After the 2008 crash, finance finds a new meaning and purpose. Financial globalisation has transformed to favour nurturing businesses and investing in the developing world above risky speculation.
In the immediate aftermath of the global financial crisis a decade ago, lending dried up and more people were pushed below the poverty line in the Global South. Ten years later, cross-border capital flows are still down by two-thirds. But with more direct investment and less risky lending; more developing countries participating; and more peer-to-peer transactions, the shock to the system has made financial globalisation more balanced and resilient, according to a new report produced by McKinsey Global Institute.
In the wake of the worst financial crisis since the Great Depression of the 1930s, while banks now precede more carefully with foreign lending, the McKinsey Global Institute says, total foreign investment relative to GDP has changed little since 2007. Developing and emerging countries have become more connected to global finance, with their share of total foreign investment assets rising from eight per cent to 14% over the decade. China, Mauritius, Russia, Mexico, Brazil, Indonesia, Thailand, the Philippines, Chile, South Africa, Malaysia, Peru and Morocco also all have foreign assets and liabilities higher than the total value of their GDP, with Argentina, Nigeria and India not far away from this figure, states the report, The New Dynamics of Financial Globalisation. China, in particular, is a significant investor in Africa and Latin America.
It is a two-way street: after post-crisis retrenchment, developing countries are net recipients of foreign capital flows again. South Africa, for example, holds $409 bn of foreign assets and a similar amount, $414bn, in foreign liabilities. Nigeria has $131 bn that it has lent abroad to set against the $182 bn that it borrows. Total capital inflows to developing countries is now as high as they were in 2006, a year before the crisis. A number of developing or emerging countries are net savers in the system: Malaysia, Russia and Thailand, while a host of others, including Brazil and Mexico, have growing financial- and capital account surpluses, meaning they are increasingly playing the role of contributors.
This leads the report authors, including partner Susan Lund and chairman and director James Mayika, to declare: “Financial globalisation is broadening and diffusing.”
There has been a major shift, the McKinsey report says, to more foreign direct investment, which now stands at more than two-thirds of total flows, and a sharp drop in lending, much of which was interbank lending and the buying of complex debt securities, which fueled the global credit bubble ten years ago. This trend will “bring more stability to cross-border capital flows” for developing countries. In addition, remittances to developing countries from foreign migrants are also providing a larger source of more stable capital, climbing to $480bn last year, 60% of private capital inflows to developing countries.
Globalization and Blockchain Technology
McKinsey believes that blockchain technology has the potential to further increase capital inflows to developing countries still further by making cross-border financial transactions including peer-to-peer lending and remittances cheaper and more secure. Lending through digital platforms is only a tiny fraction of total global financial flows today, but “the potential is enormous”. Already, platforms such as Kiva, Kickstarter and Zopa are increasingly used to raise money and procure loans, it notes. With traditional cross-border payments expensive and slow, the business model for such providers of cash-management will be “transformed,” as person-to-person remittances are made at a fraction of the cost.
Peer-to-peer lending startups are proliferating in Asia, many operating across borders, such as Japan’s CrowdCredit operates a cross-border lending platform for both individual investors and small- and medium-sized enterprises (SMEs) that can lend in countries such as Cameroon and Peru, and the Kuala Lumpur-based Crowdo, with 20,000 members, it says. The biggest impact, however, will be in trade finance, with small and medium-sized enterprises to benefit.
If clearing and settlement was processed using blockchain technology, this could save as much as $60bn in business-to-business cross-border payment costs, McKinsey estimates, concluding: “This technology will further broaden participation in global finance to more firms, investors, and countries.” To date, the digitisation of trade finance has lagged behind that of other parts of the financial system, despite it being a form of finance that “has traditionally been so inefficient, document-heavy, and open to fraud”. Platforms are now emerging to provide trade finance, it says, and banks will have to rise to the challenge of the competition from fintech companies and facilitate international trade for small businesses.
Thought leadership series on new trends and blockchain, powered by Humaniq.
Launched in 2016, Humaniq aims to provide mobile finance to the 2 billion unbanked population through its mobile app for good, that uses biometric authentication to replace traditional methods of ID and security. Humaniq’s open source stack and API will be available for startups and other businesses to build services on its core technology, making it easy to adapt their service and plug it into Humaniq’s network to reach a huge, untapped audience.
Lee Baker is a storyteller and community organiser who inspires and prepares people for leadership. He trained as a journalist after writing his first article at the age of 13 and gained a Masters in Modern and Contemporary Literature. His journalism is designed to help influence better policy-making and he works with change-makers to tell their stories to communicate how others might follow. He is a south Londoner who has supported people to confront those in power in Brixton and win changes. He set up his own social enterprise driven by the belief that everybody can demonstrate leadership. He has designed and delivered training courses to help unleash this potential.