Does Financial Globalization Help African Countries Develop?

1. Introduction

Globalization has been described as the trend of increasing integration of economies of goods and services as well as ideas, information and technology (Birdsall, 1999). Redding (1999:19) has a similar view of globalization stating that it is the increasing integration between the markets for goods, services and capital. According to Prasad, Rogoff, Wei and Kose (2003:3) financial globalization “is an aggregated concept that refers to increasing global linkages created through cross-border financial flows”.

There has been some debate as to whether financial globalization helps developing countries grow. For example one could observe how evaluating international markets allowed for the reduction in financing costs, or how foreign bank presence resulted in competitive gains and conclude that the gains from capital flows are visible (Rodrik and Subramanian, 2008:1). However, you could also look at the Mexico peso crisis and the Asian financial crisis and conclude that the risks are too big to undertake (Rodrik and Subramanian, 2008:1).

The aim of this essay is to discover whether or not financial globalization helps African countries to develop. It will look at some of the arguments in favour of financial globalization as well as their pitfalls. It will also look at the difference between investment- and saving-constrained economies and how they react to capital account liberalization.

2. New Arguments for Financial Globalization

There has been much concern over the fact that there has been no obvious link between financial globalization and growth which has lead to a number of newer studies being conducted to explain this unfavourable evidence (Rodrik and Subramanian, 2008: 3). Some say that we have not looked in the right places or looked hard enough and others say that “we should just do our homework and be patient” (Rodrik and Subramanian, 2008:4).

2.1 Flaws in Mishkin’s Argument

According to Mishkin (2006, cited in Rodrik and Subramanian, 2008:7) successful globalization relies on three crucial premises. The first is that “improved finance is the key to unleashing economic growth in developing countries”. Rodrik and Subramanian (2008:7) criticise this firstly because they do not think that finance is the most important constraint. Mishkin also draws mainly from a priori reasoning rather than from historical evidence. For example in South Korea and China their economic growth was certainly not because of financial liberalization and improved financial intermediation (Rodrik and Subramanian, 2008:8). The cross-country evidence does show that there is a link between economic growth and financial depth however, it does not show why this is so or the connection between policy reforms in the financial sector and overall growth (Rodrik and Subramanian, 2008:8).

The second