Summery of Globalization, Politics, and Financial Turmoil economic Essay

Summery of Globalization, Politics, and Financial Turmoil economic - Essay Example experience such crises mainly because there is a breakdown in communication between the chief executive of the monetary authority and financial officers in such times, leading to insufficient banking regulations and eventually flight of capital out of the country, which then has a snowballing effect. For the purpose, Satyanath elaborates on three bodies of literature – 1) globalization of capital and the political scenario in which there are possibilities of miscommunication 2) the presence of ill-informed chief executive and 3) the existence of veto players, that is, those whose consent is necessary for any policy change. Prior to the 1980s, all developing countries had relatively stringent regulations on capital inflows and outflows. All foreign exchange transactions were strictly monitored and banks had limits on overseas borrowings. From the 1980s, the International Monetary Fund (IMF) began to put pressures on the developing countries to liberalize the financial sectors, justifying that the access to foreign capital would allow these countries to invest more than the domestic savings allowed them to. Besides, short-term cyclical recessions could be balanced with countercyclical capital inflows from overseas. Also, free mobility of capital would also allow domestic investors to invest abroad thus neutralizing domestic shocks while also allowing them to earn higher risk-adjusted returns. Lastly, the dismantling of the bureaucratic shackles would allow the financial sectors of the developing countries become more professional, the IMF argued. Consequently, many Asian countries liberalized the capita l accounts as they did the trade accounts in the 1980s and 1990s, and the result was higher growth rates in Gross Domestic Product in the immediately succeeding years. However, by 1996, many of these same economies began to show signs of slower growth. Simultaneously, what disturbed the analysts were the growing current account deficits and increase in foreign