Private Capital Flows in Historical Perspective THE PAST 130 YEARS HAVE SEEN AT LEAST

THE PAST 130 YEARS HAVE SEEN AT LEAST four major surges in private capital flows to emerging markets.1 The first, from about 1870 to the outbreak of World War I, was a boom in bond finance, largely to labor-scarce and resource-abundant economies of recent European settlement. The second was the post–World War I recovery, lasting until the Great Depression, of bond lending to finance public sector deficits. The third was the surge in international bank lending to developing country governments from the 1973 oil price shock until the 1982 Mexican crisis. The most recent surge was the 1990s boom in privateto-private portfolio flows and foreign direct investment in emerging market economies. All four episodes were accompanied by solid growth in world trade and investment, were punctuated by currency and financial instability in the capital receiving countries, and eventually ended in global political or economic crisis. Although the economic, technological, and institutional settings changed dramatically over those 130 years, the last of these booms was no less beset by crisis than the first. This historical review asks what has changed and what has remained the same over this span of history. It also examines the implications for the future of capital flows—and asks what policies and institutional arrangements are required at the dawn of the new millennium to achieve greater stability. The chapter’s main messages are the following: Capital surges to emerging markets have typically been part of a larger, periodic process of rapid expansion of the global economy. They occur when the worldwide diffusion of technological changes improves communications and transport, growth is buoyant, world trade is expanding,