The earlier domination of investment and borrowing is giving way to increasing flows from transactions in securities. New players have become more and more important. The quest for the best possible return on private savings is giving insurance companies, pension funds and highly leveraged funds a dominant position. Whereas the players used to be a more homogeneous group, consisting mainly of banks, households are increasingly opting to have their savings managed more actively than simple deposit accounts. While these changes have occurred in the various national financial markets, they have obviously also had consequences for the international capital flows. Advantages of free capital flows International financial markets that are free and integrated can enhance global growth through more efficient resource utilisation. Savings can be channelled to the best investment opportunities, unrestricted by national borders. Capital-importing countries can build up productive facilities, obtain access to modern technology and expand in sectors with relatively high productivity, while capitalexporting countries can earn a higher return. The industrialisation of Sweden in the latter part of the nineteenth century is a good example of what access to foreign capital can do; the construction of the railway network, for example, was financed with foreign loans. Financial markets also make it easier for economic agents to manage risks so that the economy functions more efficiently. The wide variety of financial instruments enables investors and borrowers to choose their preferred level of risk.

Against this background my talk today focuses on global capital: its advantages and problems and the remedies for the latter that are being discussed internationally. Let me begin by looking at what has shaped the global financial markets as we know them today. Emergence of today’s global financial markets Today’s global financial markets largely date from the 1970s, when the oil-exporting countries needed to invest surpluses and many western countries had incurred budget deficits that had to be financed. There was thus a need for a more efficient international market for capital. Another factor behind the development of financial markets was that after the collapse of the Bretton Woods system in the early 1970s, the major world currencies started to float in relation to each other. This generated a demand for instruments that would render the exchange rate movements less deleterious for exporters and importers. The evolution of the financial markets has been promoted by rapid technical advances that, besides facilitating international communications and transactions, have aided calculations and made advanced financial instruments available. This has been accompanied by theoretical work on the pricing of risks. A market for risks has accordingly been established. Instruments whereby players could choose a particular level of risk had existed for centuries but could now be made more sophisticated. Before the financial markets could be globalised, moreover, national economies had to be opened up and the existing capital controls abolished. This process got under way in the 1970s and 1980s.