Despite an abundance of cross-section,panel, and event studies, there is strikingly littleconvincing documentation of direct positive impacts offinancial opening on the economic welfare levels or growthrates of developing countries. The econometric difficultiesare similar to those that bedevil the literature on tradeopenness and growth, though if anything, they are moresevere in the context of international finance. There isalso little systematic evidence that financial openingraises welfare indirectly by promoting collateral reforms ofeconomic institutions or policies. At the same time, openingthe financial account does appear to raise the frequency andseverity of economic crises. Nonetheless, developingcountries continue to move in the direction of furtherfinancial openness. A plausible explanation is thatfinancial development is a concomitant of successfuleconomic growth, and a growing financial sector in aneconomy open to trade cannot long be insulated fromcross?border financial flows. This survey discusses thepolicy framework in which financial globalization is mostlikely to prove beneficial for developing countries. Thereforms developing countries need to carry out to make theireconomies safe for international asset trade are the samereforms they need to carry out to curtail the power ofentrenched economic interests and liberate theeconomy's productive potential.
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