Introduction
The term globalization is no longer restricted to economic journals and text books. The definition of globalization has taken a wider sphere. Globalization has taken the world in its embrace since the turn of the last century. By globalization today we mean the greater integration of the world in terms of economic cooperation, financial interactions, cultural interchange, as well as enhanced political interrelationships. Thus globalization has not only increased the knowledge, understanding and appreciation of the culture, values, ethics and socio-political strife of the other nations of the globe, it has also increased the interdependence of the globalized nations. Initially, the word globalization was restricted to define greater connectivity among countries in terms of international trade flows. It meant opening up of the nations towards a free trade regime. With the passage of time and the improvement of the information and the communication technology the nations started becoming more culturally connected. The volume of knowledge flow increased. We could find a greater flow of trade in terms of services as well. Outsourcing enhanced the wider use of the personnel in one country to the production system in another country. The information flow in sectors like health, education and entertainment also increased rapidly in the second half of the last century.
Globalization has made today’s world more politically aware. The sense of respect for the culture, history and ethics of other nations has also increased with greater cultural globalization. But the objective of this discussion is the issue of financial globalization and how far it has been successful in achieving the target of ensuring higher growth and lower inequality through financial inflows and outflows. We begin with a brief description of the term financial globalization and its history then we go on to discuss the major arguments for and against financial globalization and finally we look at recent world investment trends to understand the effects of financial globalization in the current context.
Globalization: Meaning, Concept and a Brief History
Economic globalization refers to a greater flow of goods and services among different countries that take part in unrestricted trade interactions with the rest of the world. Globalization also implies a greater flow of capital, finances, business interactions, technology transfer among the globalized nations. . Globalization allows the businesses in one country to look for markets in another nation. It also allows consumers of one country to avail a good of their choice that is produced in another country. The professionals from one part of the globe can move to a different part where it can grab better opportunities and use their professional acumen in the best possible way. Globalization also allows corporates to employ the best personnel from around the globe. Trade in goods and services have increased stupendously in the last half a century. Today we are more concerned with the global flow of capital and financial services. From the mid 1970s the world has experienced significant amount of international flow of financial resources which has also led to the interchange of financial resources among nations. The establishment of overseas branches of financial institutions has also been a part of this financial globalization. Let us now look at the history of globalization in brief.
Mishkin(2006) has divided the globalization into two distinct phases. The first wave of globalization took place between 1870 and 1914. The international flow of trade increased impressively from 10% of global output in 1870 to over 20% in 1914. The flow of capital among the nations also increased considerably from 7% of global output in 1870 to 20% in 1914. This phase of development has seen the emergence of some erstwhile less-developed economies into modern growth wielding economies. The case of Japan and Argentina points to the fact how globalization has fostered greater economic growth and efficient use of the countries resources to achieve technological and financial supremacy in the world arena. This period also saw the missed opportunities for the countries which failed to take part in the globalization drive and experienced falling growth rate like China. This period was followed by the First World War which increased the sense of distrust among nations and increased the barriers to trade. After the Second World War the importance of international cooperation was realized by the dominant nations of the world. This realization ushered in the second phase of globalization since the 1960s. This phase saw the formation of the International Monetary Fund (IMF), the General Agreement on Tariffs and Trade (GATT) which led to the formation of the World Trade Organization (WTO). This phase has seen rapid growth in trade to the tune of 11% per annum. Since 1973 capital flows have grown stupendously from 5% of the world GDP in 1973 to 21% of the world GDP in the first decade of the 21st Century.
Though the trade liberalization across the globe has been lauded by the economists and political thinkers as the harbinger of growth and prosperity of the nations of the world, the financial globalization have been viewed with a lot of skepticism by economist and financial specialists from several quarters. Let us now look at the winning and losing points of financial globalization that has given rise to a sea of arguments and counter arguments in economic literature.
Hits and Misses
The aftermath of financial globalization was a mixed set of experiences. The world has seen the growth of South Korea, India, China, Argentina and Brazil. The world has also bore the brunt of the East Asian crisis of 1998 and the Mexican Peso crisis of 1994-95. There are widespread arguments that cite evidences in favor of financial globalization. Economists in this line of thought stress the fact that the financial globalization has lead to the growth of the participating nations. They also combated the counter argument that financial globalization has led to growing income inequality among nations by pointing to the fact that the income of the nations who have not globalized has in fact decreased leading to the widening of the gap between wealthy and poor nations. But it is also true that the financial openness has rendered the nations, especially the developing ones, more vulnerable to the global financial fluctuations. The increased capital inflow has lead to the increase in consumption rather than adding to investments and productive capacity. It has been argued that the economies with shortage in supply of investible funds have gained from financial globalization. For the economies where savings is sufficient but there is lack of demand for capital, the financial globalization has wreaked havoc as it has reduced domestic savings without increasing productivity of the domestic firms. Economists have also pointed out that China and India has suffered much less from the vagaries of international financial crisis as these two nations have been slow and cautious in opening up their economies to financial interactions. India and China are well known for their strict capital control policies. It has been observed in many nations around the world that the huge capital inflow from financial liberalization has lead to the increase in the exchange rate which has proved to be counter-productive for the economy. Merchandise trade has faced a debacle though service trade has improved. This is because merchandise production is more dependent on capital than services. Empirical findings have shown no positive trend between financial globalization and economic growth of the globalizing nations. Some pro-globalization thinkers have pointed out that the empirical studies have been biased in several ways. First of all it is important to note how financial globalization is defined by these studies. The indicators of globalization have not been chosen correctly. Secondly, the studies for developed and developing countries should have been analyzed differently. Thirdly, these studies have concentrated on permanent growth effects whereas neo-classical growth models suggest short-term growth effects of an increased investment-GDP ratio. The pro-globalization thinkers also point out that the failure of financial globalization in enhancing growth can be attributed to the poor financial network of the incumbent nations. Lack of well developed financial markets, weak financial institutions, and equally mismanaged financial administration has lead to the poor outcome of globalization. The counter arguments state that if the financial reforms are initiated, that removes the lacuna in financial market management in these countries then the nations will automatically trace the growth trajectory without necessitating any form of globalization. The comprehensive reform program for developing countries will make them self reliant in terms of capital required for higher production and growth. The countries will be less dependent on foreign capital. But it is also true that to come out of the low level of growth equilibrium that less-developed countries face, capital inflow is necessary especially for countries with shortage of supply of investible funds. The increase supply of capital through financial globalization reduces the rate of interest and increases the demand for investment thus increasing production, growth and employment. In this respect policy makers tend to distinguish between Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI). FDI leads to an increase in the productive capacity of the nation that is receiving the investment. On the other hand FPI is more volatile in nature subject to outflows leading to financial crisis as we have seen in East Asia in 1998. The FDI flow has played a pivotal role in the growth of some economies which has emerged as potential world leaders such as China. So, financial globalization is not all that bad as it might seem from some empirical studies. The outcome of the success and failure stories is that the effect of financial globalization largely depends on the economic, political, social, institutional and financial conditions of the nations before and after globalization. In the next section we take a look at the current international FDI flows to get an idea on how globalization has affected captal flows.
Current World Investment Scenario
The FDI flows have seen a significant upturn since 2012. In 2013 FDI inflow has increased by 9% to $1.45 trillion. The UNCTAD projects a further increase in 2014 to $1.6 trillion. The FDI flows to developed countries in 2013 have been $566 billion which is almost 39% of the world investment flows, whereas the developing countries have maintained their dominance in the FDI flows at $778 billion which is 54% of the world total. This is evident from the figure below:
Figure 1: World FDI Inflows
The Asian developing nations have remained the major destinations for FDI along with the Latin American nations.
The recent figures suggest that in spite of all the skepticism about financial globalization, world investment flows have increased in the last few years. The developing countries are relying on the Foreign Direct Investments to a great extent as this form of investment is less risky as there is no fear of sudden outflow of capital. The FDI has been successful in gearing industrial growth fostering prosperity and overall development of the emerging nations.
Works Cited
Mishkin, Frederic S. The Next Great GLobalization. Princeton University Press, 2006. Print.
Rodrik, Dani and Arvind Subramanian. "Why Did Finanacial Globalization Disappoint?" Mimeo 2008 March 2008.
UNCTAD. World Investment Report. New York and Geneva: United Ntions, 2014.
