Government's Role in an Interconnected Global Financial Market

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Recent events have merely confirmed what economists have known for some time, namely, that the interconnectedness of global economic activity renders macro-management by single governments redundant. Their function is now to regulate markets to ensure economically efficient solutions.

This essay will argue that the 2008 financial crisis has brought to the forefront of global political consideration what some economists have known for some time. This is that 1) The global financial system is inherently flawed and cyclical recessions are a product of its nature 2) The interconnectedness of the global financial system means macro-management cannot fully buffer an economy against these cyclical recessions 3) Policy has
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Kumar (1996) compares trends/fluctuations in key macro-economic variables in India pre and post 1991, both before and after initiation of new Indian economic policy in '91. These reforms included, amongst other things, the opening up of the Indian economy for international trade (prior to this India was a socialist state not involved in these markets) plus investment and heavy de-regulation processes. These particular changes to this policy allow for great insight into the impact of de-regulated, international capital trade on previously effective macro-management. He observes that this new economic policy increased economic instability which facilitates speculative activity, particularly resulting from financial sector liberalisation and the opening up of the economy. He adds that the observed increased volatility in economic fluctuations is a result from state intervention under these new economic policies that have reduced policy effectiveness. To quote: "The NEP not only lay greater stress on market forces but on opening up of the economy to foreign capital. This imposes constraints on policies since government cannot control the external environment which is governed by international finance capital- a force far more powerful than the Indian state hence able to dictate to it". He argues that since the interest of
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