The crisis in East Asia has tempered the loud enthusiasm of many
economists, magazines and multilateral institutions for unbridled
international flows of capital. Since its start some prominent economists and
financiers have expressed doubts that market mechanisms, left to
themselves, necessarily end with a desirable outcome. Perhaps this is the
first step to questioning whether free flows of capital between countries are
desirable at all.
Oddly enough, despite all that has been written in textbooks and
journals extolling international capital flows and all the romanticisation of
‘globalisation’ in television advertisements, there appears to be no systematic
examination of the gains and losses to be expected from them. One reason
may be that economic theory, as it stands now, is ill suited to carrying out
such an examination. International economic theory has two strands, the
one to explain how trade in finished products and raw materials is
determined by comparative advantages and the other, using quite separate
assumptions, to explain the balance of payments. In the former it is assumed
that capital flows are negligible, in the latter they do little more than
accommodate trade imbalances. Neither address the question of what
determines capital movements or what their effects might be.
Globalisation
