Card-carrying neo-liberals like me, who pushed for opening capital flows wide in the early 1990's, had a particular vision in mind. But the future that we hoped for did not come to pass.
We looked at how extraordinarily strongly the world's system of relative prices was tilted against the poor: how cheap were the products they exported, and how expensive were the capital goods that they needed to import in order to industrialize and develop.
"Why not free up capital flows and so encourage large-scale lending from the rich to the poor?" we asked. Such large-scale lending might cut a generation off the time it would take economies where people were poor to converge with the industrial structures and living standards of rich countries.
Certainly such large-scale borrowing and lending had played a key role in the late-19th century. Canada, the western United States, Australia, New Zealand, Chile, Argentina, Uruguay, and South Africa: all were developed due to imported capital a century ago.
But things didn't turn out that way this time around. Instead of capital flowing from rich to poor, just the opposite happened: it flowed from poor to rich, the overwhelmingly largest stream going to the US, whose rate of capital inflow is now the largest of any country, anywhere, anytime.
What has fed these inflows? One source is central banks seeking to keep the value of their home currencies down so that their workers can gain valuable experience from exporting to the rich world.
Another source is investors who feared losing their money after the various emerging market meltdowns of the 1990's, techno-enthusiasts chasing the pot of gold that the American technology boom seemed to offer, and the third-world rich, who think a Deutsche Bank account is good to have in case they need to flee their countries in a Lear jet or a rubber boat.
All of these sources contributed to the flow of money into the US, which was thus enabled to invest much more than it had managed to save. America's economy became - and remains - a giant vacuum cleaner, soaking up the world's spare investment cash.
So those of us who still wish to be flag-waving advocates for international capital mobility are reduced to two arguments. First, and most important, capital controls create ideal conditions for large-scale corruption. With capital controls, people who badly want to move their capital across borders can't - unless they find some complaisant bureaucrat. But an effective market economy needs to minimize the incentives and opportunities for corruption, or it will turn into something worse.
Second, perhaps the inflow of capital into America was and remains justified: perhaps there is something uniquely valuable about investments in America today. (But in that case, if these investment opportunities are so great, why aren't Americans themselves saving more - both privately and publicly - to take advantage of them?)
The years 1960 to 1985 formed the era in which development was to be financed by public institutions like the World Bank, because market failures and distrust of governments made it hard for poor countries to borrow privately. The years 1985 to 2000 were the era in which development was to be financed by private lending to countries that adopted the market-friendly and market-conforming policies that were supposed to lead to high returns and rapid growth.
The first era was not an unqualified success. Looking at the capital flow reversal into the US, I cannot argue that the second era has been an unqualified success either. It is nice that Mexican workers and entrepreneurs are gaining experience in export manufactures, and successful enough to run a trade surplus vis-à-vis the US. But the flip side of the trade surplus is the capital outflow. Should capital-poor Mexico really be financing a further jump in the capital intensity of the US economy?
It is not possible for a card-carrying neo-liberal like me to wish for anything but the most minor of controls to curb speculative of capital flows. Capital markets can get the allocation of investment badly wrong, but governments are likely to get it wrong even worse, and the incentives to corrupt bureaucrats do need to be kept as low as possible.
But the hope for a repetition of the late 19th-century experience has - so far - proved vain. Unlike in the heyday of liberalism, money from the world's rich countries simply is not going to give peripheral economies the priceless gift of rapid, successful development.