserve system with no central bank until 1913, was the epicenter of several disruptive crises during the National Banking era. In the interwar period, the attempt by US policy makers to transplant British institutions into the US financial system had only partial success in preventing new episodes of financial instability.