Should developing countries allow free

Should developing countries allow free movements of capital across their borders?

Brad DeLong wrestles with this one.

Fifteen years ago "it was easy to be in favor of international capital mobility." Capital controls led to corruption, as people competed for the right to move capital by bribing the civil service. Moreover, free capital was expected to migrate to poor countries, boosting productivity and incomes.

What actually happened was that capital migrated from the poor countries to rich countries, and developing countries "with open capital flows" turned out to be vulnerable to capital crises.

"...Instead of capital flowing from rich to poor, it flowed from poor to rich--and overwhelmingly in recent years into the United States of America, whose rate of capital inflow is now the largest of any country, anytime, anywhere. Central banks that sought to keep the values of their home currencies down so that their workers could gain valuable experience in exporting manufactures to the post-industrial core, first-world investors who feared sending their money down the income and productivity gap after the crises of Mexico '95, East Asia '97, and Russia '98, techno-enthusiasts chasing the returns of the American technology boom, the third-world rich who thought a large Deutsche Bank account would be a good thing to have in case something went wrong and they suddenly had to flee the country in the rubber boat (or the Learjet)--all of these fueled the flow of money into the United States, which was thus enabled to invest much more than it managed to save. The U.S. economy became, and remains, a giant vacuum cleaner, soaking up all the world's spare investible cash. As best we can calculate, the United States has run current-account deficits averaging 2.5% of GDP over the past two decades--that's $270 billion a year at today's level of GDP. Only one-third of this can be attributed to inflows from the developing world, but $90 billion a year is still the (current exchange rate) income of the poorest 500 million people in India.

The fact that the flow of capital seemed more to go from poor to rich than from rich to poor, that capital flowed by and large to capital-abundant regions like the United States, was disturbing. International capital mobility was supposed to add to, not drain, the pool of funds financing development in peripheral countries."