Financial Globalization Advantages & Disadvantages

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Table of Contents

Definition of Globalisation
Advantages of Globalisation
Disadvantages of Globalisation
Advantages of financial globalisation
Disadvantages of Financial Globalisation
Reference List

Definition of Globalisation

According to Bhagwati (2004), globalization is the integration of countries’ economies, people, societies and their culture across the world through the spread of technology, networks of communication, trade and transportation. From an economic perspective, globalization refers to the reduction and elimination of hurdles between national frontiers to facilitate the free distribution of goods, services, labor and capital. Business people around the continents engage in electronic commerce, buy goods and services online and even make advertisements for their goods through the internet. The internet also allows instantaneous communication between people who are separated by vast geographical distances thus insinuating globalization as the spread of new forms of non-territorial social activity (Scholte, 2000).

Advantages of Globalisation

Globalization provides opportunities and challenges. Large profits from the big markets help countries to invest in development projects thus reducing poverty in many countries. Consequently, the introduction of bans, tariffs and quotas to the industries, poor road and communication networks and unattainable trade policies can hinder the country’s ability to benefit from the world markets. The advantages of globalization include:

Economic growth

Most countries that have fewer trade barriers with the international markets experience high growth in their industries as well as increasing the value of their currencies. Due to the increased flow of international money, business people can invest in their markets of choice thus providing their customers with a variety of products and increasing their market share.

Improved living standards

Due to growth of economies, countries are in a position to provide cheap imports that are accessible to many people and through competition, efficiency and productivity are increased. This in turn improves their standard of living and reduces poverty.

Improved health facilities

Globalisation has enabled countries to gain funds that they in turn use to improve their hospitals, waste disposal methods and provision of clean water. This has led to an increased life expectancy as people do not contract water borne diseases like typhoid and cholera. Children below the age of five can access immunisations and receive free treatment of diseases like pneumonia and malaria.

Networking

Due to increased flows of communication, individuals and corporations are in a position to share important information across the borders. This makes it effective as even the remote geographical areas can access the information, provided there are satellites or are connected to the internet.

Disadvantages of Globalisation

Drug trafficking

Due to less restriction of people to invest and travel internationally, drug traffickers take that opportunity to introduce and sell hard drugs like cocaine, heroine and bhang to the trading partners. This brings negative effects to these countries in their effort to curb the problem of drug addiction and other consequences that comes with drug abuse.

Cultural drain

Due to a lot of travelling that is involved in event of trading, people get to interact with other people from different countries thus learning their ways of doing things. This may involve how others dress, what they watch and what they eat. Due to exposure to these things, most people have become ignorant about their social, ethical and moral values thus losing their way of doing things.

Environmental degradation

The growth of technology has led to an increase in establishment of industries with less environmental regulations which involve in a lot of activities that result in pollution of air and water. Most of these companies dispose their waste in rivers and lakes causing them to dry and even change their direction.The logging industry has also increased cutting down of trees due high demand of logs and timber.This reduction of trees results in reduction of the amount of rainfall received in those areas as well as the increase of soil erosion as land is left bare.

Child labour

Globalisation leads to an increased demand for labour forcing countries that have labour shortages to exploit children by employing them in their industries. Nowadays, children trafficking have also become an issue as they are used in prostitution and pornography (Pavcnik, 2005).

Brain drain

There is increased flow of talent, skilled and unskilled labour from developing countries to the developed countries as a result of globalisation. The free movement of people across borders encourages them to look for better positions abroad thus leaving the developing countries with a shortage of experienced and high skilled workers.

Connection between globalization and finance

Lack of putting up of rules to regulate the banking industries and financial markets has rendered the government ineffective in controlling the markets for goods and services. This has led to poor payment of employees in the job market who are then unable to repay their borrowed loans with the high interest rates thus leaving in a world of debts. The current global expansion is strong and the market strain can help to set the financial adjustments. Eventually the common people are burdened to pay this high costs.

Impact of financial globalization

Financial globalisation is the growing international linkages through cross border monetary flows. That is entrepreneurs are allowed to freely invest their money in different countries of their choice which they feel that will give them high returns.

Advantages of financial globalisation

Promote growth in developing countries

Financial globalisation promotes economic growth rate in the developing countries through different ways like reducing the cost of capital. It also enhances increased productivity as a result of better risk management, transfer of technology from advanced countries to less advanced countries and improvement of domestic financial sectors.

The stock market liberalisation improves allocation of risks through sharing between foreign and domestic investors which in turn encourages firms to invest. The increase in capital flows liquidates the domestic stock market thereby reducing the equity risk premiums thus low rate in raising capital for investment.

Stimulation of the domestic financial sector development through increased foreign ownership of domestic banks facilitates the access to international financial markets and improves the regulatory and supervisory of the banking industries. Foreign banks introduce different financial instruments and techniques that foster technology which improves domestic markets.

Specialisation causes increased productivity, but without risk management it produces high output and consumption volatility. This increase in volatility may discourage countries from using specialized activities and thus lowering the saving and investment rates.

Reduce macroeconomic volatility

Financial globalization facilitates countries to successfully run their production and utilization precariousness through diversification of risks. As financial integration increases, the volatility of consumption should be reduced relative to the output. Countries can then be in a position to offload their income risks to the world market through the global financial diversification. Developing countries share risks through selling their goods and services to the global markets and thus generate great profits.

In an effort to moderate their economy at, large least developed countries have enhanced the banking industry and have boasted its financial markets thus reducing the rate of consumption. Financial incorporation helps the poor developing nations to augment their production base through focusing on comparative advantages thus making economies further susceptible to blows that are particular to industries (Razin &Rose, 1994).

Disadvantages of Financial Globalisation

Financial crisis

The governments, regulators and supervisors in the world markets are mandated to ensure that participants follow the stipulated rules. Due to risk prevalence and the greediness of the participants over the principles of economy, a financial crisis erupts in the world market.

Currency crisis

In many instances financial crisis results to currency crisis due to overextended domestic lending. Currency crisis occurs due to high indebtness of a country or a non favourable economic situation that raises the exports thus stimulating the aggregate domestic demand. In addition currency depreciation may cause people to speculate thus selling that currency. The central bank of such countries should have enough foreign reserves to buy the excess supply of home currencies otherwise it will lose value against foreign currencies.

Fiscal imbalances

Financial globalisation shows the reduced responsibility of banks and governments incompetence’s. Governments may have huge debts due to over borrowing thus face difficulties in paying them. They are then forced to obtain funds from the citizens through the issue of treasury bonds. This means that in making the payment they repay the sum borrowed with an addition interest. Persistence of these countries budgets deficit can raise the suspicion from foreign borrowers who in turn demand an increase in the interest rates. The prices of government bonds fall and the balance sheet of banking institution holding them deteriorates thus decelerates the net worth of the bank and reduces lending. In addition people may withdraw their deposits in fear of bankruptcy.

Financial laissez faire

The opening of financial markets encourages the banks to take risks by lending money as they can in turn generate large profits. The government and institutions like International Monetary Fund serves as a lender of last resort and thus stimulates these banks to undertake huge risks. People are therefore not afraid to take risks as they are assured that their finances are insured. Moreover the risk management field is not experienced and thus borrowers are not screened and monitored in prevention of defaults. This is a clear indication of lack of competence of managerial areas which hinders the opening up of free capital flow borders.

After the liberalisation of bank’s economy, the banks raise their lending’s thus increasing the credit risks associated with default borrower (Mishkin, 1999).The banks view creditors as households, firms and other banks and the interest rates for money are higher for households than for firms. Banks thus face excess liquidity due to capital flow into the country and become risk takers bearing in mind that the government will come to their rescue in case of any problem. Due to the asymmetric information problem, the economy faces a credit crunch as a result of reduced lending and even contract the economy because of failure of financial institutions.

Globalization Financial Crisis as Example from Disadvantages of Financial Globalization

Financial crisis occurs as a result of unregulated financial globalisation and the mismanagement of financial liberalisation processes. This happens when commercial banks increase the borrowings and exercises leverage so as to benefit from it through the issue of sub mortgages instead of prime mortgages which do not require down payment and evidence of permanent income. This issue brings crisis as investment banks assumes that prices of houses provided by borrowers as security will only go up. Unfortunately more borrowers default their payment making the prices of houses to go down thus the mortgagers incur great losses and can even get bankrupt.

Reference List

Bhagwati, J. (2004). In Defence of Globalization. Oxford: Oxford University Press.

Mishkin, F. S. (1999). Global financial instability: framework, events, issues. Journal of economic perspectives, 13(4), PP. 3-20.

Pavcnik, N. (2005). Child Labor in the Global Economy. Journal of Economic Perspectives, 19(1), PP. 199–220.

Razin, A. & Rose, A. (1994).Business cycle volatility and openness: An exploratory cross sectional analysis in capital mobility. The impact on consumption, investment and growth, PP. 48-76.

Scholte, J. A. (2000). Globalization: A Critical Introduction. New York: St. Martin’s.

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