Financial Globalization in Emerging Economies: Much Ado About Nothing?

Financial globalization, defined as global linkages through cross-border financial flows, has become increasingly relevant for emerging markets as they integrate financially with the rest of the world. This paper argues that, because of the way it is often measured, it has also led to the misperception that financial globalization in emerging markets has been growing in recent years. We characterize the evolution of financial globalization in emerging markets using alternative measures, and find that, in the 2000s, financial globalization has grown only marginally and international portfolio diversification has been limited and declining over time. Next, we revisit the empirical literature on the implications of financial globalization for local market deepening and international risk diversification proposing new measures of the former that, in our view, are better suited to address these questions than those typically used in the literature. We find that, whereas financial globalization in emerging economies indeed fosters domestic market deepening, it falls short of providing the international portfolio diversification needed to yield visible gains in terms of consumption smoothing.