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Neo-Classical Model of Financial Market Globalization

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Did the experience of emerging countries fully justify the prediction of neo-classical model of financial market globalization? Why or why not?

Financial Globalization stems from the idea of Neoclassical Economics where efficient allocations of resources will bring prosperity to nations through globalization. Financial globalization is an aggregate concept that refers to increasing global linkages created through cross- border financial flows. The theory predicts the capital will flow from the more to less developed countries and all nations will gain as a result. However, in reality where market failures and information asymmetries exist, the results of financial globalizations are conflicting with its ideology. Especially in the emerging markets where the economies are even more highly distorted than the developed ones. Studies show mixed results regarding the effects of financial globalization on developing economies. Though the strong supporter of financial globalization are international organization such as IMF, World Bank and United Nations, many academics argued that the theory did not benefit the developing economies, yet worsening them. This essay will be critically analyzed the impacts of financial globalization on emerging countries in economic and social aspects.

Growth
In principle, financial globalization is greatly beneficial to economic growth in developing countries. Reduction in cost of capital, technology transfer and development of financial sectors are direct advantages from globalizing financial sectors, hence boost economic growth.

According to Prasard et al (2003), empirical studies shows that countries with ‘more financially integrated’ (MFI) grew faster than the ‘less financially integrated’ (LFI) countries during 1970 – 1999. MFI developing countries had average per capital output increase almost threefold and six times greater…...

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