International political economy also known as global political economy refers to either economics or an interdisciplinary academic discipline that analyzes economics and international relations.
“Much of politics is economics and most of economics is politics” – Charles. E Lindbolm, Political Economist
The two realms of politics and economics are inextricably joined in the era of globalization. Thus, finance is largely linked to the governance of a state. International finance encompasses “all types of cross border portfolio type transactions, borrowing and lending, trading of currencies or other monetary claims, and the provisions of commercial banking or other financial services. It also includes capital flows associated with foreign direct investment- transactions involving significant control of producing enterprises”. The central characteristic is that it is not centred on a single state thus globalization implies the growth of a single unified global market ending the importance of geography in finance.
The globalization of international finance entails both advantages and disadvantages. A major benefit of Financial Globalization is that the risk of a “credit crunch” has been reduced to extremely low levels. When banks are under strain, they can now raise funds from international capital markets.
Another benefit is that, with more choices, borrowers and investors get better pricing on their financing. Corporations can finance the investments more cheaply. The global citizen experiences the benefits of financial globalization as the overall quality of life has increased due to the economic growth that has occurred due to financial globalization.
Although what the global citizen may not realize are the risks that financial globalization poses to this new unified global market. A major disadvantage is that the markets are now extremely volatile, and this can be a threat to financial stability. Financial globalization has altered the balance of risks in international capital markets.
Globalization has had a huge impact on a governments control of their currency internationally. The powerlessness of the United States to raise the price of yuan against the dollar between 2005-2008 to reduce the huge United States balance of trade deficit speaks volumes of the government’s ability to modify the rates at which their currencies are exchanged.
Capital flight (globalization of finance) has resulted in inequalities. Although all countries are vulnerable the global south is the most dependent and vulnerable. Many scholars have called for the creation of more reliable multi-lateral mechanisms for policy coordination to better manage the massive movement of cross border capital.
In the era of globalization as all financial markets are connected to one another a substantial economic crisis could result in a global downturn as the global population witnessed with the 2008 economic depression caused by the collapse of the US housing market. With financial globalization, creditworthy banks and businesses in emerging markets can now reduce their borrowing costs. However, emerging markets with weak or poorly managed banks remain at risk.
Liberal theorists have attributed the many problems in the existing processes by which currencies are exchanged internationally under globalization to the weak and uncoordinated management of the international monetary system, a structural deficiency that they feel may amount to international anarchy.
Currently, there is no global financial architecture in place to manage the massive cross border capital flows although a set of loosely defined general principles of relatively universal scope are recognized worldwide. Many economists seek to create a mechanism to create currency stability and flexibility on which prosperity through trade depends on.
With the spread of democracy throughout the globe, most governments now face increasing pressure to sacrifice such goals as exchange rate stability for unemployment reduction. Thus, it seems the system of floating exchange rates and the globalization of finance is here to stay.