Nathan W.

Lindstrom Professor Trullinger World History 2, Circa 1600 Present February 7, 2010

Effects of U.S.-Lead Financial Globalization

Over the course of the past half century, technological and political changes have diminished the barriers separating nations, resulting in a world that has become increasingly integrated in terms of economic systems. Though labor mobility remains low, cross-border economic flows have increased dramatically since World War II, leading to an era of globalization in which international capital mobility, the internationalization of the American dollar, and cross-border security purchases have become commonplace (Obstfeld). Thanks to the positive financial effects wrought by these changes, it is likely that globalization will not only continue but increase in its overall pervasiveness in the coming years. Betty Harper, et al, point out that the process of dollarization, in which individuals and companies prefer to deal in dollars [in lieu of local currencies], is increasing in popularity as globalization becomes more widespread (Harper, Harper and Coronel). The appeal of the Dollar as the fiat currency of choice lies with the fact that it is seen by many economists as more stable than other currencies, such as the Yen or Euro. For example, the International Monetary Stability Act, introduced in the U.S. Congress by former Senator Connie Mack, would have allowed nations to adopt the U.S. Dollar as their own currency, and shared seigniorage (profit from the issuing of Dollars) with countries that had become officially dollarized. The bill was

designed to extend the price stability that has been characteristic of the American economy to other national economies through putting a brake on runaway inflation, an economic problem that negatively impacts many national economies which remain decoupled from a more globallyaccepted fiat currency like the U.S. Dollar, or who do not peg their local currency to the U.S. Dollar, as China does with their Renminbi. No doubt influenced by the United States expansionist economic policies, a number of countries in the Western Hemisphere including El Salvador, Panama, and Ecuador, have all adopted the Dollar. Representing one of the larger unique North American currency blocs, Mexico is even considering replacing their Peso with the Dollar (Harper, Harper and Coronel). Does not the specter of an increasingly interventionist United States make adopting the Dollar a risky proposition where a smaller country is concerned? Not at all, argues economist David Roche. He believes that the strength of the Dollar and of the U.S. economy despite recent downturns makes it appealing to countries with weaker currencies. Capital movements of the Dollar add to its strength and appeal and are more important in international markets than trade deficits. Roche also sees American companies and securities as offering a safe haven for savings and therefore as attractive to international private and corporate investors (Roche). From the 1970s and onward, globalization of bond and stock markets has been a constant. The ability of investors in one country to make major investments in the markets and securities of another country offers an enormous opportunity for diversification. This practice also allows a company to increase its overall wealth and holdings and to spread its investment risk across several different markets. If one market becomes troubled, the company or the investor can still count on profits from another market. Relaxed rules governing the flow of capital from one market to another are clearly the prime mover behind this process (Rafferty).

Finance in general, says Rafferty, has developed a huge global existence beyond the limits of national capital markets. The Eurobond market is an example of this integration, just as the European Union (EU) and its currency are examples of the financial integration of markets. Rafferty believes it is increasingly difficult to separate the domestic from the international element or presence in any financial market (Rafferty). Cross-border transactions and interaction are creating linkages between a national economy or market and the rest of the world. Banking systems in the major economic powerhouse countries have gone through a deregulation process which is also important in globalization. Competition among the providers of financial services has increased as a result of this process (Hausler). Financial and nonfinancial entities are benefiting from this transformation as the need to diversify portfolios internationally is leading many investors to enhance their risk-adjusted returns. At the wholesale level, national financial markets are being integrated into a single global financial system. The major financial centers serve borrowers and investors around the world. Borrowers and investors in various stages of economic and financial development can access capital in international markets on a hitherto-unseen level, greatly increasing the business growth opportunities for all involved. It is increasingly important, as Rafferty suggests in Globalization, Investment and Economic Growth, that international governance bodies work together to develop accountability and regulatory mechanisms that improve the functioning of markets that span countries and regions. This will in turn require a greater degree of political cooperation between governments than has occurred thus far. Globalization is an economic process with far-reaching social and political effects, and if allowed to continue with the United States as the prime arbiter, will ultimately serve to bring many positive benefits to the world.

Works Cited

Harper, Betty, Phil Harper and Carlos Coronel. "Dollarization: Making International Trade Seamless." The CPA Journal (2002): 5860. Hausler, George. "The Globalization of Finance." Finance & Development (2005): 10-13. Obstfeld, Maurice. "Globalization and Macroeconomics." NBER Reporter (2000): 18-23. Rafferty, Michael. "Globalization, Investment and Economic Growth." Journal of International Business Studies (2006): 193195. Roche, David. "Reasons Why the Dollar Rules." Euromoney (2002): 26-28.