THE UNIVERSITY OF ZAMBIA SCHOOL OF HUMANITIES AND SOCIAL SCIENCES DEPARTMENT OF DEVELOPMENT STUDIES NAME; FRANCIS MWAMBA COMP NO; 2017004821 COURSE; DEV 9550 LECTURER; MR MULONDA TASK; ASSIGNMENT 1 QUESTION; Globalisation is said to have proceeded at a faster pace in the financial sphere than in trade and production. With the use of practical examples, critically discuss the role of finance in the globalisation process The world has been visualized as being a global village, where the interactions of people in the world, has been of equivalent to the interaction in one village or locality. Barriers in forms of trade, production and finance which initially isolated countries have been removed. This is commonly referred to as Globalistion (Robertson R, 1992). Globalization has become established in theoretical discourse over the past three decades or so. Finance has been an important component of this process, so much so that the term financial globalization has assumed its own theoretical discourse and exegesis. This essay aims at critically discussing the role of finance in the globalisation process. Countries adjusting to globalization and opening up to international trade and payments requires finance. This was recognized as early as 1944, when the IMF was created at the Bretton Woods Conference, to provide balance of payments support to countries for maintaining an open trade system with convertible current accounts. This was in order to restore an orderly and expanding trading system, and to increase the volume of world output and trade through appropriate monetary and exchange rates policies. It was recognized that in that process, countries might often face problems of balance of payment deficits. If such deficits were temporary and reversible because they were caused by reversible, exogenous factors, these countries would need finance to tide over the period when such deficits were incurred (James H, 1994). Thus, just as multinational corporations play a key role in globalisation, large internationally active financial institutions increasingly dominate global village. As discussed by the International Monetary Fund (2000), changes at the global level and changes in both developed and developing countries explain the role of financial institutions as a force of globalization. At a global level, the gains in information technology have diminished the importance of geography, allowing international corporations to service several markets from one location. As discussed in Crockett (2000), they gave rise to global banks, financial intermediaries and international conglomerates that provide a mix of financial products and services in a broad range of markets and countries, blurring the distinctions between financial institutions and the activities and markets in which they engage. Intermediaries such as banks and other financial institutions, oversees and facilitates Globalistion through different transactions that takes place between a buyer (importer) and a seller (exporter). These financial institution step in to finance the business transaction between the importer and the exporter. The availability of trade finance has reduced payment risk and spawned huge growth in internationalization. This can be understood in the way the international trade has taken place, long ago many exporters were never sure whether, or when the importer would pay them for their goods. Over time, exporters tried to find ways to reduce the non-payment risk from importers. On the other hand, the importers were also worried about making prior payment since they had no guarantee of whether the seller would actually ship the goods. Trade finance has evolved to address all these risk by accelerating payments (carbajo M, 2019). From OEC data on Zambia, exports and imports rose from 892-888 million in 2000 to $9.7-8.5 billion in 2017 respectively on which finance has being a major contributor (OEC/Zambia). In developed countries, increased finance has led banks and nonbank financial firms to look for expanding their market shares into new businesses and markets, attracting customers from other countries, which allows them to diversify risk. Deregulation of finance has meant that banks can enter business that had been off limits (such as securities, insurance, and asset management). Nonbank financial institutions have been slowly competing with traditional banks, offering financial services traditionally provided exclusively by banks, adopting new financial risk calculation methods, and penetrating traditional banking activities in credit markets, such as syndication of loans and bridge loans via new structured financial instruments(ECLAC). For the case of developing countries, the liberalization of the regulatory systems has opened the door for international firms to participate in local markets. The privatization of public financial institutions has provided foreign banks an opportunity to enter local financial markets. Macroeconomic stabilization, a better business environment, and stronger fundamentals in emerging markets have ensured a more attractive climate for foreign investment (Clarke et al., 2007). Foreign Direct Investment (FDI) is particularly one source of finance for most countries. When an MNE establishes operations abroad, it can create a new entity or acquire all or part of an existing local company which includes re-investing the profits of, or granting loans to, its foreign subsidiary. Foreign Direct Investment growth often goes hand in hand with growth in worldwide interconnections, as recent Multinational Enterprise (MNE) strategies have shown, a growing share of foreign investment is earmarked for developing and exporting foreign production. Foreign direct investment is thus at the crossroads of financial globalisation and trade globalisation (Huwart, 2013). The evolution of global foreign direct investment is reflected in the surge by multinational enterprises, since the 1970s, to set up foreign operations, particularly in the 1990s-2000s. In figures global foreign direct investment in OECD countries has mushroomed in the last decade. In 2007, total inward and outward FDI flows in the OECD area were close to USD 3 500 billion, a historic record. Even more revealing of global economic integration is the fact that the share of foreign direct investment in capital formation has grown. In the early 2000s, OECD countries spent over 10% of their capital on FDI – up from a 4% average in previous decades. From 2005-08, the relative weight of foreign subsidiaries in industrial sector turnover grew in almost all OECD countries. However, this increased globalisation as the results of corporate financing varies according to the development level of the major world regions (OECD, 2010). Financial markets are emblematic of the more recent phase of globalisation. Take stocks and bonds. They’re the most directly linked to corporate activities, which relied on them heavily for financing from the 1970s onward after adoption of a range of rules promoting their use and trade. Take for example, the euro in. Together with parallel moves by the European Union (EU) to create a single market in financial services, the impact of monetary union has been to integrate money and credit markets across the member countries. The elimination of currency risk among the member countries has helped boost cross-border transactions. Tighter financial integration was most evident in advanced Europe, where the introduction of the euro helped boost cross-border transactions. Between 2001 and 2007, 23 percentage points of the increase in the ratio of advanced economies external liabilities to GDP was due to intra-euro area financial transactions and 14 percentage points to non-euro area countries (Lane and Milesi-Ferretti 2007, 2017) In parallel with this development, many countries have lifted barriers to international capital movements. According to the world trade organization secretariat report, since late 1991 Zambia has lifted exchange controls on its currency, the kwacha. This has enabled economic factors such as, households, companies, and governments to trade securities on all the major global markets. This combination of the growing weight of stock markets in economic activity and the deregulation of capital is at the root of today’s very advanced financial market globalisation (WTO, 1996). In conclusion, we are living in an era of financial globalisation. An era in which finance is placed at the very center of the globalisation process and in direct causal relationship with it. It being a driver, has led scholar(s) contrasting it with the passive role played by other actors such as trade, and production. Am not saying that this comparison is irrelevant, I too believe that finance has the potential to bring enormous globalisation benefits to those in both the developing and the developed world. This essay has clearly shown the extent in both words and figures how globalisation is or has proceeded at a faster pace in the financial sphere. REFERENCES Huwart, Jean-Yves and Loïc Verdier (2013), “A global or semi-global village? (1990s to today)”, in Economic. Globalisation: Origins and consequences, OECD Publishing, Paris. OECD (2010), indicators of economic globalisation. Lane and Milesi-Ferretti (2007), IFS, WDI, World Bank and Global Financial Data for financial sector data. James H. (1994): International Monetary Cooperation since Bretton Woods. J. Keith Horsefield (1969): The International Monetary Fund Volume: III (Documents). Jovanovic (1990) present theoretical models in which financial intermediaries arise to generate information on firms and sell it to investors. Thomas Larsson (2001): the race to the top, the real story of globalisation, Cato institute, United States. https://Oec.world/Zambia. Robertson, Roland (1992). Globalistion: social theory and global culture, sage, London. Economic commission for Latin America and the Caribbean; the impact of privatization on the banking sector in the Caribbean. Clarke, George R.G; Cull, Robert; Fuchs, Michael (2007): bank privatization in sub Saharan Africa. Policy research paper @ World Bank.
