The key to this debate is whether the potential benefits of financial integration are
sufficient to offset the evident risks. While there is a large body of work that looks
at the risks associated with financial liberalisation and capital flows,3 there has
been, until recently, only a few studies that evaluate the benefits of open capital
markets. The aim of this paper is to shed some light on this debate by examining
both the theoretical links and the empirical evidence on effects of financial
liberalisation on long-run economic growth. We also present some new results on
the effects of capital flows, with a particular emphasis on the composition of
capital flows.