Global financial integration - are we there yet?
In a fully financially integrated world, real interest rates will be the same; investments with similar risks will provide the same return across the world. So in such a “one price holds” situation, money will flow to wherever be the maximum return. We are not there yet, but integration has progressed in a regional and global level in the past decade or so.
Regional financial integration increases economic growth and global integration reduces risk by diversification among less correlated macro economies. As the financial world is yet to be perfect, these benefits also come with potential risks also, for example a country can be affected by a financial crisis elsewhere.
September 07 BIS report cites the Chen et al (2006) study from 1994 to 2005 sample period to say that country specific factors are more important than sector specific factors in emerging markets. This is in contrast with US and European economies where sector specific factors are more important than the country specific factors. This shows that the emerging markets are still lagging in their level of integration compared to major markets. BIS report also suggests a stronger regional integration to advance a global integration considering the example of newer European members and their advanced stage of global integration via the regional integration by EU. Report also calls for more regional integration by regional financial centers and their collective action.