Chapter 01, Financial Globalization and Crises

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One of the many definitions of financial globalization is integration of domestic financial system of a country with the global financial markets and institutions. Polychroniou and Rolle: To what extent can we speak of the macroeconomics of financialization? In other words, how does financialization impact on investment, consumption, and distribution?

Gerald Epstein: There has been important research on the macroeconomics of financialization. The net effect of these factors can mean that financialization can lead to economic expansion or stagnation dependeing on the relative size of these factors.

Effects of Financial Globalization on Developing Countries: Some Empirical Evidence | SpringerLink

But it almost always increases inequality. In addition, it almost always leads to financial instability and even crises. Empricial work has looked at more specific impacts.

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Much of the macroeconomic literature on financialization concerns, of course, the impact of financialization on crucial macroeconomic outcomes such as economic growth, investment, productivity growth, employment, stability and income distribution. Stockhammer pioneered the theoretical analysis of the impact of financialized manager motives on investment. He showed that finance oriented management might choose to undertake lower investment levels than managers with less financialized orientations. Ozghu Orhangazi used firm level data to study the impact of financialisation on real capital accumulation in the United States.

He used data from a sample of non-financial corporations from to , and finds a negative relationship between real investment and financialisation. Leila Davis provided further evidence of negative impact of financialization on real investment. Her results are consistent with the concerns expressed by heterodox analysts and others that financialization will tend to reduce real investment. In a set of surveys of corporate managers, economists have shown that many chief financial officers are willing to sacrifice longer term investments in research and development and hold on to value employees in order to meet short-term earnings per share targets.

Other empirical studies show that managers are willing to trade-off investments and employment for stock repurchases that allow them to meet earnings per share forecasts. Eileen Appelbaum and Rosemary Batt find in a survey of econometric studies of private equity firms find that especially large firms that use financial engineering to extract value from target companies, have a negative impact on investment, employment and research and development in these companies. This raises the issue of the over-all impact of financialization on income distribution. There has been some empirical work to look at the impact of financialization on income and wealth distribution.

Descriptive analysis in the U. There has also been interesting research on the relationship between financialization and economic growth. As the massive recession stemming from the great financial crisis makes clear, there is no linear relationship between the size and complexity of financial markets and economic growth. Several econometric studies have suggested an inverted U shaped relationship between the size of the financial sector and economic growth. A larger financial sector raises the rate of economic growth up to a point, but when the financial sector gets too large relative to the size of the economy, economic growth begins to decline.

To the extent that this relationship is true, economists are still searching for the explanation. One argument is that as the financial sector increases in size, because of its relatively high pay levels, it pulls talented and highly educated employees away from other sectors that might contribute more to economic growth and productivity. Their culture has also become global, spanning multiple local facets. This process has been parallel to the rapid supranational economic integration of much of Europe and, to a lesser degree, other regions of the world. Fourthly, since the final decades of the twentieth century, science, which has always transcended national borders, has experienced an unprecedented level of global integration.

In this sense, current scientific society is both global and distributed, characterized by the active participation of research groups from a growing number of countries.

Literature overview

As Professor Shankar points out in his contribution to the present book, information and Web technologies are making it possible for researchers from less-developed countries to take an active part in cutting-edge research. Moreover, many present-day scientific and technological research programs require a level of financial and technological resources that far surpass the possibilities of even the most developed countries.

Globalization has also been driven by growing awareness of planet-wide ecological problems that arose in the final decades of the twentieth century, including the hole in the ozone layer, global warming, the loss of biodiversity, and increasing difficult access to energy sources capable of sustaining the development of the most advanced countries as well as the rapidly emerging ones, like China.

Major ecological problems surpass analytical frameworks exclusively focused on national settings and, of course, any possible solution to them can hardly be viable without the adoption of global perspectives capable of preventing both free rider behavior by nations or national actors, and the imposition of excessive charges on insufficiently developed countries. These problems occupy the foreground of the agendas of leading governments and various organisms for international cooperation and government, adding significant impetus to new political forces and associations outside the profile of conventional political movements that aspire to promote decisions in a global setting Keck and Sikkink World studies of values carried out by Inglehart one of the authors in the present book over the last three decades document a significant process of convergence in the structure of individual values in large areas of the globe, overlapping divisions that organized and sometimes violent minorities seek to maintain on the basis of religious-moral credos Inglehart et al.

But not all variables point to the constitution of a global community and polity.

In the final analysis, the fundamental barrier is the lack of correct understanding of our new reality, a failure on the part of public and private agents to the integrate facts and data on globalization into their mindscapes. Helping to correct these deficiencies should become a systematic objective of sciences—in particular, of social sciences.

In this sense, the modeling of what is global, which grew during the s and s, is receiving renewed attention with the advent of more powerful computers and conceptual and statistical algorithms and tools, as well as present-day economic models and sociological and political theories. While global models of climate change are now subject to mass media attention, there is less public awareness of the efforts of the pioneers of global modeling, to whom we must pay at least brief tribute.

This generation of models had three characteristics that continue to be necessary today: a globalizing or all-encompassing character, a projection into the future medium and even long-term , and a practical-technological vocation furnishing instruments for changing policies and constellations of values in the present in order to prevent the occurrence of regional or global catastrophes. The second report to the Rome Club, M.

Mesarovic and E. In other words, correcting the excessively uniform view of the planet presented in the first report. The new global problems characteristic of our current era, such as worldwide dependence on shared amounts of raw materials, energy and food supply problems, the shared use of the physical environment on land, sea and the atmosphere, etc. And yet that does not imply the existence of a single, homogenous, and monolithic world, as the facts clearly show. New knowledge offered by the environmental and social sciences, along with the formidable power of current statistical and computational instruments, should foster a greater understanding of global dynamics, offering robust frameworks that can be carried over to the sensibilities of the citizenry and the worldviews of public decision makers.

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As we have seen, globalization is not, strictly speaking, a new phenomenon, although in our time it has reached a previously unknown magnitude. Nor are financial crises anything new; they are as old as money itself.

Financial crises are actually quite common. One of the first analyses of the Asian crisis IMF pointed out that between and there had been some financial crises in different countries around the world. Despite the considerable frequency of such crises around 20 a year at a time when globalization is rapidly advancing, there is no evidence Bordo et al.

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There is, however, abundant evidence that it favors their expansion or contagion and multiplies their impact. Nevertheless, in this introduction I would like to offer a few observations based on my experience at the helm of a transnational bank, that is, as an active agent for globalization in an industry at the heart of the crisis and deeply affected by it. Many analysts hypothesize that the crisis will signify a strong step backward for globalization, as occurred with the Great Depression in the s. Of course there is already proof that the crisis has had a strongly negative initial impact: international financial flows have dwindled and, for the first time in many years, the volume of international trade shrank in absolute terms in and will continue to do so in Definitively, national political influence has gained much greater weight among transnational companies, and that phenomenon is most significant in the banking sector.

This state power is reinforced by other public aid mechanisms that do not involve public ownership but nevertheless constitute very powerful instruments of control. Moreover, many geopolitical analysts are worried by growing global instability stemming from the worsening of general economic conditions and the weaknesses of the United States and other developed Western countries, which have been brought out by the crisis. Even before the crisis, despite extraordinarily favorable economic conditions, globalization was the object of strong criticism in certain sectors of opinion and the crisis has given new force to its adversaries.

Still, there are also reasons to think that this wave of globalization is different than earlier ones: there are differences in the absolute and relative volumes of international loans, trade, and investment flows, as well as in the magnitude and degree of integration of financial markets, the number and proportion of people living and working in foreign countries, and so on.

Even more relevant are the qualitative differences, which I can sum up in two fundamental aspects:.

The Economic Benefits of Globalization for Business and Consumers

Firstly, the existence of organizations and mechanisms for international coordination that, no matter how imperfect or insufficient, help govern international financial and economic activity. In fact, unlike what happened during the Great Depression, in the present crisis different countries have reacted decisively and their fundamental actions have been coherent on a global level.

Secondly, and certainly more importantly: this is the globalization process that has spread throughout the world with the greatest speed, breadth, and depth. Globalization has had a transforming effect on the economy, culture, and society with unprecedented intensity and speed. Global prosperity over the last twenty years, with high, sustained growth almost worldwide, has a common denominator: the participation of a larger number of countries in the global economy and their integration in international trade and financial flows.

Over the two decades before the crisis, the percentage of people living in extreme poverty less than one US dollar a day in developing countries has been cut in half.