Benefits and Risks of Free Flow of Capital In Emerging Markets

Developing and emerging economies consider foreign financial resources as suitable to solve the problem of capital they need. Thus, they resort to international financial markets to finance their financial needs, using free flows of capital. The results of various studies done in the area under analysis indicate that liberalization of capital flows makes it possible for the countries having shortfall of financial resources to get access to surplus financial resources of other countries, providing the ground for the increase of competition, production, growth and welfare. Moreover, the ever-increasing growth that is occurring in combination and liberalization of international financial markets has led such markets to have more correlation with each other, and as a result of which, more effectiveness. Although liberalization of capital flows can lead to increase of growth and welfare in the countries that proceed to liberalize their financial market, such a deed can also be followed by some dangers. The evidence present about the recent and past financial crises indicates that liberalization of capital market can make a country susceptible to foreign shocks.

Capital Market, Combination of Financial Markets, Liberalization of Capital Flow.