International capital flows

In the period before the introduction of the gold standard in 1914, capital flows were significant. Though at that time, and for some time later, there was only a limited range of investment vehicles available, primarily stocks, bonds, and direct investments. Capital flows then took the form of productive investment, and in this manner real assets were created that could help service the debt of developing countries. Capital inflows of this type typically found their way back to capital exporting countries in the form of demand for capital equipment (Turner, 1991).

In the 1920s, U.S. holdings of foreign securities more than tripled and direct investments doubled as money flowed to Lat

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illion in 1996 to an outflow of $12 billion in 1997. This shift was equal to more than 10 percent of the aggregate pre-crisis gross domestic product of these countries. The greatest turnaround was made by commercial banks, from providing an inflow of $56 billion in 1996 to demanding an outflow of $27 billion in 1997 (Wolff, 1998). Capital flows do show a pattern of variability that has been assessed. Economic theory usually assumes that market outcomes will be beneficial, meaning that capital flows are a good thing which are supposed to supplement domestic savings so as to allow more investment in those countries where returns are highest. Capital inflows should buffer variations over time between exports and imports (Cooper, 1998). The countries of Asia have high rates of growth and so attract capital for profitable investment. In addition, expected returns on equity were consistently higher than those in more mature markets, and their volatility was below those of more mature, industrialized markets (IMF, 1998). Japan became a prime source of capital flow as the decade progressed because the country was a large saver and because the drawn-out recession meant that interest rates were extremely low. Most of this capi
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