Financial Liberalization, Internationalization, Research, And Financial Supervision

Turmoil in international financial markets has generated widespread instability thrice in the last decade. The economic crisis that began in Thailand in July 1997 and affected every part of the world led to serious criticism of the intellectual and institutional underpinnings of current arrangements to deal with such events, and of the global financial system more broadly. If global markets are to work more predictably and with sustainable benefits for the vast majority of the world's population, change must occur. This essay tries to take the approach from financial liberalization,globalization and the trend of financial governance.In Chapter one, started from the history of financial liberalization and its change. Narrowly defined, globalization is global economic and financial integration. More broadly, globalization is the process by which countries become more like one country. In its humane dimension, globalization is the removal of all barriers and the integration of mankind. In this latter depiction, economic and financial integration can only be seen as a step in a long process. Because the most recent impetus for globalization began in industrial countries through rapid progress in financial innovation and information technology, there are concerns among developing countries that the advanced countries will reap the benefits of globalization while they will bear the costs. The process of economic and financial integration has been historically reversible, as witnessed most recently after World War I. This often-forgotten fact has lulled some observers into believing that the process of global financial integration is irreversible and that the hegemony of industrial countries over the process is a necessary or a sufficient condition for its continuation. None of this is inevitable. It is also not inevitable that developing countries will have to bear all costs of financial integration, provided they play a major role in the design and implementation of the necessary changes in global economic and financial governance.In chapter two, the new Basel Accord framework relies on markets and supervisors to discipline banks. Yet both markets and supervisors fail, and more so in developing countries than in high-income countries. Therefore, the new Accord is not, as its designers claim, suitable for wide application. Nevertheless, developing country policymakers have little choice but to implement it in part or in whole. Hence there are problems of governance in international regulation.Chapter Three, continue the discussion about the change of financial organization, the bigger the firm, the harder the financial governance. Over the past two decades, the increasing internationalization of production, the growth of international trade, massive changes in financial markets, and the revolution in communication and information technology have created opportunities as well as challenges. The changes include significant increases in the magnitude of and composition of cross-border financial flows, innovations in financial engineering that have expanded the menu of new financial instruments, dizzying speeds at which these flows move across national borders in response to shifting perceptions of rewards and risks, growing capacity for leveraging financial exposure in the international system, revolutionary changes in risk management practices that can accelerate outflows from developing country markets in times of stress, and exponential increases in short-term capital flows, largely consisting of portfolio flows channeled through institutional investors by means of derivatives. This leads to Chaper four.These changes, combined with the financial opening of previously closed economies, have increased the volatility and reversibility of financial flows, particularly of short-term capital flows. Meanwhile, domestic financial markets in developing countries have not acquired the depth and breadth needed to cope with the rapid changes in magnitude, speed, and diversity of financial flows. This mismatch has increased the potential for financial instability in countries with policy and structural shortcomings. Moreover, the interconnection between markets and the speed of communication has meant that instability in one country may be rapidly transmitted to others in a region, to geographically distant economies that have similar risk characteristics, and even to countries with sound policies and practices anywhere on the globe.While crises of the 1990s showed that sound macroeconomic and structural policies are essential for stability in developing countries, they also highlighted the fact that good policies are no guarantee against contagion. The expanded scope of operations of private sector financial institutions and their enhanced ability to exploit opportunities for profit-taking, plus the risk-avoidance strategies implicit in portfolio diversification, have meant that financial instability can begin in one country and escalate rapidly into a systemic crisis. Overall market confidence and productive capacity can be destroyed quickly, leading to net loss of investment, employment, and output. Moreover, the Mexican, East Asian, Russian, and Brazilian crises demonstrated dramatically the inadequacy of existing rules and standards governing crisis prevention in the framework of the international financial system. Accordingly, while crises were spreading, there were intensified demands for new rules and standards, codes of good practices, and vulnerability assessment systems to ensure stability in the international financial system. These demands have created challenges for global economic and financial governance, with the area of international finance requiring the most urgent attention.