in the natural resources and new enterprises of any quarter of the world, and share, without exertion or even trouble, in their prospective fruits and advantages... he regarded this state of affairs as normal, certain, and permanent, except in the direction of further improvement, and any deviation from it as aberrant, scandalous, and avoidable. ” ( pp. 9 - 10 ) this was, as keynes noted, a “ paradise ” in which “ internationalisation was nearly complete in practice ”. contrast this idyllic civilised picture i am grateful for the help of john hawkins, suzanna chiang and amanda thornton in preparing this paper. this is not to downplay the deficiencies in domestic policies, which have been discussed elsewhere. for some discussion of the other “ twin ” problem - financial sector fragility - see grenville ( 1997 and 1998b ). the best known proponent of this argument is milton friedman, who has argued that speculation is inherently stabilising, as any speculator who does not buy cheap and sell dear ( thus driving the price towards its fundamental equilibrium ) will quickly go out of business. more recent literature is less confident of this result. the imf managing director recently put forward seven building blocks for a stronger financial system, with the first three relating to globalisation : “ the first of these building blocks is the tremendous potential for growth and prosperity globalization provides countries fully integrating into the global economy. formidable sources of dynamism are there, engendered by new information technologies and unifying financial markets.... the second building block is integration. by integrating themselves into the mainstream of the globalizing world economy, the poorest countries will avail themselves of a most powerful instrument of acceleration of development.... the third building block is the universal consensus on the importance of an increasingly open and liberal system of capital flows in order for globalization to deliver on its promises. ” ( camdessus 1998 ). with the world keynes envisaged as he wrestled with the problem of reconstruction after the second world war : “ it is widely held that control of capital movements, both inward and outward, should be a permanent feature of the post - war system. ” 5 “ experience between the wars clearly demonstrated the mischief of unregulated capital movements, which take no account of the balance of trade available for overseas investment. ” 6, 7 the central point here is that some types of capital flows, for all their benefits,

are very volatile. policy - makers are not just interested in the growth of gdp, but its variance. large volatile influences are a policy nightmare. the asian experience private capital flow into the five troubled economies of asia ( south korea, indonesia, thailand, malaysia and the philippines ) was very large and variable, both up and down. it had reached almost us $ 100 billion in 1996 - one - third of worldwide flows into emerging countries. this was a five - fold increase over the 1990 - 93 average. it reversed in 1997, to record an outflow of us $ 12 billion. this turnaround was equivalent to more than 10 per cent of the gdp of these countries. portfolio equity investment into these five countries almost quadrupled in a single year - 1993. these flows were huge, compared to the size of the domestic financial sectors. it is hardly surprising that the then - governor of the indonesian central bank said : “ we started building the foundations of a house but suddenly we had to host a party ”. 8 kindleberger ( 1989 ), describing the post - opec period, captures the same point when he says : “ multinational banks swollen with dollars,... tumbled over one another in trying to uncover new foreign borrowers. ” ( p. 26 ) two other characteristics are worth noting : • • almost 60 per cent of the 1996 private flows to the asian five were from foreign commercial banks and 40 per cent were short - term credits. bank lending was flighty indeed - inflows of us $ 56 billion in 1996 turned into outflows of us $ 27 billion in 1997. direct equity investment - which might be expected to be more stable - was quite modest ( 6 per cent of the total ), but portfolio equity investment ( which can - and did - quickly reverse ) was twice as large ; 9 the flows were driven, to an important extent, from the supply side. the flows in the 1990s were consistently larger than the current account deficits - i. e. they were not drawn in by the need to fund the saving / investment gap. paradoxically, one source of volatility was the high profit opportunities available in these countries, as they “ got their economic act together ”, combining technology and cheap labour treasury memo to the uk war cabinet ’ s reconstruction problems committee. proposal for an international monetary fund, annex a of the washington conversations article vii, memorandum by the minister of state, 7 february 1944. bhagwati ( 1998 )