Maurice Obstfeld reviews what developing countries have gained from open financial markets. The answer: not much.
there is strikingly little convincing documentation of direct positive impacts of financial opening on the economic welfare levels or growth rates of developing countries… There is also little systematic evidence that financial opening raises welfare indirectly by promoting collateral reforms of economic institutions or policies. At the same time, opening the financial account does appear to raise the frequency and severity of economic crises. Nonetheless, developing countries continue to move in the direction of further financial openness.
So why open markets?
A plausible explanation is that financial development is a concomitant of successful economic growth, and a growing financial sector in an economy open to trade cannot long be insulated from cross-border financial flows.
Plausible indeed. But so are international pressure from financial institutions and open market ideologies. Other thoughts from people who know more about the subject than I do? (Not difficult.)
There is some evidence it relates to good governance. Governance is driven to some extent by the transparency of markets. However, the street is two-way. Volatility also increases. So, if you can manage good goverance with minimal openness, good for you. If you open up and get it, fine. However, opening up without good goverance is not a cure.
Good governance calls for NGOs that have access, good transparency, punitive measures for corruption, and enough scale to avoid nepotism and agency capture.
Ryan Lanham