^*Frederic S. Mishkin is the Alfred Lerner Professor of Banking and Financial Institutions at the Graduate School of Business, Columbia University. This essay draws heavily on material from his book, The Next Great Globalization: How Disadvantaged Nations Can Harness Their Financial Systems to Get Rich. The author would like to thank Jane Haltmaier for her assistance.

Abstract

This essay argues that financial globalization can be a powerful force in promoting economic growth and the reduction of poverty in emerging market countries. Financial development enables the financial system to allocate capital to its most productive uses and is crucial to the success of an economy. Financial globalization encourages financial development by weakening the power of groups such as government and entrenched private special interests, which have much to lose from an efficient financial system, and by encouraging support for institutional reforms to make the financial system work better. On the other hand, financial globalization, if it is not managed properly, has a dark side and can lead to financial crises that cause much economic hardship. Getting financial globalization to work well is no easy task and requires policies that promote property rights and good-quality financial information that encourage effective prudential supervision, and that promote a stable macroeconomic environment. Although these policies need to be home-grown, international financial institutions like the International Monetary Fund and the World Bank can create incentives to promote these policies in emerging market countries. Citizens in advanced countries can also help by supporting the opening up of their markets to goods and services from poorer countries, and thereby encourage expansion of their export sectors, which creates increased support for financial development and less vulnerability to financial crises.