When Globalization Goes Wrong:
The Dynamics of Financial Crises
When emerging market countries open up their markets in an effort to globalize, they have high hopes that globalization will stimulate economic growth and eventually make them rich. Instead of leading to high economic growth and reduced poverty, however, globalization has often led to great depressions, with sharp increases in poverty and social unrest.1 What has gone wrong?
In this chapter we see how financial globalization, if improperly managed, can lead to the collapse of a nation's financial system and economy. These crises are particularly disastrous for the poor in emerging market countries because the safety nets that provide assistance to those who lose their jobs (such as unemployment insurance) are much weaker.2 In addition, these crises increase income inequality, because the rich are far better able than the poor to take advantage of the financial opportunities that arise during the crisis.3
To help us understand how financial globalization gone wrong can lead to such devastation, we discuss a framework that can be used to analyze and understand the dynamics of financial crises, which have become more common in recent years.4 In Part Two, we use this framework to analyze crises that have occurred in Mexico, South Korea, and Argentina. In Part Three, we use the framework to analyze how globalization can bring prosperity, stability, and wealth to emerging market countries that understand it and that put in place the necessary institutional reforms when liberalizing their financial systems, so that they can manage globalization successfully.