ABSTRACT
This chapter aims to examine the notion that the composition of capital flows matters for a typical developing economy’s experience with (global or regional) financial integration, and to investigate some underlying institutional determinants of the composition. The 2008-9 global financial crisis presents the latest reminder that financial integration is a two-edged sword, especially for developing countries. In good times, financial integration may help a developing country by augmenting domestic savings for local investment, improving sharing of consumption risks, and disciplining national governments into pursuing better policies in macroeconomic and other areas. However, in bad times, a financially integrated economy is less able to remain unaffected. While the global financial crisis started as a subprime mortgage crisis in the United States (US) in late 2007, it spread quickly to the rest of the world, especially to countries with close ties to the world’s capital and goods markets.
