"Financial Integration Without A Proper Set Of Preconditions Might Lead To Few Growth Benefits And More Output And Consumption Volatility." (Prasad, Rogoff, Wei, And Kose, 2003) Discuss.
...growth benefits and more output and consumption volatility." (Prasad, Rogoff, Wei, and Kose, 2003) Discuss.
Introduction
The question refers to financial integration which is basically a country's links to international capital markets (Prasad, Rogoff, Wei, and Kose, 2003). This can be identified by Capital account liberalization (CAL) as well as Actual capital flows
(ACF). It is important to note that one does not ultimately require the other although in many industrialized countries i.e. western countries there is evidence of both ACF and CAL. It is a generally accepted fact that financial integration has increased over the last few decades both in developed and developing nations with capital account restrictions been lifted in many countries (Lane and Milesi-Ferretti, 2003).
The question states that increased financial integration can, without the proper pre condition in place, lead to increased volatility. This is mainly in reference to the developing world where increased financial integration as a result of globalisation has not only led to increased growth and economic activity but has also in some cases preceded economic crisis and output and consumption volatility. The paper cited in the question found that countries could increase the benefits gained from financial integration and protect themselves against crisis by adopting better policies. According to the study these include sound property rights and rule of law as well as good supervisory frameworks, low levels of corruption, high degree of transparency and good corporate governance (Prasad, Rogoff, Wei, and Kose, 2003).
However these conclusions are based on the assumption that these pre conditions must be in place before financial integration. Could it not be the case that increasing financial integration leads to better policies and practices, through adoption of best practice...
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