Financial Globalization

Finanacial Globalization : Pains and gains for developing countries

Financial globalization is a vast and complex topic which has been one of the most intensely debated topics of our times. Understanding the effects of financial globalization generally and in particular on developing countries is of considerable importance.

First of all, we should answer the question: why is finance so important to economic growth? The answer is that financial system is like the brain of economy: it is a coordinating mechanism that allocates capital to building factories houses and roads. If capital goes to the wrong uses or does not flow at all, the economy will operate inefficiently and economic growth will be very low. No work ethic can compensate for a misallocation of capital. Working hard will not make a country rich because hard-working workers will not be productive unless they work with the right amount of capital. Brain is more important than brawn, and similarly an efficient financial system is more important than hard work for an economy’s success.

Financial globalization is usually understood as an integration of a country’s local financial system with international financial markets and institutions. So the country becomes a part of one whole. Nowadays developed countries are the most active participants in the financial globalization process, but developing countries have also started to participate. Financial globalization is clearly a matter of considerable policy relevance, especially with major economies like China and India recently taking steps to open up their capital accounts. A number of developing countries are still in the early stages of globalization facing numerous ongoing policy decisions on timing and pace of further integration.

Financial Globalization is a fascinating topic for the researchers of developing economics not only due to its compelling policy relevance, but due to its enormous variation of approaches and experiences across...