By Dani Rodrik and Arvind Subramanian

First large downhill flows of capital – from rich countries to poor countries – led to the Latin American debt crisis of the early 1980s. In the 1990s similar flows begat the Asian financial crisis.

Since 2002 the flows have been uphill, from emerging markets and oil-exporting countries to the developed world, especially the US. But the outcome has not been very different. So, it does not seem to matter how capital flows. That it flows in sufficiently large quantities across borders – the celebrated phenomenon of financial globalisation – seems to spell trouble.

Causes and consequences vary, depending on which way capital flows. Developing country borrowing was associated with unsustainable fiscal policies (Latin America) and inappropriate exchange rate policies (Asia). But the financial sector was not blameless: for every overborrower there was an overlender.

The pathologies were different when the US went on a borrowing binge. Large current account surpluses and the associated savings glut in the rest of the world fed a global liquidity boom, which stoked asset prices. Even though the roots of the subprime crisis lie in domestic finance, international capital flows magnified its scale.

The remainder of this column can be read here. Debate from our panel of economists appears below.

By Martin Wolf

Mexico’s Carlos Slim is now the richest man in the world, or so Fortune magazine has told us. His ascension is fascinating. This is not only because he is extraordinarily rich. It is also because the manner in which he has accumulated his wealth tells us much about the capitalism that is spreading across the globe.

Estimated at $59bn, Mr Slim’s fortune is equal to 6.6 per cent of Mexico’s gross domestic product. Bill Gates, in contrast, at about $56bn, is worth a mere 0.4 per cent of US GDP. Even at its peak John D. Rockefeller’s wealth was less than 2 per cent of US GDP. The richest person in the US would need $900bn to possess the same wealth, relative to US GDP, as Mr Slim does relative to Mexico’s.

Does this extraordinary accumulation of wealth in a single man’s hands matter? One reason someone might think so is that it implies extraordinary inequality. If, for example, one assumed a real return of 6 per cent a year, the Slim family’s permanent income would be $3.6bn a year. On World Bank figures, the average income of Mexico’s poorest 10 per cent was $1,200 per head in 2005. So the Slim family’s permanent income equals the current incomes of 3m of Mexico’s poorest people. I am no egalitarian. But this surely needs some justification.

Furthermore, vast concentrations of wealth are sure to have political consequences, inciting corruption and populism. Thus, it seems sure to weaken both the legitimacy and effectiveness of fragile democracies. These dangers are evident. But one can counter that the drive to accumulate wealth is the spur to entrepreneurship.

The remainder of this column can be read here. Debate from our guest economists appears below.

Never before have emerging economies been in such a good position to sustain demand during a global downturn. Never before, too, has this been more important for the whole world. But the fact that a line of action is feasible and desirable does not mean it will happen. Optimists believe the emerging economies have decoupled at last. But such optimism may yet prove unhinged.

The cheerful view rests on two propositions: first, the slowdown in US demand will be quite mild; and, second, emerging market economies – and particularly the largest among them – are strong enough to respond effectively. As a result, the world is going to see a passing of the demand baton from the US and, so, benign adjustment of “global imbalances”.

On the prospects for the US, the September issue of Consensus Economics was optimistic: 2 per cent growth this year, followed by a recovery to 2.4 per cent in 2008. Goldman Sachs forecasts 1.8 per cent growth next year. But this pessimism is not universal: JPMorgan forecasts 2.6 per cent in 2008. The big point is that prospects have become uncertain: the impact of the credit freeze may be mild, but may also be severe. US policymakers do, however, have room for manoeuvre: lower interest rates and even a fiscal boost would follow economic weakness.

The remainder of the column can be read here. Comment from our expert panellists appears below