International Financial Markets and Financial Flows to Developing Countries
This course is made possible through the generous financial support of the Arab Gulf Program for Development (AGFUND). _For more information visit the Global Platform on Financial Inclusion _
Course Objectives By the end of this course, you should be able to: Understand how international finance has evolved over the past half century and the opportunities and risks it offers to developing countries. Have a sense of the state of financial flows to developing countries and of trends within these flows. Have familiarity with some basic terms and concepts that are relevant to an understanding of the subject matter of this course.
The first part is an overview of the history of international finance in the post Second World War period.
Part 1: A Brief History of International Finance and Description of the Post 1971 Order
The Post Second World War system was based on the agreements reached at the Bretton Woods Conference in 1944 at which the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD) were established.
This system required each participating state to establish a "par value" for its currency. The par value was to be determined in reference to the U.S. Dollar, whose value was set at $35 to an ounce of gold.
This meant, for example, that governments regulated the interest rates that banks could charge their borrowers and pay their depositors.
At the Bretton Woods Conference in 1944 which two organizations were established ?
Which of these was relatively fixed during the Bretton Woods era?
The Post 1971 Order Part 1: International Financial Markets (1972 to mid-1980s)
Under this new system, each country was free to choose whatever exchange rate system it wished, with the one exception that they could not set the value of their currency in terms of gold. The result was that most countries moved to more flexible exchange rate systems.
They also began to remove restrictions on access to their financial markets.
Five Critical Developments that Help Explain the Evolution in International Financial Markets
Since the end of the Bretton Woods era, there have been five developments that have influenced the evolution of financial markets. These five developments are: Technology 2. Deregulation 3. Securitization & Disintermediation 4. Changing Market Actors 5. Expanded Range of Financial Instruments
The dramatic developments in information and communication technologies that have occurred over the past two decades have facilitated the globalization of finance.
These countries were reacting to pressures from financial institutions who wanted to respond more effectively to the needs of their clients whose activities were becoming increasingly multinational and to the changes that were taking place in financial markets.
One consequence of deregulation has been a substantial increase in international capital movements.
What is the consequence of the improvement in technology used in international financial transactions?
Securitization and Disintermediation
Over the past twenty years there has been a trend towards structuring financial transactions so that the creditors can trade the financial instruments representing the debt transaction rather than having to hold the debt to maturity. This trend has been accentuated by two related phenomena.
The second phenomenon is disintermediation, which refers to the fact that both savers and borrowers are making less use of financial intermediaries such as banks in making their financial transactions.
Similarly, borrowers are discovering that they can raise funds from these asset management vehicles and such other financial institutions as insurance companies, in addition to commercial and investment banks.
What is deregulation?
Changing Market Actors The changes we have described have led to an expansion in the number of actors in international financial markets who are interested in providing funding to developing countries. The new players include mutual funds, unit trusts, insurance companies, pension funds, and individuals. The presence of these new actors has a number of implications for developing countries.
For example, in addition to standard loan agreements, borrowers can now obtain funds utilizing a range of securities.
These securities, in addition to coming in different currencies and with different maturities, may also have features that allow the holders or the issuers to structure the transaction to more closely meet their particular needs.
One consequence of the increased use of derivatives has been to strengthen the links between different financial markets and different financial actors.
It makes it possible for each of the original parties to a transaction to convert their bilateral transaction into a complex inter-linked network of transactions with entities active in different markets.
Which are examples of a new actor in international financial markets? Select 3 answers
The Impact of These Developments on Developing Countries
The developments described in the previous lesson have had a number of impacts that are relevant to developing countries.
As a result, national regulators cannot assume that all the holders of their debt instruments are citizens or residents of their jurisdiction. Some of them may be foreigners who are largely outside the scope of their jurisdiction.
This has obvious implications for monetary policy, debt and financial management and for the regulation of financial institutions and financial markets.
A second consequence is that financial markets have become stratified so that different categories of potential borrowers have very different levels of access to the markets.
The Challenges for International Finance and Financial Flows to Developing Countries
Some of these challenges include:
How to deal with increased uncertainty and the volatility of international financial flows? This challenge places a premium on risk management and effective regulation.
How to ensure that poor countries that are dependent on official sources of funds are able to obtain access to sufficient funds? This also implicates the issue of global economic governance because it raises the issue of how should these official sources use and can be held accountable for the use of their increased power over those member states that have become more dependent on their funds?
How to deal with the income and wealth inequalities that seem to be a feature of modern life both within countries and between countries and that seems to be related to the changes in access to and allocation of credit that have occurred over time?
Part 2: An Overview of Financial Flows to Developing Countries
Global flows of FDI will be under severe pressure this year as a result of the COVID-19 pandemic.
Flows to developing countries will be hit especially hard, as export-oriented investments and manufacturing-linked investments are among the most seriously affected.
Key Concepts Related to Flows of Funds
Official v. Private Sources of Funds: Official sources are funds that are provided by the public sector. It includes governments and their agencies and instrumentalities, and international organizations.
Summary and Glossary
During this period, most countries imposed restrictions on international financial flows especially capital movements.
Major international institutional agreements after World War II, such as the Bretton Woods agreement, liberalized international trade but did not do much to free the movement of international capital flow.
That situation changed dramatically in the 1970s, and the pace of change accelerated during 1980s.
There were five developments that have influenced the evolution of financial markets as illustrated in this module.
These developments have led to massive international capital flows across boundaries. At the same time, the structure and operation of international financial markets have been transformed.
Nowadays, international financial markets are highly integrated, and transactions have become increasingly complex.
The developments described in this module have increased the growing integration of the developing market economies into global financial markets.
This has been significantly affected by the role that the international financial institutions - particularly the WB and IMF play in international finance, as it will be studied in the next modules.
Introduction to International Financial Markets: Quiz
Generally cursory and introductory but touched on enough areas of international finance.
It's a great presentation I received and went through the course. It's actually convincingly and it grabbed my attention.