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Financial globalization: gain and pain for developing countries

  • Sergio L. Schmukler

Economies around the world are becoming increasingly interconnected by the unprecedented breadth and depth of financial globalization. Developed countries tend to be most actively involved in cross-country capital movement, but in recent years developing countries have begun to participate in the process. ; This article focuses on the integration of developing countries into the international financial system. It examines recent developments and the principal agents of financial globalization as well as globalization’s effect on the domestic financial sector. Financial liberalization tends to develop the financial system, enhancing financing opportunities, reducing the cost of capital, and increasing investment and liquidity. But global financial interconnectedness also carries with it some risks, especially in the short run, because it tends to intensify a country’s sensitivity to foreign shocks. ; For policymakers, the challenges center on maximizing the advantages that globalization presents while minimizing the risks. Governments participating in financial globalization tend to have fewer policy options and to become more reliant on international financial policies.> As the line between foreign and domestic capital blurs, a country’s successful participation in financial globalization will require strong economic fundamentals and a properly regulated and supervised financial system. A primary challenge of globalization, the author concludes, is to integrate all sectors and countries because nonparticipants are at a disadvantage.

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Article provided by Federal Reserve Bank of Atlanta in its journal Economic Review.

Volume (Year): (2004)
Issue (Month): Q 2 ()
Pages: 39 - 66

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Handle: RePEc:fip:fedaer:y:2004:i:q2:p:39-66:n:v.89no.2
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