Financial Globalization and Its Implications for Development

Ricardo Ffrench-Davis and Stephany Griffith-Jones ()
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Stephany Griffith-Jones: University of Sussex

Chapter 20 in The Palgrave Handbook of Development Economics, 2019, pp 697-726 from Springer

Abstract: Abstract Financial markets have, increasingly, taken the center of development objectives. This has been a major factor in the fast rise of financial activity, with finance taking the lead in economic globalization. There is increasing consensus that different aspects of a globalized economy have different effects on growth, investment and jobs. While there is agreement that trade has net positive effects on growth and jobs (though there are important issues about how trade liberalization is performed, degree of contribution to growth, and distribution of gains and losses), there is increasing evidence that, in contrast, capital account liberalization and unfettered capital flows, especially short-term and reversible ones, may have negative effects on growth, jobs and income distribution. Furthermore, the view emerged that excessive liberalization of the capital account, without regulation, may undermine rather than support trade growth. Economists concerned with maximizing growth and employment are increasingly concerned with the macroeconomic instability and harm that financial capital flows and ensuing currency crises pose as well as distortions, for example via instability of exchange rates, that deter growth and exports value-added. This chapter looks at the evolution of these ideas and the empirical evidence. It examines recent debates around capital account liberalization. The 2012 “institutional view” of the IMF is examined, which favors capital account regulations, and their contradiction with WTO and, especially bilateral trade deals. It calls for an aggiornamento of WTO and bilateral trade provisions. Focusing the analysis in emerging economies, this chapter examines why financial capital flows tend to be intrinsically pro-cyclical, overshooting in the boom and the bust. It discusses implications of structural heterogeneity among different economic agents which in combination with real macroeconomic instability, is regressive and depresses development, owing to negative effects on capital formation, quality of exports and jobs.

Keywords: Financial liberalization; Macro-instability; Capital formation; Exchange rate and tradables; Capital account management (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1007/978-3-030-14000-7_20

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