What are the causes and consequences of globalization of financial markets in last two decades? How does it affect values of National currencies?
"Globalization of financial markets" has remained an overly debated theme for quite a while now. The world has witnessed a steady increase in cross-border financial transactions in recent decades. These positive developments led to the easing of norms regarding cross-border transactions and liberating national financial markets.
Major causes of Globalization of financial markets:
1. Technological Innovations:
In the past few decades our ability to share information has increased manifold. Information Technology (IT) has provide the necessary impulse to globalization. Advancement in hardware, software and telecommunications has improved our ability to access information globally. IT provides communication network that facilitates the sharing of ideas, resources etc, among various nations irrespective of their geographical location. Thus playing a pivotal role in globalization.
2. Financial Liberalization:
Since 1980's many countries adopted the policy of liberalization and eased norms regarding cross-border transactions, this led to the flow of financial assets. The pivotal positive argument given in favor of liberalization was that, it would diversify risk due to market size, worldwide investing, lending possibilities and market efficiency. It was considered that welfare would be higher without glitches such as taxes on international trade in financial assets.
Consequences of globalization of financial markets
The consequences of globalization of financial markets can be broadly sub-divided into two categories.
1. For Developed countries:
Developed countries have utilized the untapped markets of developing countries to sell there goods, these markets have also provided cheap labor to the developed countries. Foreign Direct Investment's impact on economic growth has had a positive impact in developed countries and an increase in trade and FDI, resulting in higher growth rates.
2. For Developing countries:
Globalization, gives the governments of developed countries the opportunity to borrow money from developed countries. When this money is used for development of infrastructure, health care etc. The standard of living of the people of developing countries do improve.
On the negative side, while the inflow of foreign capital and foreign firms does reduce the unemployment and poverty, it can also lead to wide disparity in the standard of living of those who are educated and those who are not.
Effect of Globalization of financial markets on national currencies:
currency reflects the economic status of its issuer: when Japan got into economic. In the new trend of globalization, the accumulation of national debt as a result of stimulating economies does not necessarily decrease currency value for which a good example is the USD in the last year or so and austerity fiscal policies with promises of cutting deficit and playing sound "old" economics does not necessarily increase currency value for which good example is the EUR and its most recent developments; nor by expanding one's social and infrastructural policies would necessarily decrease their currency's value for which good example is the RMB whose value is considered depreciated instead.
What is so different about oil compare to any other commodity on the international market that political economists are talking about oil politics ? Do you think oil crisis will continue to reoccur ? Why ?
Oil is strategically the most important source of energy. The economical and industrial advancement of a country heavily depends on the supply of this precious commodity. Any fluctuation in oil price reflects the condition of the world economy , which always serves as moot topic in every political and economic circle of the world.
Oil consumption encompasses 40% of the global energy consumption. But because of its limited supply and fluctuating price it is an important strategic fuel for all the countries in the world. In 1970's, world faced two of the worst oil crisis which devastated the world economy. Since entering the 21st century, the international oil price fluctuates relentlessly again, from 49.51 dollars/barrel in January,2007 to 142.8 dollars/barrel in July 2008.
Some scholars believe that oil price is solely governed by Supply and Demand. But, according to me , the fluctuating oil price is not completely governed by the Supply and Demand phenomenon, the intensity of competition between rival nations.
Factors affecting oil price in the international market:
1. Imbalance between supply and demand:
There has always been an imbalance between Supply and Demand, whenever there is a big fluctuation in oil price in the international market. Hence, it is the governing factor as far as oil price is concerned.
From the perspective of oil supply, the major factors that dominate the fluctuation are as follows:
1.Restricted supply capability of international oil.
2.Instability of oil production in OPEC (organization of petroleum exporting countries). At present, oil producing companies play a much more important role than oil consuming countries in global energy structure.
From the perspective of oil demand the only factor playing a crucial role in fluctuation of oil price is the diversification in OPEC countries, the petroleum industry is the most important department in national economy and the government's entire financial revenue relies solely on income brought by oil exporting, however, this single national economic structure is easily affected by international market.
2. Dollar exchange rate fluctuation:
Depreciation of US dollars inevitably causes the rise in international oil price and its appreciation brings about a drop in international oil price. In 2007, the exchange rate of dollar to euro dipped around 10%, the international crude oil price at the same time rose by about 60%.
3. The opportunistic practices in the future market:
In today's era , the oil price in the international market is not only governed by supply and demand mechanism. Both, the supply and the demand side keep an eye on the future oil market while valuating the current oil price.
4. Geopolitical instability:
Geopolitical risks do exist in middle east and other oil producing areas. For example, Iran 18.9 billion tones of proven oil reserves, the daily oil production of 4000 thousand barrels, however, its nuclear project still remains a suspense, in addition to it, the relation between Iran and America always remains tensed.
By analyzing the past fluctuation in oil price one can conclude that there are innumerable factors affecting the oil price and with the advancement in global economy the factors affecting oil price would surely increase. Since these factors are interlocked , there study becomes very complex. Therefore, it's very difficult to predict the future of oil price in the global market.