Globalization

Globalization and Capital Markets∗
Maurice Obstfeld University of California, Berkeley, CEPR, and NBER† Alan M. Taylor University of California, Davis, and NBER‡ March 2002

paper was prepared for the NBER conference “Globalization in Historical Perspective” held in Santa Barbara, May 4–5, 2001, and is forthcoming in the NBER conference volume of the same name edited by Michael D. Bordo, AlanM. Taylor, and Jeffrey G. Williamson. Jay Shambaugh and Julian di Giovanni provided superb research assistance. For assistance with data we thank Michael Bordo, Gregory Clark, Stephen Haber, Ian McLean, Satyen Mehta, Chris Meissner, and Michael Twomey. For editorial suggestions we thank Michael Bordo. We received helpful comments from our discussant Richard Portes; from Marc Flandreau and otherconference participants at Santa Barbara; from Michael Jansson, Lawrence Officer, and Rolf vom Dorp; and from participants in seminars at Stanford Graduate School of Business, University of Southern California, King’s College, Cambridge, and Universidad Argentina de la Empresa, Buenos Aires. Obstfeld acknowledges the financial support of the National Science Foundation, through a grant administered bythe National Bureau of Economic Research. † Department of Economics, 549 Evans Hall #3880, University of California, Berkeley, CA 94720-3880. Tel: 510-643-9646. Fax: 510-642-6615. Email: . WWW: ‡ Address: Department of Economics, University of California, One Shields Avenue, Davis, CA 95616-8578. Tel: 530-752-1572. Fax: 530-752-9382. Email: . WWW: .

∗ This

1 Global Capital Markets:Overview and Origins
At the turn of the twenty-first century, the merits of international financial integration are under more forceful attack than at any time since the 1940s. Even mainstream academic proponents of free multilateral commodity trade, such as Bhagwati, argue that the risks of global financial integration outweigh the benefits it affords. Critics from the left such as Eatwell, more skepticaleven of the case for free trade on current account, suggest that since the 1960s “free international capital flows” have been “associated with a deterioration in economic efficiency (as measured by growth and unemployment).”1 The resurgence of concerns over international financial integration is understandable in light of the financial crises in Latin America in 1994–95, East Asia and Russia in1997–98, and Argentina in 2001–02. Proponents of free trade in tangible goods have long recognized that its net benefits to countries typically are distributed unevenly, creating domestic winners and losers. But recent international financial crises have submerged entire economies and threatened their trading partners, inflicting losses all around. International financial transactions rely intrinsically onthe expectation that counterparties will fulfill future contractual commitments; they therefore place confidence and possibly volatile expectations at center stage.2 These same factors are present in purely domestic financial trades, of course. But oversight, adjudication, and enforcement all are orders of magnitude more difficult among sovereign nations with distinct national currencies than within asingle national jurisdiction. And there is no natural world lender of last resort, so international crises are intrinsically harder to head off and contain. Factors other than the threat of crises, such as the power of capital markets to constrain domestically-oriented economic policies, also have sparked concerns over greater financial openness. The ebb and flow of international capital since thenineteenth century illustrates recurring difficulties, as well as the alternative perspectives from which policymakers have tried to confront them. The subsequent sections of this paper are devoted to documenting these vicissitudes quantitatively and explaining them. Economic theory and economic history together can provide useful insights into events of the past and deliver relevant lessons for...