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Abstract
Globalization of the world economy has been driven by a variety of forces: rising trade in goods, increasing international capital flows, greater technological spillovers, and growing labor mobility. This chapter examines the increase in capital movement and, in particular, the impact of international financial integration on developing countries. Views on this issue have changed since the early 1990s, when international financial deregulation, and the associated capital flows from industrial to developing countries, appeared to be fueling faster growth and catch-up. A series of financial crises, starting with industrial countries in the European Exchange Rate Mechanism (ERM) in 1992 and 1993 but then moving on in a significantly more virulent form to developing countries with the 1995 Tequila crisis in Mexico, the Asian crisis of 1997–98, and the Russian and Latin American crises in 1998–2000, have made clear that international capital flows have risks as well as benefits.
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