Some stylized facts about financial globalization from Federal Reserve Governor Frederic S. Mishkin:

Although economic globalization has come a long way, in one particular dimension–finance–it is very far from complete. As documented in the superb book by Maurice Obstfeld and Alan Taylor, Global Capital Markets, financial globalization has made its greatest strides in rich countries. Gross international capital flows, which have risen enormously in recent years, move primarily among rich countries. The exchange of assets in these flows is undertaken to a large extent to enable individuals and businesses to diversify their portfolios, putting some of their eggs in the baskets of other rich countries. International capital is generally not flowing to poor countries and is thus not enhancing their development…

As Nobel laureate Robert Lucas has pointed out, this feature of international capital flows is a paradox: Why doesn’t capital flow from rich to poor countries? We know that labor is cheap in poor countries, and so we might think that capital would be especially productive there. Just think of how hugely profitable a factory might be in a country where wages are one-tenth of those in the United States. Capital should, therefore, have extremely high returns in such countries, and we should expect massive flows of capital from rich countries (where the returns on capital should be relatively low) to poor countries (where they should be far higher). In fact, there has been a big increase in the amount of capital moving to emerging-market economies in recent years, but capital primarily still flows from one rich country to another, where the returns on capital are similar.

Thus, financial globalization is far from complete, and that fact raises a set of questions. Should financial systems in developing countries become more integrated with the rest of the world? If so, what should be done to accomplish that integration?