What is Financial Globalization? The liberalization of trade in financial assets. It is the flow of capital and corporate investments between various countries. World allocation of money leading to exchange of services and goods.
Financial Crisis Stage 1: Severe fiscal imbalances Stage 2: Run up to the currency crisis Stage 3: Currency crisis Final stage: currency crisis triggers a full-fledged financial crisis
The big question is: Then why the financial globalization has failed in the major parts of the globe?
Financial Globalization Nidhi Joshi- the ladder to speculation and ruin
1st step-First mover advantages Asymmetric trade and investment Exploitation on customers by means of increasing profits Also increases competition among the domestic service providers
2nd step-Expropriation, unfair prices Ruins the common man Political risk involved with investment The prices set by the multinational companies is not set looking at the development index of the country but just from profit-making point of view
3rd step-Economic and political interests of investor countries Disproportionate shock on the local economy if the foreign investor withdraw his money Debt and exploitation Corrupts the political system of the country
4th-Undervaluation of currency of poor countries Mismatch between the national policy and the economy of the domestic country Slow growth in the development of the country Banking panics or Recession Cheaper exports
Mexico Crisis, 1988 Happened due to 1970s increase in petroleum prices Lax banking and corrupt practices Failure in maintaining fixed exchange rate Devaluation was not handled correctly Mexico lost its image in terms of exporting its crude oil
Indonesian crisis, 1997 Occurred due to improper free-floating exchange rate arrangement Falling of the rupiah in international market
Argentina crisis, Unable to pay the debt of loan in 1983 due to tumbling economy Rise in inflation Unemployment Foreign companies moves out Problem in debt restructuring
Thailand crisis, 1997 Failure to devalue baht Bankruptcy law was enforced Problem with devaluation Its international trade became worse
Malaysian crisis, 1997 Due to the devaluation of Thai baht, Malaysian ringgit was ‘attacked’ by speculators Downgrades on the stock and currency markets The ringgit fall to almost 50% The exit of new plans for its development The first recession in the country Unemployment
Japanese crisis As foreign companies entered the market, the value and the price of the local goods fall This resulted in to low consumption rate Estate bubble The prices of housing in Japan are still high
Financial Globalization AakashGoswami – Conclusion and Recommendations
Financial globalization ‘dangerous’ success- Bubble-effect Foreign Competition and thus rivalry Brain drains The shift of outsourcing The investor on his wishes withdraws and then redeploys Chances are given more to foreign companies. What about the domestic talent?
And the success is still rising… What about the national identification? Shifting production to low-wage economies and thus we jump into the ‘race to bottom’ Due to language barriers, time also increases in solving an issue Fear of debt
Recommendations Looking at Argentina’s example, need of developing strong policies Putting a cap on financial globalization Not giving all powers to the international investor The living of middle class and poor class should be improved Keep view on inflation and not relate it with other countries.