Financialization of the Global South economy is gaining momentum. This process changes the structure of the economy and determines its resilience. However, financialization comes with both opportunities and challenges. Developing countries must consider these aspects when forming their development strategies.
The UNCTAD 2024 report shows that the growth of financing through financial instruments has become an important factor for the countries of the Global South. At the same time, financial dependence on external sources increases the vulnerability of economies. Global shocks, such as crises caused by the pandemic and geopolitical instability, have a significant impact.
Financialization has led to an increased role of the financial sector in the economy, which can be seen in the changing structure of GDP. The finance, insurance, and real estate (FIRE) sector dominates in some countries, reducing the share of productive activities. This creates risks for long-term development and improving living standards.
One of the key challenges is the increase in debt burden. The report emphasizes that Global South countries face high costs of debt servicing. Data shows that the costs of servicing external debt account for a significant share of export revenues. This limits opportunities for investment and sustainable economic growth.
Financialization also affects the resilience of the economy to external shocks. In times of economic instability, financial markets can exacerbate crises. Fluctuations in capital flows and exchange rates become additional sources of risk, especially for countries with limited financial resources.
The report provides examples of countries that have managed to reduce risks by diversifying their economies. Ethiopia and Rwanda are examples of successful diversification strategies, despite their initially low indicators. Countries that focused on the production sector and the export of higher value-added products demonstrated greater resilience.
One of the main problems is the so-called “resource curse”. Financialization adds a new dimension to this phenomenon. Countries dependent on raw material exports face additional challenges when trying to reduce the share of the financial sector. The impact of commodity prices and dependence on financial flows limit opportunities for sustainable development.
The UNCTAD report states that Global South countries need to reconsider their approaches to economic policy. The focus should be on long-term measures to develop production capacities and infrastructure. This will help reduce dependence on the financial sector and improve resilience to external shocks.
Investments in infrastructure and industrialization remain important directions. They can support job creation and sustainable economic growth. However, new approaches to attracting capital are needed, including international partnerships and government support programs.
Financialization also affects the social aspects of development. The growth of inequality and limited access to financial services are problems that need to be addressed. An important step is to improve financial literacy and create a more accessible financial environment. This will help increase public participation in the economy and improve living standards.
The implementation of strategies requires a comprehensive approach. The influence of global trends and the internal characteristics of each country must be taken into account. Only in this way can a sustainable growth model be created that leverages the strengths of the economy and reduces its vulnerability.
Financialization is not just a challenge but also an opportunity. It is important for the countries of the Global South to find a balance between using financial instruments and strengthening the production sector. This will help improve the resilience of the economy and create conditions for long-term growth.
Prepared by: Alen Serik, expert of the Economy KZ portal
