Despite an abundance of cross‐section, panel, and event studies, there is strikingly little convincing documentation of direct positive impacts of financial opening on the economic welfare levels or growth rates of developing countries. The econometric difficulties are similar to those that bedevil the literature on trade openness and growth, though if anything, they are more severe in the context of international finance. There is also little systematic evidence that financial opening raises welfare indirectly by promoting collateral reforms of economic institutions or policies. At the same time, opening the financial account does appear to raise the frequency and severity of economic crises. Nonetheless, developing countries continue to move in the direction of further financial openness.
The paradox that Obstfeld points to is an important one, which has long puzzled me. Why have so many developing countries embraced financial globalization despite the hard-to-locate benefits and all-too-apparent costs? Obstfeld's preferred answer is this:
A plausible explanation is that financial development is a concomitant of successful economic growth, and a growing financial sector in an economy open to trade cannot long be insulated from cross‐border financial flows. This survey discusses the policy framework in which financial globalization is most likely to prove beneficial for developing countries. The reforms developing countries need to carry out to make their economies safe for international asset trade are the same reforms they need to carry out to curtail the power of entrenched economic interests and liberate the economy’s productive potential.
This is an interesting hypothesis, but I am not sure I agree with the final sentence. Some of the most stupendous development successes of our time have been based on subsidized credit, a certain dose of financial repression, development banking, and managed exchange rates, all of which require controlled, rather than liberalized, finance. See South Korea, Taiwan (both of them during the 1960s and 1970s), and China, in particular.
I think an alternative explanation is ideology and the zeitgeist. The dominant narrative of multilateral institutions, the G-7 and most economists has been very kind to financial globalization--lack of evidence notwithstanding. The policy and intellectual climate has been hostile to managing capital flows. So governments have been reluctant to deviate from the norm lest they become identified as renegades.
While we are on international finance, see also Henry from Crooked Timber, who elaborates on the dilemma of global finance in a world of divided sovereignty.