nternational capital markets, like their domestic counterparts, serve several key functions. They channel resources from units (house-holds, firms, governments) that are savers to units that are dissavers, thereby loosening the constraints imposed by self-finance and enabling increases both in the overall productivity of investment and in the smoothing of consumption. They provide liquidity. They allocate and diversify risk. They may even help to "discipline" errant borrowers-either by subjecting them initially to a rising default premium and ultimately, to the threat of credit rationing, or by forcing adjustments in exchange rates. By permitting trade in financial assets to take place without regard to either national boundaries or the nationalities of market participants, there is a strong presumption that the efficiency, liquidity, risk-pooling, and disciplinary attributes of capital markets will be enhanced.

In some important respects, developments over the past two decades have been kind to the view that the benefits of open capital markets are being increasingly recognized and that integration of capital markets has already proceeded quite far, To begin with, there has been a progressive dismantling of capital and exchange controls among the major industrial countries, followed by a broader-based liberalization and reform of their domestic financial sectors.