Finance and Development

1. Introduction The benefits to developing economies of their comparatively recent integration to international capital markets are clearly substantial: access to international savings allowing the rate of investment (and thus industrial progress and income growth) to be raised; the ability to dampen exogenous shocks by borrowing abroad; and efficiency gains from the transfers of competitive technology and financial skills by foreign banks. None the less, there is increasing concern as to the destabilizing effect of short-term capital flows after financial liberalization, which can bring about sudden shifts in real exchange rates, domestic interest rates, asset values and domestic credit levels. National authorities are frequently forced to undertake sudden shifts in fiscal and monetary policy in order to offset such shocks, while international institutions become even further involved in policy conditionality and last-resort lending.