Global Finance and Financial Inequality
Global finance is the leading factor affecting income distribution in the world. Financial institutions have been crucial in regulating money supply in the economy and also act as income distribution agencies for the government as the distribution of income is done on a priority basis. However, international trade has gained traction; since then, income distribution depends on the forces of demand and supply other than the government. The control of money supply in the economy has become a challenge for the government due to globalization. Globalization has broken territorial boundaries causing governments to have no jurisdiction in controlling its money supply in foreign states. Besides the regulation of money supply, market forces of demand and supply determine the strength of a currency. Hence governments have to participate in international trade to increase national income actively.
The financial inequality gap has been on the increase in the past three decades, most of its rise is due to the failure of the financial institutions to regulate money supply in the economy effectively. Income redistribution is a challenge for global financial institution owing to the introduction of virtual money, which is universal and challenging to regulate. E-cash and the rising need for a digital market have caused problems for central governments in regulating the conduct of economic agents and the economy at large. Furthermore, digital money has rendered the borders around local markets and international markets increasingly penetrable (Kobrin, 1997). The implication is that governments have to synchronize their policies with the electronically networked global economy for better economic and political governance. Even so, it has proven extremely difficult to formulate such procedures due to the complex form of globalization especially in international trade. As a result, governments have found it hard to catch up and perform their mandates of collecting taxes and regulating financial institutions effectively.
Global finance has remarkably improved the world’s average income. However, the improvement has not been uniform as rich countries have seen a more than proportionate increase in Gross Domestic Product (GDP) compared to developing countries.The uneven distribution of income is due to the rapid growth in international trade. National income is dependent on international trade; hence countries with a variety of commodities to trade in the global markets such as natural resources, manufactured goods and labor tend to have a high national income.The inability of developing countries to participate in international trade due to lack of resources and inferior technology lowers the strength of the domestic currency. According to Alami (2019), this asymmetry converts into the inconsistent ability to develop states to draw in worldwide cash capital streams, resulting in low income. Besides, developing countries import more than they export and have little foreign investment consequently, they lack sufficient funds to purchase capital equipment and inputs required for development purpose hence they are unable to use resources at full capacity.
In conclusion, to raise the living standards of developing countries, there is a need for organizations such as World Trade Organization (WTO), World Bank and the International Monetary Fund to create economically benign conditions. Besides, boosting the confidence of financial institutions in these countries, trade agreements should favour all parties and not the advanced nations only. Moreover, the global financial institution should encourage labour mobility as it allows low-income countries to transfer idle semi-skilled and skilled workforce to developed countries and in return, earn foreign income which aids in improving development. However, international trade regulation is a challenging task as every nation seeks to better its position in the global trade market, which is governed by the free forces of demand and supply.
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