Question

Explain the financial account of the balance of payments. Discuss the benefits and harms of financial globalization taking also into account different types of financial flows and their implications.

Answer 1

Answer-A financial account is a component of a country’s balance of payments. The financial account includes measurement of changes in domestic ownership of foreign assets and foreign ownership of domestic assets. Financial account components include direct investment, portfolio investment and reserve assets.If the domestic ownership of foreign assets portion of the financial account increases, it increases the overall financial account and it is surplus. If the foreign ownership of domestic assets increases, it decreases the overall financial account and there is deficit,

Financial globalization means the development of financial infrastructure so that the debtors and creditors work in a more competitive, effective and clear financial market. Some of the benefits of financial globalisation are- enhanced capital flow which helps in better preparation for financial crisis in future. Another advantage is that due to Financial Globalization the capital flows between nations causes well-organized world allocation of money. The globalization of financial market has improved living standards of the people, safeguard against national shocks, efficient allocation of resources, helpful for economic growth in developing countries through a number of channels such as augmentation of domestic savings, reduction in the cost of capital,transfer of technology from advanced to developing countries, and development of domestic financial sectors, increased production specialization, better risk management. Moreover, competitive pressures from globalisation also induces  and improvements in both macroeconomic policies and institutions.

Although there are many benefits, financial globalisation has many harmful effects too.Many countries of the world experiences critical financial crunch and severe collapse in growth rates after they have liberalised their financial markets and became unified with the world. Some individuals thus proposed that financial globalisation creates instability in the monetary market.Financial globalisation also creates instability when the financial markets hame some inherent faults like herding habits, irrational behaviour.

Another harmful effect of financial globalisation is that it may create inequality between those who are capable of participating in global market and those who only participate in domestic marktes. When a country is deprieved of resources, foreign inventors take it as a opportunity to venture into and take advantage of the cheap resources until they over-exploit them.