Perspectives on Globalisation and Economic Crisis - Essay Example

? Perspectives on Globalisation and Economic Crisis Perspectives on Globalisation and Economic CrisisIntroduction Globalisation is a pervasive worldwide process of enhancing cooperation between and management of different countries. And the main trajectory of globalisation depends on economic integration (Claessens et al 2010). However, economy itself is a vast subject and there are various sectors inside the realm of economic integration. For example, integration of commodity markets depends on the manufacturing industries as well as broader trade agreements regarding import and export mechanisms (United Nations 2009). This can be termed as globalisation of commodity markets. On the other hand, integrating capital markets and developing a synchronised international level banking system between different economic and geographical regions is another aspect of globalisation. This can be termed as financial globalisation (Stulz 2005). Therefore, if there is a global economic crisis, then the process of globalisation can be affected in various ways. Conversely, regional or country specific economic crises too may obtain a worldwide dimension because of the fiscal dynamics of financial globalisation (Stiglitz 2010). The aim of this paper is to elucidate the process of globalisation with an objective to explore its economic dynamics with particular reference to the financial markets. The paper begins with an introduction and then there is the portion of discussion that is dedicated towards addressing the main research question. The discussion has two subsections. In the first subsection, advantages of globalisation are discussed with a focus of its key efficiencies and fiscal benefits. The nest subsection presents the concerns of key experts who have analysed the global economic crisis from various critical viewpoints. The paper ends at a suitable conclusion based on business literature and credible scholarly resources. Research Question Is globalisation process under threat because of the global economic crisis? Discussion Globalisation has often been regarded as an economic endeavour based on the socioeconomic necessities of late twentieth century, particularly after the sudden demise of erstwhile USSR. Scholars like Chinn and Ito (2008) have supported this perception in the sense that they often present entirely novel plans to steer the process of globalisation. However, Feenstra and Taylor (2013) state that monetary unions aimed at economic integration were a reality even during the 19th century. According to the authors: “In monetary affairs the launch of the Latin Monetary Union in 1866 by France, Belgium, Italy, and Switzerland (later joined by 7 other countries) could be seen as, if not an early precursor to the Eurozone, at least an attempt to coordinate monetary policy at a transnational level, even if the project was soon undermined by the contradictions of the bimetallic system it sought to defend, and the bloc ended up as a de facto member of the soon ubiquitous gold standard area which began to dominate world monetary affairs after the 1870s.” (Feenstra and Taylor 2013, p. 5) Feenstra and Taylor (2013) further state that the gold standard (as set during the mid 19th century) has served as a platform for ensuring multilateral economic cooperation. Even during the days of colonial rivalries and frequent warfare, leaderships in different countries essentially understood that economic cooperation and intergovernmental dialogue were better avenues for achieving peace and prosperity. European countries were at the foremost in comprehending the importance of such mature financial behaviour although they could not effectively establish peace in their continent unlike today’s European Union. Present day econometric mechanisms of globalisation are also based on mainly economic integration and commercial cooperation. Moreover, geographical situations of different regions as well as geopolitical dynamics play a key role in globalisation simply because it is a world wide process involving multiple countries and several country-specific, regional, and global institutions. Therefore, different scholars from different schools of thought look at globalisation from diverse view points. They draw attention of the researcher towards the fact that globalisation has both pros and cons. Also, resolving a financial crisis might have implications much beyond the very sphere of international banking and monetary regulations. Consequently, the continuous economic plight of the people of developing and underdeveloped countries is a significant trajectory of the processes aimed at minimising the global financial imbalances. The developed and industrialised countries now have slower rates of economic growth, which means that a global financial system will need new and vibrant markets (Obstfeld and Taylor 2004). Therefore, developing and underdeveloped countries must carry out proper governance so that these countries can become engines of economic growth and dependable investment destinations (United Nations 2009). Furthermore, globalisation of trade and finance requires global collaboration as well as global regulation. To follow the fiscal ideals of globalisation even during a time of economic downturn, free worldwide trade in services and goods should be relied upon. In the same context, fiscal liberalisation based rules oriented multilateral systems such as the World Trade Organisation (WTO), Association of South East Asian Nations (ASEAN), European Customs Union, etc. should be defended and expanded. Otherwise, the general approach towards global finance will remain incoherent and existing global imbalances may become more acute. (United Nations 2009) Globalisation as an Efficient Mechanism As far as the financial world is concerned, it cannot be assumed as synonymous with commerce and industry. Therefore, globalisation with regard to global commerce and industries has its own dimensions with respect to the financial world, or more precisely, the financial or capital markets. From this point of view, experts such as Allen et al (2011) are of the opinion that globalisation has culminated at international banking like never before. And at least in the regional context of Europe, the authors state that increasing cross-border fiscal services can play a positive role in fostering macroeconomic stability and market friendly policies. Scholars like Gourinchas and Obstfeld (2012) and Benetrix and Lane (2011) have pointed out that financial cycles are a truth. Several years before globalisation, events like hyperinflation in Germany during the early 1920s (Fischer 2010) and economic slowdown of USA during the 1930s (McElvaine 2010) had shaken the world economy as a whole. So if a financial crisis takes place today, then globalisation cannot be held solely responsible for such economic calamities. In the contrary, globalisation can prove to be an undeterred and dependable mechanism to reverse the adverse effects of a fiscal cycle as seen in USA during the recession of 2007-09. For example, systematic international flows of capital have widened the way of returning “safe assets” into the US economy that can considerably help the country to recover from the financial crisis that hard hit its economy during 2008 (Bernanke et al 2011, p. 13). Although one cannot deny that the financial crisis of 2007-09 has caste considerable doubt on the success of globalisation, globalisation remains a reality. Globalisation brought about a new era of economic transparency, opening up the capital markets and lead to a vibrant “financial openness” (Chinn and Ito 2008). This was the situation when financial crisis surfaced and hit the macroeconomic structure of the world virulently. Therefore, there is a misconception among many scholars like Claessens et al (2010) that globalisation made certain contributions to the financial crisis. However, the entirety of such a stance remains questionable after the clouds of financial crisis began to move away following the stimulus plan endorsed by the US Congress. If flow of money across the international borders slow down or stop altogether, that does not mean a permanent collapse. If the major powers and financial institutions of the world show patience, then this kind of recessive monetary behaviours can be overcome with the help of proper economic planning (Forbes and Warnock 2012). In other words, effects of financial mismanagement cannot be thought of as a policy level deficiency of globalisation itself. Drawbacks of Globalisation Even after acknowledging the fact that certain financial instruments, regulations, and understanding as brought about by globalisation has helped the world from financial crisis, there remain certain doubts. According to the experts like Stiglitz (2010), excess of financial flows caused a serious damage. For example, lots of Americans and Britons had started to invest overseas with the help of US and UK based stock exchanges and money market companies. Avenues of monetary outflows ranged from currency exchanges to housing loans and mortgage schemes. Lack of awareness, greed of maximising returns, and lax regulation policies made this entire process extremely easy and insecure. With lapse of time, certain financial frauds began to show up which could not be controlled directly by the financial regulators sitting in Europe and America. Therefore, integration of global financial markets appears to be a dangerously idealistic venture in absence of some strong and powerful financial institution having worldwide regulatory powers (Stiglitz 2010; Wolf 2009). However, there are indeed some more serious and long standing issues in relation with globalisation that have caused the financial crisis. A quotation from one of the key reports on global economic crisis prepared by the United Nations can be extremely helpful to understand the limits of globalisation as an established economic system: “Financial losses in the deficit countries or the inability to repay borrowed funds then directly feed back to the surplus countries and imperil their financial system. This channel of contagion has particularly great potency in today’s world, with its glaring lack of governance of international monetary and financial relations. Another important reason for growing imbalances is movements of relative prices in traded goods as a result of speculation in currency and financial markets, which leads to considerable misalignments of exchange rates. Speculation in currency markets due to interest rate differentials has led to overspending in the capital-receiving countries that is now unwinding.” (United Nations 2009, p. xii) Therefore, econometric problems like current account deficits and balance of payment issues faced by the underdeveloped as well as developing countries must be addressed while international monetary policymakers continue to do more to facilitate international banking and financing resulting into powerful stock exchanges and figurative regulatory boards. Otherwise, manipulative financial service providers and investment advisors might be able to exploit the inherent or latent weaknesses of money markets as a global scale. Once general public, government regulators, and even shrewd investors enter the volatile or deceptive market environments on the basis of false assurance, the way to come out becomes more and more difficult. This is perhaps the gravest limit of financial globalisation. (Wolf 2009; Stulz 2005) Conclusion A much better comprehension of today’s economic activities is still necessary that can help the international policymakers in finding out that how deficiencies in contemporary financial regulations might set the scene of yet another global economic crisis. International institutions like the United Nations have not ruled out the possibility that globalisation catalysed the process of global economic crisis. However, it is highly important to notice that the aftermath of the economic crisis does not appear as a lengthy period of sluggish market activities and wholesome economic crunch. The US financial stimulus provided for rejuvenating the US economy not only did help the Americans in recovering from the economic crisis but also it brought about a positive economic effect on the global financial markets as well as different country specific economies. Globalisation has indeed catalysed certain destructive processes triggered off by the international economic crisis that peaked in 2008. However, restorative financial measures of the major powers in the Western world had a worldwide constructive effect, thanks to globalisation again. Economic slowdowns have been witnessed from time to time in the past (Feenstra and Taylor 2013; Benetrix and Lane 2011). Therefore, globalisation is also destined to come across this sort of difficulties. But until and unless international institutions like the WTO and the UN completely fail to enforce global monetary regulations, globalisation cannot be stopped. Huge economic zones of intergovernmental cooperation and industrial collaboration have been already set up across the world. Prominent examples include European Union, Shanghai Cooperation Organisation, etc. With the lapse of time, these regional economies are likely to develop more coordination and the process of globalisation is most likely to continue without any major hindrance. And even if faced with a major hindrance such as another economic crisis, globalisation is a policy level integrative process with robust financial shock absorbent capabilities; and it will eventually resurge ahead. List of References Allen, F., Beck, T., Carletti, E., Lane, P.R., et al. (2011), Cross-Border Banking in Europe: Implications for Financial Stability and Macroeconomic Policies, CEPR Report, London: Centre for Economic Policy Research. Benetrix, Agustin and Philip R. Lane (2011), Financial Cycles and Fiscal Cycles, In: EUI-IMF Conference on Fiscal Policy, Stabilization and Sustainability, Florence, Italy, June 6-7 2011. Washington D.C.: IMF and Dublin: Trinity College. Bernanke, B.S, Bertaut, C., DeMarco, L.P. and Kamin, S. (2011), International Capital Flows and the Returns to Safe Assets in the United States, 2003-2007, Banque de France Financial Stability Review 15, 13-26. Chinn, M.D. and Ito H. (2008), A new measure of financial openness, Journal of Comparative Policy Analysis 10(3), pp. 309-322. Claessens, S., Herring, R., Schoenmaker, D., and Summe, K. A. (2010). A safer world financial system: Improving the resolution of systemic institutions. Geneva: International Center for Monetary and Banking Studies. Feenstra R.C. and Taylor A.M. (eds.) (2013), Chapter 1. In: Globalization in an Age of Crisis: Multilateral Economic Cooperation in the Twenty-First Century. Chicago: University of Chicago Press, pp. 1-14 Fischer, W.C. (ed.) (2010), Introduction. In: German Hyperinflation 1922/23: A Law of Economics Approach, Lohmar: EUL Verlag. Forbes, Kristin J. and Francis E. Warnock (2012), Capital Flow Waves: Surges, Stops, Flight, and Retrenchment, Journal of International Economics, 88(2), pp. 235-251. Gourinchas, P.-O. and Obstfeld, M. (2012), Stories of the Twentieth Century for the Twenty-First, American Economic Journal: Macroeconomics 4(1), 226-265. McElvaine, R.S. (2010), The Great Depression: America 1919-1941, New York: Random House. Obstfeld, M. and Taylor, A.M. (2004), Global Capital Markets: Integration, Crisis, and Growth, Cambridge: Cambridge University Press. Stiglitz, J. (2010), Risk and Global Economic Architecture: Why Full Financial Integration May be Undesirable, American Economic Review, 100(2), pp. 388-392. Stulz, RenE M. (2005), iThe Limits of Financial Globalization, Journal of Finance, 60(4), pp. 1595-1638. United Nations (2009), The Global Economic Crisis: Systemic Failures and Multilateral Remedies, New York and Geneva: Author. Wolf, Martin (2009), Fixing Global Finance, New Have: Yale University Press. Read More