Financial Systems Balance of Payment and Economic Development

The wave of globalisation over the last decades finds its centre in the international financial system. The deregulation of financial markets led to an enormous amount of new innovations and an explosion of international capital flows. Deregulation of financial systems started in the developed world in the 1970s. However, with a time lag most developing countries and later the countries of the former Soviet block liberalised their domestic financial systems (for example switching to market determined interest rates and allowed foreign currency deposits in the domestic banking system) and at the same time reduced or eliminated capital controls (for example allowing domestic firms to take credits abroad and households to keep bank accounts, debt securities or shares abroad). The question is whether these changes increased the changes for developing countries to catch up quickly or whether development becomes more difficult under the now existing conditions.