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Abstract
The last decade has witnessed a tremendous increase in the mobility of international capital. Cross-country trends in capital flows reveal that private capital flows now dominate with official capital flows reduced to a trickle. Simultaneously, arise in portfolio capital has tilted the composition of international capital flows towards short-term investments, exposing individual countries to enhanced volatility and sudden withdrawal risks. These have been driven both by strong trends towards globalization, which has enabled pursuit of higher returns and portfolio diversification, and the market oriented reforms in many countries, which have liberalized access to financial markets. Concurrent with these trends has been the rising incidence of financial crises, raising questions about linkages between the two. Concern has also been expressed as to whether the costs of increased vulnerability to financial fragility might not outweigh the gains from financial integration. Notwithstanding these doubts, most countries continue to progress in dismantling capital controls to integrate their financial markets with the rest of the world, albeit more cautiously.