Effects Of Financial Globalization On Developing Countries – Global inequality has fallen in recent decades, due to rising living standards in China and other fast-growing markets (e.g. Tarp and Nino-Zarazua 2016). However, domestic inequality has increased in many national economies over the same period. No single factor can account for rising inequality within the country, of course. But where the majority of analyzes focus on trade competition and technical innovation preferred to expertise (Cerra et al. 2021), another important factor appears to be financial globalization. Figure 1 shows the change in the Gini coefficient between 1970 and 2015, distinguishing between countries with relatively closed capital-account regimes and those that have liberalized. The change in inequality is greater in liberalizing countries. The difference is apparent for creditor and debtor countries, and for advanced economies and emerging market and developing economies (EMDEs) alike.

: The figure shows the median change in the average market Gini index during the 10-year periods before and after the liberalization of the capital account. Newly liberalized countries are identified based on significant changes in the Chinn-Ito index. Specifically, capital account liberalization occurs when the change in the Chinn-Ito index exceeds its average by at least two standard deviations and there is no change in liberalization in the following 10 years. Closed countries are those whose Chinn-Ito Index is below the lowest value of the index during the liberalization of the capital account in the entire period and those who have not liberalized their capital account in the next 10 years. Creditor (debtor) countries are those with positive (negative) average net foreign assets in the next 10 years. The sample included 173 countries where a total of 135 episodes were identified (of which data were available for 111 episodes).

Effects Of Financial Globalization On Developing Countries

Financial globalization may have other benefits, but to the extent that it promotes unequal benefits there are costs. Even better, the growth of inequality can be mitigated through complementary policies. Achieving this begins by identifying the channels through which financial globalization promotes inequality. In a recent study (Eichengreen et al. 2021), we identified several such pathways and recommended mitigation policies for each.

Positive And Negative Effects Of Financial Globalization On Developing And Emerging Economies

First, financial openness is positively associated with macroeconomic volatility that disproportionately affects the poor. These fluctuations can be limited by using countercyclical macroeconomic policies. In practice, this primarily means using fiscal policy to cushion against the headwinds caused by capital inflows. The COVID-19 crisis clearly illustrates the advantages for EMDEs to build fiscal space in advance, to strengthen the macroeconomy and support the poor.

Second, financial openness is positively associated with crisis incidence, other things being equal, where financial crises disproportionately harm the poor. Here capital flow management (CFM) policies (capital controls for short) can be deployed, as part of a wider policy package, to limit the risk of fluctuations and capital flow crises. However, CFM measures should not replace the necessary macroeconomic adjustment. In addition, distributional and social objectives can be clearly considered in the design of such policies, for example by allowing housing-related restrictions on non-resident investments where a housing affordability is an issue (IMF 2020).

In this regard, ensuring the prudent use of external funds by banks through sound micro- and macro-prudential policies can strengthen the stability of the banking sector, thereby improving stability- on finance, can slow down the change in the business cycle, and reduce the potential negative consequences of economic and financial distribution. volatility. Similarly, regulatory frameworks that promote competition in banking and finance facilitate access to credit, and ultimately allow the benefits of capital flows, i.e. more abundant credit, to be shared more widely. For example, the elimination of credit and interest rate controls and the strengthening of banking supervision (eg higher powers for the banking supervisory authority, stricter capital regulation, more monitoring of bank activities) can positively affect financial inclusion and reduce inequality (Delis et al. 2012) .

Third, the evidence suggests that the adverse distributional effects of financial liberalization are greater in EMDEs with relatively low levels of educational attainment. The lower the level of educational attainment, for example, the fewer workers benefit from the increase in the skill premium associated with inward foreign direct investment. In practice, higher educational attainment is associated with less inequality and more inward FDI (Figure 2).

Key Benefits Of Globalization

Fourth, there is an obvious role for redistributive policies and social safety nets. Inequality of disposable incomes increases with market income inequality after periods of capital account liberalization, suggesting that redistribution can reduce some adverse effects (Figure 3). Because financial globalization shifts the tax burden from more mobile factors (capital and highly skilled labor) to less mobile factors (low-skilled labor), active changes -or in tax and transfer policies are necessary to achieve the desired effect (Razin and Sadka 2019).

Figure 3 Capital account liberalization and gross and net income inequality: Changes in the Gini index after capital account liberalization, 1970-2015 (%)

Fifth, financial flows, such as remittances, that disproportionately benefit the poor should be encouraged. Remittance costs tend to be highest in small markets with little competition, and when remittances are mediated by commercial banks. Reducing transaction costs, increasing competition, and helping migrants compare providers’ costs will increase the net value that migrant families ultimately receive. Mobile technology also helps lower remittance costs (Cecchetti and Schoenholtz 2018, Schmitz and Endo 2011).

In conclusion, financial globalization has benefits but also a tendency to promote inequality. Its tendency to increase inequality can be limited by the policies that shape their composition and timing, and prevent any associated increase in aggregate volatility and increased incidence of crises. That tendency can be further limited or even reversed by taking ex ante measures to increase educational attainment so that more workers can benefit from foreign capital-skill complementarities, and by ex post measures that redistribute income to the poor.

Solution: The World Will Regret Its Retreat From Economic Globalization

Cerra, V, B Eichengreen, A El-Ganainy and M Schindler (2021), “How to Achieve Inclusive Growth”, Oxford University Press and IMF, forthcoming.

Delis, MD, I Hasan and P Kazakis (2012), “Bank regulations and income inequality: Empirical evidence”, Bank of Finland Research Discussion Papers, No. 18/2012, ISBN 978-952-462-805-1, Bank of Finland, Helsinki.

Eichengreen, B, B Csonto, A El-Ganainy and Z Koczan (2021), “Financial Globalization and Inequality: Capital Flows as a Two-Edged Sword”, IMF Working Paper WP/21/04 (January).

Lane, P R and G M Milesi-Ferretti (2018), “The External Wealth of Nations Reconsidered: International Financial Integration in the Aftermath of the Global Financial Crisis”,

How Sharp Will Be The Global Slowdown?

Razin, A and E Sadka (2019), “Welfare State, Inequality, and Globalization: Role of International-Capital-Flow Direction”, NBER Working Paper 25772. According to Bhagwati (2004), globalization is the integration of economies in nations, peoples, societies and their cultures around the world through the spread of technology, communication networks, trade and transportation. From an economic perspective, globalization aims to reduce and eliminate barriers between national borders to facilitate the free distribution of goods, services, labor and capital. Businessmen around the continents are engaged in electronic commerce, buying goods and services online and even making advertisements for their goods through the internet. The internet also allows easy communication between people separated by vast geographical distances thus defining globalization as the spread of new forms of non-territorial social activity (Scholte, 2000).

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

Most countries with low trade barriers in international markets have experienced high growth in their industries as well as increasing the value of their currencies. Due to the increasing flow of international money, businessmen can invest in their markets of choice thus providing their customers with different products and increasing their market share.

Journal Of Globalization And Development

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

Globalization has enabled countries to obtain funds that they use to improve their hospitals, waste disposal systems and provide clean water. This led to an increase in life expectancy because people did not contract water-borne diseases such as typhoid and cholera. Children under the age of five can access vaccines and receive free treatment for diseases such as pneumonia and malaria.

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

With fewer restrictions on people investing and traveling internationally, drug traffickers take advantage of the opportunity to introduce and sell hard drugs such as cocaine, heroin and bhang to trading partners. This brings negative effects to countries in their efforts to prevent the problem of drug addiction and other consequences that come from drug abuse.

Globalisation And Autocracy Are Locked Together. For How Much Longer?

Because of the large amount of travel involved in the trade event, people interact with other people from different countries to learn about their

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