Main Agents of Financial Globalization - Essay Example

Name : xxxxxxxxxxx Institution : xxxxxxxxxxx Title : Financial Globalization Tutor : xxxxxxxxxxxx Course : xxxxxxxxxxxx @2010 Table of Contents Table of Contents 2 Introduction 3 Main agents of financial globalization 3 Governments 3 Investors and borrowers 6 Financial institutions 8 Theorizing financial globalization 10 Risks and net effects of financial globalization 11 Conclusion 12 Bibliography 13 Introduction Financial globalization refers to the incorporation of domestic financial scheme of a country with the global organizations together with financial markets. Enormous growth have be demonstrated in world economy over recent years, and in the area of technology , more specifically in communications and transport revolutions which has resulted to globalization of capital. Financial globalization enhances flow of capital across nations and organized global allocation of resources. The World Bank and the International Monetary Fund are the two major institutions established to endorse global trade to keep up with the increase of economic globalization. Main agents of financial globalization Governments According to Schmulker, ( 2004 p.44), Governments permits financial globalization through liberalizing restraints on the local monetary sector and capital account of the balance of imbursements. In past years, governments were regulating the domestic monetary sector through restraining the allotment of credit by controlling quantities and prices. They also inflicted several restraints on capital investments across countries. The instruments utilized in restricting capital account includes constraints on overseas exchange transactions, derivative transactions, borrowing and lending activities by corporations and banks, and involvement of foreign investors in the domestic financial scheme. At the end of Second World War, the United States which was the only developed industrial economy was pushed into an unparallel state of economic leadership. From early times of the battle, British and US officials designed a collection of global institutions aimed at promoting economic recovery, free trade, economic stability and full employment. The general agreement on trade and tariffs, Bretton Woods institutions, UN relief and rehabilitation administration and Marshall plan were initiated by US to revive Europe and helped in laying of foundation for sustained and rapid expansion of global economy. The private sector was the driving force of the post war boom. Major Service, manufacturing and extractive firms in North America and Europe had developed a significant global presence during the initial half of the century. After 1945, the impact of the transnational corporations in global economy increased as pioneers grew and was joined by Latin America, Asian and Japanese firms. Other complements were numerous government owned firms, largely in the service and energy sectors. Together and usually through collective ventures, the transnational enterprises intensified and extended industrialization and generated globalization of investment, trade and production that intensely increased global economic interdependence. On the other hand, it increased the susceptibility economically weak nations via uneven disbursement of gains and strains on natural resources (Scholte, 2005 p.34). Financial globalization poses new risks and new opportunities for policy makers. Economic liberalization has increased as more governments implement policies that enable them to closely integrate their economies into global economy, usually under extreme pressure from international institutions and bilateral donors. The new risks generated by globalization are compellingly demonstrated by global financial system (McGrew, 2008 p.28). Liberalization and incorporation into the international capital markets has greatly expanded the vulnerability of nations to volatile flow of capital across national boundaries. This was evident in the 1997 monetary crisis in Thailand, which sparked currency meltdown in East Asia, which catalyzed the collapse of Russian rouble in 1998. Having incorporated into the global economy, several governments are more susceptible to caprices of trade policies in developed countries, unstable capital markets and a volatile international financial scheme. The 20the century started with a variety of reflections on the requirement for more efficient global coordination and cooperation. The 1990s financial crisis illustrated the ability of private sector actors like investment houses, banks, and security brokerages to generate turmoil. These actors generate profit centers from currency derivatives, and security trading departments of emerging markets, their wild trading actions generate global whirlpool. These actors are strong political participants and lobbyists in debates concerning the governance of the world financial system. Other actors of global financial governance are nongovernmental organizations which are included in discussions with global aid donors. Donor governments and aid institutions have recognized that greater participation of locally based nongovernmental organization on international financial matters is essential for development and successful implementation of policies. McGrew (2008, p.30) International institutions such as the World Bank and the international monetary fund, are seeking to ensure economic structural reforms for their member countries. Similarly, in regard to trade, the world trade organization works on several issues related to domestic policy matters and is regarding taking part in competition policy, the environment and government procurement. Investors and borrowers Investors and borrowers, including firms and households are major drivers of financial globalization. Through foreign borrowing, individuals and firms are able to relax their financial restraints so as to smooth investment and consumption. Firms are able to increase their funding alternatives through directly raising funds through equity issues and bonds in worldwide markets which then helps in reducing capital cost, enlarging their investor base, and expanding liquidity (Schmulker, 2004, p.45). The private sector leads to economic development mainly through innovation. When a particular firm form one country decided to invest in another country, it penetrates the foreign market seeking foreign direct investment, exploits natural resources such as agricultural products, minerals, and low paying unskilled labor. The firm also seeks a more effective division between production and labour and admittance to foreign technologies and other worthy valuable strategic assets. While multinational enterprises dynamically look for new opportunities for investing overseas, the governments of developing country make active attempts to attract them, usually spending significant amounts of their countrywide budgets in an effort to make their territories attractive sites for these multinational enterprises. The current interest of governments on multinational corporations is grounded on the anticipation that they will lead to several beneficial economic effects. As a result of increased knowledge that innovation is vital for economic growth and development, governments consider that the main benefits of attracting multinational corporations are that they offer a significant channel for technology transfer. Therefore one of the anticipated major beneficial impacts of multinational corporations is the creation of technological spillovers which refer to positive externalities produced by leakage of high superior knowledge from subsidiaries of multinational corporations to other enterprises in the host country through movement of skilled labour, formation or forward or backward connections with domestic firms and through demonstration of imitation effects (Dantas, Giuliani & Marin, 2007, p.3-4). Multinational firms create positive spill overs in host nations, technological transfer and the consequent increase in productivity of domestic firms. Foreign direct invest has greatly increased as a result of policies on market liberalization and developing nations have had unprecedented degrees of inward foreign direct investment. Financial institutions Through the internationalization of monetary services, financial institutions act as a major agent of financial globalization. According to Schmulker (2004, p.45), changes at global level and transformations in both developing and developed countries illustrate the function of financial institutions in driving financial globalization. At an international level, the increase in information technology has reduced the significance of geography and has enhanced global companies to service many markets from a single location. The influence of the World Bank on the development of development orthodoxies has been interceded by changes in the world economy. The accessibility of credit in 1970s made it valuable for international agencies and national governments to increase endeavors for domineering development programs but the credit crunch of 1980s made the government to leave financial matters to markets. The current structural adjustments are being used as an alternative to economic development (Pigg, 1997, p.22). According to Rupert, (2000, p.44), World trade organization functions as an agency of implementing the consolidation of world hegemonic order. The construction of the world trade organization and its commitment to tariff reduction and trade liberalization demonstrates the willingness on behalf of the nation to recognize the new actualities of globalization and to compromise numerous of its monarch rights so as to identify these dynamics. The world trade organization not only functions to offer a forum to aid and maintain continuity of wolf free market, but also offers a logical platform for scholars of free market to structure ideas that intend to illustrate that free trade is not the only solution, but when correctly applied, it can be efficiently used to alleviate poverty. The world trade organization demonstrates types of trading mechanism namely free trade model which promotes liberty of movement and technological innovation, and protectionist model which enhances governmental intervention in maintenance of the procedure of material development. While mixed economies offer some type of shield that protect employees from potentially derogatory impacts, of trade liberalization, the hegemonic venture that world trade organization seek to promote is intended to illustrate that in order to attain the actual socially liberating gains of trade, minimal state interference and limitations are significant. While state interference might function to offer short term relief, through safeguarding employment and through creation of welfare awareness, their acts smother liberating effects that increased marketisation can offer. (Rupert, 2000, p.46). Theorizing financial globalization Globalization has led to the culmination of the procedure of capitalist around the globe and its dislocation of precapitalist relations. Several people around the globe have been incorporated into capitalist market and this has resulted to capitalist production relations. Capitalism expands through commodification of social relationships, a process in which commodity production or capitalist production swaps non capitalist modes of production (Robinson, 2004, p.6). Globalization demonstrates a novel, transnational stage in creation of the global capitalist system. Globalization has resulted to technological and scientific revolutions which have enable capital to become global. New trends of accumulation enhanced by globalizing technologies require and make economies of scale that are really global and needs a greater generalized commodification of the global economy. Robinson (2004, p.9) argues that capitalists are able to attain global mobility, since political and material obstacles of free movement of their capital globally has dramatically decreased and this has made capital to become increasingly transnational. Financial globalization can lead to an improvement in the financial infrastructure because the increase in the technical abilities for engaging in the precision financing leads to an expanding completeness of global and local markets. Schmulker (2004, p.46) argues that the rigid market regulation inflicted by financial globalization has impacts both on the macro economy and on business environment and several institutional factors. The entry of foreign bank is another means via which financial globalizations results to improvements in the financial infrastructure in developing countries. Foreign bank helps financial improvement for three major reasons: Risks and net effects of financial globalization Financial globalization can result to crises when there are imperfections in global financial markets, which can create herding behavior, irrational behavior, crashes and speculative attacks. Imperfection in global capital markets may result to crises even in nations with sound essentials. For instance, if investors have a believe that exchange rate is untenable they may contemplate against the currency which can result to a self fulfilling balance of payments crisis in spite of the existing market fundamentals. Imperfection may also weaken fundamentals. For instance, moral hazard can result to over borrowing patterns when as a result of liberalization of economies and implicit governmental guarantees are present, increasing the probability of crises (Schmulker, 2004, p.50-51). The prices of majority of financial liabilities and asset vary continuously, and such change in price has impacts on consumers and producers. Financial twists become visible they transform the lives of people when they abruptly transform and pose direct impacts on the essential mechanisms via which jobs are destroyed or created, and services and goods produced. In the present democratic systems lying at the center of an integrating world economy, financial markets advantages may be constructive. When they enhance production, exchange and production, alterations in costs of financial claims are beneficial to the real economy and may act to stabilize the essential political order. Their particular political impacts may be significant but they usually apt to be invisible to most consumers and producers. Economic benefits and costs are redistributed and distributed as financial costs shift, but the procedure is often happens in such a manner that no specific groups with vast power become adequately afflicted to search essential systemic change. Instability in financial markets may be destructive and its political impacts tend to be negative. It leads to lack of confidence in by investors, savers, consumers, and producers (Helleiner, 2008, p.243). Conclusion Financial globalization is beneficial since it enhances liberalization of markets and capital across the globe. The capital flows amid nations has resulted to proper global allocation of money resulting to improved standards of people. However, financial globalization poses new opportunities and risks for policy makers and this has required governments to come up with policies that enhances closer integration of this economies into global economy. Bibliography McGrew,A, 2008 Globalization and global politics, in J. Baylis, Smith, S, & Owens, P , The Globalization of World Politics, 4th edition Oxford University Press, Oxford. Rupert, M, 2000, The Hegemonic Project of Liberal Globalisation, in M. Rupert, Ideologies of Globalisation: Contending Visions of a New World Order, Routledge, and London. pp. 42 – 64 Robinson, W, 2004, A Theory of Global Capitalism: Production, Class, and State in a Transnational World, Johns Hopkins University Press, Baltimore Dantas, E, Giuliani, E, & Marin, A, 2007, The Persistence of Capabilities’ as a Central Issue in Industrialization Strategies: How They Relate to MNC Spillovers, Industrial Clusters and Knowledge Networks’ Asian Journal of Technology Innovation 15, 2, 3-4. Scholte, J, 2005, Globalisation Debates’ Globalisation: A Critical Introduction, Palgrave Macmillan, Basingstoke, pp. 13-48. Robinson, W, 2004, A Theory of Global Capitalism: Production, Class, and State in a Transnational World, Johns Hopkins University Press, Baltimore. Helleiner, E, 2008, The Evolution of the International Monetary and Financial System in John Ravenhill Global Political Economy, Oxford University Press, Oxford, pp. 213 – 243. Pigg, S, 1997, Found in most traditional societies: traditional medical practitioners between culture and development’ in Cooper, F and Packard, R, International Development and the Social Sciences, University of California Press, Berkeley. Schmulker, S, 2004, Financial Globalization: Gain and Pain for Developing Countries, Schmukler.pdf Read More