Financial integration and national autonomy: China and India

Abstract

The narrative as well as the analysis of deregulated finance in the global economy remain incomplete unless one relates to the surges as well as volatility in capital flows which are experienced by the emerging economies. An analysis as above needs to consider the implications of capital flows in those economies, especially in terms of the ‘impossibility’ of adopting monetary policies which benefit growth in the national economy. There is also a need to recognise the role ofuncertainty and the related changes in market expectations in the (precautionary) accumulations ofthe large official reserves as are held by these countries. The consequences are found to affect the fabric ofgrowth and distribution in these economies. Recent experiences ofChina and India, with their deregulated financial sectors, bear this out. Financial integration and free capital mobility, which are supposed to generate growth with stability in terms of the ‘efficient markets’ hypothesis, have failed, and not only in the advanced economies but also in the high-growth developing economies like India and China. Deregulated finance has led these countries to a state ofcompliance, where domestic goals ofstability and development are sacrificed to make way for the globally sanctioned norms relating to free capital flows. With the global financial crisis and the spectre ofrecession haunting most advanced economies, issues as above in the high-growth economies in Asia have drawn much less attention than they deserve. This oversight leaves the analysis incomplete by ignoring the structural changes that result in these developing economies-which are of much relevance to the pattern offinancialisation and turbulence in the global economy as a whole.