Globalization: North-South Perspectives

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In the end, what matters most is the actual degree of openness. However, the paper will also consider the relationship between de jure and de facto measures. A few salient features of global capital flows are relevant to the central themes of the paper. First, the volume of cross-border capital flows has risen substantially in the last decade. There has been not only a much greater volume of flows among industrial countries but also a surge in flows from industrial to developing countries.

Second, this surge in international capital flows to developing countries is the outcome of both "pull" and "push" factors.

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Pull factors arise from changes in policies and other aspects of opening up by developing countries. These include liberalization of capital accounts and domestic stock markets, and large-scale privatization programs. Push factors include business-cycle conditions and macroeconomic policy changes in industrial countries. From a longer-term perspective, this latter set of factors includes the rise in the importance of institutional investors in industrial countries and demographic changes for example, the relative aging of the population in industrial countries.

The importance of these factors suggests that notwithstanding temporary interruptions during crisis periods or global business-cycle downturns, the past twenty years have been characterized by secular pressures for rising global capital flows to the developing world. Another important feature of international capital flows is that the components of these flows differ markedly in terms of volatility.

In particular, bank borrowing and portfolio flows are substantially more volatile than foreign direct investment.

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Although accurate classification of capital flows is not easy, evidence suggests that the composition of capital flows can have a significant influence on a country's vulnerability to financial crises. This subsection of the paper will summarize the theoretical benefits of financial globalization for economic growth and then review the empirical evidence.

Financial globalization could, in principle, help to raise the growth rate in developing countries through a number of channels. Some of these directly affect the determinants of economic growth augmentation of domestic savings, reduction in the cost of capital, transfer of technology from advanced to developing countries, and development of domestic financial sectors.

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Indirect channels, which in some cases could be even more important than the direct ones, include increased production specialization owing to better risk management, and improvements in both macroeconomic policies and institutions induced by the competitive pressures or the "discipline effect" of globalization. How much of the advertised benefits for economic growth have actually materialized in the developing world? As documented in this paper, average per capita income for the group of more financially open developing economies grows at a more favorable rate than that of the group of less financially open economies.

Whether this actually reflects a causal relationship and whether this correlation is robust to controlling for other factors, however, remain unresolved questions. The literature on this subject, voluminous as it is, does not present conclusive evidence.

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A few papers find a positive effect of financial integration on growth. The majority, however, find either no effect or, at best, a mixed effect. Thus, an objective reading of the results of the vast research effort undertaken to date suggests that there is no strong, robust, and uniform support for the theoretical argument that financial globalization per se delivers a higher rate of economic growth.

Perhaps this is not surprising. As noted by several authors, most of the cross-country differences in per capita incomes stem not from differences in the capital-labor ratio but from differences in total factor productivity, which could be explained by "soft" factors such as governance and the rule of law. In this case, although embracing financial globalization may result in higher capital inflows, it is unlikely, by itself, to cause faster growth.

In addition, as is discussed more extensively later in this paper, some of the countries with capital account liberalization have experienced output collapses related to costly banking or currency crises. An alternative possibility, as noted earlier, is that financial globalization fosters better institutions and domestic policies but that these indirect channels can not be captured in standard regression frameworks.

In short, although financial globalization can, in theory, help to promote economic growth through various channels, there is as yet no robust empirical evidence that this causal relationship is quantitatively very important. This points to an interesting contrast between financial openness and trade openness, since an overwhelming majority of research papers have found that the latter has had a positive effect on economic growth. In theory, financial globalization can help developing countries to better manage output and consumption volatility.

Indeed, a variety of theories imply that the volatility of consumption relative to that of output should decrease as the degree of financial integration increases; the essence of global financial diversification is that a country is able to shift some of its income risk to world markets. Since most developing countries are rather specialized in their output and factor endowment structures, they can, in theory, obtain even bigger gains than developed countries through international consumption risk sharing—that is, by effectively selling off a stake in their domestic output in return for a stake in global output.

How much of the potential benefits, in terms of better management of consumption volatility, has actually been realized? This question is particularly relevant in terms of understanding whether, despite the output volatility experienced by developing countries that have undergone financial crises, financial integration has protected them from consumption volatility.

New research presented in this paper paints a troubling picture. Specifically, although the volatility of output growth has, on average, declined in the s relative to the three preceding decades, the volatility of consumption growth relative to that of income growth has, on average, increased for the emerging market economies in the s, which was precisely the period of a rapid increase in financial globalization.

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In other words, as is argued in more detail later in the paper, procyclical access to international capital markets appears to have had a perverse effect on the relative volatility of consumption for financially integrated developing economies. Interestingly, a more nuanced look at the data suggests the possible presence of a threshold effect. At low levels of financial integration, an increment in the level of financial integration is associated with an increase in the relative volatility of consumption.

Once the level of financial integration crosses a threshold, however, the association becomes negative. In other words, for countries that are sufficiently open financially, relative consumption volatility starts to decline.

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This finding is potentially consistent with the view that international financial integration can help to promote domestic financial sector development, which, in turn, can help to moderate domestic macroeconomic volatility. Thus far, however, these benefits of financial integration appear to have accrued primarily to industrial countries. Massey D. A global sense of place. Marxism Today For Space. London, Sage. McFarlane C.

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