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Volume :32 Issue : 2 2004      Add To Cart                                                                    Download

The Risks of International Financial Integration in Developing Countries

Auther : Adnan A. Ali

Cross-border capital flows have increased considerably during the past few years. They have grown significantly faster than many real economic variables. The driving forces behind this development have been the liberalization and deregulation of the financial markets as well as the rapid advance in information and communication technology, which, in turn, have resulted in a sharp reduction in transaction costs. The central argument in favor of unrestricted inernational capital movements lies in their contribution to economic growth. In an environement of unfettered capital movements, national borders no longer stand in the way of the efficient allocation of savings. The financial crises of the nineties dampened the high expectation of liberalized capital markets at least in part. Suspicion became rife that the substantial risks inherent in opening domestic capital markets might have been underestimated. The fact that dynamic economies with sound macro policies (but mostly fixed exchange rates) encountered severe crises was seen by many as a sign that international financial markets had failed. The highly volatile nature of short-term capital flows bore the brunt of criticism. The fact that it was possible for crises to be transmitted to other countries which were apparently healthy was seen as being especially oblematic.

Keywords: Developing countries, International financial integration, Financial liberalization, Foreign direct investment, Short-term capital flows, Currency crisis, Collapse of the exchange rate arrangement, Banking crisis, Twin crisis, Speculation, The international monetary fund and the financial crises.

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