International Capital Markets Capital Markets Term Paper

  • Length: 13 pages
  • Sources: 15
  • Subject: Economics
  • Type: Term Paper
  • Paper: #25723755

Excerpt from Term Paper :

Inappropriate exchange rates can spell disaster. A fixed exchange rate is ideal. There are sharp mismatches in the financial and the banking sectors of the countries. The national debts of countries have also become subjects of alarm and controversy. "The global economic upturn seems to be gathering pace -- it certainly is in Asia, now the world's fastest growing region. A period of economic growth offers a chance for governments to get their fiscal affairs in order, to reduce their debts burdens and so reduce the risk of pro-cyclical fiscal tightening later." (Krueger, 2003) the capital flow must be regulated but not restricted. There must be a level playing field for all countries. All these are absent in the modern international capital market. (Krueger, 2003)

International Capital Market - Analysis

The modern market is in crisis and is volatile. And after 1990 many nations have removed the restrictions on capital flow and this change has brought about the private capital investment rise. Many institution sin the private sector have expanded globally. There is a great investment insistence and flow of short-term capital. The financial systems that have been freed have shown marked increase in the flow of short-term capital. The shift in investment has gone to the emerging markets, and these markets are clustered in ten countries. Other countries are dependent on institutional loans. This change has been hailed by supporters of the new order as the way to global prosperity and the critics have come out with the flood of capital in countries, as in Mexico have fuelled the growth but made the citizens miserable. Growth was lopsided and many countries not in the emerging sectors are impoverished. (Anderson, 1998) the Asian financial crisis that occurred in 1998 with stock market plunges and resultant collapse of national markets and May of the affected countries were developing countries. The worst affected were "South Korea, Singapore, and Hong Kong." (Anderson, 1998)

The reason advanced is that there was a flow of funds to "Thailand, the Philippines, and elsewhere in the early 1990s. The flows generated high growth rates, yet most funds were not channeled into productive long-term uses; instead much of the short-term capital artificially inflated both real estate and stock markets." (Anderson, 1998) the leaders of some countries blamed the outflow of capital for their countries crisis. The proposed Multilateral Agreement on Investment -- MAI is expected to remove the bottle necks in flow of funds as the General Agreement of Trade and Tariff did to the flow of goods. (Anderson, 1998) the modern capital markets that are internationally integrated play a very crucial role in the financial stability of a country. The fixed and floating rates at which borrowing and lending is affected and the ability of the banks to adapt to the changing market and also make the internal economy fall in line with the changes will in the long run determine the stability of the market in the domestic economy. This in turn has a telling effect on the international capital market. "This international dimension affects the nature of the prudential policies adopted as well as the processes through which they are agreed. Finally, recognizing that monetary stability and financial stability are two sides of the same coin" (White, 1999)

The problems of modern capital markets are diverse and this is not the result of any fault of the system but rather the complexities of the international relations and the fast phase of development that is occurring in the world. There is a greater demand for capital from the emerging countries. The developing countries are also slow in reacting to the changes and therefore the risk in the flow of funds to these markets has no financial backing. The modern trend is to view transactions on two principles, namely reduce support to the private sector and thus prevent the necessity of bailing them out, and increase the stability in the financial markets by stopping flows to the developing economies. (Fernandez-Arias; Hausmann, 1999)

The interdependence of the countries and the International Financial Markets was researched to determine the impact of the business cycle fluctuations and foreign policy and the effect it has on monetary policy. Lane and Michael Devereux feel that the "magnification of the business cycle fluctuations and actually reinforce the need for exchange rate flexibility to cope with real shocks. In addition, they show that the properties of alternative monetary and exchange rate policies are very sensitive to the degree of pass through from exchange rates to consumer prices." ("The Analysis of International Capital Markets: Understanding Europe's Role in the Global Economy," n. d.) There is now a lesser political barrier to trade. This is one of the reasons why the integration of the capital markets has become possible. The reason is that "trading and communication costs have been dramatically reduced by the development of modern communication technologies and in addition restrictions on international flows of capital have been abandoned or at least considerably reduced for many capital markets." ("The Analysis of International Capital Markets: Understanding Europe's Role in the Global Economy," n. d.)

It has to be admitted that there is now no governing financial standard for the international capital market. How this can be implemented is a subject of world wide concern. The conditions imposed by international agencies like the IMF may not be implemented in all countries owing to the different propensities of the nations. It has to be cautiously implemented if at all. The second problem is to regulate the developed countries to prevent them from taking actions that can affect the emerging markets. "A case in point is international financial contagion, whose main transmission mechanism, if not root cause, resides in how financial intermediation to emerging markets operates. Two main problems have been identified in recent experience. The first is the likelihood that financial intermediaries become over-leveraged as a result of market losses and are forced to sell off their positions. The second is the dependency of emerging markets on a select group of specialist financial institutions; which makes the market for paper quite illiquid" (Fernandez-Arias; Hausmann, 1999)

The 'International Capital' market has become a global financial casino. The unchecked flow of funds in the developed nations, especially from the U.S., which comes from the insurance companies, government funds, pension funds and other deposits and short-term capital from mutual funds flow from the economy into the lesser markets draining the capital reserve. "In the emerging markets of Asia, for example, capital was flowing in at the rate of about $100 billion a year in 1996; by the second half of 1997 it was flowing out at about the same rate." (Anderson, 1998) the gambling practices of some of the lobbies that influence the system have earned the ire of Asian leaders. On account of this strange situation, unemployment in the emerging markets has doubled. Some proposals to correct the situation is examined, and one is the Multilateral Agreement on Investment which was considered earlier. The second is to create strong mechanisms to enforce rights all over the globe with regard to the restraint on capital flows that will generate unemployment. (Anderson, 1998)

Globalization and the International Capital Market

The international capital market played a key role in globalization. It was the need for investment that prompted the growth of investment and technology. The principal reason that the global village concept became a reality is the rapid growth of technology. However there is an argument that "technological changes are of little importance in explaining financial globalization. Rather, the growth of international financial markets is the result of the policy decisions (or, sometimes, non-decisions) that led to the 'deregulation' of global capital flows." (Quiggin, 2005)

The main issue in globalization is the removal of restrictions and the favorable environment for movement of the capital flow to desires investment regions. Globalization may have brought about technical changes in the communication and physical transfer of the asset or communication but not necessarily has changed the functioning and structure of the capital market. It has brought to highlight the inherent problems of the system on a much larger scale. The query is not therefore if the technology or globalization has changed the capital market ever since the nineteenth century but it is the question "whether the world economy will be controlled by the individual and collective actions of governments, as it was during the postwar boom, or by capital markets, as it was in the 19th century. Framed in this way, the debate over globalization is simply an extension, to the international stage, of the debate between the defenders of the social-democratic welfare state associated with John Maynard Keynes and the advocates of free markets." (Quiggin, 2005) the failure of the free nature of the market economy which was present in the nineteenth century as also the parallel of the failure of the emerging markets to the recent international capital flow presents a similar case.

Comparison of both the Markets

In the eighteenth and nineteenth…

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