ABSTRACT
The deep integration of developing countries into the global economy has many advantages and positive effects. In particular, capital flows to developing countries have clear and important benefits. Eighteen months after the outbreak of the crisis in Asia, its financial aspects have not yet been fully contained. Increasingly the East Asian financial crisis has been transformed in the affected countries into a serious crisis in the real economy, with highly negative social effects, as well as problematic consequences for political stability. The focus of the international community in the aftermath of the Asian crisis was on better information, on the one hand, and financial system strengthening, on the other. Capital and financial markets are special, in that — though generally functioning well — they are prone to important imperfections. Asymmetric information and adverse selection play an important role in explaining these imperfections, as financial markets are particularly information intensive.
