International Financial Integration. Is it worth it?
26.03.2014
I.
Introduction
“We are witnessing the transformation of mid-20th century managerial capitalism into global financial capitalism”. This is what Martin Wolf expressed in an article written for the
Financial Times in June 18, 2007. Even after the global economic crisis that followed the next years and from which the world is still recovering, this statement is of great relevance.
Actually, this crisis is a good example of how integrated the world’s financial markets have become: a financial crisis that started in some developed countries practically spread throughout the whole world.
As Wolf himself hinted in his book Fixing Global Finance, it is obvious why financial crises bounce back from one country to another (2008, p. 25). First, markets are connected globally, both for commodities and financial instruments; second, an unexpected weakness in one country is seen by investors as a weakness for apparently similar countries; third, when governments fail to respond to financial crises as expected, trust in their willingness to act elsewhere will be lost; fourth, a high perception of risk in one market may spread to others; and fifth, the rationing of credit to risk borrowers can turn a slight instability into a crisis
(Wolf, 2008, p. 25). Likewise, Jeffry Frieden adds that current regulations and technology allow money to travel around borders almost instantly, giving rise to short-term international transactions (Frieden, 1991, p. 428).
With such vulnerabilities, to what extent is international financial integration (capital mobility) worth it? To answer this question, this paper will try to explain how and why capital mobility alters economic policymaking by governments as well as the tradeoffs such policies entail. By doing so, it will show the extent to which capital mobility takes policy
1
26.03.2014
autonomy away from governments and indicates how it can affect certain countries more than others. To do
I.
Introduction
“We are witnessing the transformation of mid-20th century managerial capitalism into global financial capitalism”. This is what Martin Wolf expressed in an article written for the
Financial Times in June 18, 2007. Even after the global economic crisis that followed the next years and from which the world is still recovering, this statement is of great relevance.
Actually, this crisis is a good example of how integrated the world’s financial markets have become: a financial crisis that started in some developed countries practically spread throughout the whole world.
As Wolf himself hinted in his book Fixing Global Finance, it is obvious why financial crises bounce back from one country to another (2008, p. 25). First, markets are connected globally, both for commodities and financial instruments; second, an unexpected weakness in one country is seen by investors as a weakness for apparently similar countries; third, when governments fail to respond to financial crises as expected, trust in their willingness to act elsewhere will be lost; fourth, a high perception of risk in one market may spread to others; and fifth, the rationing of credit to risk borrowers can turn a slight instability into a crisis
(Wolf, 2008, p. 25). Likewise, Jeffry Frieden adds that current regulations and technology allow money to travel around borders almost instantly, giving rise to short-term international transactions (Frieden, 1991, p. 428).
With such vulnerabilities, to what extent is international financial integration (capital mobility) worth it? To answer this question, this paper will try to explain how and why capital mobility alters economic policymaking by governments as well as the tradeoffs such policies entail. By doing so, it will show the extent to which capital mobility takes policy
1
26.03.2014
autonomy away from governments and indicates how it can affect certain countries more than others. To do
References: Chang, Roberto. 1999. “Understanding Recent Crises in Emerging Markets,” Federal Reserve Bank of Atlanta Economic Review, Second Quarter, pp.6-‐16. Frieden, Jeffry A. 1991. “Invested Interests: The Politics of National Economic Policies in a World of Global Finance,” International Organization 45(4): 425-51. Frieden, Jeffry A. 2007. Global Capitalism: Its Fall and Rise in the Twentieth Century. New York: W.W Frieden, Jeffry A. 2008. “Globalization and Exchange Rate Policy”: 344-357. Gallagher, Kevin. “The IMF’s Half Step,” Project Syndicate, December 5, 2012. International Political Economy”. W.W. Norton & Co., 2003: 57‐91. Krugman, Paul. 2008. The Return of Depression Economics and the Crisis of 2008. New York: W.W Neely, Christopher J. 1999. “An Introduction to Capital Controls”. Federal Reserve Bank of St Walter, Stefanie. 2008. “A New Approach for Determining Exchange‐Rate Level Preferences” Wolf, Martin. “Unfettered Finance is Fast Reshaping the Global Economy.” Financial Times, June 18, 2007 (http://www.ft.com/cms/s/518482b4--‐1dc5--‐11dc--‐89f7000b5df10621.html) Wolf, Martin. 2008. Fixing Global Finance, Chapter 2 (“Blessings and Perils of Global Finance”): 10-27.