International Production from a Historical Perspective - Essay Example

GLOBALIZATION AND INTERNATIONAL PRODUCTION IN HISTORICAL PERSPECTIVE Has financial globalization failed to meet expectations? Discuss. Introduction At the end of the World War II, cross-border trade in financial assets was limited for most countries. However, since that period, trade in financial assets has been significantly liberalized globally. Nowadays, this type of liberalization is also known under the term of “financial globalization” (Stulz 2005, 1595). There is a massive empirical literature on both growth and volatility effects of financial globalization (Kose et al., 2009). In neoclassical economic theory, financial globalization is recognized to be a driver of economic growth and development (Stulz 2005). However, despite positive predictions of neoclassical models, there is empirical evidence, which calls into question the positive impact of financial globalization (Stulz 2005). The aim of this paper is to define the expectations associated with financial globalization and to explore whether financial globalization has failed to meet these expectations. Financial Globalization Global cross-border liberalization of trade (the second age) in financial assets also knows as financial globalization has become possible after the WWII, when the countries have removed their barriers (Stulz, 2005; Mishkin, 2009). According to the neoclassical theorists, such a shift to financial liberalization should have been beneficial to both developed and developing economies (Stulz, 2005). The benefits associated with global liberalization were expected to be especially large and significant for developing countries (Kose, 2009). Great examples could be listed here are two the most populous countries in the world, which have managed to reduce the percentage of extremely poor people and, thus, to reduce income inequality in developing markets (Mishkin, 2009). Furthermore, financial integration is viewed as an important step for middle income emerging markets enabling to enhance macroeconomic stability in developing countries (Kose et al., 2009:9). In result of financial integration, capital-poor (developing) countries are expected to expand their narrow production bases (often dependent of natural resources or agricultural sector) leading to enhanced specialization and, thus, to decrease macroeconomic volatility (Kose et al., 2009). Moreover, liberalizations of equity market are recognized to be a strong driver of both short-term and medium-term growth (Kose et al., 2009). Mishkin (2006) in his book “The Next Great Globalization” also explains the benefits of financial globalization, arguing that financial globalization can bring huge benefits if there will be undertaken the complementary reforms. However, the author also recognizes imperfectness of capital-account liberalization if managed badly (Mishkin, 2006). On the other hand, financial globalization is recognized to be very risky for most middle-income countries, as the potential benefits are far outweighed by the drawbacks (Kose, et al., 2009). Moreover, some economists even question whether the effects of financial globalization are positive at all (Kose, et al., 2009). Among the key arguments are listed assumptions related to potential distortions caused by macroeconomic policies, labor markets, trade policy regime, and information asymmetries (Kose, et al., 2009). For example, information asymmetries could result in financial crisis facilitated by maturity mismatches and inefficient allocation of financial flows (Kose, et al., 2009). In order to support this statement, economists used empirical evidence of the financial crises in developing countries, that took place in Asia, Latin America, and Africa in the 1980s and in the 1990s (Kose et al., 2009). Many authors believe that only rich or developed economies benefit from financial globalization (Stulz 2005). Some researchers believe that specifically capital account liberalization has played a substantial role in causing financial crises in emerging markets during the last decades (Kose et al., 2009). Liberalization of financial assets, providing government with safety net for financial institutions and banks, often results in enhanced capital inflows and increased demand for lending. With a weak banking institutions and weak government supervision, all these factors encourage lending boom and are more likely to lead to financial crisis (Mishkin, 2009). Based on this scenario, national currency is less likely to be protected by the government, and it will lead to increased field for speculations and currency devaluations (Mishkin, 2009). As many companies based in emerging markets have taken loans denominated in foreign currencies, collapse of the national currency will increase their indebtedness in domestic currency leading to economic downturn (Mishkin, 2009). Consumers also will spend less in result of national currency devaluation. Decreased demand will lead to decreased production, and therefore, decreased GDP. Kose et al., (2009) argue that while evaluating the effects of financial globalization, the focus should be made not only on the direct effects such as GDP growth and consumption volatility decrease but also on potential collateral benefits (better governance, financial market development, institutional development, and macroeconomic discipline). The authors believe that these benefits to financial globalization are indirect and catalytic and require more time for realization. This point of view explains why the costs of financial globalization are easier to detect in short term perspective than its benefits. Moreover, even benefits might not be easy to identify in long term periods as they are more likely to have indirect impacts on macroeconomic, structural and institutional policy variables (Kose et al., 2009). However, Rodrik & Subramanian (2009) refute the arguments related to the potential collateral benefits of globalization as they believe that achievement of a particular policy objective through reforms in other areas (financial assets liberalization) is not strong enough argument. The authors believe that “one needs not only to demonstrate the presence of collateral benefits, but also to demonstrate that financial globalization is particularly effective way of achieving those benefits”, compared to all possible reform strategies (Rodrik & Subramanian, 2009:122). If developing countries could strengthen the legal system, improve the quality and enhance transparency of financial information, reduce corruption, improve corporate government and implement other structural reforms, they would no longer be consider poor or developing (Rodrik & Subramanian, 2009). In this case globalization is either irrelevant or ineffective as it fails to meet the initial expectations (Rodrik & Subramanian, 2009). Taking into consideration empirical evidence discussed earlier in the paper, it is possible to conclude that potential of collateral benefits in long-term perspective is not strong argument to support positive collateral impact of financial globalization. Financial globalization was expected to be specifically useful and helpful for emerging markets, contributing to increased investment and economic growth. However, existing empirical evidence indicates that global liberalization of financial assets has not led to the expected outcomes. Moreover, the evidence shows that the countries which relied on less capital inflows have demonstrated most rapid growth (Rodrik & Subramanian, 2009). Ineffectiveness of financial globalization should be viewed not as the ineffectiveness of economic/financial reforms but as the improper management of this system. Mishkin (2009, 156) explains that financial globalization not always yields positive outcomes as it can “go very wrong” if not managed properly. Based on this approach, it is possible to argue that financial globalization as the theoretical implication is viewed as useful tool or instrument for achieving economic growth and stability. However, in practice, it has failed to meet the expectations associated with financial assets liberalization in result of weak management practice in financial and banking sectors of certain countries. References: Kose, M.A., Prasad, E., Rogoff, K. & Wei, S. 2009, "Financial Globalization: A Reappraisal", IMF Staff Papers, vol. 56, no. 1, pp. 8-62. Kose, M.A. 2009, "Introduction: Frontiers of Research on Financial Globalization", IMF Staff Papers, vol. 56, no. 1, pp. 1-7. Rodrik, D. & Subramanian, A. 2009, "Why Did Financial Globalization Disappoint?", IMF Staff Papers, vol. 56, no. 1, pp. 112-138. Spiegel, M.M. 2009, "Financial Globalization and Monetary Policy Discipline: A Survey with New Evidence from Financial Remoteness", IMF Staff Papers, vol. 56, no. 1, pp. 198-221. Stulz, R. 2005, “The Limits of Financial Globalization”, The Journal of Finance, vol. 60(4), pp. 1595-1638. Mishkin, F.S. 2009, "Why We Shouldnt Turn Our Backs on Financial Globalization", IMF Staff Papers, vol. 56, no. 1, pp. 139-170. Mishkin, F.S. 2006, “The Next Great Globalization”, Princeton University Press, Princeton. Read More