Financial Globalization (Essay Sample)

Financial globalization and reducing poverty.
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Introduction
The modern day world is highly integrated and interconnection, primary as a result of deliberate and unpremeditated facets. Although the rate and magnitude of globalization has significantly changed over the past twenty years, estimation of the process is still clouded in mysteries due to the lack of specific measures and metrics for definition of assessment and the ensuing novelty of the phenomena resulting to biases in interpretation. Globalization of financial services represents one dimension of globalization which has intrigued economists and researchers, most of who are split between supporting and opposing the reality. The disparity in perceived and actual effects of this phenomenon is widely documented, resulting to the policy- and evidence-based support.
Brief History of Financial Globalization
The integration of the domestic financial systems, structures and frameworks with those of other countries in the international arena is defined as financial globalization. This aspect of globalization is delineated and generated by the need for liberalization of the national sectors and industry thereby propagating the enhancement of flow and influx of capital resources across state and country borders. Additionally, financial globalization creates the impetus for liberalization of the domestic financial structure, as the domestic paradigms are adjusted to create competitive and comparative advantages and differences. The recent increase in focus on globalization of financial aspects is justifiable based on the unprecedented and unparalleled breadth and depth of the changes. Capital changes have existed for a considerable time, and the mobility is not a novel aspect, albeit in some circles.[Nomaan. Majidim Globalization and Poverty. ILO. 2003. Web. /wcmsp5/groups/public/---ed_emp/---emp_strat/documents/publication/wcms_079187.pdf]
At the end of WWI, financial globalization was faced with a surge of period of economic instability owing to the unmanned and unregulated expansion of the flow of capitals. The effects of Great Depression were a capping event to cultivate the foundation for reversal of globalization of financial systems. For the first time, restrictions and guidelines were imposed for the establishment of autonomy on policies relating to supply and demand of money. Over the next ten years, the magnitude of capital flows reached an all-time low, with the 1960s characterized by domination by the system referred to as Bretton Woods which relied on limitations in mobility of capital, pseudo-fixed foreign exchange rates and highly independence in the monetary and fiscal policies. As a result, the post-1970 global financial systems and frameworks represent a new epoch, at the back drop of changes in oil prices and culmination of the Bretton Woods system. Countries previously classified as underdeveloped portrayed trajectories of economic empowerment, and the era of syndicated loans to fund economic strategies in countries became mundane, and created the foundation for deregulating and privatizing and advancement of technology-driven foreign investments driven by equity. The era of foreign direct investment open up the world for an expansion of globalization of financial services to households and corporations, thus the era of foreign direct investments came to being.[Jose A.Ocampo, et al. Financial Globalization and the Emerging Economies. 2000. http://repositorio.cepal.org/bitstream/handle/11362/2216/S2000903_en.pdf?sequence=1] [Malcolm, Knight. Developing Countries and the Globalization of Financial Markets. IMF WP/98/105. /external/pubs/ft/wp/wp98105.pdf]
In the 21st century, perceptions of perfection in enhancement of financial globalization should not be confused with perfection in integration. Empirical and theoretical evidence does exist, especially with regard to certain aspects of capital markets, with focus on variable such as country of origin bias, segmentation of countries, and deregulation of financial systems as well as change in auxiliary factors such as social, cultural and financial facets. The significant changes in technological aspects have propelled globalization of financial services to irreversible levels, primarily due to the integration of economic activities across the globe. The level of integration of national, regional and global systems was clearly indicated by the ripple effect of the 2008-09 economic crisis, which spread across all continents, in spite of having started in the US real estate market, which is a subsector of the US financial system.[Nomaan. 13] [Ocampo, et al. 15] [Phillip Arestis and Santonu. Basu. Financial Globalization and Regulation. Working Paper No. 397. /pubs/wp/397.pdf]
The close relationship between financial integration and economic empowerment is linear to an extent. Most countries rely on the financial resources available on the global scale to attain comparative advantage and actuate strategies for exploitation of national resources. In addition to achieving political stability, economic empowerment creates the impetus for expansion of productivity and amplification of socio-cultural imperatives which enhance the quality of life and standards of living. As a result, over and above national wealth and resource endowment, the level of poverty is related to access to financial resources in the global market place. In this paper, an analysis of the effects of globalization on poverty will be performed. The ability of globalization of financial systems and services to influence poverty will be the main focus of the paper.[Knight, 15.]
Figure 1: Process of Financial Globalization
Source: Arestis, (2010)
Financial globalization and Crises
Financial globalization is highly related to financial crises, and credit crunches. As indicated in figure 1, the process of financial globalization is circular and skewed towards identification of imbalance in the systems. Figure 2 provides an indication of the significant economic crises in the globe, most of which were highly correlated to significant eras in globalization.
Figure 2: Major Financial Crises
Era

Nature of Crisis

Effects

1870-1913[Ocampo, et al. 15]

Unregulated globalization of financial services in Britain

London rose to the locus of financial services provision, resulting to the first recorded crisis for banking and financial institutions, originating from excess speculative demand and supply, unregulated lending, poor oversight of monetary policies and insufficiency in disclosures in financial activity

1920-1930s[Nomaan. 13]

The Great Depression

Introduction of financial controls and control of foreign exchange rates resulted to great depression.

1950-1960[Schmukler, 6]

Devaluation of GBP, the post-Korean war crisis

Sterling pound was devalued due to

1970-1980[Schmukler, 20]

Oil Crisis

Sharp increase in the price and demand for oil, resulting to the quadrupling of oil and high inflation in the US

1980-1992[Ocampo, et al. 15]

Bonds market crisis

Collapse of bond and monetary instruments markets due to an increased demand and supply over the 1970 resulted to a crash in the Western economic outlook

1997-1999[Arestis, 10]

Asian Crisis, including Japan

Collapse in Thailand currency and the economy of Japan due to uncontrolled expansion in productivity and currency valuations

2008-09[Schmukler, 6]

Sub-prime lending crisis

Collapse in the real estate market in the US, resulting to a global meltdown and credit crunch.

Financial Globalization and Poverty
As indicated in the introduction, financial globalization has propagated the emergence of changes and imbalances in the wealth endowment of nations across the globe. This necessitates an investigation into the link between financial globalization and poverty. The discussion here under provides an investigation into the relationship between financial globalization and poverty.
Imbalances in Capital Flows
Capital flows are essential to economic growth in any country. As observed, most countries classified as developing have benefited from capital inflows, and the outcomes of financial globalization. In the absence of this influx, such economies would not have managed to break the barriers to economic prowess, expansion of GDP as well as creation of comparative and absolute advantages. Their ability to exploit natural resources would be highly impaired, as indicated with the colonization of Africa which resulted to enhancement of its resource output, although the outcomes are debatable. Countries in the Asian block benefited from financial globalization as well, rising to global prominence in textiles industry.[Knight, 8] [Schmukler, 13]
However, for poverty reduction and economic growth to be reliable and tangible, such inflows have to be constant and reliable over a period of time. Reliability is closely linked to sustainability in economic terms, as well as creation of long term streams of income. The existence of absence of financial intermediaries who provide close alternatives for the liabilities and assets and its efficiency in providing such substitutes is closely linked to the viability of a banking sector in a country and indeed its financial stability. The existence of robust frameworks to create equilibriums when demand and supply changes is essential to essential to generation of capabilities for generation of financing sources from domestic or regional sources to form capital for stimulation of savings and investment in order to return a country to attractiveness for FDI.[Knight, 13]
This is more prevalent and imperative for countries where credit risks is high and political ties strained ...