World Finance in World Economy and International Economic Relations System

Characteristics of the World Financial System

The Essence of International Financial Flows

The overflow of money capital from one country to another within world economy creates the world's financial flows.

International financial flows are a set of financial transactions, the object of which is the money capital.

These flows serve both international trade in goods and services and reallocation of capital between countries.

The main channels of financial flows movement are:

• the monetary and settlement services for trading in goods and services;

• foreign investment in fixed and circulating capital (FDI);

• transactions with securities and different financial instruments;

• currency transactions;

• the assistance to the developing countries and state's contributions to the international organizations.

The volume and direction of financial flows depend on various factors. They are:

1. the state of the world economy. Thus, the economic recessions in the industrialized countries usually cause declines in the growth rate of world trade, and vice versa;

2. the reduction of trade barriers;

3. the different rates of economic development (synchronous or asynchronous in the economies of advanced countries);

4. the restructuring of the economy of a country;

5. differential gap in inflation and interest rates;

6. the rapid growth of international capital flows in comparison to international trade. This influences the size of the international financial markets;

7. the transition of industrialized countries from labor-intensive to knowledge-intensive production;

8. the increase of the diversification activity of TNCs, including international investment in joint ventures. Joint ventures reduce the need to send the products from one country to another. This reduces the volume of international trade, but increasing international investment. In addition, TNCs carry out the massive transfer of low-technology productions abroad;

9. the increase of the balance of payment deficits as a result of the imbalance of international payments.

International financial flows are directed to those areas and regions where is the demand for them and there is an opportunity to get the greatest return.

Flow of funds (in the form of money, in the form of various kinds of finance and credit instruments) carry out through banks, specialized financial and credit institutions, stock exchanges, which form the global financial market.

Financial flows are enormous. According to some estimates, the daily transactions of the global financial markets is 50 times higher than the transactions of world trade.

The Nature of the World Financial Market

The world financial market is traditionally divided into the international exchange market, the international debt market and the international securities market, each of which includes Euromarkets (Eurodeposit, Eurocredit, Euroequity, Eurobond and Eurobill markets, etc.). According to another model, the world financial market, depending on the timing of property rights, is divided into the money market and the capital market (stock market) [16, p. 436]. The simplified structure of the world financial market is shown in Fig. 6.1.

The structure of the world financial market is very complex and the strict line between its components cannot always be drawn. Thus, the international bond market is a part of the international securities market by one criteria and is a part of the international debt market by another criteria; the international market of titles of ownership is an element of the international securities market and the international capital market as well.

The purpose of financial markets is to ensure the efficient allocation of the available spare capital between final consumers (investors). Financial markets are the mechanism that drives for transactions of those who offer money to those who are looking for them. To increase the efficiency of allocation of available funds, there are financial institutions - the intermediaries between lenders and end-use borrowers. They offer a professional service based on the connection of supply and demand for capital to firms, citizens and governments and operate in the particular legal and tax space. It should be noted that the financial institutions, in the narrow sense, are considered as financial organizations, and in a wide sense - the normative regularity, the system of monetary and financial operations of these organizations.

The current world financial market is characterized by:

• a significant amount of financial resources and the transactions carried out around-the-clock, most of which are unified and to which entities with a high rating are attracted;

• the abolition of restrictions on financial flows across borders, such as capital controls and limit circulation of foreign currencies; high use of information technologies, which reduce transaction costs between countries;

• using a variety of financial instruments.

The structure and the components connection of the world financial market

Figure 6.1. The structure and the components connection of the world financial market

International capital flows is 5 times higher than the international flows of goods and services. Due to the fact that the monetary means are moving faster in relation to changes in interest rates and foreign exchange rates, the international mobility of capital intensifies the instability of exchange rates. Foreign exchange rates have become more volatile in the national macroeconomic policies. The high mobility of capital has led to increased interdependence of national economies, weakened the autonomy of national policies, despite the existence of floating exchange rates.

The main trends, observed in world financial markets, are:

1. The creation of currency blocs around the major currencies of the world.

2. Changes in the structure of financial market instruments in favor of instruments of the real sector - the corporate securities and their derivatives.

3. Stock markets are the main structural element of the financial sector. The banking sector cedes a role of a redistribution mechanism of financial assets to the stock market.

4. Growth of the interrelation of the financial and real sectors of the economy.

5. The growth in technological modernization of financial markets based on the Internet technology.

6. Changes in the ideology of the international financial institutions. These organizations have focused on increasing the responsibility of developing countries for the stability of the national markets, and have refused to act as a guarantor of stability in their financial markets.

7. The sharp increase and dominance in global financial markets of speculative transactions, which account for over 95% of all financial transactions.

< Prev   CONTENTS   Next >