History of globalization of finance

Economic interdependence of nations of the world is referred as globalization.Some analysts say that the very phenomenon of globalization is nothing new, it started in mid-1800’s only.

Early phase of globalization consisted of two distinct phenomena namely, globalization of production and globalization of finance.In recent past, globalization of finance attained a position of greater prominence and dominion than that of production. e.g.- By 1986 about $188 billion passed through the hands of currency traders in New York, London and Tokyo everyday but, by 1995 the daily turnover reached almost $1.2 trillion.This was a major leap taken in the currency trading due to globalization of finance.

As stated by Deepak Nayyar, in 1914, the stock of long-term foreign investment in the world economy was distributed as follows: 55 percent in the industrialized world(30 percent in Europe, 25 percent in the United States) and 45 percent in the underdeveloped world(20 percent in Latin America and 25 percent in Asia and Africa).In 1992, the stock of direct foreign investment in the world economy was distributed in a far more uneven manner: 78 percent in the industrialized countries and 22 percent in the developing countries.

Historically, the functioning of foreign exchange was greatly dependent on international trade as buyers and sellers of foreign goods and services needed another currency for the establishment of their transactions.But this scenario changed to a great extent during mid-90’s, as the trade in currency was left with very little share in international trade, as it remained at a share of just two percent of the global currency movements.So, globalization of finance no longer remained complementary to international trade and investment and gained a life of its own.

These days, financial flows are largely liquid and are attracted by short term speculative gains and they can leave the country as quickly as they come.Financial instruments like bonds, derivatives, mutual funds, gross depository receipts etc. have contributed greatly in the globalization of finance.

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