Globalization and the Contagion Effects of External Shocks on Emerging Market Economies

This paper examines how globalization affects developing country capital markets. While these countries benefit from global integration of capital markets since it enables them to access foreign capital, globalization also imposes costs on them since their capital markets become vulnerable to external shocks. These issues are examined by analyzing the May-June 2006 decline experienced across all emerging country stock markets. Using Turkish economy as an example the reasons behind the vulnerability of these markets are examined. Finally, the set of measures developing countries need to take in order to strengthen their financial infrastructure against external shocks are discussed.