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COMP NO; 2017004821
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
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.
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
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.