International capital flows both benefit emerging nations and in some cases damage their ability to develop. The result depends on world circumstances and a variety of factors. Recently, numerous reports suggested that international capital flows were a major cause of the Asian financial crisis, for instance (Chote, 1998). Capital flows play an important role in the international economy and have a particular relationship to emerging markets. A historical overview of the nature of capital flows leads to a consideration of capital flows in terms of emerging markets in recent decades, with the question being raised as to whether capital flows should be controlled in order better to shape the emerging markets and assist in their economic development.
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 Latin America, Canada, France, Belgium, Sweden, Austria, and Germany (Fearon, 1981). Britain contributed little to these regions and instead concentrated on Australia and New Zealand. The money was used by public utilities, distribution processing, and financial services, and only a small amount went into manufacturing (Fearon, 1981).
After World War II, capital flows repeated this pattern, largely bypassing the so-called Third World, and this was especially true in the 1980s (Turner, 1991). W...