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The Next Great Globalization

The Next Great Globalization: How Disadvantaged Nations Can Harness Their Financial Systems to Get Rich

Frederic S. Mishkin
Copyright Date: 2006
Pages: 320
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  • Book Info
    The Next Great Globalization
    Book Description:

    Many prominent critics regard the international financial system as the dark side of globalization, threatening disadvantaged nations near and far. But inThe Next Great Globalization, eminent economist Frederic Mishkin argues the opposite: that financial globalization today is essential for poor nations to become rich. Mishkin argues that an effectively managed financial globalization promises benefits on the scale of the hugely successful trade and information globalizations of the nineteenth and twentieth centuries. This financial revolution can lift developing nations out of squalor and increase the wealth and stability of emerging and industrialized nations alike. By presenting an unprecedented picture of the potential benefits of financial globalization, and by showing in clear and hard-headed terms how these gains can be realized, Mishkin provides a hopeful vision of the next phase of globalization.

    Mishkin draws on historical examples to caution that mismanagement of financial globalization, often aided and abetted by rich elites, can wreak havoc in developing countries, but he uses these examples to demonstrate how better policies can help poor nations to open up their economies to the benefits of global investment. According to Mishkin, the international community must provide incentives for developing countries to establish effective property rights, banking regulations, accounting practices, and corporate governance--the institutions necessary to attract and manage global investment. And the West must be a partner in integrating the financial systems of rich and poor countries--to the benefit of both.

    The Next Great Globalizationmakes the case that finance will be a driving force in the twenty-first-century economy, and demonstrates how this force can and should be shaped to the benefit of all, especially the disadvantaged nations most in need of growth and prosperity.

    eISBN: 978-1-4008-2944-6
    Subjects: Economics, Political Science

Table of Contents

  1. Front Matter
    (pp. i-vi)
  2. Table of Contents
    (pp. vii-viii)
  3. Preface
    (pp. ix-x)
  4. One The Next Great Globalization: A Force for Good?
    (pp. 1-16)

    In 1960 South Korea was one of the poorest countries in the world, with an average income per person less than that in many countries in sub-Saharan Africa. It was only minimally engaged in trading goods and services with the rest of the world,¹ and the flow of capital from abroad into South Korea was minuscule, amounting to less than $400 million per year. Today South Korea is a member of the rich-countries club, the Organisation for Economic Co-operation and Development (OECD), and the booming metropolis of Seoul looks like any prosperous, world-class city. International trade is a key feature...

  5. Part One Is Financial Globalization Beneficial?

    • Two How Poor Countries Can Get Rich: Strengthening Property Rights and the Financial System
      (pp. 19-35)

      In America and many other cultures, we are taught that the key to success is hard work. Yet, when we look at many less-developed countries, we see people who work extremely hard for long hours. Their wages are low and so they remain poor, and their countries as a whole remain poor. If hard work does not make a country rich, what does?

      The right institutions make a country rich. Nobel laureate Douglass North defines institutions as the “rules of the game in a society, or, more formally, humanly devised constraints that shape human intervention.”¹ The institutions that are most...

    • Three Financial Development, Economic Growth, and Poverty
      (pp. 36-48)

      As we have seen, developing the institutions that allow a financial system to overcome the problems created by asymmetric information is challenging. Indeed, recent research finds that an important reason why many developing countries and transition (i.e., ex-communist) countries like Russia experience low rates of growth is that their financial systems are underdeveloped, a situation referred to asfinancial repression.¹ We can understand why this is so by returning to the metaphor of the financial system as the brain of an economy: just as repressing the activity of the human brain (say, by the use of drugs or alcohol) seriously...

    • Four When Globalization Goes Wrong: The Dynamics of Financial Crises
      (pp. 49-68)

      When emerging market countries open up their markets in an effort to globalize, they have high hopes that globalization will stimulate economic growth and eventually make them rich. Instead of leading to high economic growth and reduced poverty, however, globalization has often led to great depressions, with sharp increases in poverty and social unrest.¹ What has gone wrong?

      In this chapter we see how financial globalization, if improperly managed, can lead to the collapse of a nation’s financial system and economy. These crises are particularly disastrous for the poor in emerging market countries because the safety nets that provide assistance...

  6. Part Two Financial Crises in Emerging Market Economies

    • Five Mexico, 1994–1995
      (pp. 71-84)

      The framework described in the previous chapter presents the bare bones of the genesis, buildup, and downward spiral of a generalized financial crisis as it occurs in an emerging market economy. To really understand the specifics of why financial globalization can go so wrong and what policies are needed to make it work, we need to examine specific crises in more detail. We will look at the villains, and sometimes the heroes, in these episodes.

      The case studies in this chapter and the two that follow illustrate many key themes of this book. First, financial crises are primarily homegrown and...

    • Six South Korea, 1997–1998
      (pp. 85-105)

      Prior to its crisis in 1997, South Korea was one of the great economic success stories in history. In 1960, after the Korean War, the country was extremely poor, with an annual income per person of less than $2,000 (in today’s dollars).¹ During the postwar period, South Korea pursued an export-oriented strategy that helped it become one of the world’s major economies. With an annual growth rate of nearly 8% from 1960 to 1997, it became one of the leaders in the “Asian miracle,” as what were once desperately poor countries embarked on a period of rapid economic growth. By...

    • Seven Argentina, 2001–2002
      (pp. 106-126)

      The story of Argentina is the most depressing of all the case studies in this book. Argentina did many things right in developing a financial system that would promote economic growth. Unfortunately these efforts were not enough to ensure success for this emerging market economy. Structural problems in the Argentine economy, a failure to deal with fiscal problems, and some bad luck, which weakened macroeconomic fundamentals, led to a financial crisis that was far more devastating in a more long-lasting way than the crises in Mexico and South Korea.

      Argentina’s sad story begins with the high hopes engendered by a...

  7. Part Three How Can Disadvantaged Nations Make Financial Globalization Work for Them?

    • Eight Ending Financial Repression: The Role of Globalization
      (pp. 129-136)

      Good investments make people productive, and greater productivity is the road to riches. But good investments can occur only if funds are channeled to those with good investment opportunities via an effective financial system. To achieve this goal, disadvantaged nations must end financial repression and promote financial deepening. How exactly can they do this?

      The key to ending financial repression is the development of institutions that enable the financial system to work well. If the development of such institutions is so important to improving poorer countries’ well-being, why doesn’t it happen? As we have seen, setting up the infrastructure for...

    • Nine Preventing Financial Crises
      (pp. 137-163)

      In a now famous, but initially ignored, paper published in 1985, “Good-Bye Financial Repression, Hello Financial Crash,” Latin American economist Carlos Diaz-Alejandro was way ahead of his time in warning of the dangers of financial globalization.¹ As the recent experiences of Mexico, South Korea, Argentina, and many other countries have shown, financial globalization does not always work for emerging market countries. Without proper implementation and management, financial liberalization can lead to financial crises with disastrous and often long-term consequences for the economy. Can emerging market countries avoid these crises and reap all the potential benefits that financial globalization has to...

    • Ten Recovering from Financial Crises
      (pp. 164-172)

      The previous chapter identified the reforms needed to realize the benefits of financial globalization while avoiding the devastation brought on by financial crises. To make financial globalization work, emerging market countries must have institutions and policies in place that can not only help prevent financial crises but also help them recover quickly and at minimal cost if such crises do occur.

      What steps can emerging market countries take to recover quickly from crises?

      The key to a rapid recovery is restoration of confidence. Only when confidence in the system returns will participants return to the financial markets so that the...

  8. Part Four How Can the International Community Promote Successful Globalization?

    • Eleven What Should the International Monetary Fund Do?
      (pp. 175-199)

      An overriding theme in previous chapters is that the blame for the failure of globalization usually rests with the emerging market countries themselves. Indeed, taking responsibility for policy failures, as South Korea did in the late 1990s, is a crucial step in putting in place the reforms that can set a country on the path to wealth. Often international institutions such as the IMF step in to help countries in crisis. As often as not, however, the IMF doesn’t help matters as much as it could—and sometimes it makes bad situations even worse. Have some IMF policies contributed to...

    • Twelve What Can the Advanced Countries Do?
      (pp. 200-208)

      Outlining the reforms that poor countries must take to harness the power of globalization and achieve rapid economic growth is easy—all it takes is ink and paper. Implementing these reforms, however, is very, very difficult. Not impossible, but difficult. As success stories like Singapore, Hong Kong, Taiwan, and Chile suggest, itcanbe done. International financial institutions like the IMF can help (particularly if it narrows its focus, improves its governance, and promotes a more open dialogue with developing countries), but the rich nations of the world also have a role to play. We in the affluent nations have...

  9. Part Five Where Do We Go from Here?

    • Thirteen Getting Financial Globalization Right
      (pp. 211-220)

      Promoting economic growth and alleviating poverty in so many disadvantaged countries is one of the greatest challenges the world faces today. How can these countries safely get on the path to riches?

      The chapters in this book contain a lot of information, a lot of data, a lot of economic reasoning, and a lot of advice. Here are six lessons we can draw from it all.

      An economy’s ability to allocate capital to its most productive uses enables it to reach its full potential in terms of growth, high income per person, and all the benefits that come with achieving...

  10. Notes
    (pp. 221-276)
  11. References
    (pp. 277-304)
  12. Acknowledgments
    (pp. 305-306)
  13. Index
    (pp. 307-310)