Friday, May 25, 2007

The Next Great Globalization

Frederic S. Mishkin, The Next Great Globalization: How Disadvantaged Nations can Harness their Financial System to Get Rich. Princeton University Press, 2006.

Columbia University Professor Frederic Mishkin is a renown expert on banking, finance and monetary policy. His textbook on money and banking is the standard reference in this field. I was more than a little surprised, therefore, to find that he has written a book about globalization. It is a very good book and a very useful contribution to this field.

The conventional wisdom about globalization is that free trade is clearly beneficial to the world and to less developed countries, too (Mishkin calls them "disadvantaged" nations). But free finance is another matter. Financial globalization, most people insist, has not delivered the goods. The benefits from access to global capital markets, the story goes, are offset by the risks associated with hot money flows and the financial and currency crises that they have helped create.

Mishkin's book argues that global finance can have great benefits, but only if we do it right. As an expert on banks and finance, he argues that there are a number of important principles that must be followed in opening a "disadvantaged" economy to global capital markets. He explains these principles and then shows there relevance in three case studies: Mexico, South Korea and Argentina.

One of Mishkin's big points is that rich country credit markets are fundamentally different from poor country credit markets (the countries wouldn't still be poor, I suppose, if their credit markets were better able to facilitate economic growth), so policies that make sense for rich countries systematically create problems in poor countries. This is the same point that Joe Stiglitz makes when talking about trade. Interestingly, Mishkin singles out Stiglitz's proposals for dealing with poor country financial crises as an example of what's wrong with current policies. Stiglitz's ideas would work in rich countries, Mishkin says in Chapter 10, but they are exactly the wrong policies for poor countries. He concludes the book with chatpers on what rich countries and the IMF can do to make financial globalization work.

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