This paper reviews the central themes and concepts of one manifestation of the globalization trend: Financial globalization. In addition to casting light on its fundamentals, this article also provides insight into the positive and negative implications of financial globalization on the international community.
Keywords: Capital Mobility; Emerging Market economy; Financial Globalization; Gold Standard; International Monetary Fund; World Bank
Beginning in the last two decades of the 20th century, there has been a worldwide trend of international commercial activities operating beyond borders and the confines of national government-imposed regulations. Enterprises increasingly began looking for and establishing links to business partners in other countries. To be sure, international commerce has been a staple of human history, although inter-governmental trade agreements were considerably different than the business contracts of today.
Globalization has undergone an evolution of sorts, accelerating in growth and volume, particularly with the evolution of technologies that serve its needs and effectively make the notion of globalization's indefinite continuation inevitable. As former UN Secretary General Kofi Annan once said, "It has been said that arguing against globalization is like arguing against the laws of gravity" ("Kofi Annan quotes," 2009).
Indeed, the speed at which globalization has developed over a relatively short time corresponds with the suggestion that it is a powerful force of nature, one whose strength continues to build rather than subside. It is therefore important to understand the elements and trends that give it life. This paper reviews the central themes and concepts of one manifestation of this trend: financial globalization. In addition to casting light on its fundamentals, this article also provides insight into the positive and negative implications of financial globalization on the international community.
Understanding Financial Globalization
Financial globalization can be defined as the linkages created from cross-border financial flows. Globalization is closely linked to another trend, financial integration, in which myriad national and regional markets merge into one single international entity (Prasad, et al, 2003). As has occurred in other studies, these terms shall be used interchangeably in this paper in light of their close connections. Such trends are significant, as they present a shift away from commerce on a nation-state basis and toward a more private, super-national network.
Super-national networks serve several important purposes.
- First, they make available and accessible the funds to be used for development loans (Arestis, Basu & Mallick, 2009). This is so because within such a large financial marketplace, greater opportunities exist for developing nations to tap into international development funds.
- The second purpose is akin to the first, in that the quality of living of developing nations, having been influenced by the same financial systems that strengthened industrialized countries, stands to improve as a result of this manifestation of globalization.
- The third of these purposes is one of global stability — by centralizing global financial systems, adverse systemic shocks may be mitigated (Federal Reserve Bank of New York, 2004).
This paper explores these three purposes in greater detail. However, it is first important to review the history of financial globalization in the modern world and how it led to the evolving system of financial integration prevalent in the 21st century.
A Brief History of Financial Globalization
Financial globalization is hardly a new concept in human history. During the latter 19th century, it was particularly commonplace because of the gold standard (the practice by which currencies were converted into gold at fixed prices per ounce), which was set by Great Britain and the United States. The fact that the British Empire was the dominant developer in the world also contributed to the centralization of various national financial systems: The Bank of England was the central lender in British development efforts in Australia, India, Africa, the Americas and other regions. As such, developing nations looked to the central, globalized British Empire to conduct any international financial business (Tobin, 1998).
The events of the early 20th century turned this environment on its ear. The British central financial system was virtually destroyed during World War I, and never returned to its pre-20th century form following the Great Depression and World War II. Instead, in the absence of a central banking authority for other countries, the international community fractured into a vast tapestry of independent nations, each developing its own currencies and converting against a myriad of other currencies. During the latter 20th century, several regional economic powers grew to prominence, centralizing currency and gold exchanges based on three currencies: The US dollar, the German mark and the Japanese yen.
Coinciding with the nationalization (and later regionalization) of currency and financial transactions during the early to mid-20th century was the development of regulatory protections that were designed to promote stability of a given country's economic interests. Such measures, however, limited expedient growth, often isolated economies, and even created regional crises when exchange rates faltered (as was the case in Mexico and Southeast Asia during the 1990s and Argentina in the early 2000s).
Meanwhile, the three major regional currencies (the dollar, the mark and yen) began liberalizing their own exchange protocols, allowing for floating exchange rates rather than fixed ones. Doing so created greater stability among these currencies and those countries that were linked to them. Continued liberalization of monetary regulatory schemes also proved enticing to those countries wishing to obtain development monies in order to build or rebuild their own economic infrastructures. As this paper next discusses, there are benefits as well as negative consequences to liberalized and globalized financial transactions — a trend that continues to grow in the 21st century economic regime.
In 1944, the European theater was devastated by war; the infrastructures of virtually every major country were crippled. The International Bank for Reconstruction (more popularly known as the "World Bank") was established at the Bretton Woods economic conference for the purposes of providing financing for those countries affected by this conflict. The Bank would also serve a long-term purpose: Provision of low-interest, long-term loans to developing countries around the world. Over time, the Bank grew in membership, whose dues helped finance these loans (along with the sale of its securities), to more than 180 countries ("The World Bank," 2009).
As its name would suggest, the World Bank has worked to provide its loans worldwide but under a set of member guidelines, subject to the Bank's governance. Under a condition of such strict infrastructure and economic system management, the World Bank's form of financial aid has proven very effective in aiding development since its introduction.
It is interesting to note that while the Bank enables developing countries to rebuild their financial institutions and systems, globalization has spurred similarly developing countries and the regions to do so on their own. In fact, some experts argue, the economic development that has occurred naturally in a number of regions was done more quickly than was the development of World Bank-sponsored development.
Financial globalization has fostered this dynamic environment for two important reasons. First, whereas the World Bank and International Monetary Fund (IMF) have strict boundaries and regulations governing development, regional financial globalization tends to liberalize lending and development spending policies. Such liberalization means fewer administrative expenses and a greater degree of competition among financial lenders (as opposed to the singularity of the Bank and IMF). This means that securing development funds from a regional, non-governmental organization equals less cost to the developing country in question.
The second reason for non-World Bank development is the fact that less regulation and restrictive policies have been shown to result in higher rates of regional integration and development. In one study, for example, the regions of East Asia and Latin America were analyzed in terms of their rates of development. Latin America, in...
(The entire section is 3865 words.)