Simply put — financial globalization means cross-border capital flows in the form of debt, equity, FDI, or anything else, and when we seek to answer whether it is good or not, we impulsively look at the standard parameters like GDP growth, reduction in consumption volatility and risk of crises arising out of such capital flows. However, neither is it easy to answer this question nor is it simple to analyze the good versus the not-so-good impacts of financial globalization.
Some economists like Dani Rodrik, Jagdish Bhagwati, and Joseph Stiglitz view unfettered capital flows as disruptive to global financial stability, leading to calls for capital controls and other curbs on international assets trade. Others like Stanley Fischer and Lawrence Summers argue that increased openness to capital flows has, in general, proved essential for countries seeking to rise from lower-income to middle-income status and that it has strengthened stability among industrial countries.
On the face of it, any serious student of economics or related fields will say that a lot will depend on which country we are talking about. Is it a developed country, an emerging economy, or a developing country? What are the internal controls in that country and how strong is the financial system, discipline, and law implementation? Also, one would tend to evaluate if there are any other indirect benefits apart from GDP growth, consumption stability, etc., that weighs against the associated risks. And despite the best efforts, one would remain scientifically inconclusive, while having a personal view. That too would probably enumerate some outcomes of financial globalization, such as supporting international trade, more efficient global allocation of capital, opportunities to diversify risks, greater returns, and financial crises.
The fact is that several countries like China and India (also Mauritius and Botswana) have gained in terms of better GDP whereas several countries (such as the countries in Latin America in the 1980s, Mexico, and some Asian countries in the 1990s) went through crises as well, and despite many attempts by experts like the IMF at an empirical study on the subject, we remain inconclusive whether financial globalization is all good.
In the last three to four decades, despite financial integration, several developing countries (for example, almost all the countries in sub-Saharan Africa) did not gain enough from financial globalization on account of weak financial systems. They did not have strong institutions to support them. Economic policy and financial sector development are therefore very important before a country opens its capital account.
No doubt, there are indirect benefits of financial globalization such as the transfer of managerial and technical expertise, better governance, and financial discipline. These certainly enhance efficiency, but these are long-term benefits. So, it may help in terms of financial sector development, institutional quality, and macroeconomic policies. The banking sector and equity markets may benefit in terms of size and regulation. Stock markets would certainly become larger and more liquid. Also, it is a fact that foreign capital is better utilized by developed financial markets and industrial economies than by emerging and developing economies (for example, Latin American and Asian countries have performed better than sub-Saharan African countries).
To conclude, therefore, while it is very difficult to analyze and decide from empirical data and evidence due to the multiplicity of factors involved, it can be broadly stated that there always will remain some risks with financial globalization, but the benefit-risk balance can be tilted towards benefits and the risks can be minimized, with better planning, policy design, and implementation.
