Global Financial System Essay Sample
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Why global financial system are not working well for developing countries Global financial system (GFS) can be defined, as financial system comprised of institutions and rules that act on the internal level. Private institutions acting on the global level government departments (central banks and finance ministries) and the global institutions (IMF and Bank of International settlement are the key players of the GFS (Park, 2003). At this point we may
this point we may ask ourselves questions such as; how will proposed reforms of the global financial system affect developing countries? Can international standards and regulatory bodies operate in such a way that they help rather then hinder development? Do the IMF and World Bank need to find a new role? All these issues revolve around global governance impact on the developing world. There is need of strengthening financial system of developing countries that will ensure financial stability.
This is seen to be much more than just getting rules, articulating standards and creating new institutions. The present financial system could be globally integrated in such a way that its efficiency and changing effect could result to significant financial resources that could then finance a number of major global projects. This then calls for evolution of the current international institutions as a way of creating an effective framework for financial reallocation in the 21st century (Camrava, 1999).
With the shift that has evolved in managing the balance of payments under the pressures of globalization the support in the event of a financial crisis are changing. This means countries that rely on capital flows to finance their development need to hold sufficient international reserves to give global market a sense of comfort. This indicates that rapid changes in investor sentiment can cause enormous instability particularly in developing economies. Developing countries need to strengthen banking regulations if the benefits of domestic financial liberation are to materialize. Short-term foreign borrowing should thus be reduced by while strengthening banking regulations.
International cooperation should therefore be sought in setting and implementing fiscal, momentary and exchange rate policies. This implies that long tern foreign investment can be attracted only by cultivating a healthy economic environment and not by offering inducements. There must be very little wrong with the global economy that can be made right without through reform of global financial system. This means that there is very little wrong with the global financial system but with sufficient policitical will, it can be made right (Goode, 1985).
When developing countries attempt to exert some control over their economic destinies by restricting foreign borrowing or imposing local content standards on manufactured goods, they are ordered by the US to cease while threatening the loss of access to the market or cut – off credit. Potential volatility as well as improved efficiency of the system is as a result of developments towards more open and sophisticated markets.
Financial crises in developing countries are not always local or homegrown and this implies that fluctuating interest rates between industrial countries have increased volatility of global capital flows, which can be addressed by policy coordination among developed countries consumption volatility on the other hand increases due to the uneven access to foreign markets and is related explicitly to participation in international financial markets. The framework therefore used allows distributional aspects of financial integration in developing countries.
External assistance can encourage and compliment policies that will help developing countries to strengthen their balance of payments resulting to beneficial effects on world trade and finance. It may sound ridiculous to note that over, the global imbalances have widened, oil prices have strongly raised, and political uncertainty has increased in some emerging economies yet the global financial system has done well. Developing countries are prone to high levels of household indebtedness, sustained high oil prices and this combination could totally impair the global growth in the future (Kruegery 1994).
It should be seen that all factors that have strengthened the financial system over the past few years currently provide a welcoming if the global financial system were to come under stress. The developing countries should therefore be given time to adjust to avoid full –blown crises. Thiemann that if a balance is strengthened among the financial, corporate and household sectors, then the severe effect of market correction for a financial system are prevented promptly.
Given that the financial sector development will take years or probably decades to complete, we should not have unrealistic expectations but rather be patient. Perhaps, this is the reason as to why some global commentators argue that the global financial system is not working well for developing countries. However, it is important for global financial system to recognize that developing countries have made important progress towards improved financial supervision reforming the financial sector appropriately. This mean the process will require full ownership of and participation on the process by the society and its government.
As noted earlier, the financial integration of countries into the global economy countries at a high pace. Advanced can tries are the most financially integrated while developing countries have significantly increased their cross border asset and liabilities thus improving their degree of integration. An important lesson in this case is that our efforts to strengthen the global financial architecture need to continue tirelessly to ensure that the global financial system is preserved.
It should be stressed that for standards and codes to retain their relevance, policymakers and standards settlers should take up the challenge of ensuring that these instruments updated to be in line with the fast changing global financial environment. We developing countries should therefore embrace the present global financial system in order to progress towards a financial sector development.
Goode, R (1985) Economic Assistance to Developing Countries through the IMF. Washington, DC, The Brookings Institution.
Kamarava, M (1999) Cultural Politics in the Third world. London, UCL Press.
Krueger O.A (1994) Lessons for Developing Countries about Economic Policy. American Economist, 38(1) pp2-3.
Park, S (2003) Understanding Business Systems in Developing countries. Pacific Affairs, 76(2) pp 3-5.
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