What Explains Today's High Degree of Global Financial Integration - Essay Example

Global Financial Integration Global financial integration on one hand implies the deregulation of the domestic financial market and the opening up tothe international trade and capital movement of an economy and on the other hand it implies integration of the domestic financial market of the economy with the global financial market. International financial integration have tremendously helped the foreign players to reap the gains of economies of scale by reducing managerial inefficiencies and sophisticated use of more advanced and improved technologies in the production line. The global integration in the financial market has given the opportunities to the investors to diversify the risks and to access the financial products in a more easy way. (Agarwal, n.d.) The functionalities of the process of globalization has been motivated by heterogeneous factors, such as gradual increase of trade in goods and services, increase of free movement of capital across international borders, increase of international mobility of labor and increase of global technological transfers. The impact of international movement of capital and global financial integration on the developing countries experienced a dramatic change in the early 1990s with the enhancement of financial deregulation in many countries. (Wolf 2005) This is the period when the free capital movement from the developed and industrial nations to the developing nations had started to rise vividly which was seen through the increase in growth of the developing nations. However, during this era the globe has also seen a sequence of financial crises across many countries. In one hand many developed countries faced the financial crises, such as the 1992 and 1993 financial crises of the developed countries in the European Exchange Rate Mechanism (ERM). On the other hand the developing nations also faced such crises, like the Mexican Tequila crisis in 1995, 1997 and 1998 Asian crises, the Latin American and the Russian crises from 1998 to 2000 etc. All these crises that were seen throughout different part of the globe gradually proved that there lies an inherent risk of the international financial integration behind its benefit. The international financial integration through the opening of the cross border financial markets is a multifarious phenomenon that involves in unrestricting the movement of foreign direct investment (FDI) from the developed countries to the developing countries and pulling up the regulations from both the short term and long term financial instruments which are responsible for such international financial integration. (Mendoza, September 13, 2008, pp 8-10; Lane and Milesi-Ferretti, 2003, p. 8) The benefits of this process of financial integration are reflected in the increasing investment opportunities, intensifying of the domestic capital market and increasing technology transfers. On the other hand, the risks of lifting regulations on the international capital movement may results in macroeconomic instability, political weakness and inconsistencies and crash down of domestic financial system for coping with the volume of capital inflow. (International Financial Integration and Developing Countries). Over the last thirty years there occurred a significant increase of financial integration across the world through the hand of capital account liberalization. The current account liberalization was first occurred in the developed countries but the process started slowly for the developing countries and took its momentum with the beginning of 1990. Over the last three decades opening of the international borders for free trade is coupled with high growth and larger regional union. Before 1914, the First World War period, the prevailed classical gold standard was supported by a liberalized capital market and in comparison with today’s framework; the system maintained relatively larger flows of capital flows. Even at that time the international financial crises were also less frequent relative to the period since 1973. At this era of fixed exchange rate system, through the mechanism of price change the balance of payment adjustment was done. This relative stable international economic and political environment at the First World War period suggests that at that time the degree of integrity of domestic policies with the international standard in association with gold standard was very high. The main reason behind this stable environment was presence of a tight knot between the Great Britain, the major international lender of that time, and the other key borrowers. However, the world environment after the end of the Second World War had changed dramatically. During this period the world experienced a growth with a slow pace and a little regional convergence due to the fall down of international trade and capital movement across the nations. (Oately, 2009, pp. 215-220) In 1960 under the fixed exchange rate system of Breton Woods, the fixed value of the U.S. dollar has been observed as overvalued. A huge increase of U.S. domestic spending and the increase in military expenditure for the Vietnam War steadily deteriorate the dollar and ultimately resulted in its overvaluation. The Bretton Woods System melted down the period between of 1968 and 1973. In 1971, U.S. proclaimed the postponement of convertibility of dollar into gold. In the era of 60s with in the structure of the Bretton Woods parity the dollar had moved violently and gradually the crisis forced the break down of the system. By 1973, world has noticed that the major global currencies glide against each other. With the fall of the Bretton Woods system, the members of the IMF were allowed to choose any type of currency exchange arrangement according to their wish to float freely or to fix their currency to another country’s currency or a container of currencies so as to form a monetary union. The oil price shocks of 1970 frightened many policymakers as they thought that the breaking of the Bretton Woods System would end the period of speedy international growth. But the result became completely different. The emergence of the flexible exchange rate system eventually helped the counties to take right adjustment against the hike in the oil price. During this period, the IMF dealt with many poorest economies of the world regarding the difficulties in balance of payments. The IMF started to provide them financial help. In 1986 the Structural Adjustment Facility had been created by the IMF for giving loan to its member countries on a concession basis. The world gradually started to adjust itself for the coming period of neoliberalism. (The end of the Bretton Woods System (1972–81), n.d.; Marston, 1997, pp. 48-49) The structural adjustment facility of the World Bank and IMF has facilitated the globalization process in 1980s and 1990s. There occurred several economic reforms in the developing world through the persistence of such global funding agencies, which led to opening of the developing economies to the developed economies. This process has further been aggravated through a sequence of multilateral negotiations under the GATT which has been modified as WTO after the Uruguay round of negotiation where different issues regarding the international trade and liberalizations were discussed to make a consensus among the member countries. However, there are other many factors, which are influential for today’s financial integration. Revolution in telecommunication, computer accounting system, financial data processing and instrument development innovativeness are the key forces that enabled the developing world to be integrated with the financial system of the developed world. (Does Globalization Make Sense? pp 63-66). There has emerged an evolutionary outcome in the international commercial banking system. With a huge amount of petrodollars the world’s bigger commercial banks find the lending opportunities to the developing nations. The mechanism of trade financing and forex services of the modern banking facilities enabled the people to connect to the other countries easily. The global governing agencies have reduced the portfolio risks in the global banking operation by diversifying the portfolios of these banks and give them the opportunities to earn higher rates of return. (Oately, 2009, pp 237-241) However, in exemplifying some of the crises that took place during the process of global financial integration we should not forget the case of the Asian Financial Crisis of 1997. During this period there appeared a flow of financial crisis over the East Asian countries- Thailand, Indonesia, Korea, etc. All these countries required financial helps from IMF for their restructure and reformation of the economic policies. Criticism and conflicts gradually were rising on the justification of the boom of the financial liberalization. From this experience, however, the IMF has modified itself further to materialize its responsibility regarding its future functionalities. (Grabel, November, 2001; Moreno, Pasadilla and Remolona, July 1998) As our final discussion we can trace the example of the recent financial shocks that almost every nation, both the developed and developing, has experienced. The critiques have argued that it is the reason of global financial integration, which has affected the world economies. The developing world has accomplished the percolation effect of the global financial crises from the direct effect of stagflation in the developed world. However, inspite of the recent brutal effect of the international financial crisis, we put forward our arguments in favor of the global financial integration as there is no doubt that the financial integration have modernized the economic surroundings of the nations from various dimension by creating more employment opportunities, giving the organizations to perform in a more competitive framework, revolutionizing the banking systems and opening up the door to the developing nations to negotiate on the direction of the global governance with the developed nations on the same platform. References 1) Agarwal, N, R (n.d.), “Global Financial Integration and Vulnerability to Crisis in Developing Countries : A Study of Indian Economy”, Institute of Economic Growth, Delhi. Available at: http://iegindia.org/dis_rna_12.pdf (accessed on April 5, 2010) 2) “International Financial Integration and Developing Countries” (October 1, 2001), IMF, HighBeam Research. Available at: http://www.highbeam.com/doc/1G1-79666009.html (accessed on April 5, 2010) 3) Oatly, T (2009) “International Political Economy: Interests and Institutions in the Global Economy”, Pearson, NY. 4) Wolf, M. (April 2005). "WILL GLOBALIZATION SURVIVE? Institute for International Economics, Washington DC. Available at: http://www.iie.com/publications/papers/wolf0405.pdf (accessed on April 5, 2010) 5) “DOES GLOBALISATION MAKE SENSE?” (February 2008), Economia Internazionale / International Economics, pp. 47-80.Available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1165362 (accessed on April 5, 2010) 6) Mendoza, G, E (September 13 2008), “Financial Integration, Financial 7) Development and Global Imbalances”, Available at: http://www-rcf.usc.edu/~quadrini/papers/CApap.pdf (accessed on April 5, 2010) 8) Grabel, I (November, 2001), “Averting crisis? Assessing measures to manage financial integration in emerging economies”, University of Denver.Available at: http://www.financialpolicy.org/financedev/grabelavert.pdf (accessed on April 5, 2010) 9) Lane, R. P. and G.M. Milesi-Ferretti (2003), “International Financial Integration”, IMF. Available at: http://www.imf.org/external/pubs/ft/wp/2003/wp0386.pdf (accessed on April 5, 2010) 10) Moreno, R, Pasadilla, G and E, Remolona (July 1998), “Asia’s Financial Crisis: Lessons and Responses”, Federal Reserve Bank of San Francisco.Available at: http://www.frbsf.org/econrsrch/workingp/pbc/wppb98-02.pdf (accessed on April 5, 2010) 11) Marston, C, R (1997), “International Financial Integration”, Cambridge University Press, NY. 12) “The end of the Bretton Woods System (1972–81)” (n.d.), IMF.Available at: http://www.imf.org/external/about/histend.htm#top (accessed on April 5, 2010) Read More