The Global Financial Crisis, the Rationale of Globalization - Coursework Example

GLOBAL FINANCES Institution: Name: Date: Global Finances Introduction The growth of the International financial marketplaces towards the end of the 20th century was based on the sole initiative that resources have to to flow across the borders of nation states with little or no constraints and parameters. The free will for the movement of funds therefore turned out to be the new convention and disagreements occurred at all, they were presupposed in opposition to the administrative capitals and in favor of market places who in this case were the imaginary holders of control (Abdelal 2007). During this period, the International Monetary Fund (IMF) began a form of unofficial endorsement of liberalizing capital and the rules of the European Union (EU), and even those of “the Organization for Economic Cooperation and Development (OECD)”, obligated its members, some among the thirty or so wethiest nations to permit all cross-border streams of funds. By the 1980’s, global finance was erected, and upheld by prescribed organizational establishments (Abdelal 2007). But things were not always that way. Any transaction carried out by managers, investors and even banks in the 1990s such as trading in bonds and stocks and borrowing of fund in the form of foreign currency for instance had been unlawful in most nation states for many years earlier on and in some countries up to about two years before the 1990’s. Evading such constraints was possible but complicated and costly because the rules governing global finance that had been written in the 1940’s and 1950’s were confining in terms of plan and dogma (Obstfeld & Rogoff 1995). It was during that time that members of the international community in finance began to collectively voice their concerns about these issues and established a new set of beliefs on how to subvert the outcomes of short-term tentative flow of capital or “hot money” and the necessity for administrative nation state sovereignty from Global fiscal market places. The prevailing convention of the time was that of regulation and categorization of capital (Mody & Antu 2005). With time, as the rules were relaxed, and an era of freedom materialized which was enjoyed by managers, and investors as they engaged in all manners of financial transactions . Among these, foreign exchange which had been unheard of by the year 1945 was perhaps the most symbolic as a necessity for cross-border capital flow (Eswar & Rajan 2008). By the year 1973, the standard day by day income in distant exchange was fifteen billion dollars which was by the standards of those a figure unimaginable. By the year 1998, about 1.5 trillion dollars changed hands on a daily basis in the foreign exchange markets and by the year 2004, the sum had risen to 1.9 trillion dollars. The rationale of Globalization Lowering of barriers in the flow of capital, goods and labor set in motion the globalization process in finance and business in general (Gough 2002). The Globalization processes were brought about by the need to reduce barriers for the free movement of goods, capital and labor amongst all the countries of the world. Some countries have had their reservations about the processes and while many are for it, it is not without their own reservations either (Quinn 2003)Those that are for the globalization processes believe that lowering of trade barriers will boost growth and that growth is the fountain of wealth for everyone across the world. The idea behind this belief is that rich countries should embrace the idea of moving towards industries where they are likely to have an advantage such as those of technology, and let the developing countries to grow and export. Low wage levels in developing countries are believed to have been caused by low productivity in the industries of those countries. The belief held in globalization is that if industries in the third world countries become more productive, then the rates of wages will definitely rise. Japan and Singapore are for instance two countries that have enjoyed improved living standards and a rise in wages which are analogous with those of the countries in the west due to the success that they have had in the building of industries that are successful for the past 40 years or so (Rajan & Luigi 2003) But all has not been bliss when it comes to globalization processes for they have not come without their own price. All in all, globalization is here with us and it is affecting every business everywhere. When the underlying structure of the world changes, as it is doing today, companies and countries have to take become aware of them. The opportunities are enormous and the dangers as well. The accessibility of affordable capital within the global markets, the increase in cross-border mergers and acquisitions, reductions in labor bargaining power, the rise of imports, changes in the attitudes of people in the public domain, the opening up of huge markets such as India and China, demographic change, and the e-revolution are some of the changes that globalization has brought about (Stulz 2005). These changes are here to stay and businesses can only ignore them at their own peril. Those that ignore them or fail to understand the underlying reasons as to why they are taking place are either going out of business or getting acquired. In Europe for example, Siemens has reduced its divisions of operation from 15 to 5. Likewise, Thyssen Krupp (23 to 8). The Fiat’s Agnelli family has had to sell 20% of the firm to GM. Daimler Chrysler has purchased US Chrysler company. UK based Vodafone took over Germany’s Mannesmann in a bid that was cited as the most hostile in Germany ever (Gough 2002). The effects of globalization are being felt everywhere in the world today and more so in the finance sector. Theorists and policy makers have in the recent past tended to focus on a variety of issues that have led to the liberalization of capital in a bid to make clear the alterations which have occurred in the precedent times within the international financial system. Some of these issues include; the advancement of the idea that capital liberalization is just a sensible idea and nothing more, policies that are growth-oriented and a common exhortation that control of funds “does not work”, the end of organization extensive unchanging rates of exchange and aggressive financial re-standardization (Abdelal 2007). All these factors have an element of worth and to some extent they have contributed to the mobility of capital. But as Beth Simmons argues, they are just matching clarifications for the globalization of capital. All of them hold a constituent of dilemma; that of failing or not being able to give details on the essential alterations in the authenticity and the indicator content of control of funds (Simmons 2008). In this vain, they do not help in giving details as to the efforts that have been made to regulate the norm of capital mobility. The Global Financial Crisis Global finance as a subject is very broad and has many aspects such as currency, liberalization of financial markets, globalization and such other issues. The significant thing to appreciate is that Global finance constitutes many facets and in the middle of them all are the national economies which make up the global finance system and without them then there is no global finance. When these countries trade together and even lend and borrow each other, which expand opportunities for everyone has an opportunity to smooth their options and all this is good. But just as the existence of financial institutions make financial institutions panic, there is always the possibility of a possible international financial crisis so long as we have an international financial system. The current fiscal predicament has turned out to be a key global occurrence and is comparable to another one that occurred in 1997 to 1999. The current crisis started in the US mortgage market in the year 2007 and spread to the international fiscal and banking systems. In the year 2008, it was threatening to tear down the world system of banking and dragged the economy of the US into downturn. Towards the end of the year 2007, its effects had begun to be felt in the Euro-zone. The only difference with the 1997-1999 crises is that this one seems to have affected the emerging markets less. This crisis is far from over and yet it has already established the ways in which things can go wrong in an system of trade and industry with little or no regulation. Like the 1997-1999 crisis, the current predicament was unsurprising and the reality that it was never foretold and its rigorousness constantly underestimated is an indication that the inadequacy of ideological content in the mainstream economics. Some economists have argued that recessions are good for the world economy because they drive inefficient companies out of business and force the rest to cut on waste and better utilize resources (Sapir 2008). Conclusion The current crisis is not just a consequence of a mortgage collapse caused by bad regulations in the US and has poisoned the worldwide economy. It is also a construction of the conformist insurgency of the 1980’s and the 1990’s in countries such as the US and a number of European countries. It’s a catastrophe that has been contributed to by the neo-liberal policies and thinking and it spread into the global markets due to deregulation of the international monetary markets and the WTO-sponsored global free trade environment which allowed an untenable negotiation that emerged between Asian countries and the US as well. List of References Abdelal, R, 2007, Capital rules : the construction of global finance, Cambridge: Harvard University Press. Eswar, P., & Rajan, R, 2008, A Pragmatic Approach to Capital Account Liberalization, Journal of Economic perspectives 22 , 150-175. Gough, L, 2002, Global Finance. Oxford: Capstone Publishing. Obstfeld, O, & Rogoff, K, 1995, The Mirage of Fixed Exchange, Journal of Economic Perspectives 9 , 70-99. Mody, A, & Antu, A, 2005, Growimg up with capital flows, Journal of International Economics 65 , 240-266. Quinn, D, 2003, Capital Account Liberalization and Financial Globalization, International Journal of Finance and Economics, 180-202. Rajan, R, & Luigi, Z, 2003, The Great Reversals: The Politics of Financial Development in the 20th Century, Journal of Financial Economics 69 , 1-47. Sapir, J 2008, Global finance in crisis: A provisional account of the “subprime” crisis and how we got into it, real-world economics review, issue no, 46 , 1-20. Simmons, B, 2008, The global diffusion of markets and democracy, Cambridge: Cambridge University Press. Stulz, R, 2005, The Limits of Financial Globalization, Journal of Finance 60 , 1599-1649. Read More