| Financial globalisation will make you stronger |
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| Written by Tom Clougherty | |
| Monday, 20 November 2006 | |
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Frederic Mishkin, a recently appointed governor of the Federal Reserve, has written a book called "The Next Great Globalization: how disadvantaged nations can harness their financial systems to get rich". This next globalisation, he says, will be financial in character - the flow of foreign money into stocks, bonds and banking in emerging economies. But as this week's Economist points out - "wasn’t cross-border finance the last, rather disappointing globalisation?" This opinion is based on the 2003 review of financial globalisation by four prominent economists at the IMF (Eswar Prasad, Ken Rogoff, Shang-Jin Wei and Ayhan Rose), who found "no robust proof that financial globalisation helped countries to grow more quickly". However, those same economists have since reappraised financial globalisation, and this time their findings are more positive. Financial globalisation has four main benefits. The first is a direct one. When capital is free to flow from rich countries (where it is abundant) to poor countries (where it is scarce), those poor countries can invest much more in their own economies - fostering growth and wealth creation - than they would otherwise be able set aside from their output. There are also indirect benefits, which Prasad and company believe may be far more important. Financial globalisation transfers both capital and financial expertise across borders, from developed countries to developing ones, and this brings about a deeper financial system, with better-run companies and a more disciplined macroeconomic policy. The problem with their original research was that in examining the impact of financial globalisation on national economies, they attempted to strain out factors like financial depth, institutional strength and macroeconomic policy. If these things are in fact the main benefits of financial globalisation then it’s no wonder the original research had such disappointing findings. According to Frederic Mishkin the moral of the story is a simple one: "Poorer countries must let go of the idea that financial infrastructure and wealth can be built up when the country remains closed off to the rest of the world." Globalisation offers a great opportunity to the developing world and sensible governments will seize it. |
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