democratic governance and political liberty, initially in Western Europe and as of late, worldwide.

The collapse of the Bretton Woods system, the subsequent floating of exchange rates, the rise in oil prices, chronic inflation, and slumping global economic conditions led to intensified currency and interest rate risks in global financial markets during the 1970s and 1980s. These risks instigated responses that were principally "market solution"'" oriented, exemplified by the drive toward the international diversification of capital, and the impressive expansion of derivitive markets (i.e. interest and currency forwards, options and swaps). These steps occurred in tandem with an important shift in the direction of macroeconomic policy away from its traditional focus on full employment and toward price stability. The success of these actions has been considerable on both fronts - derivative markets today provide a broad a range of hedging instruments for managing currency and interest rate risks in major currencies. The total market value of currency and interest rate futures, options, and swaps traded both on exchanges and over the counter was estimated at the end of 1997 to have reached over US$40 trillion, which is considerably larger than the market capitalization value of world stock markets.

On the macroeconomic front, industrial countries as well as many developing countries experienced considerable success in attaining stability, with reductions in fiscal deficits and the lowering of inflation and interest rates. Indeed, cross-country empirical research shows that volatility in the main macroeconomic variables, i.e. growth, export and inflation rates (measured by their standard deviation in a sample of 90 developing countries), in the 1990s declined by more than 60 percent as compared with the 1980s.

Today, the implementation of measures ensuring financial openness among OECD countries is nearly complete. Progress towards liberalization of capital controls accelerated, particularly in the 1980s, as members' liberalization obligations under The Code of Liberalization of Capital Movements were broadened to include virtually all capital movements including short-term transactions by enterprises and individuals.'<sup>2</sup> Thus, the U.K. abolished all exchange controls and achieved capital account convertibility in 1979. Japan completed this in 1980, while the timeline for the rest of the OECD stretched until 1992, when the last groupcomprising Ireland, Greece, Portugal, and Spain-completed the abolition of their capital controls. By the early 1990s, the capital accounts of OECD countries were open to a wide range of cross-border financial transactions including capital market securities, money market operations, forward operations, swaps, and other derivatives. This process of liberalization coupled with the internationalization of financial markets means that today in OECD countries borrowers can raise financing in their desired currency at competitive terns, and investors have the opportunity to achieve their desired degree of portfolio diversification in terms of currencies, maturities and risk profile.

Regarding emerging market economies, the overall trends have also been towards the reform of local financial markets and the liberalization of cross-border capital movements, but "See Dailami, Mansoor, 'Managing Risks of Capital Mobility," _PoicyResmot_ **_WokgPaper_** 2199, World Bank Institute, 1999.

> **12** See OECD (1990)

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