Financial Globalization
Author Yugandhara Chaudhari
Emerging Economies
ZHAO, Z. et al. (2024) this study looked at how trade and financial connections with other countries affect how productive emerging economies are. They studied data from 1984 to 2019 in 20 developing countries and found that when these countries invest more in government projects and participate more in global trade, they tend to become more productive. However, when they rely too much on borrowing money locally, have a large labour force, or are heavily involved in global finance, their productivity tends to decrease. Interestingly, borrowing money locally can sometimes help productivity in the long term. The study has some limitations. They didn’t have enough data from all emerging countries, so their findings might not apply to all of them. Also, what they found might not be true for countries that are even less developed. In the future, researchers could compare how financial globalization affects productivity in both developed and developing countries. They could also study how factors like government policies and the economy’s structure influence the relationship between globalization and productivity in different types of economies.
The Limits of Domestic Monetary Policy
CAO, J. and DINGER, V. (2024) this article presents new evidence on how global funding affects the way banks in a small open economy like Norway respond to domestic monetary policy. The study finds that when global funding conditions are favourable, Norwegian banks are less responsive to changes in domestic interest rates. Instead, they tend to rely more on foreign currency funding, which insulates them from domestic monetary tightening. This reliance on global funding improves bank liquidity, allowing them to increase leverage and take on more credit risk. The findings suggest the existence of a “risk-taking channel” associated with currency appreciation, which poses challenges for conducting monetary policy in small open economies. When central banks attempt to limit lending risks and maintain financial stability through tighter monetary policies, banks may respond by seeking cheaper funding internationally, potentially increasing their risk-taking behaviour. to address these challenges and maintain the effectiveness of domestic monetary policy while mitigating banks’ risk-taking encouraged by global funding, the article suggests exploring complementary macro prudential policies. These policies could target banks’ exposure to risks associated with foreign currency funding. The authors plan to delve further into this issue in future research.
The legal system on stock market quality
NA, H. and KIM, S. (2024) the study investigates the impact of globalization on market quality, particularly focusing on how stronger investor protection, facilitated by globalization, influences market efficiency. Through empirical analysis, the study confirms a significantly positive relationship between globalization and stock market efficiency. To explore investor protection’s role, the researchers conducted a regression analysis between globalization and investor protection, finding a significant relationship. They decomposed the investor protection proxy into globalization-predicted and residual components, revealing that globalization-predicted investor protection significantly correlates with market efficiency. Notably, these findings primarily apply to civil law countries, indicating that improved investor protection in such countries serves as a channel between globalization and stock market efficiency. The study contributes to the literature by uncovering the interconnectedness among globalization, investor protection, and market quality, with implications for policymakers in civil law countries seeking to leverage globalization for financial market development.
Saving-investment correlations
SINGH, T. (2024) this study investigates the relationship between domestic saving and investment in the BRICS economies and evaluates their financial globalization. It finds that there is a long-term connection between domestic saving and investment in these countries. The analysis reveals that Brazil relies moderately on international capital (IMC) to finance its investments, while Russia, India, China, and South Africa (RICS) rely less on foreign saving, indicating low IMC due to financial market frictions and imperfect global market integration. in RICS, domestic savings primarily fund domestic investments, emphasizing the importance of increasing domestic savings to support capital accumulation and sustain current account imbalances. The study suggests that while current account imbalances are sustainable in the long term, macroeconomic policies are necessary to manage short-term deviations from the equilibrium between saving and investment. the findings underscore the need for varied methodologies and test statistics in empirical research to accurately gauge the relationship between saving and investment. The study highlights the complexities and debates inherent in empirical research, urging researchers to employ multiple estimators and consider diverse evidence in their analyses.
The non-linear effect of inequality on investment
CARRERA, J. and DE LA VEGA, P. (2024) the relationship between income inequality and investment, highlighting the complexity of their interplay and its implications for economic growth. They note a recent consensus on the negative impact of high inequality on growth but stress a lack of detailed understanding regarding the mechanisms involved. The authors conduct an extensive econometric analysis involving 95 countries from 1990 to 2015, aiming to improve upon existing literature by considering various control variables and testing for non-linear relationships between inequality and investment. their findings reveal a significant and non-linear relationship between inequality, measured by the Gini coefficient, and investment, showing a ‘U-shaped’ pattern. The analysis suggests that changes in inequality can have differing effects based on initial inequality levels, with higher inequality associated with reduced investment in countries with low to moderate initial inequality but increased investment in countries with high initial inequality. The authors propose potential explanations for these patterns, such as variations in productive structures, domestic demand, and export compositions across different countries. They also raise questions about the political economy of inequality, particularly in open economies, warning of the risks associated with sustained high growth and inequality. The analysis concludes by suggesting the necessity of structural economic changes aimed at creating a more inclusive growth model that requires less inequality to foster investment and sustainable growth.
Capital Account Liberalization and Firm Innovation
HOU, F. and XU, X. (2024) the article investigates the impact of capital account liberalization on firm innovation through a novel international firm-patent panel data analysis. It finds that capital account liberalization is associated with increased patenting activity, especially in sectors with higher innovation intensity. Firms with better legal protections and greater productivity show more pronounced responses to capital account liberalization by filing more patents. The observed innovation effect is not solely due to legal factors, as it holds across various patent quality measures. The results remain robust across alternative measures of liberalization, firm and country characteristics, and estimation models. these findings have significant implications for corporate investment and policy reform, contrasting with the temporary growth effects often associated with financial globalization. The study emphasizes the importance of understanding the micro-level impacts of macro-level financial reforms, suggesting that financial integration can stimulate domestic firms’ innovation growth, at least in the short term.
Ages of financial instability
TONVERONACHI, M. (2024) the evolution of financial instability and the role of ideas and vested interests in shaping economic policies over time. It contrasts Keynes’s approach, which advocated for active state intervention to ensure national autonomy and welfare, with the subsequent dominance of laissez-faire ideas supported by financial vested interests. The weakening of the Bretton Woods Agreement and the rise of a post-Bretton Woods framework marked by financial liberalization are attributed to the alignment of financial interests with laissez-faire ideology. The narrative emphasizes the entrenchment of global private interests and laissez-faire ideas despite repeated financial crises. It criticizes the lack of constraints on private finance’s freedom to innovate, highlighting the current era as one of financial authoritarianism. The comparison to the hard sciences underscores the resilience of laissez-faire economics despite its disastrous consequences, attributing this to the malleability of economics as a “soft science” susceptible to ideological and vested interests.
The role of openness in the effect of ICT on governance
ASONGU, S. A. and NWACHUKWU, J. C. (2024) the study examines the impact of openness, measured by trade and financial globalization, on information and communication technology (ICT) penetration and government quality in sub-Saharan Africa from 2000 to 2012. It uses mobile phone and internet penetration rates as proxies for ICT and ten governance indicators. The empirical analysis, conducted using GMM with forward orthogonal deviations, yields five main findings. Firstly, financial globalization tends to have a greater impact than trade openness when combined with ICT on both economic and institutional governance. Secondly, mobile phone penetration is more influential than internet penetration in enhancing economic governance in conjunction with trade openness and institutional governance with financial openness. Thirdly, while openness-driven ICT policies contribute to higher economic and institutional governance levels, the impact on political governance is consistently negative in the short run. furthermore, countries with low governance levels are catching up to those with higher governance levels, and only the interaction between internet penetration and financial openness significantly boosts general governance. The study suggests practical and theoretical contributions to the literature and recommends future research directions, including country-specific studies for targeted policy implications and assessing openness and ICT thresholds relevant to the findings. It also suggests exploring estimation techniques that retain country-specific effects and considering additional governance variables for a more comprehensive analysis.
the External Portfolio Structure of Emerging Markets
MENDOZA, E. G. and SMITH, K. A. (2024) the paper investigates the impact of financial integration, especially in emerging markets, in the presence of financial frictions. It finds that financial integration exacerbates the probability of financial crises during the transition phase, leading to an overshooting effect. This results in a long-term shift in external asset portfolios, marked by decreased domestic equity holdings and increased bond holdings after the crisis probability peaks. the increased likelihood of financial crises during transition arises from rising borrowing and leverage, which heightens the risk of hitting collateral constraints, triggering a fisherman debt-deflation amplification mechanism. Despite the positive effects of financial liberalization, such as reduced borrowing costs and improved consumption smoothing, the economy becomes more vulnerable to crises. These findings align with empirical evidence showing higher crisis frequencies in emerging markets post-financial liberalization. The analysis attributes these dynamics to significant supply-side effects of financial frictions, which affect dividends and lead to asset fire-sales during crisis periods. Comparatively, industrial countries experienced a different trajectory in their external asset portfolios post-financial integration, marked by increased net equity holdings and decreased net debt. However, recent financial crises suggest that financial frictions in industrial countries may be more relevant than previously thought, potentially leading to similar patterns of portfolio rebalancing in the future.
Globalization, inequality and redistribution
GOZGOR, G. and RANJAN, P. (2024) the paper explores the impact of globalization on inequality and redistribution, both theoretically and empirically. It introduces a novel measure of redistribution, quantified as the difference between pre-tax/transfer Gini and post-tax/transfer Gini indices. The study reveals that as economies become more globalized, they tend to engage in more redistribution. The findings, particularly concerning the KOF index of economic globalization, remain robust even after controlling for various factors and excluding outliers. Notably, the positive relationship between globalization and redistribution is more pronounced in wealthier countries, aligning with previous research indicating a positive association between globalization and social expenditure in OECD countries. The paper suggests that without government intervention through redistributive measures, globalization could exacerbate effective inequality. These results support the compensation hypothesis, which proposes that globalization leads to increased government intervention to mitigate risks and address inequality. While the compensation hypothesis traditionally focuses on welfare expenditure to counteract volatility associated with globalization, this study broadens it to include additional redistributive spending aimed at addressing increased inequality.
Conclusion
A study on emerging economies found that increased investment in government projects and global trade enhances productivity, but heavy reliance on local borrowing, large labour forces, or deep involvement in global finance can diminish productivity. Borrowing locally may aid long-term productivity, although the study’s scope is limited and may not apply universally, suggesting future research to compare financial globalization’s impact on productivity across developed and developing economies. Research on Norway’s banking system reveals that during favourable global funding conditions, Norwegian banks become less responsive to domestic interest rate changes, preferring foreign currency funding, which boosts liquidity and enables increased leverage and credit risk. This poses challenges for monetary policy effectiveness, requiring complementary macro prudential policies to manage banks’ risk-taking behaviour associated with global funding. Improved investor protection in such nations serves as a pathway between globalization and market efficiency, suggesting implications for policymakers aiming to leverage globalization for financial market development. High income inequality exhibits a ‘U-shaped’ relationship with investment, suggesting nuanced effects influenced by initial inequality levels and highlighting the necessity of inclusive growth models to foster sustainable investment and economic growth. The narrative discusses the influence of financial interests and laissez-faire ideology on global economic policies, criticizing the dominance of laissez-faire economics despite repeated financial crises and highlighting the era as one of financial authoritarianism. The study examines the impact of trade and financial globalization on ICT penetration and government quality in sub-Saharan Africa, finding that financial globalization has a greater impact on both economic and institutional governance, with mobile phone penetration playing a significant role, albeit with negative short-term effects on political governance.
References
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