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In 1944, the Articles of Agreement of the International Monetary Fund (IMF), which led to establishing the Bretton Woods System (BWS), also fixed exchange-rate regime guaranteeing foreign exchange for the conduct of free trade in goods and services or current account convertibility (Article VIII). That notwithstanding, the Agreement allowed IMF member countries to impose capital controls to achieve equilibrium in their Balance of Payments (BOP) accounts and internal stabilisation objectives (Article VI). However, rapid globalisation, financial engineering and IT development have created pressures on the BOP accounts to remove restrictions on international capital mobility. Therefore, the IMF spearheaded the move to amend the BWS articles "to make promotion of capital account liberalisation a specific purpose of the Fund and give the Fund appropriate jurisdiction over capital movements" (Interim Committee of the IMF, 28th April, 1997). The process of globalisation has witnessed a surge in capital flows to emerging market developing countries. The total capital flows increased from an annual average of US$30.5 billion in 1977-1982 to a peak of US$240.8 billion in 1996. This figure shot up to US$623 billion in 2009, USD1.09 trillion in 2010, US$1.05 trillion in 2011 and projected to be US$1.08 trillion in 2012. The composition of the capital flows also changed and bank lending, which had dominated- capital flows, was replaced by dominant flows of foreign direct investment and portfolio capital flows (hot money). It is now well recognised that financial liberalisation � domestic financial sector deregulation and opening of capital account of the BOP � played a large role in the recent and past financial crises. Suffice it to say, however, that countries that have effective prudential regulation for their domestic financial sector and sensible control over short-term capital flows found that their banking and financial sector was largely unaffected by the turmoil in the global financial markets. The banks of these unaffected countries were prevented from the enticement of �toxic� assets in the US due to restrictions on capital account convertibility. Additionally, some of these countries, especially in East and Southeast Asia, are able to handle the current crisis better due to their large foreign currency reserves, the importance of which they have learned from the Asian financial crisis of 1997-98. It is quite surprising to see how little progress has been made in terms of re-enacting effective prudential regulation and sensible capital control since the Asian crisis. It seems there is a general sense of skepticism about the role of government. For example, in writing about the lessons from the Asian crisis, Jeffery Frankel noted, �This implies the need for a greater role for governments in the domestic financial system, but governments are not perfect either. Capital controls must be used sparingly�� The skepticism seems to be deepest when it comes to capital account restrictions, and the faith in the efficacy and virtue of an open capital account continues to dominate. For example, in the wake of the Asian financial crisis, comments like, �In the long run, policies should aim to reduce the vulnerability of the financial sector by encouraging adequate risk-management through financial reform, strengthened supervision, and regulation. It is noted that greater exchange rate flexibility and the maintenance of open capital accounts may also create incentives for managing risks effectively.� In 2005, the Independent Evaluation Office of the International Monetary Fund (IMF) found that to deal with large capital inflows, the IMF advocated tightening fiscal policy and greater exchange rate flexibility. On rare occasions, it recommended further liberalisation of capital outflows. The IMF, in principle, has opposed the use of temporary controls, either on inflows or outflows. According to the IMF, temporary controls were not very effective, especially in the long run, and could not be a substitute for the required adjustments in macroeconomic and exchange rate policies. However, it became much more accommodating of the use of capital controls over time, albeit as a temporary, second-best instrument. The World Bank which also promoted capital account liberalisation notes in the wake of the financial crisis, �Capital restrictions might be unavoidable as a last resort to prevent or mitigate the crisis effects. �Capital controls might need to be imposed as a last resort to help mitigate a financial crisis and stabilise macroeconomic developments.� Thus, capital account control is still seen as either a second best response or last resort once a crisis breaks out. It is not considered as part of governments� macroeconomic policy instrument to protect their countries from the hazard and risk of financial crises in the first place. This is because there is reluctance among the World Bank, IMF and neo-liberal economists in recognising short-term capital flows (hot money) as a culprit. A point that I must over-emphasise here is that central banks of the developing countries need to have some controls on capital flows, especially short-term capital flows. This will give central banks control over monetary aggregates and hence monetary policy independence to keep real interest rates low, stabilise employment and keep inflation at a moderate level. In short, restrictions on short-term capital flows, popularly known as �hot money�, are needed to remove the pro-cyclical bias of macroeconomic policies. These restrictions can slow the speed of capital outflows when a country is faced with the possibility of a sudden and destabilising withdrawal of capital during a time of uncertainty. They can also break the link between domestic and foreign interest rates, so that crisis-hit economies can conceivably pursue expansionary monetary and credit policies as a means of growing their way out of debt or a recession without having to worry about possible capital flight and the weakening of the currency. Of course, there are many critics of capital controls. However, they must accept that the Mundell-Fleming model conceived of capital flows as largely money-market flows or at most money and bond markets flows. An important development in the world economy in the late 1990s was the shift of international capital flows from the fixed income market � both money and bond flows � to the equity market � both portfolio equity flows and FDI. A decline in policy interest rates to support small and medium size enterprises and structural change can raise expected corporate earnings. This can lead equity prices to rise and attract foreign investors with projecting expectations to buy more equities. Therefore, equity effect of lower interest rates can be larger than the money-bond market effects to overturn standard Mundell-Fleming results. Thus, capital account openness should not be viewed as an all-or-nothing proposition. The increased importance of equity flows has increased the effective scope of a capital account policy of semi-openness. A capital account can be open to equity flows � both portfolio and FDI, but closed to money and bond flows. Epstein, Grabel and Jomo (2003) have examined capital management techniques, to refer to two complementary (and often overlapping) types of financial policies: policies that govern international private capital flows and those that enforce prudential management of domestic financial institutions. In conclusion, there is no single type of capital management technique that works best for all developing countries. Indeed, policy makers can choose from a rather large array of effective techniques depending on the circumstances and characteristics of their respective countries.