Introduction

Financialisation can be defined as a size increase as well as the importance of the

financial sector of a country relative to its overall economy. Financialisation has led to

greater investment technologically as well as the development of products since Wall Street

chases financial returns of the short term over long term goals (Belfrage and Kallifatides,

2018). The importance of studying financialization is the fact that it helps one understand

how it impacts both macro and micro economy through changing how financial markets are

operated as well as structured by influencing economic policy and corporate behaviour.

Globalisation on the hand can be referred to as the policies collections that are associated

with free trade, global sourcing, multi-national businesses as well as capital mobility

(Selwyn, 2019). Thus, this paper will delve into discussing some costs and benefits of

financialization in the economy as well as giving an explanation of how globalisation has

increased inequality.

Financialisation Benefits

Financialisation has several benefits as discussed below. External participants in the

market provide more efficient financing as compared to the local ones, leading to growth

improvement prospects for new risk-taking ventures. Accurate pricing is a general accepted

positive externality for a market and thus, making integration into a greater market scheme

where the participants can import external correlated perspectives or information as well as

local market factors with great accuracy (Van der Zwan, 2014). Derivatives give an

allowance of characterization as well as the pricing of risk in second-order, which proves to

be of help for specific market forecasting as well as allowing people to make informed

decisions. It also enables the participants to increase specialization because they can offset

various risk exposure where they do not wish to spend their effort and time. Due to lower
transaction costs individuals as well as associations can look around for the best loan which

matches their needs (Bieling, 2013). Another advantage is that future contracts for currencies

can assist in exporter’s insulation from exchange rate swings. For instance, exporters could

be made unprofitable by a rapid appreciation. Future contracts can smoothen over this

unexpected appreciation thereby encouraging investment through firm exportation. The

financial sector allows the foreign flow of capital where inward investments create jobs thus

helping a developing economy to catch up.

Cost of Finacialization

Financialisation heavily correlates local markets to external ones, thus exposing them

to liquidity crises as well as deleveraging once the participants of the external market enter.

Another cost is that a newly structured market naturally, usually entices additional market

participants to enter especially for allocation of AUM with a specific mandate which often

leads to a return-chasing condition which can develop bubbles (Bieling, 2013). Another cost

is that if the participants are potentially larger but the market is smaller and they put it into a

consideration of a simple small fraction of their portfolio, there may arise a diminishing

marginal rate of return in too much time spent focusing on it, which might through pricing

out of whack, since the investors may have improper rebalance with the new information.

However in an alternative case, if the market is too small, large participants to begin

with they may exclude it thereby leaving it to more specialized participants (Belfrage and

Kallifatides, 2018). Laying focus on finance can be harmful to investment in industry as well

as real goods; research has shown that after a certain point of development in an economy,

quick growth in finance is bad for aggregate real growth. This finding can be interpreted in

the sense that booms in financial sectors are inherently bad for growth trend. Another cos is

that financialisation has caused the creation of wealth by raising the prices of assets rather
than by increased production and innovation (Van der Zwan, 2014). Consequently, this

encourages rent-seeking where wealth as well as income is sought from the success of the

financial firm. It diverts efforts and time away from seeking profit from goods and services

production. High wages in finance sectors attract skilled graduates especially those with

science and math degrees and take them away from jobs in the real economy that are more

productive.

Globalisation

Globalisation increases inequality for example in income and wealth inequality could

be increased since it usually leads to high profits for multinational associations like google

which feed into pay-out that is generous for senior executives as well as dividends increment

for shareholders. Another way of increased inequality is through the increased demand for

and returns to high-skill work as well as lowering the earning expectations of individuals in

relatively low knowledge and skill occupations (Selwyn, 2019). One of the driving forces of

foreign direct investment is that resources tend to flow where the cost of a production unit is

low. Also, inequality is increased by trade and specialisation increment. An increase in trade

to the GDP ratio signifies an increased value and volume of trade between regions as well as

countries. Trade based on comparative advantage can lead to poverty rise although it has the

potential of stimulating growth as well as lifting per capita income (Seabrooke and Wigan,

2017). For instance, if a given country exports cheap steel from elsewhere it would result in a

contraction in domestic supply and a fall in employment as well as real income in that

country’s firm.

Conclusion

Financialisation can be concluded as a reference to particular trends in an economy’s

financial sector which includes increased importance that is put on the financial sector for the
shareholders’ value concept as the firm’s primary motivation. This could lead to

organisations becoming more focused on dividends maximisation to please shareholders. For

this reason, downward wage pressure can be arrived at as well as short-termism rather than

investment in the long term. The costs of financialisation from the above arguments have

proved to be more than the benefits.it is not inevitable that globalisation also has led to

increased inequality of income and wealth and big changes have been experienced in the

workforce in earnings between different groups.

 Bibliography

Belfrage, C. and Kallifatides, M., 2018. Financialisation and the new Swedish

model. Cambridge Journal of Economics, 42(4), pp.875-900.

Bieling, H.J., 2013. European financial capitalism and the politics of (de-)

financialization. Competition & Change, 17(3), pp.283-298.

Seabrooke, L. and Wigan, D., 2017. The governance of global wealth chains. Review of

International Political Economy, 24(1), pp.1-29.

Selwyn, B., 2019. Poverty chains and global capitalism. Competition & Change, 23(1),

pp.71-97.

Van der Zwan, N., 2014. Making sense of financialization. Socio-economic review, 12(1),

pp.99-129.