Financial Globalization In Industrialized And Developing Countries
In recent times, globalisation has emerged to be an international dynamic that is accentuated due to technological advancements and all countries in all five continents, both developed and developing countries have been engaged and affected (Lund et al. 2013). For over three decades, the globalisation of finance has proven to be an unstoppable trend. In the past years before the global meltdown, the world economy was becoming more integrated, and access to new markets through new technology was enhancing cross-border capital flows to unimaginable heights (Brunnermeier et al. 2012). However, the global financial crisis suddenly brought that period of rapid growth to stop. Based on international strategies, globalisation is defined as a process that is aimed at expanding business operations on a worldwide level, and was originated through the facilitation of global communications due to political, environmental, and socioeconomic developments, and technological advancements (Pologeorgis 2012).
Financial Globalisation
The objective of globalisation is geared toward providing organisations with a superior competitive stance with lower operating costs in order to gain greater numbers of consumers, products, and services. The approach of globalisation rooted in competition through diversification of resources, development and creation of investment opportunities is to open up access to new raw materials, additional markets, and resources. Developed or industrialised countries possess a high level of economic development and satisfy certain socioeconomic criteria based on economic theory, such as industrialisation and human development index (HDI) and gross domestic product (GDP) as defined by the World Trade Organisation (WTO), the United Nations (UN), and the International Monetary Fund (IMF). Some industrialised countries in 2012 are United Kingdom, Austria, Sweden, Belgium, Denmark, Finland, France, Germany, Norway, Luxembourg, Japan, Switzerland, and the United States.
The incidence of global financial crises has increased drastically all over the world in the past decades with a crisis in one country spreading contagiously to other countries like a virus to cause a currency or banking crisis. The integration of international financial markets was the product of deliberate change of policy, such as the deregulation of domestic financial markets and the elimination of capital controls (Mussa and Morris 1993, p. 32). In a somewhat deep causal relationship, the international financial liberalisation was followed by the suspension of the Bretton Woods system of adjustable exchange rate pegs for floating exchange rates among regional currency blocs or major currencies (Eatwell 1996, p. 25).
Globalisation in Industrialised and Developing Countries
The course of the globalisation process is highly influenced and determined by the World Bank, the WTO, the IMF, and more specifically, the high-income countries. They are also considered as the driving forces underlying the monetary policy reforms that the developing countries needed to implement as an integral part of their structural adjustment programmes under the auspices of the WTO, the World Bank, and the IMF (Ftp.cgiar.org 2014).During the past two decade, most countries in East Asia experienced unparalleled rates of economic growth, and many of their poor population were lifted out of poverty. Regardless of the crisis of 1997–98, which opened up critical weaknesses in their social, political, financial systems, and governance, many East Asian countries resorted to a course of comprehensive reforms in dealing with the crisis. Conversely, many countries in sub-Saharan Africa, and quite a few countries in Latin America, the Caribbean, and South Asia were believed to have benefited nothing from the globalisation process. This is, as a result, of the fact that these countries have been burdened with a series of structural problems have plagued their economies in the previous century which are aggravated by AIDS epidemic and heavy debts.
It is evident that rich industrialised countries have bountifully harvested huge profit from the increased trade and faster growth due to globalisation, meanwhile the economies of many poor countries had become worsened during the past decade (Ceballos, Didier and Schmukler 2012). Many developing countries have been side tracked and cut off from the benefits of the global economy, as a result of the gap between the countries with a 20% most affluent population and countries with the poorest 20% of the world’s population (in per capita income) being doubled in the past two decades. In the industrialised countries, globalisation brought about international trade, integration of financial markets, and re-organisation of production. The phenomenon of globalisation is driven by three major forces: technology, globalisation of financial markets and all product, and deregulation. Greater trade in financial services through cross-border entry activity and capital flows is a product of increased economic integration in economies of scale and in specialisation (Dobbs and Lund 2013).
The impacts of globalisation and the integrated global economy cannot be overemphasised. Cross-border capital flows including cross-border lending, investor purchase of foreign equities and bonds, foreign direct investment increased from $0.5 trillion in 1980 to a peak of $11.8 trillion in 2007 because of integrated global economy. It was not a surprise when the crisis struck; it affected all the industrialised countries with less impact on most of the developing countries. This is an indication of the risk of integrated network of financial interdependence (Dobbs and Lund 2013).
Capital Mobility for Exchange Rates
In a study by Ito and Chinn (2007), it was found that there was a broad diversity in the coefficient relating differentials and depreciation. Differences in financial development, inflation volatility, capital account openness, trade openness, nature of the exchange rate regimes, and legal development could be attributed to these differing results. The measurement of the extent of international capital mobility has been a long debate, however, on the criterion of the covered interest parity (CIP) condition a consensus is formed, which in approximate terms is:
i = i *+ f
where i* is the foreign interest rate, i is the home interest rate, and f is the forward discount on
the home currency (f = (F-S)/S, where S is defined as the spot exchange rate, and F as the forward exchange rate, both of them are defined in units of home currency per unit of foreign currency) (Blecker 2001).
If financial markets are open enough to permit free covered interest arbitrage activity, this condition is expected to hold, and provided that the interest-yielding assets are considered to be risk-free. In the late 1970s and early 1980s, the condition started to hold very tightly in the major developed countries that liberalised their capital markets at that period, such as Japan, USA, UK, and West Germany. Subsequently, covered interest parity condition started to exhibit fairly in other developed countries and developing countries, which liberalised their capital markets in the late 1980s and early 1990s. As the financial markets in developing countries developed, especially as the currency swap market advanced, market players practically depended on covered interest parity to develop opportunistic strategies and new securities toward investing and borrowing.
Most financial markets were thrust into a period of disruption of certain trading metrics and stress during the global financial crisis of 2007–09 (Lane 2012). For example, the formation of funding shortages in the US financial markets and the heightened sense of counterparty risk in particular among large active banks in the foreign exchange market during the global financial crisis led to the observed deviations from covered interest parity in the USD-EUR pair and the deterioration in liquidity (Levich 2011). Banks outside the United Stated had challenges in accessing USD facilities during the crisis period. For these banks to meet their USD funding obligations, they resorted to borrowing from their home currencies (GBP, EUR, or others), maybe through access to the home central bank and then carry out foreign exchange swap. At the end of the global financial crisis, counterparty risks appear greater and more unspecific, and currency bid-ask spreads have broadened, and in most cases capital becomes more expensive and scarce.
Policy Measures for Global Financial Crisis
It is very germane to take concerted efforts at the national and international levels in the formulation of policy measures that guarantee a healthier global financial system. Confidence has to be created and safeguarded so that the uncertainty attached to the present wave in financial globalisation could be warded off (Lund et al. 2013). The financial crisis in 2008 wrecked havoc on capital flows in Europe. Therefore, it is imperative to institute a global regulatory reform to provide stability and confidence. Another vital measure is to build capital market in order to meet the demand for credit. Clearing mechanism, solid regulatory foundation, and standardised rating system are essential prerequisites for building an enduring capital market. Policy for stable cross-border flows of finance should be formulated and promoted. Policy makers can look at minimising legal barriers for foreign direct investment, creating cross-border resolution mechanisms for companies, and creating new channels for retail investors in developing country markets.
Exposure to capital flows and foreign investment involves risks as demonstrated by global financial crises, but it also has huge benefits attached to it. The risk of sudden reversals of capital and financial contagion can be reduced by closely restricting capital inflows and foreign banks. This will surely help in reducing the dangers of comparative or total advantage of other countries on domestic industries. Encouraging this type of closed door policies will safeguard the uncertainty attached to international trade. Finally, new financing mechanism for constrained borrowers should be created.
Conclusion
Without gainsaying, financial globalisation is characterised with both merits and demerits. The negative effects associated with financial globalisation can be cushioned even eliminated through effective policy measures geared towards building confidence and stability. Both the industrialised and developing countries will benefit comparatively if the global financial regulatory reforms aimed at stabilising the global economy are implemented. The present conditions where some of the developing countries are not reaping the benefits of financial globalisation would be reversed.
Creation of clearly stated processes for cross-border bank recovery and resolution, and building a strong framework for supervisory capabilities will go a long way to provide an enduring international trade among nations. Finally, enhancing liquidity, development of local capital market, increasing transparency, improving the quality and quantity of information, and promoting better corporate governance practices are all prerequisites to achieving stable global economy.
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