The Role of International Capital Markets in Economic Growth

National boundaries are no longer an obstruction to lenders and borrowers meeting in a market to buy and sell securities. It is possible for borrowers in one country to issue securities denominated in the currency of another, and these to be sold to investors in a third country. Often, such transactions will be organized by financial institutions located in yet another country, usually one of the three primary centers of these international capital markets which are New York, London, and Tokyo.

There was some significant beneficiary that could be impact by international capital markets for the growth of economy. And These are two of their benefits :

1. Capital Markets Improve the Allocation of Capital

The development of the capital markets has generated two major sets of economic benefits. First, it has improved the allocation of capital. Because the prices of corporate debt and equity respond immediately to shifts in demand and supply, changes in the outlook for an industry (and/or company) are quickly embodied in current asset prices. The signal created by such a price change encourages (i.e., by higher prices) or discourages (i.e., by lower prices) capital inflows into the industry (and/or company). Businesses with high returns attract additional capital quickly and easily. When returns drop due to added capacity or a decline in demand, prices drop, and this signal causes investors to cut the flow of new capital to that industry.

The ability of companies in their early stages of development to raise funds in the capital markets is also beneficial because it allows these companies to grow very quickly. This growth in turn speeds the dissemination of new technologies throughout the economy. Furthermore, by raising the returns available from pursuing new ideas, technologies, or ways of doing business, the capital markets facilitate entrepreneurial and other risk taking activities.

International capital market also provides equity capital and infrastructure development that has strong socio-economic benefits in developing countries like roads, water and sewer systems, housing, energy, telecommunications, public transport, ideal for financing through capital markets via long dated bonds and asset backed securities. Capital markets are very important because they play a significant role in the economy by channeling investment where it is needed and put into the best use.

2. Capital Markets Help Facilitate Superior Economic Performance

The improved allocation of capital and risk sharing facilitated by capital markets has led to superior economic performance. As the capital markets have become more developed in the UK and the US, the economic performance of these countries has improved. Superior economic performance is measured by three different aspects :

2.1 Higher productivity growth

The capital markets have played an important role in this process. First, the capital markets helped improve the allocation of capital, thereby raising the average return on capital. Second, the capital markets facilitated the allocation of risk and helped provide a mechanism by which start-up companies could raise capital.

2.2 Greater macroeconomic stability

Capital markets have helped to reduce economic volatility in two ways. First, because the capital markets use mark-to-market accounting, it is more difficult for problems to be deferred. As a result, pain is borne in real time, which means that the ultimate shock to the economy tends to be smaller. Second, by providing immediate feedback to policy makers, the capital markets have increased the benefits of following good policies and increased the cost of following bad ones.

2.3 Greater home ownership

The revolution in mortgage finance has increased the ability of households to purchase their own home. The closing costs associated with obtaining a residential mortgage have fallen, and the terms (for example, the loan-to-value ratio) have become less stringent. At times, homeowners can obtain 100 percent financing to purchase a home.