ABSTRACT
One of the most remarked upon trends in modern economics is globalization, or the increasing interconnectedness of economies across the globe. Globalization in the trade of goods and services, however, has been around since the late 1800s, although it was significantly interrupted by the Great Depression and two world wars. What is new today is financial globalization, or the free movement of financial assets across borders, and the extent to which it involves not just finance between developed countries but now also finance in emerging market economies. There has been a pronounced trend among emerging market economies toward freeing capital to move more easily between countries through the process of capital account liberalization. 1 Capital account liberalization involves the removal of constraints on the flow of foreign portfolio investment (the purchase by foreigners of financial assets such as stocks and bonds), foreign direct investment (investment by foreigners in structures, equipment, and organizations usually involving some operational control), and bank borrowing/lending across countries. Figure 6.1 presents data on net private capital inflows (inflows minus outflows) to the 30 largest emerging economies since the 1980s. Net private capital inflows to the largest emerging market economies were over $1 trillion in 2011 and 2012. This is below pre-global financial crisis levels in 2007 but up over 50 percent since 2009. However, despite this sustained (but volatile) growth, emerging market economies continue to attract only about one-fifth of all international private capital flows.
