How much does liberalizing capital markets spur economic growth in developing countries? It depends on what kind of country you look at, according to a recent paper by Kenneth Rogoff, formerly chief economist at the IMF, also Professor at Princeton.
He suggests that financial integration should be “approached cautiously.” Many of the benefits kick in only after countries have achieved a particular level of financial integration. Improvements in integration, starting from low levels of integration and development, often have increased the volatility of consumption. Trade integration is associated with faster increases in health and infant mortality, but financial openness is not.
Rogoff sees four problems with financial integration for poorer countries: investors engage in herd behavior, investors engage in speculative attacks on unsound currencies, the risk of contagion, and governments may use financial globalization to overborrow. Financial integration can, in principle, bring great benefits but it is not always used responsibly.
We should take these results seriously. Rogoff is a highly respected economist and he has no starting bias against market globalization. Read his open letter to Joseph Stiglitz, which offers a good statement of his overall perspective on global markets.