Inherent in ptuirSulinlg OpenneCSS tO international capital technology and communications, financial risk flows is an awareness that it brings both benefits and management practice has improved significantly in recent risks. Muchi of the currenit debate is about how best to years through the use of statistical models, such as value balancc tlhem.at risk, computer simulation, and stress testing. Major beniefits for developinig countries include access At the national level, with the worldwide trend toward to a broader mentI of investmiietnt sources, optionis, and democracy, Dailami argues that managing the risks of instrumenits, as well as enhlaniced efficienicy of domestic financial openness will require developing national financial institLitionis and the discipline of capital markets mechanisms thirouglh whichi to provide insurance to in conducting domtestic macroeconomic policy. By easing citizensthrough the mar-ketplace or through financing constraints, the greater availability of redistributive policy -and thus to avert political internationial finanice canl extend the period for pressure for capital controls. implementing needed adjustments.To succeed, open democratic societies have to balance From the perspective of emerging market economies, the threat of capital exit, made easier by the opening of Dailami highliglhts two sources of risk: capital markets, with the political voice of citizens-* Thle host governments' policy of liberalizing capital demanding protection through redistribution, social controls before having established the macroeconomic, safety nets, and other insurance-like measures. These regulatory', and instituttional founldations required for insurance mechanisms have been critical in easing the capital accounit openness.tension between politics and financial openness in OECD * A shift in foreign lenders' and investors' sentiments countries. Indeed, cross-country empirical analysis and confidence, not necessarily related to a particular confirms that countries that spend a large share of their country s long-ternm creditworthiness.GDP on social needs (education, health, and transfer Risk maniagement demands judicious strategies for payments) are more open to free international capital botlh corporate and finanicial institutions and national flows and also score high on measures of political and policy. At tihe institutional level, with the advances in civil liberty.This papera produict of Governance, Regulation, and Finance, World Bank Instituteis part of a larger study, "The Challenge of Developm rc tin the 21stCentury" (RPO 683-14). Copies of the paperare available free from theWorld Bank, 18 1 8 l StreetNW, Waslhington, DC 20433. Please contactWilliamNedrow, room G2-072, telephone 202-473-1585, fax 202-3,34-8,350, titerniet address wrnedrow(U worldbank.org. Policy Research Working Papers are also posted on the Web at lhttrp://ww\.world1baink.org/lhtml/dec/Publications/Workpapers/home.lhtmll. 'The author may be contacted at nidailami(o worldbank.org. October 1999. (30 pages) hlu Po/i...