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Global Financialization - Essay Example

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The author discusses the financial globalization which has led to regular crises of exchange rates because of volatile flows of capital. Global financialization causes movements of exchange rates to be determined by the flow of capital, instead of current account positions…
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Global Financialization
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Global Financialization

Download file to see previous pages... In fact, massive inflows of capital followed by sharp and sudden reversals of capital flow result in crises of exchange rates that have characterized developing and emerging nations (Stiglitz 1081). The macroeconomic troubles stirred by volatile flows of capital have been acutely felt in developing and emerging countries such as Turkey and Argentina in 2001 and the late 90s South East Asia financial crisis, which were all related to flow of capital. These countries suffered from sharp declines in real GDP. A particular reason that leads to rates of exchange having such a significant effect is because, in liberalization and financialization of global markets, it is profitable to be involved in interest arbitrage, which means that one borrows from a specific currency and lends or invests in other currencies, also referred to as carrying trade (Rodrik 1). For example, if interest rates of the Turkish Lira were higher compared to those of the Euro, taking rates of exchange to be stable, it tempts to borrow in Euro credit and then invest or even lend in Turkish Lira. This implies that liabilities, as well as assets, will be in currencies of different countries. Therefore, abrupt realignments in rates of exchange could end up having disastrous effects on the balance sheets of banks or organizations. In addition, capital flow liberalization also lets developing nations accrue current account deficits for a longer time, and at a higher level than they could be during the reign of the Bretton Woods organizations. Financial globalization and liberalization have led to an increase of potential difference in development among countries if the global market financial markets retain their stability and calmness. The revaluation, typically, of financial markets has been accompanied by abrupt reversals of capital flow, as well as crises in exchange rates, all of which show that global financialization is not good for developing countries (Rodrik 1). Governments play a crucial role in the evolution of global financialization, as well as its effects on individual countries and their development. All governments at national level possess a specific responsibility to ensure security and stability of the domestic financial, banking, and monetary systems, which are vital to any economy’s functions. The vulnerable nature of financial and banking systems to crises, failure of markets and instability has virtually produced regulatory authorities and central banks that are aimed at protecting their social interests, as well as for the mediation of their countries’ interactions with international financial markets (Doyran 32). Effective stability and functioning of the financial and monetary systems have become a fundamental requirement as far as development is concerned, which is only achievable via the effective actions of nations. ...Download file to see next pagesRead More
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