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The Next Great Globalization: How Disadvantaged Nations Can Harness Their Financial Systems to Get Rich

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As the final word, Mishkin says: "...the next great globalization should be financial. I hope this book provides some guidance on how it can be done right."

It sure did.

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(Since my review is somewhat long, I'll present the outline first.) I've scrutinized the book with much care, and I'll write about the following reviews in sequence:

I. Book's main issue
II. The author's standpoint
III. Book content summary
IV. The writing style
V. My personal view about globalization

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I. The issue of the book

This book touches the grand topic of financial globalization, which is something important yet confusing to us ordinary people. Though the topic has a large audience, few writers dared to address it, since the picture of globalization is too big and complex for most to envision, to understand, to interpret. THEY ARE SIMPLY UNABLE TO HANDLE IT. Those who are interested in globalization - and especially financial globalization - have been waited a long time for someone who can really explain it for them.

Mishkin didn't fail us. In a relatively short book, he outlined the whole structure of financial globalization with nations as the basic unit of study.

I think this books is comparable to <The world is flat>, in which the journalist Friedman painstaking drew the huge picture of globalization with vivid stories and anecdotes. He did make the whole thing come to live. And this book is different in nature. While Friedman strived to give us an INTUITIVE FEELING about globalization (even created a phrase to capture the elusive concept - "the flat world"), Mishkin tried to RATIONALLY ANALYZE it for us. While Friedman kept our mouth open APPERCIATING the effects of globalization, Mishkin keeps us thinking about HOW it works. While Friedman enabled us to ENVISION it, Mishkin enabled us to UNDERSTAND it.

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II. The author's standpoint

Like most economists, Mishkin is strongly "pro-globalization", even when talking about the controversial - financial globalization. He believes that successful participation in the world capital market can give weak countries the chance to catch up with their rich brothers. He argues persuasively that financial liberation in a country is mostly about how to get the SYSTEM right. It is the institutional design that matters most, not the amount of capital in it. As he puts it, when the institutional structure is in good shape, the market can attract investment, allocate them to their most effective uses, and keep away from financial crises.

As for the basic infrastructure of financial system, he mentions the following elements again and again:

1. Developing strong property rights. Lack of property right protection kills investment incentives.
2. An effective and efficient legal system. If the legal system doesn't work or work too slowly, it will also be a huge impediment to investing.
3. Financial supervision and regulation. Such practice include increasing market transparency, enforcing strong accounting standards, imposing safe capital requirement of banks, effective supervision of the financial institutions, and so on.

Although the prospect of financial globalization for "emerging market economies" is brilliant, powerful politicians and businesses may have strong will against it. Especially domestic monopolies, they hate globalization because it brings competition.

Mishkin believes that the action of globalization can "force" reluctant officials and business elites to embrace globalization, by giving them incentive and increasing competition.

Mismanagements by the elites will cause severe problems. For example, in an attempt to quickly privatize the banks, the Mexican government made many impudent moves that left the financial system at high risk, which resulted in a lending boom. The same thing happened when the chaebols (huge family-owned conglomerates in South Korea) perverted the financial liberalization process to suit their insatiable thirst for capital, which also resulted in a financial crisis.

The author believes that the financial crises of "emerging market economies" are generally "homegrown". External effects function only as problem accelerators.

In his analysis of the three typical financial crashes, one important villain in monetary policy is "pegged exchange rate + liability dollarization". It is also argued that, to keep the financial system in good shape, both fiscal and monetary policies must be responsible.

He believes, although quite naively, that the IMF and some other institutions (his brainchildren) can be "lender of last resort" and therefore act as the savior of weak countries in trouble.

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III. Content summary


The first part of the book, "Is financial globalization beneficial?" illustrated why financial globalization is bound to come, what it will look like, and how such globalization can change our lives for the better.

Then, the second part, "financial crisis in emerging market economies", showed how the whole thing can go wrong if mishandled. With case studies of three financial crises (respectively in Mexico 94', South Korea 97 - 98', and Argentina 01 - 02'), Mishkin showed us how strong political and business interests can pervert the right course of financial liberalization, give rise to unhealthy lending booms with large amounts of bad loans, and how such problems can eventually turn into currency crises, and finally, full-fledged financial disasters.

The third part, "How can disadvantaged nations make financial globalization work for them", gives prescriptions to developing nations on how to enter into the world capital market profitably and safely.

The fourth part, "How can the International Community Promote Successful Globalization?" centers on the roles of IMF and advanced countries in helping new comers. This part, however well intentioned, is little if at all useful. IMF and other international institutions, in which Mishkin places unjustified hope, are largely manipulated by political interests of strong countries. The world powers dominated it. For example, since the IMF requires an 85% vote to get a bill passed and U.S. counts as 17%, the United States actually has a veto. Probing into the history, we see they frequently fail to act in the interest of the weak countries in trouble. Unfortunately, even Mishkin himself agree that the IMF, as well as the World Bank, cannot take the role of a savior.

The final part, "where do we go from here", is an epilogue with a hopeful look into the bright future of financial globalization.

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IV. Writing style

Luckily, his writing is rather layman-friendly! With careful explanation and detailed analysis, even those with no prior knowledge about finance can understand many technical terms after reading. Ever terrified by such words like "liquidity", "liability dollarization" and "financial liberalization"? Don't worry. They will be part of your active vocabulary after this book.

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V. Some personal thoughts on financial globalization

Although undesired by many, globalization, in today's world, seems more and more unavoidable. Most of us have sensed its rush towards us, gaining momentum along the way. Therefore, we need to get ready for it, with both an open mind but also aware of its potential to do harm.

Caution first:

I think the problem in globalization is INHERENT in PRINCIPLE OF ECONOMICS. Most economists are fond of globalization just like they are fond of free-trade, since globalization is virtually FREE-TRADE in THE WHOLE WORLD. According to the economics theory, "TRADE MAKES PEOPLE BETTER-OFF" by allowing them to specialize in their advantaged area. Free-trade promotes competition, which results in lower prices for better goods.

However, when we take the social effects into account, TRADE DOESN'T NECESSARILY MAKE PEOPLE BETTER-OFF, since it maximizes profits AT THE EXPENSE OF POLARIZATION. The rich get richer and the poor get poorer. Let's consider welfare: economists would tell you unanimously that any form of welfare reduces economics outcomes. True. But aren't those who live in the European welfare states happy about their society safety net? Furthermore, pursuing free trade and increasing the income gap means decreasing social stability, and this undermines the economy in return - the poor not only get poorer, but also angrier.

Therefore, if the whole world is to be integrated into one single economy (as is the ultimate future goal of globalization), we can expect severer polarization. You might say, well, since a free-trade country can solve its problem, why cannot a free-trade world? The situation is, when wealth distribution gets too uneven in United States, there is still a federal government to redistribute for U.S. citizens. However, when the inequality occurs on a global scale, who is going to redress the problem for World citizens?


An open mind is also important:

There are certainly beneficial outcomes for globalization besides the creation of a world-free-market. Some of them are:

1) Financial opportunities

Utilizing financial globalization resources is a great opportunity for the poor, as illustrated by Prof. Muhammad Yunus's (06 Nobel Peace Laureate) feat with Grameen Bank. His micro-loans to the poor in Bangladesh has lifted millions from absolute poverty by enabling them to operate their own business. On a much larger scale, countries can attract foreign capital to speed up its development, although this must be done with excessive care.

2) Trade globalization

Trade globalization enables developing countries to adopt an export-oriented economy, which proved highly successful, with wonderful examples by the rise of post-war Japan, South Korea, China, etc. With large working forces at lower wages, by focusing on manufacturing, countries can create jobs for their citizens, gain profit from selling things to rich countries, and building political friendship by trading. The fact that almost all countries strive to get into the WTO shows the importance of trade in a country's economic development.

3) Information globalization

Information globalization helps poor countries develop faster. With today's information technology, even the poorest nation can gain access to much of the expertise in leading countries, provided 1) internet is linked 2) literacy. This is really, really exciting! Computers ties the whole world together, and they effectively expedite the process of "learning" between countries, allowing "students" to rapidly grasp the knowledge their "teachers" spent hundreds of years to develop.

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In general:

When something is unavoidable, you just have to be ready for it. Globalization is such a thing. The recent fact is that the wealthy are doing a good job harnessing globalization for their use, while the poor are either ignorant or terrified of the issue. This is troublesome. If they do not catch up with the notion of globalization and be prepared, they will be thrown behind even further. They must do something. Frankly, I don't know whether a "globalized" world will stop the gap from widening, but I know an "unevenly globalized" world will make the widening even faster.

In his book Frederic Mishkin sets out quite convincingly how countries can increase their wealth by establishing financial systems which are transparent, well regulated and governed by the rule of law.

First the author explains the conditions required for implementing a functioning financial system. Then Mishkin has a close look at the financial crises in Mexico, South Korea and Argentina and every single one of those is worthwhile reading because Mishkin explains in detail how the conditions for the financial crises came about, how the authorities reacted to it and how well they have been able to put these crises behind them.
If Mishkin ever writes another edition of this book he should perhaps add a chapter for the USA. Even though it is not exactly an emerging economy it is a classic example of what can happen if any part of a financial sector is not comprehensively regulated. In the final three parts of this book the author discusses how financial globalization is best implemented.

What Mishkin tells in his book is not exactly new. Most of it has been known for a while. But as long as there are countries who believe that wealth can be created without any of the necessary requirements listed in Mishkin's book, it should remain compulsory reading for everyone.

Whilst Mishkin tells it like it is, you just may want to follow on with "EXTREME COMPETITION" by Fingar, and "THE WORLD IS FLAT," by Aronica and Ramdoo to get to the "what do I do tomorrow."

Great book, Mishkin... readers, keep reading!