The impact of globalization on international finance i. Relationship between globalization and international finance ii. Globalization. system with international financial markets and . Taylor () presents evidence on the relationship between domestic investment and savings as a proxy for. The Impact of Globalization on International Finance and Accounting Examines the economic consequences of globalization in areas such as Relationships Between World Stock Market Indices: Evidence from Economic Networks. Fučík.
Having sketched a four-part indictment of the behavior of international financial markets by its critics both among the antiglobalizers and among some who would not be caught dead carrying placards denouncing the policies of the International Monetary Fund or the World Bank, I assume that you expect me to provide you with a persuasive response to each charge, preferably in sound-bite form. If that is your expectation, you are going to be disappointed.The Benefits Of International Trade: Econ-1 with John Taylor
If we had all afternoon, I am confident that I could provide a set of arguments that would satisfy most of you on these points. In part, my confidence derives from my assumption that most of you don't need a great deal of persuasion.
However, we do not have all afternoon. Instead, I would like to leave you with the four criticisms as food for thought to illustrate my core message that the challenges facing the institutions and individuals that take part in the international financial system are daunting, particularly in the context of the overall debate about globalization and its management.
In order that you do not go into the afternoon sessions of this conference completely empty handed, or maybe I should say empty headed, I would like to offer some reflections on two areas that bear on these questions as well as on the overall debate about globalization and the international financial system: First, concerning the structure of international financial flows, many start from the position that the international financial system facilitates the reallocation of savings from locations with lower expected rates of return to higher expected rates of return.
This is not a universally accepted view. The skeptics point to the apparent inconsistency of such a view with the fact that in recent years a major portion of net international capital flows has been directed toward the richest country of the world-the United States-where one would expect that rates of return on capital on average to be relatively low, rather than to emerging-market and other developing countries, where one would expect rates of return on average to be higher.
International Financial Globalization
Moreover, with respect to emerging market economies, which have attracted considerable net capital inflows on balance over the past decade, one often hears the view expressed, as in the recent Economist survey on globalization and its critics, that "the inflow of capital may produce little or nothing of value, sometimes less than nothing. The money may be wasted or stolen. If it was borrowed, all there will be to show for it is an unsupportable debt to foreigners. Far from merely failing to advance development [by improving the global allocation of capital], this kind of financial integration sets it back.
However, later on the authors comment, "One of the clearest lessons for international economics in the past few decades, with many a reminder in the past few years, has been that foreign capital is a mixed blessing.
If a publication as conservative, certainly in the eyes of most critics of globalization, as the Economist can through its reporting implicitly support such a view questioning the benefits of global capital flows, then I would submit that practitioners of international finance have their work cut out for them in defending the social utility of their activity.
If the benefits of global capital flows are not well established, we should not be surprised that many only think that they should be shut down, but also that they think that capital flows can be shut down, which would be more difficult than they think but would have tremendously adverse side-effects.
I, for one, also would take issue with the Economist's implicit view of the structure of capital flows and its endorsement of foreign direct investment as the preferred form of capital inflow from the standpoint of emerging market economies.
Of course, countries can get into trouble by relying too heavily on foreign borrowing as a temporary, easy way out of the box of growing fiscal deficits or low levels of national savings. However, the distinction found in the Economist piece between FDI and other forms of capital inflow is too glib, in my view.
For example, in the analysis of external financial crises, it is an oversimplification to identify bank lending as the principal source of crises and financial instability merely because those institutions' claims generally have short maturities, which by their nature can run off more quickly as pressures build on the borrower.
Countries, of course, may borrow too much at short term because, facing pressures, other sources of external finance dry up. In such cases, short-term borrowing may contribute to their problems, or postpone the adoption of needed policies, but more often than not such borrowing is a symptom of the need to adjust economic and financial policies, not a root cause of the subsequent crisis.
Thus, countries and the international financial community are justified in trying to discourage excessive reliance on short-term external borrowing, especially when it is not hedged; both lenders and borrowers make mistakes. However, a systemic response to this phenomenon that might, for example, propose to restrict sharply short-term external borrowing would be like bundling up children when they go outside in all seasons of the year merely because during winter not doing so increases the risk of their catching a cold.
Globalization and the International Financial System | PIIE
Moreover, a misplaced concentration by some analysts on banking flows undervalues the fact that short-term financing is the major source of liquidity for all participants in the financial system, starting with the financing of international trade of developing countries.
Indonesia's experience in illustrates this point; because it was cut off from trade finance, as a consequence of the failure of its domestic financial institutions and the uncertain condition of many of its enterprises, not only did Indonesia's imports collapse, as one might have expected, but also its exports because of a lack of trade finance.
Along the same lines, some observers argue that longer-term debt obligations are preferable to shorter-term obligations. However, longer-term debt obligations also come due regularly, and they are even less likely to be rolled over when the borrower comes under pressure than shorter-term banking obligations.
For example, a substantial proportion of the drawdown of Brazil's foreign exchange reserves in lateearly was used to pay off long-term debt obligations of the Brazilian private and public sectors that came due during that period. Along similar lines, observers often argue that portfolio investments are preferable to debt obligations, but foreign investors can sell their portfolio investments, repatriate the earnings, and, thereby, put pressure either on a country's reserves or its currency.
Thus, many observers argue, along with the Economist, that foreign direct investment is preferable to portfolio investment. The reality is that foreign direct investment inflows also may dry up, and they cannot be relied upon as a stable counterpart to countries' current account deficits, as Brazil has learned during In addition to the cessation of capital inflows in the form of FDI, foreign direct investors can and do hedge their positions, exerting pressures on exchange rates and on international reserves.
They can and do step up their repatriation of earnings, and they can and do cut back on extensions of credits and other financial inflows. More fundamentally, given the ingenuity of today's financial markets and their capacity to unbundle exposures and redistribute risks, it is essentially impossible to distinguish different forms of international investment. For example, a foreign direct investor may still own a stake in a firm, but that investor can finance or refinance that stake in domestic currency, and thereby avoid any foreign exchange risk.
My conclusion on the structure of capital inflows is that not only do those who work in the arena of international finance have a selling job to demonstrate better the social utility of their work, but also they have an education job to do with respect to assessing the various risks associated with the structure of those flows. Turning to my second set of reflections, on the conditioning environment for international financial flows, it is widely believed that the international financial system would benefit from a common set of rules of the game that are transparently followed and in which participants in international financial markets are held accountable when they do not adhere to those rules.
This view has motivated much of the effort in recent years to reform the international financial architecture with respect to the crisis-prevention dimension. The official sector has invested heavily in the development of a broad array of codes and standards seeking to improve the functioning of the system. As you are probably aware, codes and standards have been drawn up for the most part by ten major standard-setting bodies.
The list includes core principles for effective banking supervision, data dissemination standards, a code of good practices on transparency in monetary and financial policy, and international accounting standards. These efforts have been primarily focused on providing guidance to national financial supervisors and regulators in discharging their responsibilities within a common, internationally agreed framework; it is hoped that by increasing the robustness of national financial systems, the stability of the international financial system will be enhanced as well.
- International Financial Globalization
In some areas, such as the accounting standards, the private sector has been more directly involved, and of course the intention is to affect the behavior of the private sector. Despite widespread agreement that the international financial system and the global economy stand to benefit from the development and adoption of internationally agreed codes and standards, such efforts are not without their critics and detractors.
First is the question of authorship. Should the codes and standards be drawn up by experts or by politically responsible officials?
Changes in Capital Markets The driving forces of financial globalization have led to four dramatic changes in the structure of national and international capital markets. First, banking systems have been under a process of disintermediation. Financial intermediation is happening more through tradable securities and not through bank loans and deposits. Second, cross-border financing has increased. Investors are now trying to enhance their returns by diversifying their portfolios internationally.
They are now seeking the best investment opportunities from around the world. Third, the non-banking financial institutions are competing with banks in national and international markets, decreasing the prices of financial instruments.
Globalization and the International Financial System
They are taking advantage of economies of scale. Fourth, banks have accessed a market beyond their traditional businesses. It has enabled the banks to diversify their sources of income and the risks. Benefits and Risks of Financial Globalization One of the major benefits of Financial Globalization is that the risk of a "credit crunch" has been reduced to extremely low levels.
When banks are under strain, they can now raise funds from international capital markets. Another benefit is that, with more choices, borrowers and investors get a better pricing on their financing.
Corporations can finance the investments more cheaply. The disadvantage is that the markets are now extremely volatile, and this can be a threat to financial stability. Financial globalization has altered the balance of risks in international capital markets.