During the 1980s, capital account liberalisation came to be seen as an essential, and even inevitable, step on the path to economic development, analogous to the earlier reductions in barriers to international trade in goods and services. But the financial crises that erupted during the 1990s in the Nordic countries, east Asia, Russia, and Latin America – which were often associated with periods of rapid liberalisation of the domestic financial system and the opening up of the capital account – prompted some commentators to go so far as to suggest that open capital markets could actually be detrimental to economic development. I think this assessment is simplistic. Instead, the episodes of instability that often occurred as capital accounts were liberalised during the 1990s warn us that we must consider the quality of a country’s institutions and how they need to change in order to manage a complex transformation to free international financial transactions that ultimately can lead to major improvements in a country’s economic efficiency. And the characteristics that seem to matter most are those related to the execution of enforceable contracts and those that ensure clear property rights and the integrity of the associated legal processes.…
