The phenomenon of globalization that began in the 1990s has had an impact on the finances of public and private organizations. The application of new technologies in products and production processes has produced growing economies of scale that move companies towards adapting this phenomenon.
The growing global rivalry, the convergence of economic systems towards a generic model of market economy and industrial relocation, as well as the international expansion of companies to the progressive consolidation of free trade, have re-dimensioned the financial function and administration in the context of the changes brought about in the regulation of financial markets.
The deregulation of financial markets at the national level and the progressive removal of obstacles to the free movement of capital between countries have had a decisive influence on the globalization of international finance.
The interventionist model, especially in the 1970s, with high inflation rates, taught that regulation did not always achieve the proposed objective and that, on the other hand, it had negative effects on the management of financial entities. Based on this reality, significant changes have taken place in the regulation of financial markets – which have been notable drivers of economic globalization-, the main aspects of which have been the following:
Free Access of Foreign Financial Entities to National Markets. This led to the spectacular development of financial companies with international business, which in turn produced brutal competition in the sector. Its consequence was the development of an international strategy, the greater interrelation between the various national financial systems and the efforts of hundreds of governments to attract financial companies from other countries. In the area of the European Union, the goal of the single financial market has borne fruit in the achievement of a single currency (Euro).
The Universalization of Institutions. The universal banking model is adopted. This has brought increasing competition internationally.
The freedom to set the prices of financial services. The beginning of deregulation in this area is due to the aforementioned competition between business banks in different countries.
It is evident that the elimination of obstacles to the movement of capital has been a decisive step in the independence of finance. On the other hand, at the same time there was a notable increase in multimillion-dollar investments carried out by multinational companies in general, in countries other than those of their origin. In addition, additional phenomena have appeared that have intensified the expansion of international business. Among them are:
The growing indebtedness in international markets of companies and governments. Due to limitations in domestic markets and a great abundance of resources and a great abundance of resources in international financial centers.
Growth of portfolio investments, that is, pension funds, mutual funds and insurance companies. These institutions invest their resources in public and financial securities in international markets, in search of superior profitability, frequently targeting the foreign countries that provide it.
Creation of new risk coverage instruments. Especially in currencies. Options, futures or swaps traded from different financial centers for one or more currencies.
So what is the Importance of Globalization to Public Finance?
Financial globalization could be thought of as the same as financial integration. However, the first refers to the process, while the second is the result. In other words, financial globalization allows markets to interconnect with each other, up to a point where they are integrated to form one.
To see it another way, it may be that nearby financial markets are integrated into a single platform. Globalization refers to the process that aims to achieve this type of cohesion at the global level. There are many reasons why globalization is important for the field of public finance. As globalization is a policy measure and then requires government spending such as maintaining an infrastructure that supports the policy to globalize. Hence, this is important for many developing country.
Muhammad M. Rashid, a researcher, scholar and alumnus affiliated with the University of Detroit Mercy and University of California of Davis, explained briefly about the globalization and its importance to public finance in one of his research papers, titled “Analysis of political economy, international political economy, globalization and its importance to public finance”.
- Rashid has committed most of his professional career studying inclusively about Finance and Economics. His papers, documentaries and opinions are truly inspiring and factual. Stated in one of Mr. Rashid’s papers, “globalization can be seen demand an increase in government regulation while at the same time reducing the government capacity to intervene due to a reduction in the availability of financial resources.”
Another main reason why globalization is important to public finance is tax competitiveness. This may lead to a fall in government revenues especially for developing countries, because of a tax competitiveness, foreign direct investment, tax havens, portfolio investments, electronic commerce.
The severity of the current financial crisis and its various dimensions have led to questioning some basic aspects of the financial system: the supposed efficiency of financial markets, the advisability of reducing the global level of debt of financial and non-financial companies over total resources, the necessary improvement in regulation and supervision, the suitability of risk management mechanisms or the convenience of economic incentive systems related to the volume of transactions and their short-term results. Furthermore, doubts about the efficiency of the financial system have also been projected on the very functioning of market economies and, indirectly, on the future of economic globalization.