Financial Globalization, Growth and Volatility in Developing Countries

This paper introduces the debate about the effects of financial integration on developing economies - on one hand the cash flows between industrial and developing economies have been associated with high growth rates, while on the other, a number of countries have experienced episodic collapses and financial crises over the same period.The paper is divided into five sections. Section one focuses on the following questions:

• Does financial globalization promote economic growth in developing countries?
• What is its impact on macroeconomic volatility in these countries?

Documenting some of the salient features of global financial integration from the perspective of developing countries, the second section covers the following:

• Definitions and basic stylized facts;
• The question: Does financial globalization promote growth in developing countries;
• The impact of financial globalization on macroeconomic volatility;
• The role of institutions and governance in globalization.

Sections three and four analyze the evidence on the effects of financial globalization on growth and volatility in developing countries.

• Section three:
  • Looks at the theoretical benefits of financial integration;
  • Places it alongside the empirical evidence on levels of economic development;
  • Synthesizes reasons for the lack of a causal relationship between financial integration and growth.
• Section four dwells on:
  • Macroeconomic volatility;
  • Crises as a special case of volatility;
  • Transmission of volatility.