The emergence of a global, market-based financial economy has brought considerable benefits to those middle-income countries at the forefront of economic reform and liberalization—the so-called emerging market economies. Thanks largely to the opening of the financial sector in these countries, investors worldwide can now better diversify their investment choices across domestic and international assets, increasing their expected rate of return. Businesses within these countries, meanwhile, are better able to finance promising ideas and fund their expansion plans. As a result, financial resources worldwide are invested more efficiently, boosting economic growth and living standards.
At the same time, however, the globalization of financial markets has proved to be a double-edged sword. Even in those countries where liberalization has been a tonic for economic growth, it has also raised the real risk of financial crisis. The most controversial aspects of financial liberalization are capital account liberalization and, within the capital account, the liberalization of portfolio flows. The dangers were brought into sharp focus during the East Asian financial crisis of the late 1990s: the failure of financial systems in that episode imposed high economic and social costs, such as high unemployment, increased migration, social conflict, and social instability—and not only in the countries directly affected. In the wake of this and other crises, we have seen an urgent debate about reform of the international financial architecture to reduce the chance of further financial instability. This seminar will talk about the different aspects of globalization of financial services and capital transactions, including foreign direct investment and portfolio capital flows.
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