Academic journal article The Journal of Social, Political, and Economic Studies

Financial Globalization and National Macroeconomic Policies: Managerial Challenges to the Nation-State

Academic journal article The Journal of Social, Political, and Economic Studies

Financial Globalization and National Macroeconomic Policies: Managerial Challenges to the Nation-State

Article excerpt

Examination of the interplay between global financial markets and natinal currency, budget and monetary policies, using recent examples, including Mexico's 1994 crisis, the British ERM episode, and the recent Asian contagion. This study finds that when 'policy misalimments' exists, that is when gots adopt monetary policies that has the unintended effect of undermining the soundnes of the economy and the financial system, markets act as a disciplinary mechanism, sanctioning policy mistakes.

Key Words: Globalization, national economic policy, financial crises, exchange control, devaluation.

I. Introduction

Globalization is commonly understood to mean a deepening "internationalization" and unterdependence among nations in the form of cross-border exchanges of goods, investments, people, money, messages and ideas. Another usage associates "globalization" with the liberalization of borders, as many countries reduce regulatory barriers to international trade, travel, financial transfers and communications. While the vocabulary of international relations can easily describe the trends in cross-border relations or "internationalization," the concept of "liberalization" is sufficiently precise to explain the opening of borders.

Yet these two conventional constructs tell us nothing new. Indeed, critics may be rightly asking why such a fuss is made about these issues.

Therefore, this article is informed by a more innovative construct. "Globalization" may be regarded as those transborder relations which extend across widely dispersed locations, transcending territorial borders.

In a similar vein, we define financial globalization as the emergence of a single, increasingly integrated and universal world financial markets operating 'transnationally', and therefore largely transcending state frontiers.2

The globalization of money and finance is perhaps the most significant expression of the transcendence of national territorial space.

As a result of rapid increases in telecommunication and computer-based information technologies and products, and the new instruments and risk management techniques they have made possible, a dramatic expansion in global financial flows within and across countries has emerged. As a consequence, an ever wider range of international firms are able to manage their financial and currency risk exposure more effectively, thus enabling them to concentrate on managing the economic risks associated with their primary business. Dramatic gains in communications and information technologies have enabled financial markets to develop and use complex financial instruments such as put and call options, interest rate swaps, `short positions', etc.

New technologies have made it possible to deploy complex financial instruments and techniques, and in the process have strengthened interdependence among markets and market participants, both within and across national boundaries. The recent financial turmoil in Hong Kong, South Korea, Taiwan, Thailand, Singapore, Malaysia and Indonesia, and the turmoil in the European exchange rate mechanism in 1992, confirm that in a world of global financial mobility, a disturbance in one market segment or one country is likely to be transmitted to other segments of the market and to reverberate with astonishing rapidity throughout the world economy. This contagion effect was almost unthinkable two decades ago.

Many of these global transnational financial flows are based on worldwide portfolio investing. However, in terms of global economic fundamentals, such flows of capital are part of the transworld economic architecture that supports the efficient international movements of goods and services. The solid profitability of these and other financial products lends support to the general proposition that the increasing effectiveness of financial markets helps facilitate the flow of trading and direct investment, and in the process, contributes to raising the overall standard of living around the globe. …

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