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Financial Globalization by Mind Map: Financial Globalization
4.0 stars - 3 reviews range from 0 to 5

Financial Globalization

Varona

Costs

 

Financial crisis

Currency crisis

Benefits

Economic Growth

Reduction in info assymetry and repressive incumbents

Increased competition /diversification

Employment/poverty

Regulations

Factors influencing ability to harness

Lack of Collateral

Regulations

Extensiveness of financial globalisation

Government/R.incumbents

Recommendations

Government, Enforce restrictive covenant, Prudential regulations, Removal of guarantees

Local Firms, Expertise, Risk Management

ForeignFirms/Organisation, Policies, Solutions, Technical assistance

Prashant

Oversimplified Essay

Essay: Does Globalisation benefit both developed and developing countries? Globalisation involves the increased integration of national economies. It means a reduction in barriers of trade and investment between different economies. The benefits of globalisation are related to the benefits of free trade. 1. Consumers will have a wider choice of goods, and prices are likely to be lower. Globalisation has been an important factor in the falling price of manufactured goods. 2.Globalisation gives an opportunity for domestic firms to export a wider market. Export led growth has been an important factor in increasing economic welfare in Asian countries. 3. Globalisation enables increased specialisation of production. This specialisation enables firms to benefit from economies of scale. This leads to lower average costs and increased efficiency. 4. Globalisation causes increased competition between different firms and countries. This puts pressure on firms to be increasingly efficient and offer better products for consumers. 5. Increased Inward Investment. The process of globalisation has encouraged firms to invest in other countries. For example, many firms are relocating call centres to countries like India, where wage costs are lower. This inward investment benefits developing countries because it creates employment, growth and foreign exchange. Some foreign companies are criticised for exploiting cheap labour. But often the wages are higher than otherwise. Problems of Globalisation 1. Developing Countries May Struggle to compete. If a developing country wishes to develop a new manufacturing industry, it may face higher costs than advanced industries in the west, who will benefit from years of experience and economies of scale. To develop an industry it may be necessary to have protection from cheap imports; this gives the firm chance to develop and gain economies of scale. 2. Globalisation keeps Developing countries producing primary products. Developing countries may have a comparative advantage in primary products, however, this offers little scope for economic growth. Primary products have a low income elasticity of demand. Therefore, with economic growth demand for products increases only slowly. Primary products often have volatile prices, this can cause the economy to be subject to fluctuations in income 3. Multi national Companies may be able to force out local retailers, leading to less choice for consumers and less cultural diversity. 4. Movement of Labour. globalisation enables workers to move easily around. however, this may cause the highest skilled workers of developing countries to leave for better paid jobs in developed countries. http://www.economicshelp.org/2007/05/discuss-whether-globalisation-benefits.html

P2

Cost of Globalization

Costs Of Globalisation Developing Countries often struggle to compete with developed Countries. It is argued free trade benefits developed countries more. There is an infant industry argument which says industries in developing countries need protection from free trade to be able to develop. Environmental Costs One problem of globalisation is that it has increased the use of non renewable resources. It has also contributed to increased pollution and global warming. Firms can also outsource production to where environmental standards are less strict. Labour Drain Globalisation enables workers to move more freely. Therefore, some countries find it difficult to hold onto their best skilled workers, who are attracted by higher wages elsewhere. Less Cultural Diversity Globalisation has led to increased economic and cultural hegemony. There is arguably less cultural diversity   http://www.economicshelp.org/blog/trade/costs-and-benefits-of-globalisation/  

P1

Fishkin Speech, Why Higher Returns in Developing Countries, The problem of export restrictions, Trade liberilization, Promotes Comparative Advantage

World Development and Rural Poverty, As self employed, Ex how bad infrastructure and globalization problem, Bangaladeshi Farmers Benefitted, Price Variances, Comparative Advantage (Exporting Sector) down

Pain and Gain of Globalization, P6. 4 Agents of Financial Globalization, Governments, Borrowers, Investors, Financial Insitutions, Improvement in Financial Sectors, Six Snakes, Foreign Entires(Bank), Evidences, Stock Market Liberalization, Country Specific, Firm Level Evidence, International Listing ..Helpful, How migration useful, Mixed Batch, Bank-Entry Evidence, Risk and Net effects of Globalization, Globalization can lead to crisis if, Domestic Factor/ Market Discipline, due to imperfection in international financial market, due to importance of external factors, through contagion, real links, financial links, p. 13 herding behavior

Effects

3 costs

Opponents of financial globalization see international capital mobility as a destabilizing source in the global economy. There are three main reasons for this: excessive inflows and outflows of capital, worsening income inequality, and international tax competition. As developing countries have liberalized their capital accounts foreign investment has increased. But it has also led to a number of devastating financial crises due to sharp capital flow reversals. When capital inflows quickly turn into capital outflows the domestic financial system may collapse and no longer channel funds from lenders to borrowers, slashing investment and consumption as happened across Asia in the late 1990s. Excessive capital outflows are due to what is known as asymmetric information that exists in financial markets. A lender must assess whether a borrower represents a good or bad credit risk. The borrower knows if she is going to invest the funds in a risky project but the lender does not. Once there are rumours that the debtor is in trouble and may default the lack of information makes creditors worried that this is endemic among all debtors and they begin to withdraw their funds. In a global economy asymmetric information tends to worsen with cultural differences and physical distance. The Mexican Peso crisis in 1995 is a perfect example of how capital flow reversals, spurred by asymmetric information can be devastating. In the late eighties and early nineties Mexico’s banking system was privatized. At the same time Mexico was also liberalizing its capital account. But, the banking system was incompetent to risk management and the supervision from the central bank was limited. As foreign capital flowed in these funds were channeled into bad investment projects causing an increase in non-performing loans. Bankers like Carlos Cabal were accused of making hundreds of millions worth of bad loans. Cabal was never convicted but as the world interest rate rose and investors realized that Mexico might default on its stand a sharp reversal in capital flow occurred as capital left the country causing a collapse of the financial system and widespread loss in economic activity. The Asian crisis in 1997 displayed similar features as the Mexican Peso crisis but also illustrated how asymmetric information in the global capital market could cause a financial crisis to spread to other countries. When a country defaults on its stand investors may withdraw their capital from neighbouring countries with similar culture or economic infrastructure because of fear of future default allowing the crisis to spread from country to country. Financial globalization can also cause problems for developed countries experiencing capital outflows. Capital outflows make workers less productive and therefore cause wages to decline. This may be especially true in industries that employ low skilled labour. So companies such as car producer General Motors have moved some of their production to Mexico where wages are lower, as is electronics producer Thomson RCA. Because the effect is less predominant among high skilled labour wage inequality rises. Financial globalization also poses problems for countries with large welfare programs. These welfare programs are funded by taxing both labour and capital. Without capital restrictions capital tends to flow where taxes on capital are low. So countries may engage in tax competition in order to attract capital. Welfare states cannot afford to reduce capital and must follow suit and lower taxes on capital. In order to maintain the welfare system the lower tax revenues from capital must be compensated with higher taxes on labour. This is a problem for many European countries with large welfare programs and high taxes on labour. Financial globalization may therefore force these countries to reduce the size of the welfare state. Britain’s National Health Service, for example, founded in 1948 is funded exclusively through taxes and provides free healthcare for all. But with patients now suffering long waiting lists and being denied expensive treatments, many say Britain’s welfare state is creaking at the joints. http://financionomics.blogspot.com/2008/08/cost-of-financial-globalization.html

excessive inflows and outflows of capital

Income inequality, Papers, On the Social Costs of Financial Globalization without Financial Development, Mexico Example

International Tax competition

Exchange Rates, Argentina Example

Paper 2

p5, Thresholds Effects

p6, Consumption, Better measure than output, Low integration =, greater volatility in consumption

p7, surge in flows from industrial to developing, push, business cycle ,macro policy, pull, liberalization of capital aaccounts, domestic stock markets, large scale privitization

p10

Paul

Background On Impact of Financial Globalisation

The majority of empirical studies are unable to find robust evidence in support of the growth benefits of capital account liberalisation. Kose  et al(2006)  sates that de jure measures are better able to detect the growth and productivity gains stemming from financial globalisation. Furthermore, Kose et al (2006) states there is little empirical evidence to support the oft-citied claims that financial globalisation on itself is responsible for the spate of financial crises that the world has seen over the last three decades. Importantly, Kose et al (2006) points out that the impact of financial globalisation is not direct and to achieve benefits from capital account liberalisation  economies must met certain threshold conditions.

Collateral Impact

Threshold Conditions

Benefits

Financial globalisation leads to certain potential collateral benefits which lead to the GDP/TFP growth and a fall in consumption volatility. Given that most of the threshold conditions are part of the collateral benefits this generates a deep tension which further underscores the important of the threshold conditions.

Financial markets development

Institutional development

Better government and corporate governance

Macroeconomic discipline, Monetary and fiscial policy, Choice of exchange rate regime

Costs

Captal account liberalisation is believed to have played an important role in formenting financial crises and has been indicted by some observers as the proximate cause for the crises experienced by various emerging markets over the last decades. Kose et al (2006) argues that there is little empirical evidence to support that capital account liberalisation by itself increases vulnerability to crises. These crisis episodes are just sharp mainfestations of more general phenomenon of macroeconomic volatility

Volatility

Factors that influence the ability of developing countries to harness the benefits

Developing countries inability to meet threshold conditions infleuences the ability to achieve benefits of financial globalisation

Threshold conditions

Recommendations

Kose et al (2006) recommends that for developing countries, financial globalisation appears to have the potential to play a catalytic role in generating ana array of collateral benefits that may help boost long run growth and welfare. At the same time, premature opening of the capital account in the absence of somne basic suppporting conditions can delay teh realisation of these benefits, while making a country more vulnerable to sudden stops of capital flows. Still, this fundamental tension between costs and benefits of financial globalisation may be difficult to avoid. The collateral benefits perspective might be a way of moving forward on capital account liberalisation. If developing countries can identify which reform priorities are key to them, they can design an approach to capital accounbt liberalisation that could generate specific benefits while minimising the associated risk.

Individual Contribution Seciont

Paul

Prashant

Varona

9 Pages madness

PPT

Professore Recommendation Paper