Financialisation and globalisation: permament reverse or cyclical downturn?

2 Apr 2013
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One of the major markers of globalisation since the 1970s has been the incredible expansion of the financial sector - a phenomenon known as financialisation. The financial sector expanded in virtually every country in the world. Since this time the process of financialisation (defined as the expansion of both domestic and global finance) has been been in retreat as has financial globalisation (defined by cross-border financial flows only).

The global crisis, not surprisingly, has been primarily responsible and it will take quite some time for capital flows to recover, especially if the European financial crisis deepens. The expansion of credit/debt has stalled and the excesses of pre-crisis finance continue to be worked out of the system, Over the medium-term, even in the absence of another systemic financial crisis, it is likely that financialisation will be restricted by global deleveraging as excessive indebtedness is worked out of the world economy.

Nevertheless, wariness about financial instability will continue to be challenged by financial innovation and the possibilities for profits in new financial products. Despite arguments that the global financial crisis showed the need for better regulation of financial markets, it is not clear that this view has overcome the arguments of financial interests for few substantial changes to regulation. Financialisation continues to progress in developing countries and financial globalisation will recover as the world economy recovers.

The issue for the future is whether a financialised world political economy is inherently prone to a cycle of crisis, retreat, recovery, stability, excesses, crisis. While it is possible to argue that financialisation has reached a high point in many developed economies, it is likely that developing countries will become even more important global financial players in coming years - both as recipients and investors.

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Photo Credit: Robert S. Donovan via Compfight cc

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2013
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