And by investing overseas, domestic residents are able to pool risks of various kinds with residents of other countries. To date, international diversification of portfolios has been remarkably limited. In particular, equity portfolios of investors in the industrialised world are heavily biased towards domestic equities. In part, this reflects the difficulty of obtaining adequate information about the legal, accounting and other aspects of the infrastructure of economies overseas. But the failure to exploit the full benefits of an open capital market reflects also the instabilities resulting from the volatility of short-term capital flows. The volatility of capital flows has affected not only Asia but also Latin America, and almost all emerging markets have suffered directly or indirectly as spreads on their debt have risen to levels that in some cases have come close to cutting them off from the international capital market altogether. Indeed, Eisuke Sakakibara, formerly of MOF in Japan, has insisted that the past five years have been a “crisis of global capitalism”.2 Over that period, financial crises have been too frequent to be acceptable. The so-called “Washington consensus” that sound macroeconomic and financial policies should embrace the free movement of capital has come under fire. Both Mexico and Korea, regarded as models of development to such an extent that they were admitted to the OECD, experienced damaging crises shortly after their elevation to the premier league of advanced economies. Contrast their fate with that of India. Capital controls insulated India to a large extent from the recent crisis.

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