Walter: Understanding Financial Globalization

Walter, A. 2002. Understanding Financial Globalization. Institute of Defense & Strategic Studies.

"This paper makes three main arguments. First, it is implausible to claim that contemporary levels of financial integration remain low by historical standards...Second, I argue that it is now reasonably well-established that financial globalization is not (or at least not yet) the great 'leveling force' implied in some of the earlier literature, where it was seen as an increasingly powerful structural constraint upon national policy autonomy in all countries...Third, I argue that it would be wrong to conclude from this somewhat Euro-centric literature that financial globalization has had little effects at all. The emergent international financial structure constrains governments, but very unequally: most of the costs and risks it entails falls largely upon developing countries" (1).

The author argues that global financial flows have grown considerably since the 70s, and that this represents a unique global phenomena. However, measures of these global transfers are not perfect, and Walter goes about exploring a few different metrics for thinking about changes in and different types of international financial tools. The author argues that financial global integration has not been benign, or simply beneficial for less developed countries: "...the costs of financial integration have been substantial" (5).

While these costs have been high, and the author argues that they are higher than anticipated, it is a wonder that countries who have suffered through the ill effects of increased financial costs (ie., the SE Asian financial crisis) have not imposed capital controls (with the notable exception of Malaysia). "Three main approaches in the existing political economy literature to explain financial globalization may be identified: technological determinism...hegemonic power approaches...and rational interest group approaches" (5).

The author then goes on to provide literature reviews of each of these three explanations for the increase in financial interdependence.

"I have argued that structural theories, including technological determinism and hegemonic power theories, are better at explaining the broad trend towards financial opening since the 1970s. However, they largely fail to explain the large differences in patterns across countries. Rationalist interest group approaches, supplemented by institutional analysis, provides considerably greater insight into the cross-country pattern of financial liberalization, but perhaps inevitably does so at the cost of much greater analytical complexity" (14).