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The Pros and Cons of Financial Globalization

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Financial globalization advances the financial infrastructure. An advanced commercial segment infrastructure implies that debtors and creditors work in a more clear, competitive and effective financial structure. In this surrounding, challenges of unbalanced statistics are reduced, and credit is increased. As a result, financial globalization reduces adverse choice and moral threat, hence improving the accessibility of credit.

Regardless of the many benefits of financial globalization, it can also have some adverse effects. Even if capital inflows have been related with substantial growth rates in several developing nations, most of them have also faced periodic collapses in growth rates and critical financial crunch that have had significant macroeconomic as well as social costs. The financial crunches and contagion after nations liberalized their monetary structures and became unified with global monetary markets might make some individuals propose that globalization creates monetary instability and crunches. Some of the financial crisis that got global attention includes Uruguay crisis in 2002, Argentina crisis in 2001, Turkey crisis in 2001 and Ecuador crisis in 2000.

Globalization can also cause crunches if the worldwide financial markets have some faults which can create bubbles, irrational habit, herding habit, speculative outbreaks and crashes. Faultiness in worldwide capital markets can cause crunches even in nations with complete and comprehensive fundamentals. For instance, if financiers trust that the exchange rate is unmanageable, they might gamble against the currency, hence causing a self-fulfilling balance-of-payments crunch despite the market fundamentals. In case the correct financial infrastructure is not achieved throughout the incorporation, liberalization and capital inflows can weaken the wellbeing of the domestic financial structure. In case market fundamentals worsen, hypothetical attacks will take place with capital outflows from both local and foreign financiers.

Another possible adverse effect of globalization is the division that it can bring between those capable of participating in the world financial system and those that must depend on local financial segments. Where a nation is deprived of resources, huge companies notice a chance to venture into. Where most of the first happenings of economic globalization are stored as being the enlargement of trades and corporate development, in the majority of poorer countries globalization is primarily caused by foreign trades investing in the nation to enjoy the benefits of the lower pay rate.

Whereas it is a fact that globalization boosts free trade amidst nations, there are also adverse effects since some nations attempt to save their countrywide markets(Broner & Ventura, 2016). The major export for most developing nations is often agricultural products. Developed nations usually subsidize their farmers, which reduces the market cost for the deprived farmer’s plants compared to the market cost of free trade. Another problem with globalization is that, in a remarkably unified global, governments are left with minor policy equipment. Hence, some worldwide financial organization becomes more significant.

In conclusion, globalization has both negative and positive impacts on international finance. However, a well-understood process of activities would make it possible for a nation to maximize the advantages whereas cutting the adverse outcomes. The main benefits of globalization are the creation of an international market and the increase of funds for developing nations. However, globalization can divide those that can participate in the world financial system and those that must depend on local financial sectors.


  1. Mishkin, F. S. (2007). Is financial globalization beneficial?. Journal of Money, Credit and Banking, 39(2‐3), 259-294. (
  2. Kose, M. A., Prasad, E. S., & Terrones, M. E. (2009). Does financial globalization promote risk sharing?. Journal of Development Economics, 89(2), 258-270.
  3. Mishkin, F. S. (2009). Why we shouldn’t turn our backs on financial globalization. IMF staff papers, 56(1), 139-170. (
  4. Stulz, R. M. (2009). 1. The Limits of Financial Globalization. In Global Corporate Governance (pp. 3-16). Columbia University Press. (
  5. Cao, J., & Dinger, V. (2022). Financial globalization and bank lending: The limits of domestic monetary policy. Journal of Financial and Quantitative Analysis, 57(8), 3223-3251.

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