Difference in flow of capital in the two financial globalization periods

It is pretty well know now that there were two periods of globalization/ financial globalization. First from 1870 to First World War and second from 1970 onwards. An interesting paper looks at whether the crisis problem was more severe now or then. 

In another interesting paper, Moritz Schularik of University of Berlin shows the flows of capital flows in the two eras. Ideally, we would expect capital to flow from developed to developing. But this has not been true atleast in this era. Lucas pointed in his 1990 lecture – Why Doesn’t Capital Flow from Rich to Poor Countries? This was followed by huge research on the subject which looked at possible reasons. (See a summary here). 

But What about the previous era? Did we see the same trend?Schularick answers the question in this paper:  

In this paper we take a comparative look at the patterns of capital flows from rich to poor countries in two eras of financial globalization. The paper extends recent research on the developmental effects of international  financial integration, long-term trends in capital mobility and ‘globalization in historical perspective’.  

Analysing the patterns of international financial integration in the three decades of the classical gold standard and after 1990 we show that investment in developing countries was a central element of 19th century financial globalization, but plays only a minor role today.  

The Lucas paradox of capital failing to flow from rich to poor has grown much stronger. In historical perspective, today’s financial globalization is marked by massive diversification flows between high-income economies and a relative marginalization of less-developed economies. 

He adds that developed countries were indeed bankers to the world then and led to growth in emerging economies. The same evidence does not show now for the current period. 

The paper has two other findings: 

First, a secular increase in international financial integration has taken place in the course of the 20th century. Relative to world output, cross-border investments are considerably larger today than ever before. Yet, this increase has not been transmitted to developing countries. A long-term historical perspective on global investment patterns shows a relative disintegration of developing economies. So far, only mutual investments between rich countries have increased dramatically, rich–poor capital flows remain far below historical levels. In 1913, British investors had placed less of their foreign investments in France and Germany combined than in a country like Uruguay. Today, British investments in France are larger than all British emerging markets investments together. 

Second, already a hundred years ago, investors found it more attractive to invest in rich economies than in poor countries. Nonetheless, different forces seem to be at work in both eras: back then, the wealth level of an economy was a much weaker predictor for the amount of capital inflows than today. 

He adds financial globalization can deliver in this era as well, but for that capital flows have to goto developing/emerging economies.  

Financial globalization is back, but with a very different face. The patterns of international investment in both ‘globalizations’ suggest that – atlooking at the hopes that were associated with the integration of poor countries into the global capital market the glass is half-empty rather than half-full.  

The historical lesson that emerges from the comparison is that financial globalization can be and has been a benign force for development. However, the contemporary world economy has a long way to go to capture the potential benefits of international financial integration. These findings call for a better understanding of the circumstances under which large-scale development finance became possible in the first era of financial globalization. Financial history might have more important lessons to teach  

Another exciting paper on eco history.

One Response to “Difference in flow of capital in the two financial globalization periods”

  1. Extended Scholarly Blog – The Blogosphere, Twittersphere, and New Media in the spread of Globalisation « Maddy Kirby's Globalisation Blog Says:

    […] As we know, globalisation is a highly contested term. Chalkley et at. (p. 15, 2012) suggest that globalisation is “A process whereby industries are operating increasingly on an international basis as a result of the deregulation of communications industries and improved communications technologies.” Often, definitions of globalisation will focus on the economic and trade-related aspects of the concept, ignoring the idea that it contributes to democracy, and the concept of ‘flows’ as discussed in the ALC215 Unit Guide (2012): cultural flows (the objects, skills, beliefs, and practices that travel around the world both as ‘cultural baggage’ with people who move, as well as through other means such as being transferred through media and communication technologies), media flows (the proliferation and consolidation of global media empires) and information flows (the so called information super highway: the information flows linked to the instantaneous and almost unlimited access to information of all kinds), as well as flows of capital. […]

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