investments which help increase efficiency. d. a. irwin, long - run trends in world trade and income, world trade review ( 2002 ), 1 : 1, 89 - 100. imf, world economic outlook october 2007, chapter 4, p. 33. this is often one of the key arguments for the part of financial trade known as foreign direct investment or fdi. another benefit of financial globalization is the increased scope for consumption smoothing for individuals and countries. as the business cycle of emerging markets often is decoupled from that of industrialized countries, the possibility of global investment should also benefit investors in that they are able to spread their investment. however financial integration is also associated with a range of risks. these include a possibility for greater volatility as capital inflow can be withdrawn in the face of a crisis or just a change in sentiments and " flight to quality " as we have seen in recent months ; however, the effects on emerging economies have been small. the evidence suggests that the largest benefits from risk - sharing have accrued to advanced economies. countries with developed domestic financial systems, open trade, good governance and sound macroeconomic policies have not experienced greater volatility due to greater integration. those without these “ thresholds ” have. 3 reasons for globalization the shrinking importance of geographical distance due to technological progress is one important aspect of the increased interaction in the world economy ( slide 4 ). this is largely due to the evolution of transportation measures, reduced cost and increased speed. it has been an ongoing process through the century and is thus less likely to be the reason for the recent up - surge in international trade. communication possibilities through for example the internet has increased markedly over the past decades and has contributed to the increased globalization. however, the most significant change over the past decades has been the inclusion into the world economy of countries which were formerly very closed economies. the integration of china, india and the former communist bloc countries into the world economy and the increasing support for international rules and institutions such as the wto is thus one important explanation for the recent surge in international trade. 2. macro trends growth contribution first, the relative importance of the economies in the global economy is changing fast with the ( re ) emergence of the large and populous countries of russia, china and india into the global economy. in 2007 the imf estimates that china will be the largest contributor to global growth and be the fourth largest economy ; roughly the same size as the german ( slide 5 ). india

in both directions, thereby contributing to the difficulties we are now facing. danish house prices showed an almost constant upward trend from 1993 to 2007, particularly in 2005 and 2006. until 2005, growth in property prices during the most recent upswing was to a large extent attributable to low interest rates – especially at the short end of the curve – deferred - amortisation loans, higher disposable incomes, falling unemployment and the tax freeze. but the trend became self - fuelling. in the expectation that prices would continue to rise, new homes were purchased before the old ones were sold. property became an object of speculative investment. driven by expectations, combined with the economic upswing, prices of single - family and terraced houses soared by almost 25 per cent within one year from early 2005. the increase was even stronger in the copenhagen area. a hike of that magnitude cannot merely be explained by the underlying economic conditions. expectations also played a role. the rising property prices added fuel to the upswing. home equity increased, and consumers gained extra purchasing power. we witnessed a strong expansion in construction activities, with clear signs of overheating. and last, but not least, lending growth was particularly strong for banks with large - scale commitments to the property sector. it is characteristic that in the shadow of property - market developments activities took place that are now being investigated by the danish fraud squad. the rollback of these imbalances has amplified the impact of the international recession. declining property prices have not only affected the building and construction sector, but have also exacerbated the fall in consumption when compared with other countries. as regards the financial sector, it is worth noting that the ailing banks are primarily found among those that previously displayed the most aggressive lending policies in the property market. what does this tell us? in a market economy, crises can never be avoided. we must accept economic downturns from time to time. as a small, open economy we cannot guard ourselves against a sudden drop in external demand, reducing exports by almost 20 per cent in six months, as we have witnessed. but we can seek to conduct economic policy that does not in itself amplify economic fluctuations. we have not been good at that. during the upswing, our economic policy was procyclical, contributing to the upward trend. too little was done to curb it. you might say that we put the economy into a higher gear in a situation when it was