Factors Driving Financial Markets Globalization and Whether They Can Be Reversed - Essay Example

Factors driving financial markets globalization and whether they can be reversed Factors driving financial markets globalization Name Course Name and Code Instructor’s Name Date These are factors which promoted the internationalization of financial markets. Internationalization of financial markets refers to the spread and connectedness of financial markets across the globe (Wunderlich & Warrier, 2009). Various factors are responsible for the integration of global financial markets. Various innovative financial products have evolved within a period of the past two decades which has been described as derivative products (Buch, 2004). These products have enabled lenders and borrowers to tailor their exposure to risks in addition to adjusting to them over time. Derivative products have made it possible for lenders and borrowers to prevent some of the problems which are associated with asymmetries of information within financial markets that are common in global markets (Torre & Schmukler, 2007). Thus, the development of new financial instruments has made globalization of financial markets cheaper through reduction of the cost differential between the rate of return paid to the investor and the cost of capital paid by the ultimate borrower (Baker, Hudson, & Woodward, 2005). Other financial innovations that have facilitated globalization of financial markets include Eurobond financing and hedge funds. Technological advancement especially information technology has been instrumental in globalization of financial markets. Data computation and storage is now rapid courtesy of information systems. The ramification and augmentation capacity of telecommunication networks in connecting computing machines in an efficient way (Wunderlich & Warrier, 2009). In addition, more reliable data exchange protocols have emerged that has increased reliability and efficiency in data exchange. As consequence, this has enabled secure and easier cross border financial deals (Buch, 2004). This has in turn lowered the distance barrier that initially barred financial deals due to geographical positions. Thus, technological advancements have reduced the costs of transport and transmission of data. This has in turn contributed to financial market globalization. One of the main factors that have contributed to globalization of financial markets is the search for economic profits. In this case search for economic profits refers to earning profits that are way above normal profits. Economic theory has suggested that when one gets closer to a competitive market, his or her profits diminishes (Wunderlich & Warrier, 2009). Thus it is argued that markets in the developed countries were largely competitive in the last two decades and hence investors had to look for markets which were not yet competitive. Studies have indicated that during this period interest rates in these countries were declining drastically (Torre & Schmukler, 2007). For instance, it has been reported that in 1990s the London interbank offer arte on six month US dollar deposits fell to 3.4% (Buch, 2004). This is argued to have been one of the main driving forces for investors from developed countries to channel their funds to developing countries. By 1998, Japan which was by then the largest creditor nation was running an interest rate of 1% (Mishkin, 2008). Thus it is imperative that developing countries which were offering higher interest rates were more attractive to investors who were out to gain enormous profits from their investments. Financial market globalization is also attributed to prudent macroeconomic management and economic growth in many nations (Buch, 2004). For instance, consistence economic growth in Asian countries convinced many investors from the west to channel their investments whether direct or indirect into these markets. Financial market globalization in the last two decades was also influenced by avoidance of excessive taxation and regulation in some nations. This allowed investors in countries where there were excessive taxation and regulations to move to countries that had lower taxation and regulation policies (Wunderlich & Warrier, 2009). The growth in Euromarkets is attributed to lower taxation policies and regulations in euro zone and high regulations in American markets. Thus, many American investors moved their funds into Eurodollar which facilitated the exponential growth of Euromarkets (Banse, 2007). According to economic theory free flow of capital maximizes global welfare. Such free flow of capital is enabled by a friendly and facilitating environment (Buch, 2004). On the basis of this argument, several developing countries have been influenced, partly by International Monetary Fund (IMF) and World Bank, to adjust their economic policies to attract capital flows. The adjustment in policies has enabled global financial market integration (Torre & Schmukler, 2007). In addition to economic policy adjustments, several countries have liberalized their exchange restrictions, controls on portfolio inflows, direct investments and portfolio outflows (Buch, 2004). This has enhanced integration of financial markets (Mishkin, 2008). Developing countries have also deregulated their national financial markets. This has in turn increased foreign capital inflows hence contributing to internationalization of financial markets. Another, regulation that was abolished that played a major role in financial market globalization was the removal of exchange control and floating exchange rates. Another factor that has played a major role in globalization of financial markets is privatization of sate corporations in both developed and developing countries (Buch, 2004). Investors seeking to diversify and increase their profits got an avenue to do so by acquiring shares from various state owned companies that were being privatized in various countries (Banse, 2007). Are any of these factors reversible? Most of the factors described above are irreversible. For instance, no one can take back technological advancement and innovation in financial markets. May be what could be reversed is the deregulation of economic policies adopted by various countries (Wunderlich & Warrier, 2009). However, a country reverting back to tight controls of its financial policies risks being secluded and lagging behind other countries in terms of development (Torre & Schmukler, 2007). This is because it will restrict capital inflows necessary for spurring economic growth. Another factor that might be reverted is re-acquisition of previous state owned firm (Banse, 2007). However, this means that governments of various countries will have to neglect other developments and channel funds in acquiring these firms back (Mishkin, 2008). Or in unlikely manner, such governments led by dictators may forcibly re-acquire these firms without paying anything. In such scenarios such countries are likely to face seclusions from other countries and hence may not be able to acquire essential goods and services from other countries. Reintroduction of high taxation and regulations can also inhibit foreign investments and reduce globalization. However, the downside of such actions is reduced foreign investment and reduced economic development. Thus, its is apparent that, even though some measures can be undertaken to slow down financial markets integration on global arena, it near impossible to reverse it. Reference Baker, A., Hudson, D., & Woodward, R. (2005). Governing financial globalization: international political economy and multi-level governance. London: Routledge. Banse, G. (2007). Technological and environmental policy: studies in Eastern Europe. New York: Edition Sigma. Buch, C. (2004). Globalization of financial markets: causes of incomplete integration and consequences for economic policy. New York: Springer. Mishkin, F. (2008). The Next Great Globalization: How Disadvantaged Nations Can Harness Their Financial Systems to Get Rich. London: Princeton University Press. Torre, A., & Schmukler, S. (2007). Emerging capital markets and globalization: the Latin American experience. Chicago: World Bank Publications. Wunderlich, J., & Warrier, M. (2009). A Dictionary of Globalization. London: Taylor & Francis. Read More