International capital mobility:

International capital mobility has depended to a large extent on the nature of international financial system  since  the beginning of  the Bretton Woods system. You learned about the GATT and the WTO; in Unit 8, about the evolution of the internationhl monetary system; about the Bretton Woods  financial  institutions, the  IMF and  the World Bank; and in Unit  10, about the debt crises in various developing countries in the 1970s and 1980s. Given the fact  that in present times, trade  in goods  and services are often linked to capital flows like the FDI and portfolio as well  as the global technology regime it is  important to understand the functioning of the erstwhile GATT and the present WTO, governing global trade through multilateral rules. This is an aspect often missed out in a discussion on international capital flows.

It would be noticed that the international monetary  issues are dificult  to discuss in isolation  fiom  the exchange rate management issues. In other words, the international monetary system has to be studied with the evolution of some of  the related international financial and macroeconomic issues. This Unit therefore begins with a brief exposition of the standard IS-LM model for an open economy with  the possibility  of  capital flows. This is  followed by a review of the evolution of  the international monetary system. It ib discernible from  the analysis that at present there is hardly any effective global monetary system under any one single multilateral institution. Recent developments of financial market integration and globalisation of capital flows have rendered the monetary system quite fragmented in nature and it often lacks coherence.

On  the other hand, they have increased the risk of contagion of crises. The Asian currency crisis is dealt with at some length. This only calls for setting  in place a more strengthened international monetary and financial architecture.  In the last part of  this Unit a brief account of  the theory of optimal currency areas is given, and post-Maastricht developments in the EU have been presented
along with some of  their possible implications for  the developing countries.