A remarkable globalization of the world economy has taken place. The increasing integration of national economies into global markets promises to continue to alter dramatically the volume and character of international resource flows.
Because the expansion of global trade is essentially constrained by the domestic and international banking sector, which provides financing for international transactions, the increasing size, competitiveness, and diffusion of international financial markets has the potential to draw low-income economies into the economic mainstream. For developing countries experiencing severe liquidity problems that constrain investment, limit the importation of inputs and replacement parts, and raise the level of risk associated with trade contracts, increased integration into expanding international financial markets could greatly improve prospects for economic flexibility and growth.
However, it still remains unclear how much middle-income and especially low-income LDCs will benefit from the globalization of international markets. For a variety of reasons, the full participation of many poor nations in the global economy is yet to be realized. At a time when national markets are opening up, it is ironic that some global financial markets remain restricted. In fact, despite the 1994 trade agreement and creation of the WTO, protectionism against LDC agricultural products has greatly increased, and the real rate of interest paid by developing countries on borrowed capital is on occasion more than four times greater than that paid by their industrialized counterparts. The globalization of international financial markets thus reduces the transaction costs of trade for participants with access to international credit while increasing the relative disadvantage of those excluded from the benefits of financial globalization.
But even in cases where developing countries are directly involved in the physical, technological, and financial globalization process, the implications for long-term development are ambiguous. Money and information can now be instantly transmitted from one comer of the earth to another. Multinational corporations are creating global factories with both horizontal and vertical integration spread over many countries. And a small group of newly industrializing countries in East Asia, now expanded to include China, has captured the lion's share of LDC international flows of goods and services.
The effects of such globalization are threefold.
First, the power and influence of individual nation-states, particularly many of those in the developing world, is weakened. LDCs that are not linked in some way to the new dollar, yen, or euro-dominated regional trading blocs in North America, the Pacific Rim, or Europe, respectively, face particularly difficult times ahead.
Second, there are increased risks of financial market instability (as evidenced by the Mexican crisis of 1995, the Asian crisis of 1997, and the crises in Turkey and Argentina in 2001), access to global markets may become more difficult for low-technology producers, and the effects of economic growth in the North may no longer automatically benefit the poorest nations of the South. Indeed, the nature of past North-South relationships may have hindered the performance of many LDCs in the international arena. The substantial global imbalances of the early years of this century - notably the U.S., trade deficit - will eventually have to be resolved, and when they are, there is a significant risk that exports and growth may falter and instability and debt problems return in some of the developing nations.
Third, a striking manifestation of the growing inequality of nations in an era of rapid global transmission of information is the tremendous increase in international illegal migration from the poor South to the industrialized North. Just as capital has become more internationally mobile, so has labor. But unlike the movement of capital, the movement of unskilled Southern labor across Northern borders is not always a welcomed occurrence. In fact, some citizens of the industrialized world view this phenomenon as a threat to their economy, not to mention their culture and "way of life". As a result, "human smuggling" has taken a terrible toll in lives lost and other suffering at the hands of corrupt profiteers.
Cost-Bnefit Analysis
Cost/benefit analysis means comparing the cost of a proposed investment and the benefit that will be achieved from investment. Normally financial costs and benefits are considered in cost/benefit analysis but in some sophisticated analysis models intangible benefits are also taken into account.
Fiscal Policy and Economic Development
Whereas financial policy deals with money, interest, and credit allocation, fiscal policy focuses on government taxation and expenditure. Together they represent the bulk of public-sector activities.
Economic Development and the Role of Stock Markets
Recent years have witnessed enormous growth in developing countries stock markets. This has had costs as well as benefits for development. It has increased volatility in the economy as funds have flowed in from abroad and even more dramatically flooded out. We take a look at developing countries and consider some proposed policies to get the most benefits from these markets. We also consider some of the limitations of depending too heavily on markets as an engine of growth.
