Globalisation and the role of effective internal institutions Fariborz Moshirian JEM044 – International Finance Josef Kurka Jan Šíla Jiří Čermák Maxime Vaissié

Abstract  Empirical research has demonstrated that a sound financial system drives economic growth  Factors limiting stronger economic growth and financial globalisation are related to deficiencies of the current global system  Some studies have argued for the significance of high quality national institutions as a way of creating the right environment for sustained economic growth and integration into the global markets  A number of financial barriers limiting financial globalisation have in essence international regional and national components  Without a globally coordinated strategy and framework to have parallel reforms at those three levels the limits to financial globalisation may remain in the future

Structure I. I ntroduction II. Home bias, the EU integration and the process of global integration III. Beyond national reforms and regional integration: Global public goods IV. The role of international institutions in the 21st century V. The united states federal system and the process of global integration VI. Conclusion

Introduction  A large number of countries have emerged and at the same time, the process of globalisation has accelerated  Financial deregulation has led to the opening of developing countries into the global economy  Emergence of the EU as a major economic and financial block  APEC and ASEAN in the Asia Pacific region are also making good progress in the process of regional integration  Prasad et al (2003): despite national reforms and countries participation in the process of globalisation, some countries have experienced more volatility in their income and consumption

 Stulz (2005): national institutions are the key factor to contribute to the process of financial globalisation  « twin agency problems » : rulers of sovereign states and corporate insiders pursue their own interests at the expense of outside investors  Limits economic growth financial development  The paper argues that a number of financial barriers are limiting financial globalisation  Those barriers have three levels: international regional and national components  Hence without a coordinated strategy to have parallel reforms the limits to financial globalisation may remain in the future

II. Home bias, the EU integration and the process of global integration  Since Uruguay round of negotiations (Date????) : barriers to international investment and finance have declined  Yet most emerging countries are not attracting as much capital and foreign investment as they would like to have.  Neoclassical theory: in the absence of explicit barriers capital should flow from rich to poor countries where capital productivity is much higher  However in reality borders amongst nations still exist and prevent capital to flow  Reason for less optimal flows of capital to developing countries: quality of national instituions, human capital, patterns of savings and investment, home bias

 Will these national actions be only be addressed by national action or are there also international factors that should be considered ?  Consider the EU and its financial integration as an example of how some barriers could be diminished.  Key achievement of the EU: elimination of exchange rate risk and a commitment to currency conversion  The emergence of a single currency has ensured deeper financial integration amongst some of the European countries  European financial integration has enabled reduction of home bias  European investors have a strong preference for holing « euro area » assets

 How could we accelerate the process of regional integration in the Asia Pacific region and other parts of the world ?  1996/1997 Asian currency crisis a number of financial analysts called for a single Asian Currency.  Yet Asian countries had to accept a number of national reforms  The influence of national can influence the degree of speed at which national institutional reform can take place.  De Santis and Gerrard (2006): the process of regional integration tends to accelerate the process of national reforms  International Monetary Fund (2006): The institutional reforms in Eastern and Central European countries have been the most successful process of national institutoinal reform in the world

III. Global public goods and international institutions

Reforms of national institutions  Countries (except EU) need reforms of national institutions to experience positive effects of globalization  Why do not they do it?  Factors limiting economic growth and financial globalization caused by global system disparities

Global public goods  National public goods  Health, education, etc.  Promoted by national institutions  Global public goods  Global financial stability, eradication of poverty  International institutions must be responsible for them  Their absence might be the reason of first globalization wave failure  Are they present nowadays?

Current international institutions

IV. Role of international institutions  Too much weight put on proper functioning of national institutions  2 main problems  National institution reforms are influenced by financial integration  Regional or global institutions could remove national factors limiting financial globalization  EU is well integrated because it has specialized European institutions  ECB  Are current international institutions sufficient for spreading global public goods?

 NO  UN, WTO, World Bank or IMF were established to deal with numerous issues after WW II  Institutions must be more specialized to promote financial globalization  International institutions could be reformed the same way as national institutions  Home bias and accumulation of reserves in emerging countries  Chance to create global investment fund to reallocate resources  To ensure sufficient amount of money for developing countries in second globalization wave