The post-war economic globalization resulted in an increasingly interdependent financial system.

This
is mainly due to the increase in foreign investment and to the facilitation of capital movement
oversees. Indeed, many industrialized economies (as in the United States) owe their post-war
economic prosperity partly to British overseen investments. This movement of capital and finance
however made the word economy more fragile, i.e. more prone to international crises.

Despite the increasing flows of capital movement and offshore investments, economists argue that
international finance is not as integrated as we think it is or expect it to be. This is due to the
tendency of investors to invest within their national territory, which the author refers to as “the
home-bias effect”. In addition, the differences in capital costs highlight the lack of international
integration within the monetary system.

Due to significant interdependence, the financial system is significantly vulnerable to international

crises. The financial stability theory states that the globalized capitalist system is inherently prone to
crises. This is due to the high level of interdependence; any “external shock” like the outbreak of a
war may cause the system to collapse. While an external shock may benefit a certain economic
sector, it will damage the profit opportunities in other areas. The author gives the example of the
East Asian crisis in the 1990s where the devaluation of the Russian ruble triggered an international
financial crisis.

While many American economists emphasize the necessity and benefits of a liberal flow of capital
which the government does not intervene in nor regulate, many of them have become concerned
over the high level of financial interdependence when the Asian financial crisis took shape. Indeed,
while many economists in the world argue for complete liberalization of the financial system, other
economists and countries think that the freedom of capital movement should remain under the
control and regulation of governments and institutions (the IMF). This is because an unregulated
financial system is more prone to crises.

In the same logic, many argue that global financial institutions such as the IMF are ineffective in
terms of preventing, predicting or solving global crises, thus should be abolished. However, other
claim that the IMF operates as a guarantee for investors, thus encourages investors to move their
capital more freely and more often. Another group of economists believes that further strengthening
the role of the IMF in terms regulation and surveillance is the adequate solution for the international
financial instability. Strengthening the IMF also includes “greater transparency and improved
information-gathering.” Additionally, the IMD must set a “rule of conduct” for the member states in
order to regulate bank practices, prevent inflation and “warn investors about potential problems in a
particular country.”

In conclusion, the free movement of capital has proven beneficial for the global economy. However,
it has also resulted in the increasing instability of the global financial system while there is a
widespread agreement over the fragility of the global financial system, economists disagree on the
causes and solutions for that instability..