Globalization stalls due to crisis, study shows

ISTANBUL - Hürriyet Daily News

The financial crisis has slowed down the rate of globalization, McKinsey says. DAILY NEWS photo/ Emrah GÜREL

The 2008 financial crisis hit the pace of financial globalization as cross-border capital flows fell by 60 percent compared to its pre-crisis level especially due to decline from Europe, a McKinsey report has shown. However, the share of capital flow going to emerging markets surged by 32 percent in 2012.

The “Global Capital Markets 2013” report published by McKinsey Global Institute reveals the profound and lingering effects of the financial crisis despite major equity markets increasingly indicating hints of recovery.

“For three decades, capital markets and banking systems rapidly expanded and diversified but now that process –called financial deepening – has largely ground to a halt,” the report said.

The world’s financial assets grew rapidly from around $12 trillion in 1980 to $206 trillion in 2007 while the financial depth, which measures those assets relative to GDP, hiked from 120 percent to 355 percent during the same period.

In five years global financial assets have grown to $225 trillion, but the growth has slowed considerably as the financial depth plummeted by 43 percent between 2007 and 2012.

Over the same period, cross-border capital flows, one of the fundamental indications of the global integration level, has fallen by 60 percent, also mainly thanks to the increasing alignment of Europe – which used to account for half of the growth in global capital inflows – from global markets.

Eurozone banks have reduced cross-border lending by 3.7 trillion in five years with $2.8 trillion of that reduction coming from intra-European claims, while more than 50 percent of capital flows within Europe are from public institutions, including the European Central Bank.

“With hindsight, it appears that capital mobility in Europe outpaced the development of institutions and common regulations necessary to support such flows,” McKinsey said.

Flow to emerging world

Of the most striking outcomes of the report is that despite financial depth being low for emerging markets as well, capital flows involving them have rebounded after a sharp decline in 2008-2009.

McKinsey calculates that $1.5 trillion in foreign capital went to developing markets last year, which accounts for 32 percent of the overall global amount, up from 5 percent in 2000.

“Foreign direct investment [by private-sector companies as well as state-owned enterprises and sovereign wealth funds] and cross-border loans [from commercial and development banks] have also risen sharply in recent years.”