Similar with goods trade, trade in capital literally has a net gain, but different groups may have different results. The gain of the capital market may differentiate depending on the country and its trading environment. Moreover, countries with liberalized capital flows are likely to have unexpected economic reversal that different from free good market.
Whether a country could gain from the capital market is depending on, broadly speaking, the countries’ open and liberal degree, which will be the premise to determine the result of capital flows. According to the article “The US-Japanese Stake In A Free and Open Asian Capital Market” written by Lawrence H. Summer (deputy treasury secretary), it is possible to identify four critical factors in the emerging market problems:
1. Large-scale unmatched borrowing-“lending for conspicuous construction projects favored by local elites is much more like consumption than investment and at least as likely to cause repayment problems.”
2. Poor developed domestic financial systems-“Lax lending standards, weak supervisory regimes and inadequate capital all help to permit large-scale imbalances to develop—and to disguise their true extent when they do develop.
Countries with liberalized capital flows are also likely to have unexpected economic reversal that different from free good market. The research shows capital flows on many cases do not have the positive supports on growth. Even the costs of capital market liberalization have outweighed the benefits.
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