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Globalization of Financial markets by Mirzayev Kenan

I discuss the opportunities and challenges that financial globalization entail for developing countries. Financial globalization can come with crises and contagion. But financial globalization can also lead to large benefits, particularly to the development. Financial peoples thinking that net effect of financial globalization is likely positive with risk being more prevalent right after countries liberalize.

From a historical perspective, financial globalization is not a new phenomenon, but today’s depth and breadth are unprecedented. Capital flows have existed for a long time. In fact, according to some measures, the extent of capital mobility and capital flows a hundred years ago is comparable to todays. At that time, however, only few countries and sectors participated in financial globalization. Capital flows tended to follow migration and were generally directed towards supporting trade flows. For the most part, capital flows took the form of bonds and they were of a long-term nature. International investment was dominated by a small number of freestanding companies, and financial intermediation was concentrated on a few family groups. The international system was dominated by the gold standard, according to which gold backed national currencies.

The advent of the First World War represented the first blow to this wave of financial globalization, which was followed by a period of instability and crises ultimately leading to the Great Depression and the Second World War. After these events, governments reversed financial globalization imposing capital controls to regain monetary policy autonomy. Capital flows reached an all time low during the 1950s and 1960s. The international system was dominated by the Bretton Woods system of fixed but adjustable exchange rates, limited capital mobility, and autonomous monetary policies.

The potential benefits of financial...
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