Due to the Asian crisis capital was withdrawn en masse as traders sold the currencies of Russia, brazil and Argentina for safer currencies in Western Europe, and the dollar. Capital flight also devastated the mexican economy in 1994-5. From 1990 to 1993 91bn flowed into mexico, a fifth of all capital going to developing states (O'Brien williams, 2007). Higher interest rates in the usa, combined with a rebellion in Chiapas and the assassination of a presidential candidate, caused investors to doubt that Mexico could keep its peso fixed to the dollar. In December 1994 investors sold the peso in such large quantities that the dollar link was abandoned. Living standards were cut in half (O'Brien williams, 2007 the poor suffered, and the middle class faced skyrocketing interest rates and diminished savings due to the devaluation. Some claim that these disadvantages, and their specific effect on ldcs, are not given proper consideration by advanced states and their neo-liberal programme of reform.
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The remarkable development of the east Asian economies would not have been possible without huge inflows of capital, both in fdi and government borrowing to fund economic development strategies. The disadvantages of integration, while the advantages of greater financial integration mentioned above have helped many less-developed countries expand their industries and grow thesis their economies, their progress has been beset by financial crises, most notably in the 1990s. These crises were notable because they happened in very similar circumstances in completely different parts of the world, and spread across national boundaries and even to different regions. Contagion of financial crises is the most serious disadvantage of increased interdependence. This effect was most obviously witnessed in the late 1990s, where integration turned a currency crisis in Thailand into the Asian crisis, and turned the Asian crisis into a global recession. Thailand's devaluation made Thai exports very cheap, meaning other economies selling very similar exports to the same markets were forced to devalue in order to protect demand. The crash in Asia precipitated crashes in Russia, brazil and Argentina. As Jones (2000) explains, the contagious effects of Asia were threefold: psychological upon investors, the collapse of regional markets for southeast Asian exports, and upon other world markets as demand collapsed. This demonstrates a key point, that due to the nature of their economies, developing countries bear much more of the cost of crises because of capital flight. As crisis spreads, investors begin to question the wisdom of their investments in, and the reliability of, other emerging market economies.
The economies of East Asia, china, india and others have shown what can be achieved utilising international investment. Millions have been lifted out of poverty, economies transformed to industrial powers, and their national firms business compete at the global level. These developments have been enabled by the crucial advantage of interdependence to smaller economies, access to financial markets. The opening of financial markets, as Jeffrey frieden (1991) suggests, has strengthened labour-intensive industries, in which developing economies have a distinct advantage, through increased investment. The ease of transferring capital across national borders has increased the use of outsourcing and facilitated an explosion of fdi in the 1990s to areas like east Asia and Latin America, providing a huge boost to industries in the recipient countries. Access to financial markets also means that the governments of smaller economies can borrow to fund their development. Borrowing allows such economies to hold their currencies at preferred rates to suppress inflation and keep up debt repayments without inflicting a huge recession at home (Green, 2003).
With the ease of transferring financial resources to emerging markets and new host states, tncs have access to a mass global pool of cheap labour. This capital mobility means governments all over the world have to provide more attractive conditions for companies, from low capital gains tax to relaxed financial and labour presentation regulation (Frieden, 1991). Emerging economies, deemed to be high risk, must offer attractive interest rates to attract investment. There is constant competition between economies for foreign direct investment with which to finance development, meaning better and better business environments for investors. The key advantage for the capital-rich entities is that while gaining from the volatility and uncertainty of the system, they can also protect themselves against. Modern financial markets operate to allow risks to be packaged and redistributed so that actors can hedge against specific risks like exchange rate fluctuations (Held., 1999). High-risk investments yield high returns, but if these investments do not yield, investors are protected by the profits from investments elsewhere. Market innovations such as options, futures and swaps even help protect investors from future fluctuations. There are also huge advantages associated with the development of the global financial system for less-developed book countries (LDCs).
Currency trader george soros is alleged to have made 1bn from the devaluation of the British Sterling in 1992. Private companies are also said to have benefitted from the Asian financial crisis of 1997. Stiglitz (2002) argues that the intervention of the imf, a western-backed institution, ensured that Western firms were paid back their loans, while numerous national firms in Asia were left to collapse. Most of the 55bn the mexican government owed following its 1994 crisis was to private creditors (O'Brien williams, 2007). The nature of the financial system means that investors can pull money out of a currency virtually instantaneously, and move back in after a collapse making a handsome profit. This leads to self-fulfilling prophecies of currency speculation, discussed below, but the investors are protected from most of the risk involved, whereas the economies concerned can suffer decline for years. Secondly, with the opening of countries' capital markets, the opportunity for investment has increased substantially. Banks, hedge funds, and international manufacturing firms have all benefitted from having a much larger global market to do business.
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The neo-liberal programme holds as desirable the homogenisation of national policy across state boundaries. The freedom of capital is said to have enabled the european Union's resume single currency, tax harmonisation across national borders and the international convergence of macroeconomic policy (Frieden, 1991). This, the argument goes, is good for eradicating instability in the global financial system. The incentive for resources to evade without controls and regulations is lessened if national regulations are homogenised. The problem with this argument, however, is that capital mobility breeds a competitive environment between emerging economies for investment, which will be discussed below. Some international firms now command more resources than many states (O'Brien, 2005). For these firms, the development of the contemporary global financial system has brought two huge distinct advantages: higher returns on their investments, and the ability to diversify risk internationally.
Higher returns have been produced by two factors - the inherent volatility of the system, and the greater opportunity to exploit. Firstly, the inherent volatility and uncertainty of the financial system leads to higher returns for investors. Firms are able to trade on the volatile prices of currencies and commodities. With vast capital resources huge sums can be made very quickly with even small fluctuations on international capital markets. The best example of how capitalists gain from this volatility is the benefit that many manage to take from the system's crises.
Before the 1990s only data could be exchanged instantly between corporate offices and banks. The rise of the Internet meant opinions and rumours could also be traded, contributing to dangerous fluctuations but increasing interdependency. International banks and firms transfer huge amounts of money quickly and safely due to automatic clearing systems. In 1995 the usa's Clearing house Interbank payment System (chips) became the largest international clearing system processing some 200,000 transactions a day (Strange, 1998). Today chips, and its state-run competitor Fedwire, clear an average daily value.5tr (chips, 2010) and.5tr (Fedwire, 2009) respectively.
The root causes of the globalisation of finance are crucial to the understanding of its advantages and disadvantages, as it is evident that major states initiated the process because of the benefits it promised to them and to the rest of the world. It is also clear that innovation in both technology and markets has accelerated the process, making the benefits more pronounced for those involved, while also increasing the potential costs. The advantages of integration, the advantages of increased interdependence and the expansion of the global financial system are often championed by international institutions, politicians and international business leaders. At a fundamental level, the benefits cited are backed up by economic theory, that which is at the heart of the neo-liberal paradigm of international finance advocated by many of the world's economies. It holds that markets allocate resources in socially desirable ways. Flows from capital-abundant to capital-scarce countries, on the assumption that the marginal product of capital is higher in the latter than the former, increase welfare on both sides (Eichengreen mussa, 1998). International financial transactions allow economies experiencing business-cycle disturbances to smooth the time profile of consumption and investment. Free capital movements thus facilitate a more efficient global allocation of savings and resources to their most productive uses. An advantage of the expansion of the financial system advocated by the global financial institutions is the convergence of national policies.
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This theory was less sympathetic to the Bretton woods ideal that national policy autonomy had to be protected, and was content to let the markets impose an external discipline on governments pursuing 'not sound' policies (Helleiner, 2007). Financial liberalisation has been successfully institutionalised as a component of several multilateral agreements (Eichengreen, 2003). As early as 1976 the usa successfully lobbied for a change to the International Monetary fund's Articles of Agreement so that the new official goal of the fund was to preside over a regime that facilitated the free exchange of capital between countries (Watson, 2007). This regime, however, has been deepened and broadened to an unprecedented extent by technological and market innovations. The volatility of prices and exchange rates in the 1970s led to phenomenal growth in the derivatives market, particularly after the emergence of an 'over-the-counter' (OTC) derivatives market in the 1990s. In 1990 otc contracts totalled.45bn, which had risen to 18tr in 1995 and 24tr by 1996 (Strange, 1998). These new financial instruments involved an initial outlay only a fraction of the notional value of the contract, giving banks and other tncs the means at relatively low cost to hedge themselves against losses from unpredicted changes in exchange rates, interest rates, and commodities. Huge advances in computing and telecommunications listing over the last thirty years have been central to the huge volume and velocity of international financial flows (Held., 1999).
Helleiner also, however, neglects the exponential effect that technological and market innovations have had on the financial system, a factor considered key by others such as Cerny (1993) and Strange (1998). Political actions by leading states have enabled the globalisation of finance since the 1970s. By far the most significant was the abolition of capital controls, firstly by the usa and the uk, and then other major economies. As goodman and pauly (2000) suggest, liberalisation became and continues to be a competitive practice, and other countries had to react to prevent mobile domestic capital and financial business from migrating abroad. By the 1990s an almost fully liberal pattern of financial relations had emerged and today market actors experience freedom in cross-border activity unparalleled since the 1920s (Helleiner, 2007). International capital mobility is the most significant, and defining, characteristic of the global financial system. It has created many of the advantages and disadvantages associated with integration, and has also been instrumental in creating and sustaining the global dichotomy. The embracing of a new neo-liberal economic ideology trip among the major economic powers in the 1980s was key for the international financial system, which was given a large boost by plans to remove the state from the economy and allow the market mechanism to work.
interconnectedness to an unprecedented level. These origins are key to understanding why capital-rich entities are better equipped to reap the benefits of financial integration. The next two sections will put forward the principle advantages and disadvantages of this integration. The following section will provide an analysis of these, contending that the capital-poor gain less of the former, and are more exposed to the latter. The concluding section will summarise this argument and touch on its implications for the future of the global economy - while globalisation promises universal benefits, these cannot be realised under the current system, which precipitates a global dichotomy between the capital-rich and the capital-poor. Origins of the contemporary global financial system. As Benjamin Cohen (1996) suggests, little consensus exists concerning the causes of financial globalisation, and many scholars have attempted to apply their own structure to the study. The critical contribution to the debate comes from Eric Helleiner (1994 who persuasively argues that the globalisation of finance was advanced by the political decisions of major states.
The recent financial crisis of 2007 has again generated discussion at the normative and theoretical level about the contemporary global financial architecture, its widely perceived benefits, and its increasingly evident costs. The increasing significance of the global financial system over the past two decades has been mirrored by a surge of interest from the academic field of international political economy. Its effects are now so far-reaching that commentators have drawn connections between international financial integration and such diverse developments as social turbulence in East Asia, monetary presentation union in Europe, and failed development strategies in Latin America (Pauly, 2005). Most of this literature, however, tends to focus on specific aspects of financial globalisation, such as its implications for national economic policy or the power of transnational corporations (TNCs). This essay intends to broaden the debate, to demonstrate the apparent paradox of international financial integration - while it has made states, economies, firms and individuals more intimately interconnected than ever before, it is an inherently divergent process. It will argue that the international financial system is increasingly producing a global dichotomy. The benefits of financial integration, in the main, accrue to capital-rich states and the owners of capital, those free to move their resources around the world to seek the highest returns. Developing states, and those without control of capital resources, while receiving less of the advantages of integration, are more adversely affected by its disadvantages, such as contagion and capital flight. The first section will discuss the evolution of the contemporary global financial system, and how it came to be in its current form.
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Print, reference this, published: 23rd March, 2015, since the 1970s the 'globalisation of finance' has made the economic summary fortunes of states increasingly interdependent. Until relatively recently international finance was still considered principally to be an adjunct to trade (McGrew, 2007 a necessary mechanism that enabled the exchange of goods and services at the international level. Its phenomenal growth over the past few decades has shattered this perception. Today the global economy is characterised by the sheer volume and velocity of international financial transactions. Average daily turnover on traditional foreign exchange markets increased from 15bn in 1973 (Gilpin, 2001).2tr in April 2007 (bis, sep 2007). While the successes of financial liberalisation include lifting millions out of poverty in China, east Asia, and elsewhere, and improving the developing world's access to markets, its failures have also been stark. Various crises of the 1990s showed that problems in one country or even a particular industry can fast become global.