Benefits and Risks of Financial Globalization

Benefits and Risks of Financial Globalization: Challenges for Developing Countries

Sergio L. Schmukler* Senior Economist Development Research Group World Bank

June 2004

Abstract This paper discusses the benefits and risks that financial globalization entails for developing countries. Financial globalization can lead to large benefits, particularly to the development of the financial system. But financial globalization can also come with crises and contagion. The net effect of financial globalization is likely positive in the long run, with risks being more prevalent right after countries liberalize. So far, only some countries, sectors, and firms have taken advantage of globalization. As financial systems turn global, governments lose policy instruments, so there is an increasing scope for some form of international financial policy cooperation.

Keywords: financial globalization, financial liberalization, international financial markets, crises JEL classification codes: F02, F21, F30, F33, F35, F42, G15, G28

*

This paper is partly based on the background paper prepared for the World Bank Policy Research Report “Globalization, Growth, and Poverty,” available at http://worldbank.org/research/bios/schmukler/. David Dollar, Chang-Tai Hsieh, Rick Mishkin, and Jose Antonio Ocampo, among others, provided several helpful comments on earlier versions of this work. I thank Pablo Zoido-Lobaton for letting me use some of the material on which we had worked together. I also thank Juan Carlos Gozzi Valdez and Marina Halac, who provided excellent research assistance. A related version of this paper will be published at the Atlanta Fed Economic Review. The findings, interpretations, and conclusions expressed in this paper are entirely those of the author; they do not necessarily represent the views of the World Bank. Email address: sschmukler@worldbank.org.

1. Introduction The recent wave of globalization has generated an intense debate among economists,...