The trend towards financial globalization has well and truly stalled; write Martin Neil Baily and Susan Lund
The article begins with pointing out how the information technologies have expanded to the extent that international trade is facilitated in a better and more improved manner. Due to this technology advancement, conducting the transaction around the world has become easier. The author noted that the globalization has enhanced borrowing and lending of money around the world hence foreign direct investment (Lamfalussy, 2000). It is evident that globalization enhances cross border trade as the author identifies how cross border flow of capital has peaked to $US 11.8 trillion in 2007 from $US500 billion in 1980.
The outlined the financial crisis a fundamental challenge for the globalization especially, the globalised financial system. In 2008 the global financial system was hit by the financial crises. According to macroeconomics theory, financial crises come along with recession, which consequently deteriorates the global economy at large (Mankiw, 2007). According to this article, the consequences of financial crises were reflected by the abrupt collapse of cross boarder capital flows. This followed the negative effect of capital account of the balance of payment of different economies since the capital flow are recorded on the capital account. This is the reason the world experienced shrinking of the global economy, hence pull back in the international trade.
According to global asset allocation concept, the growth of the global assets is highly associated with the substantial performance in the equity market and the increase in the flow of capital and investment (Lamfalussy, 2000). However, the author of the article indicated that, despite the fall in the foreign transaction and low international capital flow, the global financial assets were experiencing growth. This might be due to the effects of United States dollar in the foreign exchange market. The author could have stated that the increase in the global assets might be due to the devaluation of the dollar against the other strong currencies in the world.
According to the international trade concept, the economic and financial integration leads to the expansion of the globalization. However, the article has illustrated how the economic and financial integration adversely affected the cross border trade in Europe. As a result of the introduction of Euro in Euro zone, banks has cut down the international lending within the zone by about $US2.8 trillion from the end of 2007. The economic and financial integration has also led to the reduction of foreign direct investment in Europe (Mankiw, 2007). This is the reason why the member countries of the Euro zone had started to undermine the economic and financial integration in Europe.
However, the suggested and underway regulatory reform schemes could effectively help to solve the challenges of the financial stem. The creation of the standard banking policy, such as Basel 3 banking standard would help the local banks transact effectively in the foreign exchange market. On the other hand, the cross border bank resolution will play a major role in developing a national resolution authority in the foreign market. The financial stability would be achieved since the policy will enable the identification of the major parent banks and fiscal authority. These initiatives will facilitate the right balance decision making process and financial stability responsibilities.
Economically, the globalization and financial system is highly influenced by the foreign direct investment and investors’ assets such as bonds and equities. Therefore, eliminating barriers that adversely affects the direct foreign exchange would be significant in construction and stabilization of the financial market. This is because with the absence of these barriers, there would be available long term financing that are required for expansion of the businesses in the economy.
In general, the financial globalization would be enhanced if the growing economies embrace the terms that are able to facilitate the financial market growth. However, the author suggests that the most significant measure is to ensure supervision and enforcement of the market regulations and infrastructures. The regulations and market infrastructures should be managed in transparent and accountability manner to facilitating banking lending and investments within the economies (Lamfalussy, 2000). Significantly, the policy agenda towards achieving stable financial system should be based on developing open and diverse financial sectors as well as competitiveness between the countries. This in turn would result to developed and established international trade.
Cracks in global system yet to be fixed. (n.d.). Retrieved from http://www.theage.com.au/business/world-business/cracks-in-global-system-yet-to-be-fixed-20130416-2hy9f.html
Lamfalussy, A. (2000). Financial crises in emerging markets: An essay on financial globalisation and fragility. New Haven, [Conn.: Yale University Press.
Mankiw, N. G. (2007). Macroeconomics. New York: Worth Publishers.