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The Global Financial System FINANCIAL SYSTEM 22 THE GLOBAL FINANCIAL SYSTEM THE GLOBAL FINANCIAL SYSTEM prof. Ing. Irena Hlavatá, PhD., Ing. Roman Feranec* Globalisation represents one of the most dominant price for the integration of economies into internatio- trends in today's social and economic international nal financial structures, an intensive discussion relations. Besides affecting the world economy and began across the world on the functioning and direc- the entities operating within it, globalisation has, of tion of international financial markets and on whether course, a noticeable effect in the social and political their structures included serious problems and fai- context. The results of globalisation processes are lings that brought on these crises. not restricted to economic growth and the advance of There started to be talk of "a new architecture" for the world economy, but also include the emergence financial markets. This includes the main changes of new problems, conflicts and disputes that did not proposed within the existing financial system to avert appear in regard to strictly divided national and eco- a repeat crisis situation, in other words to prevent the nomic areas. Society should therefore understand emergence of financial crises. The measures may be how globalisation affects particular aspects of the life divided into three groups: measures to restrict the ex- of countries and their people, and should accentuate cessive inflow or outflow of capital, measures to the positives, eliminate the negatives and minimise make the private sector more engaged in addressing the risks. financial crises, and measures to reform the public Globalising trends are probably most apparent in sector and the public institutions operating above the international financial markets. This process took on international financial market. Within each group a particular intensity in the final years of the last cen- there are many proposed measures, some of which tury, mainly due to liberalisation and deregulation of are more realistic than others and all of which have economic processes, supported by the considerable their proponents and opponents. scientific and technical advances in the area of infor- In is not realistic to expect that a dramatic and fast mation and communication technologies. change in the functioning of the international financi- The international movement of capital has risen in al system will happen in the near future. Nor can it be value over the past twenty-five years by more than expected that the trend of liberalisation and deregu- thirtyfold. The largest share of this growth is accoun- lation in international capital flows will be stopped or ted for by the increase in volume of portfolio invest- reversed. It should be realised that the trend of gra- ments, especially shares, as well as by growth in fo- dual liberalisation in the movement of international reign direct investment. Nevertheless, the capital is currently driven by something much stron- international trade in goods and services has seen ger than simply "free market" ideology, i.e. technolo- turnover rise by "only" 320% during the same period, gical progress, which makes the effective control of while world gross domestic product has grown by this movement ever more costly and less effective. It 140%. It is clearly a long time since international ca- is also obvious that as more countries liberalise the pital flows were linked solely to the international trade movement of international capital, so it will be more in goods and services, and they are in fact forming difficult for other countries to restrict it. a more or less independent market. International fi- Is it good for countries to deregulate and liberalise nancial markets are gradually gaining independence financial transactions and thus become more inte- and are to an increasing extent outside national ma- grated into global financial structures? nagement and control. Their effect, however, on the The prevalent consensus among economists is that national economy remains considerable. a developed financial system benefits a country's eco- During the 1990s, the world experienced a number nomic growth. This happens mainly through its positi- of major financial crises that adversely affected the ve effect on capital accumulation and technological life of many people, and not only those in the afflicted progress, and therefore also on the labour productivity countries. Since it was not possible to be reconciled of economic entities. This general consensus is not, with the fact that financial crises are a necessary however, to be seen on the issue of the liberalisation of national financial systems and their integration into ––––––––––––––– The author is a PhD student at the Faculty of Management, Comeni- the global financial system, and on the effect of these us University, under the supervision of prof. Ing. Irena Hlavatá, PhD. factors on national economic development. BIATEC, Volume XIV, 1/2006 FINANCIAL SYSTEM THE GLOBAL FINANCIAL SYSTEM 23 Most economist concur that to open up the financi- which are more financially integrated have lower in- al system of a country and link it more efficiently with flation than do those which are less integrated. the financial systems of other countries, in other Using a similar analysis, it is possible to prove the words the global financial system, make that count- claim that short forms of capital investment into libe- ry's financial system function more effectively. Libera- ralised countries are growing substantially. Examina- lisation and subsequent integration improve the ca- tions show that financially integrated countries are re- pacity to manage and diversify risks and make the ceiving greater volumes of short-term and long-terms global allocation of capital and investments more ef- capital and also that capital structure has been alte- ficient; integration also forces greater discipline on red by the effect of integration in favour of its short- national institutions responsible for macroeconomic term form. policy. On the other hand, opponents of financial sys- These results confirm that the benefits of financi- tem liberalisation point out that whatever advantages al integration far outweigh the negative effects, or come out of liberalisation are offset by the volatility of risks, even if it is not directly connected with natio- growth and the risk of economic crises that liberali- nal economic growth. As a result of financial inte- sation carries with it, and that economies become far gration, there is obviously less scope for the state to more vulnerable to sudden and economically-desta- conduct an active financial policy for the manage- bilising capital outflow. ment of the domestic economy. International capital flows thus squeeze the space in which economic Does a country benefit from financial policy can be executed, while their effect substanti- liberalisation? ally accelerates its consequences. Relatively small measures of economic policy can thus have a sub- In examining how a country's integration into inter- stantial impact on the overall economy. The main national financial structures affects its real economy, contribution of a country's financial integration it is appropriate to examine the development of the should probably be seen in the growth in effective- main microeconomic indicators. By analysing the re- ness. Indeed, financial integration compels state in- lationship between the intensity of a country's finan- stitutions, especially governments and central cial integration and the growth of its GDP, we find that banks, to conduct economic policy in a better and the country's integration into the global financial sys- more consistent way. Considered and effective eco- tem is not a decisive factor of economic growth, alt- nomic policy is also the basis for efficiently exploi- hough it may in certain circumstances have an indi- ting the potential of integration in the international fi- rectly positive effect on growth. This means that nancial system and for taking advantage of the financial integration does not in itself ensure econo- potential of instruments and functions of the financi- mic growth. al market. It is at the same time the main prerequi- Taking a similar approach, it is possible to see how site for staving off financial crises. a country's financial integration may affect the volati- During the period before complete liberalisation of lity of its economic development. The results indicate international capital flows, a country should ensure that countries which are more integrated have more that it is well prepared for this step. Most crucial in stable economic growth compared with countries this regard is the preparedness of the domestic fi- which are less integrated or not integrated at all. This nancial sector. It is particularly important to have con- to some extent confutes the prevailing view that fi- sistent risk management, as well as transparency of nancial integration of a country has a negative effect financial flows, legal structures for property, and last on its GDP growth stability. Although it is the case but not least a sufficient volume of reserves and ca- with open economies that any financial crisis adver- pital for the coverage of any risks. On the other hand, sely affects the swings of their economic develop- the national economy is exposed to an increased risk ment, this risk is usually offset by the more stable of financial crisis. Other factors are, of course, also long-term growth brought about by the economy's fi- important for a country's general economic environ- nancial integration. One reason for this could be that ment, and include the level of development in the in- government institutions produce better, more consi- stitutional environment, the state of the legal environ- stent and more suitable macroeconomic policy when ment and court system, the enforceability of rights, under danger of provoking an actual economic crisis. legal protection for creditors, the standard of the edu- The assertion that economic policy is improving in cation system and the education level of the popula- quality may also be confirmed by examining the rela- tion, as well as many other factors.
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