If an economy is characterized as a coin, then one side of the coin is the real sector (with all its tangible and intangible real assets) and the other side is the financial sector. If the fundamental function of financial markets is the translation of household savings into real business investments, then the aggregate value of financial claims must be equal to that of real assets. Given this ground-zero description, historical evolution of financial markets is best portrayed alongside the developments in the real economy. And this has much to do with intense global economic integration over the last 50 years.

Size of the industry

Historically, the first era of globalization, with its peak in mid-1800s, was largely in the form of powerful imperial countries trading with less developed regions rich in natural resources. This era came to an end during the First World War. The years between the two world wars of the past century was a period of high geopolitical uncertainty and hence very low international trade and investment. After the wounds of the Second World War were mended, however, economic globalization, with great help from technological advances, significantly improved people’s standard of living all over the world. Globalization has been criticized – often correctly – for many shortcomings and social challenges, such as deterioration in income distribution and domestic political instabilities. But the fact of the matter is that trade liberalization, which is both a by-product and also an enabler of economic globalization, has been materially beneficial for most countries and people. Figure 2.1 shows world’s total GDP and also GDP per capita since 1960.

World GDP has increased from less than $1.5 trillion in 1960 to about $11 trillion in 1980. Since then, it has jumped up to $81 trillion in 2017. This is a remarkable added value of almost $70 trillion in less than 30 years. More importantly for economic wellbeing, GDP per capita has increased to $10,700 in 2017 from a dismal $450 per person in 1960, which is equivalent in purchasing power to only $1,280 in 2017. This could not have been possible without global economic integration and free trade.