This paper examines the policy implications of structural changes in financial markets. Domestic financial markets have become less segmented, and the major financial centers more integrated. At the same time, the structural changes in financial markets have improved efficiency by lowering intermediation costs, increasing the ability to hedge financial risks associated with currency, interest rate, and price volatility and opening up access to new sources of savings. The widespread application of computer and telecommunications technology to financial markets has permitted markets to process a significantly larger volume of transactions.
One of the more important yet puzzling aspects of the recent global stagflation has been the rather surprising resiliency of growth rates of real income in non-oil developing countries during the 1973-80 period in the face of the marked slowdown of corresponding growth rates in the industrial world. The primary purpose of this paper is to shed some light on this phenomenon by examining the relationship between the rate of economic growth in the non-oil developing countries and that in the industrial countries over the past decade or so.
In this paper it is argued that in a system of widespread managed floating, as in a par value system with occasional floating, the problem of asymmetry of adjustment between the issuers of the principal intervention currencies and other countries and the problem of ensuring an effective international management of reserves remain to be solved. If the latter problem is less acute under a floating system, the former problem is potentially more acute than under par values. Although widespread floating would appear to offer no obstacle to the operation of a substitution account, its effect on the acceptability of asset settlement is debatable and it would add considerably to the difficulties of organizing multicurrency intervention. If politically acceptable, a system of guided intervention oriented to an established system of normal exchange rate zones would probably be superior to any other arrangement under floating for the purpose of promoting symmetry in adjustment, while permitting an adequate degree of exchange rate management and avoiding the anomaly of mutually offsetting intervention.
For the past hundred years the rate of growth of output in the developing world has depended on the rate of growth of output in the developed world. When the developed grow fast the developing grow fast, and when the developed slow down, the developing slow down. Is this linkage inevitable?1
In this section we begin our investigation into how the rate of growth of real income in industrial countries affects the income growth rate in non-oil developing countries by considering the relationship between income growth in the former and export growth in the latter.
This section focuses on the relationship between the export growth of non-oil developing countries and their economic growth rates. In brief, an attempt is made to identify the channels by which exports affect economic growth; whether the relationship between the two growth rates is rigid or subject to change; whether the relationship has strengthened or weakened over time; and how the relationship differs among the subgroups of non-oil developing countries.
This paper has examined the relationship between the rate of economic growth in the non-oil developing countries and that in industrial countries, with the intention of appraising the effects of slower industrial country growth on the non-oil developing countries during 1973—80. At the risk of oversimplifying the arguments and the evidence examined in the preceding sections, the principal conclusions emerging from our analysis can be summarized as follows: