FINANCIAL GLOBALISATION IN DEVELOPING COUNTRIES Macroeconomics

INTRODUCTION Financial Globalisation is the integration of a country’s local financial system with international financial markets and institutions. (Schmukler, 2004)

Who Does it Really Benefit? Both developing and developed country Schmukler(2004), outlines that there are increased participation by developing countries and that the net benefits are increasing.

Is it beneficial? Some empirical evidence refute the fact that it is. Many link capital market liberalisation to economic development/growth Kose et al (2006) outlines that these benefits are indirect and are only achieved given certain thresholds.

Developing Countries? According to the World Bank (2007), they are those countries that have gross incomes per capita of US$11,455 or less. Includes: Asian, African and Caribbean countries

Developing Countries Miskin (2006), argues that financial globalisation is an issue among these economies as a result of similar background. Colonies, small European population, laws imposed in favour Europeans.

FACTORS INFLUENCING THE ABILITY OF DEVELOPING COUNTRIES TO HARNESS THE BENEFITS OF FINANACIAL GLOBALISATION

Collateral and the Asymmetry of Information As a result of information asymmetry, the risk of moral hazard and adverse selection increases Collateral reduces these risks.

Developing Countries and Collateral High poverty levels and income inequality Not enough assets for collateral Even when owned, it is not legal When legally owned, value is reduced after legal proceedings

Legal Systems ‘Outdated’ and inefficient legal systems Restrictions on right to claim properties- hard to reduce moral hazard risk Inefficient bankruptcy proceedings Poor laws on disclosure for financial institutions

Repressive Incumbents and the Principal-Agent Problem Governments are not pushed by the profit motive and may allocate capital inefficiently. This is more possible with information asymmetry. There is normally no institution that promotes free flow of information.

Repressive Incumbents Large powerful firms stand to lose with globalisation They control the information flow They manipulate the system in their favour to discourage liberalisation and encourage barriers to information flow.

Extensiveness Capital market liberalisation must be extensive enough To encourage foreign investors To increase competition To encourage more information flow

Risk Management and Government Regulations It is important that banks and financial institutions have good risk management systems. Financial institutions must be well regularised and supervised

Quality of Management and the Workforce Without the requisite skills, larger market and more competitions will not be dealt with well Skills are necessary to fully yield the benefits