The financial turmoil in Asia has led to several calls for tighter controls on inflows of foreign investment, particularly short-term. There is plenty of evidence to show that as markets and institutions mature, the efficiency and regulatory gains arising from the liberalization of capital movements outweigh the risks. Several conditions are important to maximize the benefits of foreign investment and to reduce the risks associated with capital liberalization. They include prudent macroeconomic policies and responsive exchange rate regimes. A robust banking system and securities market and good corporate governance are also key, as is the removal of distortions from government support and guarantees. Another requirement is to instill market discipline through transparency and disclosure.
