15 грудня 2009 FINANCIAL GLOBALIZATION Oleksandr I. Rogach. Стаття подається в авторській редакції мовою оригіналу

FINANCIAL GLOBALIZATION
Oleksandr I. Rogach.

Financial globalization is one of the modern challenges for many countries of the world. The article characterizes the main causes of financial globalization: internationalization of capital and production, information innovations, financial markets liberalization. Special attention is paid to analysis of global financial flows and interdependence of world financial centers.

Global transformation of various aspects of human society life is the most important feature of global development. Global community more and more clearly becomes a functionally interrelated integral system, which experiences one of the deepest transformation period in its history.
Gradually new approaches to global development emerge, where “growth impetuses” are not transmitted within vertically hierarchical structures, but proceed from a number of poles, connected by a complex system of horizontally equal relations with surrounding countries and between themselves. New common values (human rights, environmental safety, economic stability etc.) and interests forming global goals of world community activity are being formed.
New situation in the world at the end of the ХХ century provides nations with wide opportunities for cooperation and engagement in using achievements of global civilization. At the same time due to global transformation of world economy countries face new complex problems of adaptation to dynamic process of social and economic modernization.
Globalization of the world economy, deep structural changes that take place within it under scientific and technological revolution and much increased activity of multinational corporations requires that all countries not only mobilize all their resources and opportunities to the utmost, but also maximally use advantages of international division of labor, refuse from autarchic development, and become integrated into global economy.
Some countries become integrated into global economy faster than others. Such countries have achieved significant success in accelerating economic growth and lowering poverty. According to the Annual Report of the International Monetary Fund for 2000 “Globalization in its economic context means growing integration of economies of the world, especially regarding trade and financial flows. This concept also includes flows of people (manpower) and knowledge (technology) through national borders”(1).
The term of globalization was disseminated in the 1980s, it mirrors technological innovations that considerably intensified international transactions – trade and financial flows.
Global markets make new opportunities for growth of business efficiency. They provide access to huge resources of capital, technology, more cheap imports and bigger markets for export. But globalization does not guarantee than benefits from growing business efficiency will be evenly distributed between everibody. This clarifies existence of various approaches to evaluation of this phenomenon. One opinion about globalization considers it to be the key phenomenon of future development of the world. Another point of view is characterized by negative attitude towards globalization and accusing it of growing inequality inside and between countries, menace to employment and living standards. A number of financial crises in 1990s (Mexico, Thailand, Indonesia, Russia, Brazil) gave ground to some researchers to assert that those financial disturbances had been direct and inevitable result of globalization. Indeed, financial crises in those countries would not have happened if they had been isolated from global capital markets. At the same time it is obvious that the majority of those countries would have never experienced substantial growth rates if they had not had financial inflows from those global markets.
 Countries interdependence becomes one of the most significant features of the globalization process of world economy. New forms and directions of links between countries develop under deep transformation of world economy affected by scientific and technological revolution. Such interdependence more and more determine coordination of world community activity in settling not only topical political, ecological, or economic issues, but also other problems dealing with global character of common human values and rights.
Globalization of world economy accelerated by growth of competition, influence of scientific and technological revolution, economic policy liberalization, and other factors entails relative de-emphasis of countries as the main element of economic activity (2).
Under dynamic transnationalization, emergence of global firms and industries of global character new conditions determine necessity than forming multiindustrial complexes even in the biggest countries should orient to international division of labor at the very beginning. By changing character of economic growth and directions of comparative advantage development globalization causes that borders bounding area of specific industry development do not go within separate countries, but more and more often join different countries.
Thus, competitiveness of country’s economy more and more is determined by the level of its engagement in globally functioning complexes, which are formed much on the basis of  intracompany division of labor in multinational companies and their active trans-border operations.  Transition of multinational companies to creation of unified systems of integrated production means increase of interdependence between countries, emergence of their new forms and directions (3).
One of the challenges of the modern world economy comes from so called financial globalization.  Huge financial resources of multinational companies and multinational banks, trans-border financial transactions  of these entities never yet seen in terms of  intensity, emergence of  new mechanisms and instruments of international financial transactions, and formation  of global financial market, where redistribution of immense financial resources takes place – all these features of financial globalizations create new situation in the world economy.
On one hand, financial globalization provides new opportunities for countries in geting necessary money and capital resources, and for companies in earning additional profits from efficient investment of uncommitted resources. On the other hand, due to these processes there is the risk of global financial instability growth, and thus significant losses for all entities operating in the global financial environment.
A good example of the latter were the events at the global stock market after September 11, 2001 in New-York. The terrorist attack  paralyzed the main financial center of the U.S. Already in several hours after the  tragedy in the U.S. quotations at European financial markets plummeted. The British stock exchange index  FTSE-100 declined by 4.03% already in 1.5 hours after the events in New-York, and by 5.07% at the end of the trade session. German stock exchange index DAX declined by 11.41%, and French   САС decreases by 7.39% to the record level since 1999. The terrorist attacks literally shook financial markets of Latin America (stock exchange index in Mexico fell by 5.6%, and the one of Argentina – by 5.2%) and Asia. During the first trading week at the stock market of the U.S. (September 17-24, 2001) after the four-day interruption due to the terrorist attacks Dow Jones index slumped 1369.7 points, or by 14.26% (4). It has become one of the biggest drops of DJІA since the 1st World War, when the basic principles of formation and calculation of the index were determined (in 1933 at the time of the Great Depression Dow Jones index declined by 15.5% during a week, and in 1944 after the news that the French army had been defeated by the Hitler's army the index fell by 14.2% during one day).
Global markets of commodities, services, technology and capital, information and finance mean mobility of factors of production, which is provided, first of all, through the channels within multinational companies (MNC). And this evidences one of the significant new features of transforming global economic environment – significant growth of share of economic activity, potentially freer in its allocation, and more sensitive, than before (in terms of location) to changes in prices and productivity of factors of production.
Such mobility of more and more number of industries also characterizes new conditions of economic growth in recipient countries. Relatively more facility of organizing production by MNC in any part of the world not only provides them with additional opportunities for accelerating growth, but also prepares a test for the recipient countries, e.g. in case of “planned” disinvestments of multinational companies, which leave certain countries because of disappearance of advantage of location.
The process of business and financial globalization is characterized by significant increase in the level of world economy internationalization, mutual entwinement and penetration of its components, intensification, exchange of goods, capital, knowledge, people, which entails universalization of economic life.
At the same time we must note that internationalization of economic life has become one of the most important factors of formation of global financial environment.
Intensification of economic links between countries, national companies, and activization of international cooperation of multinational companies required creation of a new financial environment. It caused, firstly, changes, qualitative transformation in international currency and credit relations; secondly, entwinement and supplementation of national loan capital markets; thirdly, integration and globalization of stock markets; fourthly, enormous growth rate of international banking transactions, creation of worldwide net of multinational bank branches.
Wide dissemination of achievements of scientific and technological revolution became another factor of globalization of the world finance. Computerization of financial sector, blistering progress in telecommunications caused accelerated growth of the global financial system. Spread of new technologies entailed a real “banking revolution”. It enabled to raise quality of processing financial information, provide enormous speed of international transactions and movement of resources between financial market segments. Technological improvements in the field of electronic communication lowered costs of international transactions. Electronic payment displaced cheques as the main instrument of payment.
Microelectronics-based information revolution caused transformation of a wide range of banking services, it enabled efficient introduction of new financial instruments and provided transnational character of banking activity. It made opportunities for enormous increase in volume of international financial transactions and accelerated trans-border capital flows.
Liberalization of international currency and credit relations and financial markets became the third factor of globalization of the modern financial environment. In recent decades squint towards financial deregulation emerged in countries different by the level of development. It refers to industrially developed  countries with market economy (first of all the U.S., Japan, and the U.K.), developing countries (i.e. new industrial countries of Asia or Latin America), transitional countries (i.e. Baltic states or countries of Eastern Europe).
Financial competition between countries strengthens liberalization trend. This process, firstly, covers more and more countries, which reconsider their regimes of international economic relations system, refuse from protectionism and austere measures of regulating links in global economy. Secondly it covers more and more complex spheres of economic relations (ranging from markets of goods to services, capital, and stock markets). An evidence of this is the WTO country-members signing the treaty on financial services liberalization and gradual decrease of barriers at loan capital markets since 1999.
During the last decade governments of many industrially developed countries much decreased their intervention in transactions at domestic financial markets. E.g. in the U.K. they relaxed controls over the capital market significantly, and carried out major reform of stock market. In Japan the government took serious steps towards liberalization of foreign exchange market and domestic financial market (5).
Capital market deregulation enabled owners of financial assets transfer them quickly from one country to another and, thus, act in global financial environment.
Growing integration of national money and capital market became the fourth factor that considerably accelerated the process of globalization. More and more fast pace of such integration, which in turn was caused by the processes of internationalization, information revolution, and liberalization, gradually lead to a new quality – emergence of the global financial architecture. Progressive entwinement, interconnections between national financial markets, lowering barriers between domestic and international financial markets enabled huge resources of money and capital to flow freely between different segments of global financial system. As a result, the volume of trans-border financial transactions has run up to a never yet seen scale.
The entire financial architecture evolves under the influence of financial markets integration and gradual formation of general conditions of their operation. Financial globalization ruins isolation of national markets and forms complex interconnections between different segments of unitary global financial system.
First evidences of global market emerged already in 1950-1960s when the Eurocurrency market was being created. In 1970-1980s growth of international capital flows and integration of national capital markets and the Eurocurrency market much increased. Finally, in 1990s these trends ran up to huge scale. Volume of trade at the Eurocurrency market exceeded 2 trillion dollars. Flows of bond and bank loans, intensive direct and portfolio investment between countries turned local security and loan capital markets into global. Due to such international financial markets temporary surplus funds are redistributed between countries and sectors of global economy in the most efficient and fast way (6).
Despite such fast, blistering changes, which evidence amalgamation of “onshore” (national) and “offshore” (Eurocurrency) capital markets, the process of globalization of the world financial system is far from its completion yet. National money and capital markets still are different from each other. Since countries of the world have their own currencies, financial integration is not complete. International capital market is still segmented by different national currency systems, that’s why there are differences in interest rates between countries. Though institutional barriers for international capital flows are decreasing considerably, currency risks of transferring financial assets between local markets still exist, and thus, national interest rates differ.
Information revolution and new financial technologies provide easy access to international capital markets for a wide range of investors. But international diversification of assets by investors of leading market economy countries is deepening relatively slowly. E.g. most security holdings of investors in the U.S., Japan, the U.K., and Germany are in a form of local securities. It also refers to the biggest pension and mutual funds.
We must also note that financial markets of transitional and developing countries are relatively less integrated in the global financial architecture, than financial markets of developed countries. Liberalization of controls limiting international capital flows and deregulation of security markets in those countries are still under way. It also evidences intermediated character of modern stage of global financial system formation. At the same time, we must note that events of recent years distinctly indicate the process of growing globalization in financial sphere. Obviously this trend will determine one of the main features of the global economy in the 21st century.
Successful operation of the currency union of the EU countries gives a mighty impetus for further globalization of finance.  Introduction of single currency euro, creation of the supranational European Central Bank, abolition of all restrictions of free movement of capital within the European Union, and between the European Union and third countries, single monetary policy of country-members of the EU – all these contribute to new dynamization of international currency, credit, stock markets, and formation of super-segment of global financial architecture on the European continent.
Formation of global financial architecture is accompanied by rushing growth of global financial flows, sharp spurt in capital flows between countries, enormous growth of international credit and stock markets (7).
During the last decade volume of transactions at all segments of global financial market increased dramatically. Total volume of international bonds exceeded 2 trillion dollars already in the middle 1990s, and volume of international bank loans – 4 trillion dollars. During the last 20 years international loans increased twentyfold. Daly volume of trade at the global exchange market ran up to 1.5 trillion dollars in late 1990s, which is two times more than foreign reserves of all countries of the world. By comparison average global volume of export of goods and services was only 25 billion dollars at that time (or 6.6 trillion dollar per year). Eurocurrency market increases fourfold in 1980-1990s. Volume of Eurocurrency deposits is approaching 10 trillion dollars.
Share of stocks (mostly of multinational corporations) issued at the global level is growing constantly. Only in the second part of the last decade volume of such transactions increased twofold. During 1970-2000 flows of bonds and stocks increased 54 times in the U.S., 55 times in Japan, and 60 times in Germany. At that time global market capitalization ran up to 20 trillion dollars (8).
New instruments developed by multinational banks start to circulate internationally. Total value of financial derivatives and other new financial instruments was estimated to be 360 trillion dollars at the end of the 20s century, i.e. it was more than value of the entire global economy. It still more increased complexity and instability of modern global financial system. At the global financial market multinational banks accumulate huge volume of capital for investment by their clients. During the last years only by means of Eurobond and stock floatation at the supranational level 500 billion dollars are accumulated.
Globalization significantly intensified flows of foreign direct investments. Annual export of capital has risen steeply since middle 1980s. Global economic recession interrupted “investment boom” only for a short period of time, but in 1993 it came up with a bang.  Enlargement of global net of multinational corporations on the basis of new foreign direct investment entailed considerable international financial flows of dividends, royalty, intracompany loans and movement of temporarily surplus funds into tax heavens and offshore centers of multinational business (9).
Another consequence of globalization is that during the last 20 years a new global net of financial centers emerged. It includes the leading financial centers – New York, London, Tokyo, Zurich, and other financial centers (Frankfurt, Amsterdam, Paris, Hong Kong).
Conditions of formation of such centers have changed somewhat. If earlier the necessary attributes of such centers were highly developed banking system, and big stock exchanges, recently sufficient conditions for emergence of some new financial centers (Singapore, Bahrain, Cyprus, Panama, Bahamas etc.) were liberal financial law, absence of income taxes, simplified registration procedure for representative offices and branches of foreign banks, and doing exchange business. Interdependence, mutual complementarity and increasing integration became qualitatively new feature of this net.
Big institutional investors (pension funds, insurance and investment companies, mutual funds), besides multinational companies, multinational banks, and governments of countries, became more and more evident players in the global financial environment. If at the beginning of 1980s number of global and international funds in the world was several dozens, at the close of the century – more than 700. Total volume of assets accumulated by big institutional investors ran up to 20 trillion dollars.
Globalization of world economy transforms environment for a national state. This process raises many topical questions on forms and methods of governmental interventions in international economic relations. Ability of particular countries to control powerful international financial flows or limit some trans-border financial transactions more and more decreases, faces strong resistance from multinational companies and multinational banks. The effect of these players and also international financial organizations on economic policy of particular countries is increasing dramatically.
Globalization of economy causes many difficult problems and contradictions. Conflict between the national and the global is one of the motive powers of transformation of modern global economy. “Financial revolution” of the last decade significantly increased the level of interconnections between national economies. At the same time, it much increased financial flows of short-term, quickly changing, speculative resources, which turns modern finance to a very unstable segment of modern global economy. Huge scale, extreme volatility and speculative nature of trans-border financial flows make governments of countries very vulnerable in case of fast reversals of such flows. Global “chain reaction” of contagion of financial and currency crises (as the events of 1997-1999 indicate) is one of the good examples, which evidences dangerous “challenges” of this process for stable development of national states.
All this plus unequal distribution of benefits of globalization between particular countries entails relevant resistance from national states. They try to protect their own interests, provide financial and economic security, retain levers of regulation of economy, and protect welfare of their citizens in a new turbulently changing environment. Governments of many countries understand that they may attain their goals most effectively by coordination of their policies and combining efforts.
That’s why at the modern stage the processes of regionalization, in particular regional economic integration, develop along with globalization and in a complex interdependence with it. Such processes actively gather momentum in Western Europe (EU) and North America (NAFTA). They are apparent  (though much more slowly) in Asia (Asia-Pacific Economic Cooperation), Latin America and Africa.
Countries of the European Union not only intensify formation of economic and currency union, but also plan to significantly extend this group in the near future by means of accession of new members. During the last decade there were significant steps towards coordination of trade, currency, and investment policies within North American Free Trade Association.
Thus, globalization of economic environment raises the question about the relevant “global” coordination of countries in financial and economic sphere, about extremely crucial role of international financial organization (IMF, IBRD etc.) in regulation of currency and financial problems and providing predicted (controllable) evolution of modern currency and financial system.

Література

1. IMF. Annual Report 2000. N.Y., 2000, p.36.
2. Рогач О. Транснаціональні корпорації та економічне зростання. Київ, Видавництво Київського університету, 1997, розд. 2.
3. Рогач О., Шнирков О. Транснаціоналізація світового господарства та перехідні економіки. Київ, Видавництво Київського університету. 1999, розд.2.
4. The Financial Times, 18. 11. 2001.
5. Максимо В.Энг, Френсис А. Лис, Лоуренс Дж. Мауэр. Мировые финансы. М., 1998, частина 1, стор. 12.
6. Cheul S.Eun, Bruce G. Resnick. International Financial Management. Irwin McGrow-Hill, 2001, p.9.
7. Джеральд М. Майер, Даніела Олесневич.  Міжнародне середовище бізнесу. Конкуренція та регулювання у глобальній економіці. Київ, Либідь, 2002, розд. 4.
8. Д. Михайлов. Мировой финансовой рынок: тенденции развития и инструменты. М., Экзамен, 2000, розд.1.3.
9. World Investment Report 2002. Transnational Corporations and Export Competitiveness. United Nations, New York and Geneva, 2002, p.2-5.

Oleksandr Rogach graduated from the Kyiv State University in 1977. He proceeded to the degree of Ph.D. in International Economics in 1980. In 1995 he was awarded Doctor of Science Degree. He has been teaching in Kyiv University since 1980. At present he is Professor, Head of the Department of International Finance of the Institute of International Relations of Kyiv National Taras Shevchenko University. Oleksandr Rogach wrote more than 100 articles and 5 books on the various topics of international economic relations.